Making Small Business Planning Easier

By Amer, Tarek S.; Bain, Craig E. | Journal of Accountancy, July 1990 | Go to article overview

Making Small Business Planning Easier


Amer, Tarek S., Bain, Craig E., Journal of Accountancy


Small businesses--those with annual sales of less than $5 million-account for almost 97% of all U.S. businesses and 45% of the gross national product. An estimated 100 million Americans, more than half the labor force, rely directly or indirectly on small companies for their livelihood.

Venturing into a small business is risky. The estimated average mortality rate of U.S. businesses is more than 10,000 a year, with a failure rate of about 70% for small businesses. Most small business failures occur in the first year of operation due to insufficient sales, high operating expenses, receivable difficulties, poor inventory management, inadequate financing and cash flow problems. Timely forecasts and planning can help prevent these problems and allow the company to be prepared when an emergency arises. "Strategic Planning: What CPAs Need to Know" (see page 32 of this issue) deals with comprehensive strategic planning. This article discusses business planning for small companies and reviews five microcomputer software packages that facilitate the planning process.

IMPORTANCE OF PLANNING

Decision-making in the small business environment often is characterized by intuitive, "seat-of-the pants" speculation. Decision-making is thought to be done via crisis management--putting out one fire to move on to the next. But the successful business plans systematically for the future, avoiding or significantly reducing the impact of crises.

Although many studies of small businesses have shown a positive relationship between formal planning and organizational performance, such planning is not practiced often by small companies. This is mainly because smaller companies do not have the staff or time to engage in formal planning. Generally, the top manager in a small business is more concerned with running daily operations than with planning for long-term business success.

The planning process forces a company to look at future business operations. Planning means problems can be anticipated and solutions developed. Plans that are well developed, implemented and controlled contribute significantly to a company's success.

TYPES OF PLANNING

There are two main areas of planning: long-range and short-term, or operational. Both are necessary for the success of any business venture.

Long-range planning includes a company's efforts to monitor, understand and adapt to a changing environment in order to establish and maintain a favorable competitive position. Environmental assessment, internal analysis and the development of goals, objectives and supporting strategies all affect small business success positively. Time horizons for long-range plans can extend from 3 to 20 years; 3 to 5 years is the norm.

Developing a long-range plan helps the small business differentiate itself from its competitors by requiring management to examine its business mission. And companies with established distinctive competencies are most likely to succeed.

Operational planning is a detailed, quantitative plan that specifies both how the goals for the coming year will be attained and the procedures for managing daily operations. The operational plan outlines the spcific steps to accomplishing the long-range plan. It thus plays a major role in implementing business strategies by translating long-range plans into action.

MICROCOMPUTERS AND THE

PLANNING PROCESS

Recent advances in both hardware and software technology capabilities, coupled with price declines, have fueled computer usage in small companies. Microcomputers provide an effective tool for small businesses to carry out the essential tasks of bookkeeping and financial statement preparation. In addition, microcomputers can mold data into many useful forms and carry out analysis of numerous "what if" scenarios. For example, microcomputers can quickly calculate what the effect on financial statement line items will be if the sales projection is changed. …

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