What Factors Can Affect the Planning Function of Management?
When planning his company, the small-business owner first develops a vision for the company’s future, including the most important goals he intends to achieve. He then determines the strategies and tactics he will employ to manifest his vision. Planning also involves forecasting the revenues, expenses and profit for his company. Both internal factors -- those within the company -- and external factors in the business environment can cause the planning function to be more difficult and sometimes less effective than the small-business owner anticipated.
Accurate planning is easier if the small-business owner has solid data -- actual financial results -- to use as a basis for her projections. Early stage companies do not have a great deal of past results to go on. If the company is operating in a small or emerging market, it can be difficult to predict what the growth rate of the industry is likely to be. The small-business owner may spend significant marketing dollars assuming the market is poised for explosive growth only to find the customers aren’t yet there and ready to buy in the numbers she expected.
When the overall economy or an industry is facing turbulence, planning is more difficult. When a recession begins, companies must attempt to forecast how severe the downturn will be and determine how to maintain sales and profit levels despite the negative environment. Companies face threats from new competitors entering the market and from changes in technology that may reduce their competitive advantage. Companies operating in stable environments can plan the upcoming year and beyond more easily. A small-business owner coping with rapid change may elect to revise his plan more frequently than once a year, because by midyear, for example, the original plan may not fit the current environment.
Planning has a strategic aspect that requires creative thinking and the ability to envision what the future will look like and a financial aspect that requires being able to make detailed, realistic projections of revenues and expenses. Ideally the small-business owner will have both of these skill sets. If not, she may engage a business planning consultant to guide her through the planning process and help her develop an ongoing planning system.
With practice -- going through annual planning several times -- her planning skills will sharpen. She will be better able to judge whether her projections are realistic, and the variances of actual results to forecasts will be smaller than in the past. She will also know which economic indicators -- such as interest rates -- have the greatest impact on the business and develop a system to closely monitor those.
Some small-business owners and managers consider a formal annual planning process to be a waste of time. Others go through the process halfheartedly. A small-business owner with little planning experience often realizes how valuable the process can be in helping him stay ahead of his competition, grow the business more quickly and manage the company’s finances more efficiently. For planning to be truly effective, the small-business owner must let all of his employees know that he views the planning process as a critical business function and devote the time required to prepare a thorough plan.