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Chapter 06 - Planning, Organizing, and Managing a Small Business
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CHAPTER
6
Planning, Organizing, and
Managing a Small Business
CHAPTER CONTENTS
Learning Objectives 6.3
Chapter Overview 6.3
Brief Chapter Outline 6.3
Chapter Outline and Teaching Notes 6.4
Learning Objectives Revisited 6.29
6-1
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
Key Terms Used in this Chapter 6.30
Notes for Discussion Questions 6.32
Bonus Exercises 6.34
6-2
whole or part.
LEARNING OBJECTIVES
After studying the material in this chapter, the student will be able to:
1. Tell why planning is so important—yet so neglected—in small businesses.
2. Explain the role of strategic and operational planning, and give some examples.
3. Explain the role of financial planning, and give some examples of it.
4. Tell why a business plan is needed and what purpose it should serve.
5. Prepare a sample business plan.
CHAPTER OVERVIEW
Chapter 6 focuses on planning. The Profile illustrates some of the problems and steps
involved in planning, organizing, and developing new business. The first three of those were
discussed in Chapter 5. Income, expenses, funding, and essentials of preparing a business plan.
New this issue is an in-depth Business Plan for Southern Comfort Carriage Rides.
BRIEF CHAPTER OUTLINE
I. WHY IS PLANNING SO IMPORTANT TO SMALL BUSINESSES?

A. Why Small Businesses Need to Plan
B. Why Small Businesses Neglect Planning
II. THE ROLE OF STRATEGIC PLANNING

A. SWOT Analysis
B. Mission and Objectives
C. Vision
D. Strategies
III. THE ROLE OF OPERATIONAL PLANNING

A. Setting up Policies, Methods, Procedures, and Budgets
B. Planning to Operate the Business
6-3
whole or part.
IV. THE ROLE OF FINANCIAL PLANNING

A. Estimating Income and Expenses
B. Estimating Initial Investment
C. Locating Sources of Funds
V. THE ROLE OF THE BUSINESS PLAN IN STRATEGIC AND OPERATIONAL

PLANNING
A. Purposes of the Plan
B. What the Plan Should Include
VI. PREPARING THE PLAN

A. Who Should Prepare the Plan?
B. Developing Action Steps
VII. COMPONENTS OF THE PLAN

A. Cover Sheet
B. Executive Summary
C. Table of Contents
D. History of the (Proposed) Business
E. Description of the Business
F. Definition of the Market
G. Description of the Product(s)
H. Management Structure
I. Objectives and Goals
J. Financial Data
K. Appendices
VIII. PRESENTING THE PLAN

A. Writing the Plan
B. The Written/Oral Presentation
IX. IMPLEMENTING THE PLAN
X. SAMPLE BUSINESS PLAN
6-4
whole or part.
CHAPTER OUTLINE AND TEACHING NOTES
CHAPTER OPENING PROFILE:

Sam and Teresa Davis Do Their Homework Before Launch
Sam and Teresa Davis, decided to open a school supply company. They started their
venture the right way—by doing extensive strategic and operational planning. Then they gathered
all the information together to create a detailed business plan. One result of their careful planning
was being able to identify an unmet need and design their store to provide a work area for students
and educators. Sam Davis said there were ups and downs as in any other business, but they were
able to succeed by building relationships with area schools and with their customers. After 22
years, Sam and Teresa decided to “Slow down and focus on family”. Slowing down may have
been a dream as the couple has 8 grandchildren. Learning Experiences of Northport, Alabama,
closed its doors in 2016.
I. WHY IS PLANNING SO IMPORTANT TO

SMALL BUSINESS? (You Must Look
Ahead!)
Learning Objective 1.
Tell why planning is so important—yet so neglected—in
small businesses.
A. PLANNING is the process of setting
objectives and determining actions to
reach them.
1. Answers questions:
a. What business am I in?
b. What finances do I need?
c. What is my sales strategy?
d. Where do I find personnel?
e. How much profit can I expect?
2. Criteria of Terry Thomas, business
owner.
a. Be prepared.
b. Be patient.
c. Know when to get help.
d. Form your own support system.
e. Know the power of vertical inte-
gration.
6-5
whole or part.
f. Never rest on your own laurels.

