The purpose of planning business activity: ● the role and importance of a…

The idea

Planning business activity is essential for transforming an idea into a viable enterprise. The primary purpose of a business plan is to minimise risk and obtain finance. By forcing an entrepreneur to research their market and forecast financials, the planning process highlights potential pitfalls before money is spent, thereby minimising the risk of failure. Furthermore, external providers of capital require a business plan to assess the viability of the enterprise before providing sources of finance.

For example: A bank will review a startup's cash-flow forecast within the plan to ensure the business can afford monthly loan repayments, reducing the lender's financial risk and securing the necessary capital.

What earns the marks

• A business plan helps to minimise risk by forcing entrepreneurs to anticipate potential problems and plan solutions.
• Thorough planning reduces the likelihood of financial loss by identifying unviable ideas early.
• Obtaining finance from banks usually requires a formal business plan to prove the business is capable of repaying the debt.
• Equity investors use the business plan to assess the level of risk and potential return before committing their capital.

Common mistakes and how to put them right

• Claiming that a business plan eliminates all risk.

  Put it right: State that a business plan minimises or reduces risk, as external factors can still cause failure.

• Assuming only startups need business plans.

  Put it right: Established businesses also use plans to obtain finance for expansion and to minimise the risks of growth.

• Stating that a business plan is only for internal use.

  Put it right: Recognise that obtaining finance requires sharing the plan with external stakeholders like banks.

Exam tips

• If a question asks why a business was denied a bank loan, suggest that they may have lacked a detailed business plan.
• Always pair 'minimising risk' with a practical example, such as using market research to avoid launching an unwanted product.
• When evaluating the usefulness of a business plan, weigh the benefit of obtaining finance against the time and cost required to create accurate forecasts.