The purpose of planning business activity
Minimising risk
A business planA business plan is a document created by a business or entrepreneur that provides details about each element of the business. allows an entrepreneurA calculated risk-taker who sets up a business in return for financial gain. to minimise the level of riskAn estimate of the probability of an unwanted outcome. It depends upon the chance of it happening and the consequences if it did happen. when setting up a business. This is important because there is a high risk of business failure within the first year.
Lu Li talks about the importance of internal growth for a business
When creating a business plan, an entrepreneur has to consider all of the key elements of a business and address any issues. They must also conduct market researchMarket research involves gathering data about customers, competitors and market trends. around their idea to gain a better understanding of the market, their potential customers and where to locate the business. Market research will also help them to create aims and objectivesA business aim is the overall target or goal of the business, whereas business objectives are the steps a business needs to take to meet its overall aims. for the business. The two types of market research a business might undertake are primary and secondary research.
One of the key documents used to minimise risk in a business plan is a cash flow forecast A prediction of the money flowing in and out of a business.. This is a prediction of the money a business might have coming in or going out over a period of time. By completing a cash flow forecast, an entrepreneur will see if there are any times of the year when they may lose money. They can then use this information to make changes to their budgetA plan for expected income and spending over a specified time period. and payments or increase receiptsThe money flowing into a business, otherwise known as inflows..
Obtaining finance
A business plan is essential when a new business is attempting to raise financeAny form of money used by a business. from a bank or potential business investorA person or group that buys part of a business with the aim of making money.. An entrepreneur is able to take a business plan into a meeting with a bank or investors to provide evidence of why the entrepreneur believes the business will succeed.
When an entrepreneur applies for a loan or for a mortgageA special loan taken out by some property buyers, where the more money you borrow, the more you will pay back in interest payments. Also the longer you take to repay your mortgage, the more interest you will pay. on a building, the bank reviews the business plan and decides whether it believes the business will be a success. If the bank thinks the business is too risky and may not succeed, it may decide not to let the business borrow money.
Investors want to see a business plan to ensure that they will not lose money. The primary purpose of an investor is to make more money, so they want to make sure the business has the potential to be a success.