B. Why Small Businesses Need to Plan
1. Planning, one of the most difficult
activities, is necessary to know where
you are going and how to get there.
2. Well-developed plans can:
a. Interest moneyed people in
investing in your business.
b. Guide the owner and managers
in operating the business.
c. Give direction to and motivate
employees.
d. Provide an environment to attract
customers and prospective
employees.
e. Planning helps the owner pre
pare to take advantage of pro-
missing opportunities and cope
with unexpected problems.
C. Why Small Businesses Neglect Planning
1. Day-to-day activities leave owners
little time for planning.
2. They fear the problems and
weaknesses planning may reveal.
3. They lack knowledge of how to plan.
4. They feel future changes cannot be
planned.
II. THE ROLE OF STRATEGIC PLANNING

Explain the role of strategic and operational planning, and
give some examples.
6-6
whole or part.
A. STRATEGIC PLANNING provides

comprehensive long-term directions to
help a business accomplish its mission.
1. Mission Example from Chapter 4:
(Www.asplandh.com) Asplundh, “Our
Mission is to be the recognized world
Leader in providing professional
safe, cost-effective and environment
tally sustainable vegetation manage-
ment and other utility related ser-
vices.”
2. Examples of strategic planning
a. Selecting the type of business to
enter.
b. Formulating the company’s
mission.
c. Deciding whether to start a new
business, buy an existing one, or
buy a franchise.
d. Choosing the product or service
to sell.
e. Deciding the market niche to
exploit.
f. Choosing the type of organization
to use.
g. Determining financial needs.
h. Selecting the location for the
business.
REAL WORLD EXAMPLE 6.1
A recent study by three CPAs focused on the importance
of location to small business. Firms that succeeding were
those that differentiated themselves from the mainstream.
6-7
whole or part.
B. SWOT Analysis
1. A SWOT (Strengths, Weaknesses,
Opportunities, and Threats) analysis
is a tool to scan the business’s
environments, and base objectives.
2. SWOT analysis can be organized as
a matrix:
a. Internal environment: Strengths
and Weaknesses.
b. External environment:
Opportunities and Threats.
3. The goal is to eliminate weaknesses
and threats and capitalize on the
strengths and opportunities.
C. VISION, A Business Vision Explains
what the business is striving to
become in the future.
D. Mission and Objectives
1. A business’ MISSION statement
defines the present business scope
and broadly describes the
organization’s present capabilities,
focus, and activities.
a. A clear definition of the mission
enables you to design results-
oriented objectives and
strategies.
b. A good mission statement
defines exactly the identity of
your business and allows all of
your planning to flow from it.
Real World Example 6.2
6-8
whole or part.

Carpe Diem (Beginning Profile for Chapter 14) developed a
mission statement that covered business goals, community
objectives, and social needs.
c. OBJECTIVES are the purposes,

goals, and desired results for the
business and its parts.
d. Objectives are more specific than
missions and are revised more
frequently.
e. Creating the mission and
objectives involves the
business’s external environment
and the internal resources.
2. The External Environment
a. External environmental factors to
consider include:
(1) Competitors.
(2) The U.S. market climate.
(3) Clients.
(4) Legal and political factors.
(5) The economy.
(6) Changing demographics.
(7) Foreign competition.
b. This is part of the SWOT
analysis—opportunities and
threats.
c. Changes in the external
environment such as technology,
as well can be a blessing or a
death knell.
3. The Internal Resources and
Competitive Edge
6-9
whole or part.
a. HUMAN RESOURCES are the

