Introduction to business planning for manufacturing businesses
Planning your business success
A manufacturing business has some very clear elements to being able to sustain its operation and further make a desirable profit.
Whether the manufacturing business is a sole trader manufacturing one-off product, or a large scale operation mass producing a high volume of product, the base elements for business sustainability are the same. The business must have the required know-how to make the product, in a facility that allows the product to be manufactured successfully, with enough equipment and people resources to complete the manufacturing process efficiently enough to gain profit from the product produced.
The business must also manufacture product that the market is willing to purchase, at a price the market is willing to pay, and at a volume the market demands. The relationship between what the business is able to manufacture verses what the market demands is often a balancing act and should be regularly reviewed to confirm the direction the business is going in is the right direction.
Many manufacturing businesses have experienced changes in how their business may operate from the onset of Covid in various ways, with staffing issues and manufacturing interruptions.
Further to the manufacturing interruptions are the recent increases in overhead costs with the rising minimum hourly rate, additional employee holidays, and other employee benefits being introduced. The current health mandates may impact on staff availability and the ability to employ further staff if required.
There are a range of associated less obvious factors influencing the operations of the business. The product that was previously popular may not be wanted now, may not meet current market purchasing trends, or is unaffordable in the current economic environment. There may be difficulties with the supply chain or raw materials/distribution systems within NZ and/or off-shore that have been disrupted, causing difficulty in accessing raw materials or the consumer market.
The additional manufacturing costs adding to the manufacturing cost (cost of goods sold) needs to be balanced against the margin that may be gained, to ensure the business retains a level of profit to sustain the operations of the business.
There are many variables that may impact on a manufacturing business that could either benefit or stifle the ability of the business to survive. There is never a more important time to plan a pathway forward for the business than now, as change can be just as much of a benefit as it can be a threat to the survival of a manufacturing business.
The importance of planning
Starting or continuing with a manufacturing business carries a level of excitement balanced with an amount of risk as there is always an element of the unknown with how the cost of manufacture might change, does the consumer market still want what is on offer, and can the consumer market still afford to purchase the product.
The business owner feels passionate and enthusiastic about what they might achieve when embarking on the adventure of manufacturing their creations with the desire to transform their business ideas into products to gain profitable and successful outcomes.
Being aware of overhead variations and market trends that may influence demand for the product being manufactured may reduce the risk of the business manufacturing a product that is not in as much in demand by the market than previously. Attempting to battle through the changes without considering any variation to the process or cost factors may have consequences that are not favourable for the business.
Continuing to do the same without consideration to changes that may be occurring that affect the manufacturing or distribution of a business is a bit like going into battle without a battle plan, which would be madness for any general to even think of doing, as the losses would be great with few benefits, yet some enthusiastic manufacturing business owners feel that marching forward whilst blindfolded might be worth the risk.
Passion and enthusiasm should not be confused with strategically planned drive and determination, as there is a mountainous difference between acting on impulse and acting on a measured approach.
Simply relying on passion and the desire to succeed can also cause the downfall of the very outcome the manufacturing business owner was hoping to achieve. Passion and enthusiasm can easily override sensibility and a measured approach in starting a business borne from a product creation, yet it is also passion that is one of the most important ingredients needed for a business owner or entrepreneur to initiate and grow a business.
What is a Business Plan
The meaning of the word ‘plan’ as described in the dictionary is “the representation of anything drawn on a plane, and forming a map or chart; a scheme devised; a project; disposition of parts according to a certain design; a method or process; a way; a mode. To invent or contrive for construction; to scheme’ to devise; to form in design.”
Why have a Business Plan
Developing a plan prior to initiating a manufacturing business would assist in identifying any risks that may arise and how those risks could be reduced should they occur. The plan can also guide the business owner to issues such as how to sustain the manufacturing business whilst moving through various hurdles once the business has been established, and the identifying financial impacts of the business from conception, through to profitability.
Types of Business Plan
A basic plan may be used for an individual starting their own business in providing goods to an organization or collection of organisations. It may be that the individual has left employment and is offered a long term contract with the organization they had left or another similar organization. For the individual to provide such services, they may have to initiate a business entity as a sole trader or possibly a limited company.
In doing so the individual may consider developing a basic plan for their business, as there may only be a low level third party (i.e. accountant, lawyer) requirement to view such a plan. The basic plan would simply entail the steps taken to transition from past employee into a business entity, and further maintain a level of financial sustainability that suits the individual.
A basic plan might include information such as:
- Who owns the business (individual or shares)?
- What type of business entity is required?
- How will the financial matters be managed?
- Are there any medium or long term liabilities that need to be managed?
- What are the products/services of the business?
- Are there any constraints in conjunction with the customers?
- What are the business liabilities and risks?
- Will the business plan for any further employees in the future?
- What is the duration of any long term contracts, and what happens when the contracts expire?
- What is the exit strategy of the business?
If the business has no intention of employing staff, does not operate from a leased or purchased facility (operated from home), does not require any marketing input to gain or maintain a customer base, and has no or low equipment overheads to maintain the product/service, a basic plan may provide all that is needed for the business to operate.
When wanting to initiate, restart, or grow a business that has employees, regular overhead costs, or a need to gain and maintain a customer base, having a plan for the business would be valuable.
As with all business entities in NZ business ownership carries a significant level of accountability. The business owner is entirely accountable for all actions within the business and carries the responsibility for anything that occurs within the business they own, whether the business is new or long established.
A component of that responsibility is the business owner being aware of the risks the business may be affected by, having enough financial support to ensure the business will survive the start-up process, implementing and monitoring all regulatory and compliance measures, and ensuring that all employees and other stakeholders are protected by the required employment and safety measures required of the business.
If things go wrong within the business, it is the business owner’s responsibility to show they had taken all practicable steps to identify the possible risks and have a plan to mitigate them. If no evidence can be provided showing the due diligence the business owner has taken, it is likely the business owner could be held accountable by the current government Laws and Acts for negligence of operating the business at risk.
As a business grows to a size needing employees, and further requiring a director, or board of directors that are not owners of the business, liability for any adversities within the business will reflect on the directors initially, then liability may continue through to the shareholders of the business, depending on the adversity and business structure.
One of the mechanisms to reduce negligence is to construct a business plan that would indicate the risks that have been considered and the actions to be applied to mitigate the risks, should they occur.
The business plan should include the critical operational components of the business that need to be managed, supply chain requirements, and the financial impact of implementing the business as well as any growth strategies. Prior to constructing the business plan, identifying who will view the plan and why, will influence the level of detail required. Third party stakeholders viewing the plan will want to understand the direction the business in heading in, and will seek to gain confidence in the soundness of the business, including the competency of the business owner.
Stakeholders that may seek to view a business plan:
- Shareholders (Stock Market listed)
- Management team & employees
- Regulatory & compliance stakeholders
- Banks (for borrowing)
- Suppliers (supply agreements)
- Large Customers (supply agreements)
- Community (based on the product/service)
The business plan should provide enough detail for the plan to clearly indicate the information required to specify what type of business entity it is, what is the purpose of the business, who owns the business, is there enough financial input, what are the risks and have they been mitigated.
There are many types of templates for business plans for a wide range of businesses ranging from owner operator sized businesses through to multi-national corporations. Small to medium business entities wouldn’t be expected to produce the depth of detailed documentation more commonly produced in businesses listed on the stock exchange, or the multi-national corporations, yet there is a framework with minimal information to provide a clear pathway and intent for the business, without the need to document details that may not be significant to the business.
Noel Rodgers MBA – CMC
For further information on this subject please email Noel Rodgers
E email@example.com M 0274 775583