34 Accounting: Business Reporting for Decision Making
plan than other businesses, the mere existence of a plan does not ensure survival (Perry 2001). Business
plans do not eliminate uncertainty, because no business entity exists in a completely predictable environ-
ment. In addition, many entrepreneurs express the view that a high level of planning will reduce their
flexibility and room to move, rather than enhance it (Gibb & Davies 1990). In some cases, an inflexible
over-reliance on a predetermined plan, even in the face of overwhelming evidence of significant changes
taking place in the business environment, can do more damage to the business than might otherwise be
the case. There is also evidence emerging that the process and focus of plans (on marketing, operations
or finance) should change in response to the prevailing environmental circumstances (Gruber 2007).
There are several other pitfalls that may reduce the effectiveness of a plan. Common failings can
include a lack of sufficient detail in explaining the intentions of the small business owner; reliance on
outdated, limited or biased information; failure to undertake detailed market research to validate the
sales forecasts, expense estimates and marketing plans of the business entity; and preparation of a docu-
ment that appears self-evident to the writer, but cannot be understood by other readers (Crawford &
Merle 2003).
Just how effective are plans to the overall success of a business? A recent extensive study aggregating
the findings of many incidences of business planning undertaken in the period 2007–2010 provides per-
haps strong evidence of the value of business planning (Burke, Fraser & Greene 2010). The aggregated
analysis shows that there is indeed a significant positive relationship between planning and performance.
Whilst planning was shown to be important for new firm performance, this need was identified as even
stronger for existing firms, which can draw upon internal knowledge and data to aid in their future fore-
casting and planning.
Components of a business plan
There is no universal format for a business plan; however, most business plans contain a common mix of
items, since there are universal issues that are dealt with by all business entities. The main issues dealt
with in all business plans can be broadly grouped into those relating to marketing, operations and finance
(see figure A1.1).
MarketingFinanceBusiness
planOperationsFIGU R E A1.1 Central components of a business planThese three components — marketing, operations and finance — are universal. All business owners
need to research their market, know their customers, understand the state of the industry they operate
in and have a comprehensive knowledge of the products or services they sell. They must also be able
to structure, manage and operate the business in a logical manner so that it can work effectively on a
day-to-day basis. Finally, they must know how much money is required to start the business, its prospec-
tive sales turnover and what returns they are likely to receive from it. One possible format of a plan is