personnel that make up the
business’ workforce.
(1) Human resources includes
both management and
nonmanagement people and
include key operating
employees. To keep the
company competitive, these
people must be motivated
and qualified.
B PHYSICAL RESOURCES are
the buildings, tools and
equipment, and service and
distribution facilities that are
needed to carry on the business.
(1) These resources must be
Strategically located, be pro-
ductive, be low in operating
costs, be effective distribu-
tors, and make the proper
product.
c. FINANCIAL RESOURCES
include cash flow, debt capacity,
and equity available to run the
business.
(1) To make the company com-
petitive, company finances
must be adequate to main-
tain current levels of activi-
ties and to take advantage
of future opportunities.
6-10
whole or part.
4. A COMPETITIVE EDGE is a
particular characteristic that makes a
firm more attractive to customers than
are its rivals.
a. To be effective a small business
must align its mission, objectives,
and resources with its environ-
ment.
D. Strategies
1. STRATEGIES are the means by
which a business achieves its
objectives and fulfills its mission.
a. Should give the business.
a competitive advantage in
the marketplace.
b. Should combine activities such
as marketing, production, opera
tions, and resources with its envi
ronment.
III. THE ROLE OF OPERATIONAL PLANNING

A. Three types of planning improve a small
business owner’s chances of success:
1. Strategic planning before starting the
business.
2. A business plan to attract investors,
financiers, and prospective
employees.
3. Continuous planning and control after
the business starts operating.
6-11
whole or part.
B. Setting Up Policies, Methods,

Procedures, and Budgets
1. OPERATIONAL PLANNING sets
policies, methods and procedures,
budgets, for achieving objectives.
a. Form the basis for the other parts
of operational methods and
planning.
2. POLICIES are general statements
that serve as guides to managerial
decision making and supervising
activities—they guide action.
a. Policies exist so that managers
can delegate work and employ-
ees will be able to make con-
sistent decisions.
4. METHODS AND PROCEDURES
provide standing instructions to
employees on how to perform their
jobs.
5. BUDGETS are detailed plans,
expressed in monetary terms, of the
results expected from officially
recognized programs for a given
future period.
a. Budgets set the requirements
needed to follow the strategies
and accomplish the objectives.
C. Planning to Operate the Business
should include:
1. Choosing your location:
a. The type of business influences
6-12
whole or part.
most of your location decisions.

2. Planning operations and physical
facilities ( A firm’s ability to sell its
product is based on its ability to
produce that good, or service, as well
as on its market potential.)
a. Good selection and efficient
arrangement of physical facilities.
b. Too much capacity increases
costs, and can reduce the
company’s competitive position.
c. Too little capacity can mean lost
sales, reduces availability of
goods and causes loss of sales.
d. Planning starts with the estimate
of sales and the operations
needed to produce the
product(s).
e. A key decision is whether to buy
facilities or lease them.
3. Developing sources of supply for
goods and materials
a. The largest expense for
companies selling products
usually is purchasing materials,
supplies, and goods; this cost is
often more than 50% of products
sold.
b. The business must have sources
of supply that meet its standards
in all ways, including competitive
prices.
4. Planning your human resource
requirements
6-13
whole or part.
a. HUMAN RESOURCE
PLANNING is the process of
converting the business’ plans
and programs into an effective
work force. (Chapters 10 and 11
also covers HR.)
(1) The less time the owner can
devote to the business, the more
important it is to have capable
employees.
(2) How many do I need
(3) Where will I find them?
(4) How much do I pay them?
5. Setting up the legal and
organizational structure
a. Retaining too much authority can
kill the business. Be aware of
setting up too rigid of a structure.
b. The legal form of a business
must also be decided.
d. The administration structure
should be based on:
(1) The strategic plan.
(2) The owner’s personal and
business objectives.
(3) The plans, programs,
policies, and practices that
will achieve those objectives.
(4) The authority and
responsibility relationships.
6. Determining your approach to the
market
6-14
whole or part.
a. If the environmental study shows

