Business planning: The purpose of business planning

The idea

Business planning sets out the aims, target market, operations, finances and risks of a new or expanding business. Its purpose is to clarify the business idea, test whether it is viable, and provide a roadmap for start-up and growth. A plan helps secure finance because lenders and investors want evidence that the business can generate sufficient cash flow and repay debts. It also helps the owner anticipate problems such as cash shortages, and set targets for sales, costs and profit. For example, a plan might show that a café needs £20,000 to refurbish and will break even after selling 500 coffees per week. However, plans are based on forecasts and may need revising as market conditions change.

What earns the marks

• Business planning clarifies the business idea and helps the owner decide whether the idea is viable.
• A plan provides a roadmap for start-up and growth, setting out aims, target market, operations and finances.
• Planning helps identify and anticipate risks and problems, such as cash shortages or strong competition.
• A plan sets targets for sales, costs and profit, which can be used to monitor performance.
• Plans are forecasts and may need to be revised as circumstances change.

Common mistakes and how to put them right

• Thinking a business plan guarantees success.

  Put it right: Recognise that it is a forecast and may need revision.

• Confusing the purpose of a plan with the contents of a plan.

  Put it right: The purpose is why it is created, while contents are what it includes.

• Assuming only start-ups need plans.

  Put it right: Existing businesses may also plan when launching a new product or entering a new market.

• Ignoring the role of planning in securing finance.

  Put it right: Lenders often require a plan before approving a loan.

Exam tips

• Link the purpose of planning to specific benefits, such as helping to secure a loan or avoid cash flow problems.
• Use examples to show how a plan helps a business, such as a plan showing a break-even level of sales.
• For higher marks, evaluate the limitations of planning, such as the difficulty of forecasting accurately.