Business planning: the purpose and content of a business plan, the benefits and drawbacks of planning, and how a plan supports raising finance and reducing risk.

What this topic is asking

OCR J204 topic 1.2 wants you to explain what a business plan is for, what it contains, and the benefits and drawbacks of producing one. The exam often asks you to identify the contents of a plan, then to judge how useful planning is for a particular start-up. It links closely to finance (the plan contains the cash-flow forecast and sources of finance) and to aims and objectives (which the plan sets out).

What a business plan is

What a business plan contains

OCR likes you to know that the financial section is central: it shows the bank or investor how much money is needed, what it will be spent on, and when the business expects to make a profit.

The purpose and benefits of planning

A business plan does three main jobs:

1. Gives direction. It turns a vague idea into clear aims, objectives and actions, so the owner and any staff know what they are working towards.
2. Reduces risk. Writing the plan forces the entrepreneur to research the market, estimate costs and spot problems before committing real money. A weakness on paper is cheaper to fix than a weakness in a running business.
3. Helps raise finance. Banks, investors and grant providers will not usually hand over money without a credible plan. The plan demonstrates that the owner has thought the idea through and that the numbers add up.

The drawbacks of planning

Planning is not a guarantee of success. The main drawbacks OCR expects you to weigh are:

• It takes time and effort to research and write, which a busy entrepreneur might prefer to spend on the business itself.
• Forecasts can be inaccurate. Sales and cost predictions are estimates; a new competitor, a price change or an economic downturn can make them wrong quickly.
• It can give false confidence. Over-optimistic figures may make a weak idea look stronger than it is, leading the owner to commit when they should not.

The balanced view, which scores well in evaluation questions, is that a plan is a valuable tool provided it is realistic and updated, not a promise that the business will succeed.

Try this

Q1. State two reasons a bank would want to see a business plan before lending. [2 marks]

• Cue. It shows the idea is researched and credible; it shows how the money will be used and repaid.

Q2. A plan forecasts inflows of $5{,}000$ and outflows of $4{,}200$ in a month, with an opening balance of $1{,}000$. Calculate the closing balance. [2 marks]

• Cue. Net cash flow $= 5{,}000 - 4{,}200 = 800$; closing balance $= 1{,}000 + 800 = 1{,}800$.