market potential, plans must be
made to capture enough of that
market to be successful.
b. The selected target market then
has to be reached, including
sales promotion and distribution.
(1) You must tell potential cus-
tomers about the business.
(2) Choose methods of mar
- keting best suited to this
business.
a. Consider your product.
(1) What qualities make it
special to the customer?
(2) Are there unique proper
ties?
Earl Tupper didn’t accept rejection by large retailers. He
took his rubber dustpan directly to consumers, and
Tupperware was born.
7. Establishing an efficient records

system:
a. Keep track of activities and
obligations.
b. Keep records of information
demanded by government and
outside agencies.
c. Keep all personnel records:
(1) Date employees hired,
(2) Hours worked, and
(3) Wages and benefits paid.
6-15
whole or part.
d. Inventories, accounts receivable,

and accounts payable.
e. Taxes paid and owed.
d. Units of each product sold.
8. Setting up a time schedule
IV. THE ROLE OF FINANCIAL PLANNING

Explain the role of financial planning, and give some
examples of it.
A. FINANCIAL PLANNING involves
determining what funds are needed,
where they can be obtained, and how
they can be controlled; it should include at
least these activities:
1. Estimating income and expenses.
2. Estimating initial investment required.
3. Locating sources of funds.
B. Estimating Income and Expenses
1. Income from sales (revenue) can be
estimated by market study.
2. Expenses ( costs) can be calculated
from past experience, knowledgeable
People, trade associations.
3. NET PROFIT is the amount of
revenue (sales) over and above the
total amount of expenses (costs) of
doing business.
a. Expenses and income (or loss)
estimates are usually made for
only the first year of operations.
6-16
whole or part.
b. Total expenses move up and

down with sales volume, but they
do not vary as much.
3. VARIABLE EXPENSES change in
relation to volume of output: when
output is low, the expenses are low,
and when output is high, expenses
rise.
4. FIXED EXPENSES do not vary with
output, but remain the same.
5. Do not forget to prepare a personal
budget!
a. Estimate your continuing needs
and where you will get the re
sources to satisfy them.
C. Estimating Initial Investment
1. To start your business, you must pay
for buildings, equipment, personnel,
inventory, machines, business forms,
and sales promotions.
2. Using credit adds to business
expenses.
3. The cash needed to start the
business represents the delay
between paying money out for
expenses and receiving it back as
revenue.
3. Starting Inventory is an illustration of
buying goods inn one period, and
selling them in another.
4. Inventories of goods and supplies—in
the form of purchases and recurring
inventories—continue to exist for the
life of the business.
6-17
whole or part.
5. Funds obtained from investments in

the business or from loans must
continue for its life unless they are
paid off.
6. Because cash does not produce
revenue, it should not remain idle.
7. Projections should be made for the
use of CASH FLOW—the amount of
cash available at a given time to pay
expenses. (See Chapter 15
Worksheet.)
D. Locating Sources of Funds
1. There are basically two sources of
funds: the owner and others. (These
will be discussed in detail in Chapter
7/)
2. Using Your Own Funds
a. Decide how much money you
and others will put into the
business, and how much will
come from other sources.
b. To maintain control, the owner
must continue to invest more
personal funds than all the other
investors combined.
c. The owner can maintain control
only so long as lenders do not
become worried about the safety
of their money.
d. With your own capital, you can
lend money to your business set
loan conditions, and pay the loan
off to yourself with interest.
6-18
whole or part.
3. Using Funds of Others.

a. EQUITY INVESTORS are those
who actually become part owners
of the business.
b. LENDERS are those outsiders
who provide business owners
money for a limited time at a
fixed rate of interest.
(1). Investors accept risk for the
opportunity to share future
returns.
(2) Lenders require some secu
rity to offset risk.
b. Microloan is a small short-term
loan provided by the SBA
through intermediaries.
c. Venture Capitalists capitalize a
business start-up in return for
partial ownership.
(1) They seek high-risk busi-
nesses that show the poten-
tial for high profit.
e. You may be able to find investors
interested in a venture
opportunity among friends,
relatives, bankers, etc.
f. A well-prepared business plan is
essential to attract investors and
lenders.
g. Start-up Accelerators are programs
that include mentorship and educa-
tional components, culminating in a
pitch event on Demo Day.
6-19
whole or part.
E. Jump-start Our Business Startup Act

1. The Jobs Act of 2012 is a way
for small business to sell to
moderate investors instead of
just “Accredited Investors”.
2. Investors see modest profits
small business get much-needed
cash, allowing them to add jobs
and become a healthy presence
in the community.
3. The Wall Street Journal (02 Jan
2016) sees it as a “Return to
intrinsic values, helping those
around you.”
4. This could also lead to few jobs
outsourced, bring back the
Slogan: “Buy American.”

Lucy Valena received a $4,000 microloan through the
Samuel Davis Brewing American Dream program to help
launch her coffee business.
V. THE ROLE OF THE BUSINESS PLAN

IN STRATEGIC AND OPERATIONAL
PLANNING
Tell why a business plan is needed and what purpose it
should serve.
6-20
whole or part.
A. All planning should to be formalized into a

business plan.
1. A BUSINESS PLAN is a formal plan
prepared to serve as a tool for
attracting the other components of
the business formation package,
including people and money.
2.
A well-developed and well-presented
business plan gives entrepreneurs a
greater chance for succeeding.
B. Purposes of the Plan
1. The business plan keeps your
thinking on target and concentrates
your power on reaching your goal.
2. The plan can be a money-raising tool
to attract venture capital.
3. Others use a formal business plan to
obtain loans from lending agencies.
4. Business plans are also a detailed
blueprint to guide the continuing
operations of a firm.
Some businesses never revise their business plans.
However, Craig Knour, CEO of Associated Business Systems,
estimates he has revised his plan about 120 times, since
founding the company in 1997.
C. The business plan should include a

detailed analysis of:
1. The proposed product.
2. The expected market for it.
3. The strengths and weaknesses of the
industry.
4. Planned marketing policies, such as
price, promotion, and distribution.
6-21
whole or part.
5. Operations or production methods

and facilities.
6. Financial aspects, including expected
income, expenses, profits, and
expected cash flow.
D. It should answer questions such as:
1. Is the business formation package
complete?
2. Would it be attractive to potential
investors?
3. Does the proposed business have a
reasonable chance for success at the
start?
4. Does it have any long-run competitive
advantages to the owner? To
investors? To employees?
5. Can the product be produced
efficiently?
6. Can it be marketed effectively?
7. Can the production and marketing of
the product be economically
financed?
8. Can the new company’s business
functions be properly managed?
9. Are the needed employees available?
E. In summary, a properly developed plan
serves as:
1. An effective communication tool to
convey ideas, research findings, and
proposed plans for others
2. The basis for managing the new
venture
6-22
whole or part.
3. A measuring device by which to

gauge progress and evaluate needed
changes.
VI. PREPARING THE PLAN

Prepare a sample business plan.
A. Developing a Business Plan
1. Determine where the business is at
present.
2. Decide where you would like to be.
3.
Determine how to get to where you
want to be, identifying the best
strategies.
B. Who Should Prepare the Plan?
1. If the owner is the only one involved,
he or she should prepare the plan
with the advice of competent
advisors.
2. If the business is to be organized and
run by more than one person, it
should be a team effort.
3. Having other key employees help in
the planning stage helps improve
communication and motivation.
One business owner sees his business plan like a
restaurant—solid, consistent, and thorough, with a few grease
stains.
4. There are many software packages

available to help plan and prepare the
business plan.
C. Developing Action Steps (Chapter 5)
6-23
whole or part.
1. Information can be collected using

the steps discussed in previous
chapters, as well as from business
associates, legal, management, and
financial consultants.
2. The focus of the plan should be on
future developments for the business,
including steps to deal with specific
aspects.
3. Realistic, measurable objectives
should be set, and the plan’s steps
should be delegated and monitored.
VII. COMPONENTS OF THE PLAN

A. Information that should be included tends
to be standardized; the format to be used
is not.
1. One entrepreneurial consulting firm
have developed a five step approach
to planning:
a. Discovery
b. Market research
c. Business strategy
d. Communications strategy.
e. Communications documentation
B. Cover Sheet: The cover sheet presents
identifying information, such as the
business name, address, phone number,
and who the principals are.
C. Executive Summary
1. The EXECUTIVE SUMMARY is a
brief overview of the most important
information in a business plan.
6-24
whole or part.
2. Lenders often evaluate the worth of

the plan on the basis of this
summary.
3. This part outlines the entire business
plan, its major objectives, how these
objectives will be accomplished, and
the expected results.
4. The executive summary is just that—
a summary, keep it short.
5. The summary is the first component
of the plan, but the last thing written.
6.
The summary should also contain
sections on the ownership and legal
form of the business.
D. Table of Contents:
Should be written concisely, in outline
form, using alphabetical and numeric
headings and subheads.
E. History of the (Proposed) Business
1. Provide background information on
the person(s) organizing the business
and describe their contributions.
2. Explain here how the idea for the
product or firm originated and how
the idea developed.
F. Description of the Business
1. This definition should describe what
customer needs the business intends
to meet.
2. It is helpful to distinguish between the
owners’ perceptions of the business
and potential customers’ perceptions.
6-25
whole or part.
3. These perceptions should be closely

aligned and compatible.
The description of the business section should analyze the
business from the owner’s perspective and then from the
customer’s perspective. One FM radio station realized that the
two perspectives were out of line and made changes to correct
the mismatch.
G. Definition of the Market

1. This is one of the most important—
and most difficult—parts of the plan to
develop.
2. The definition should indicate the
target of the marketing efforts and the
trading area to be served.
H. Description of the Product(s)
1. Describe the firm’s existing or
planned products and the status of
any ongoing research and
development.
2. Discuss any legal aspects such as
patents, copyrights, trademarks,
pending lawsuits, and legal claims
against the firm.
3. Visuals, such as catalog sheets or
photographs, should be included.
I. Management Structure
1. Describe the management structure,
especially the expertise of the team.
2. Also, discuss employee policies and
procedures.
3. This section should showcase the
ability and dedication of the owner
and staff.
6-26
whole or part.
J. Objectives and Goals

1. Outline what the business plans to
accomplish, how and when it will be
done, and who will do it.
2. Include sales forecasts and financial
plans.
K. Financial Data
1. One important purpose of the
business plan is to show the
expected financial results from
operations.
2. The plan should show prospective
investors:
a. Why they should provide funds.
b. When they can expect a return.
c. What the expected rate of return
will be.
When a restaurant owner analyzed the restaurant’s real
costs and profit, a problem was uncovered. The product cost
for the most popular menu items was only slightly less than
the menu price.
3. Assumptions have to be made about

expected revenues, profits, and future
market conditions, but projections
should be realistic.
L. Appendixes
1. Include the firm’s organizational
structure, shown in an organization
chart.
2. Also include résumés of the officers,
directors, and key personnel.
6-27
whole or part.
3. Historical financial information and

documentation should be included.
VIII. PRESENTING THE PLAN

A. Presenting the business plan is almost as
important as preparing it.
B. Writing the Plan
1. Suggestions:
a. Be honest.
b. Use the third person.
c. Use transitional words.
d. Avoid redundancies.
e. Use short, simple words.
f. Use visuals.
2. The plan should be printed on
standard letter-size paper, with
copies for outsiders attractively
bound.
3. Most business plans can be
presented effectively in 25 to 30
pages or less.
4. The plan should be reviewed by
people outside the firm, such as
consultants and attorneys.
5. The cover and title page should
indicate that the information is
proprietary and confidential.
C. The Written/Oral Presentation
1. The business owner should conduct
the oral presentation in person.
2. In the eyes of the listeners, the owner
is the business.
6-28
whole or part.
3. Provide visual aids for key segments

of the plan.
4. The amount of detail in the market
data and financial projections needed
depend on the plan’s purpose.
5. You may have only one brief
opportunity to present your plan, so
be prepared.
J. Presper Eckert, one of the inventors of the first digital
computers, tried to get IBM to invest in his new company. The
IBM president rejected the business plan, stating that the
market for computers would be too small.
IX. IMPLEMENTING THE PLAN

A. Use a lawyer to help acquire the charter.
B. Obtain the funds and put them in a
checking account.
C. Obtain facilities and supplies, then hire
and train people.
D. Then purchase equipment, establish a
marketing program, and develop
information and accounting systems.
X. SAMPLE BUSINESS PLAN

The appendix for this chapter contains a
sample business plan for a new attraction in
Mobile, Alabama: Southern Comfort Carriage
Ride awaits you.
6-29
whole or part.
LEARNING OBJECTIVES REVISITED
1. Tell why planning is so important—yet so neglected—in small businesses.

● Planning is one of the key managerial functions and since everything else depends on it, it
is usually done first.
● Planning establishes directions and goals for a business.
● Small business owners neglect planning for many reasons, including lack of time, fear of
revealing problems, and lack of knowledge of how to plan.
2. Explain the role of strategic and operational planning, and give some examples.
● Strategic planning consisting of setting the company’s mission, establishing the objectives,
and determining strategies.
● Examples:
○ Selecting the type of business to enter
○ Formulating the mission of the company
○ Deciding whether to start a new business, buy an existing one, or buy a franchise
● A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis can be used to scan
the business’s environments.
● A clear mission statement is needed to design result-oriented objectives and strategies.
● Operational planning is shorter-term planning that sets policies, procedures, and standards
for achieving objectives, including:
○ Policies
○ Methods and procedures
○ Budgets
3. Explain the role of financial planning, and give some examples of it.
● Financial planning involves:
○ Estimating income and expenses
○ Estimating initial investment required
○ Locating sources of funds
● Net profit (or loss) is the amount of revenue (sales) over and above the total amount of
expenses (costs) of doing business.
● Initial investment must be calculated using projected cash flow and one-time expenses.
● Two sources of financing are possible, using your own funds (equity) and using funds from
others (debt.)
6-30
whole or part.
4. Tell why a business plan is needed and what purpose it should serve.
● The research and analysis involved in writing a business plan helps the entrepreneur focus
on the company’s goals and problems.
● A well-developed and well-presented business plan gives entrepreneurs a greater chance for
succeeding.
● The plan can be a money-raising tool to attract venture capital, to obtain loans, and for the
continuing operations of a firm.
● Business plans are also a detailed blue-print to guide the continuing operations of a firm.
5. Prepare a sample business plan.

● The plan should include:
○ Cover sheet
○ Executive summary
○ Table of contents
○ History of the (proposed) business
○ Description of the business
○ Definition of the market
○ Description of the product(s)
○ Management structure
○ Objectives and goals
○ Financial data
○ Appendixes
● Using the information in this and the two previous chapters, a prospective small business
owner should be able to prepare an effective business plan.
KEY TERMS USED IN THIS CHAPTER
Budgets are detailed plans, expressed in monetary terms, of the results expected from officially
recognized programs for a given future period.
A business plan is a formal plan prepared to serve as a tool for attracting the other components of the
business formation package, including people and money.
Cash flow is the amount of cash available at a given time to pay expenses.
A competitive edge is a particular characteristic that makes a firm more attractive to customers than are its
rivals.
Equity investors are those who actually become part owners of the business.
The executive summary is a brief overview of the most important information in a business plan.
Financial planning involves determining what funds are needed, where they can be obtained, and how
they can be controlled.
Financial resources include the cash flow, debt capacity, and equity available to finance operations.
6-31
whole or part.
Fixed expenses do not vary with output, but remain the same.
Human resources planning is the process of converting the business’ plans and programs into an
effective work force.
Human resources are the personnel that make up the business’ workforce.
Jumpstart Our Business Act (JOBS Act of 2012) allows small businesses to sell to moderate investors
instead of just “Accredited Investors.”
Lenders are those outsiders who provide business owners money for a limited time at a fixed rate of
interest.
Methods and procedures provide standing instructions to employees on how to perform their jobs.
A business’ mission statement defines the present business scope and broadly describes the organization’s
present capabilities, focus, and activities.
Net profit is the amount of revenue (sales) over and above the total amount of expenses (costs) of doing
business.
Objectives are the purposes, goals, and desired results for the business and its parts.
Operational planning sets policies, procedures, and standards for achieving objectives.
Physical resources are the buildings, tools and equipment, and service and distribution facilities that are
needed to carry on the business.
Planning is the process of setting objectives and determining actions to reach them.
Policies are general statements that serve as guides to managerial decision making and supervising
activities.
Strategic planning provides comprehensive long-term directions to help a business accomplish its
mission.
Strategies are the means by which a business achieves its objectives and fulfills its mission.
Variable expenses change in relation to volume of output: when output is low, the expenses are low, and
when output is high, expenses rise.
A Business’s Vision explains what the business is striving to become.
6-32
whole or part.
NOTES FOR DISCUSSION QUESTIONS
1. Explain why planning is so badly needed by small businesses. Why is it so often neglected?
Planning is essential because, before taking action, managers must know where they are going
and how to get there. Outsiders who invest or lend money need to know what a firm’s chances of success
are—and their chances of making money. Plans provide courses of action, information to others, bases for
change, and a means of delegating work.
Owners and managers neglect planning because:
(1) Day-to-day activities leave little or no time for planning.
(2) They fear the problems and weaknesses planning may reveal.
(3) They lack knowledge of how to plan.
(4) They feel that future changes cannot be planned for.
2. Explain the two overall categories of planning. What are the essential differences between the
two?
The two overall categories of planning are strategic planning and operational planning. Strategic
planning provides comprehensive long-term direction to help a business accomplish its mission.
Operational planning, whose direction and scope are established by strategic planning, consists of the
policies, standards, budgets, procedures, methods, and rules and regulations necessary to carry out the
strategic plans.
3. Explain each of the following: policies, methods and procedures, budgets, and standards.
Policies are general statements that serve as guides to managerial decision making and
supervisory activities. They are guides to action and exist so that managers can delegate work and
employees will make decisions based on the philosophy and thinking of the owner of the business.
Methods and procedures provide standing instructions to employees on how to perform their
jobs. They provide employees with instructions for performing work and give detailed explanations of
how to do the work properly.
Budgets are detailed plans, expressed in monetary terms, of the results expected from operating
programs. They set the requirements needed to follow the strategies and accomplish the objectives.
Standards establish the level of productivity expected of employees, facilities, and materials.
4. In planning to operate the business, what are the factors that must be planned for? Explain each.
The eight factors are given below.
(1) Choosing location: The type of business to be operated influences most location decisions.
The location chosen relates to access to customers, suppliers, employees, utilities, and
transportation, as well as compliance with zoning regulations and other laws.
(2) The planning of operations and physical facilities begins with determining the appropriate
capacity and deciding what part of the business process your firm will perform, at which
time sales are estimated and rental or purchase decisions made.
(3) Developing sources of supply for goods and materials. The largest expense for companies
selling products is usually materials and/or goods; this cost is often more than 50% of the
cost of goods sold.
6-33
whole or part.
(4) Human resource planning includes estimating personnel requirements—the number of

people required, their specialties, their pay, and their supervision. This can be one of the
most frustrating tasks that small business managers must face.
(5) The legal and organizational structure must be developed, taking into consideration the
legal and administrative aspects of the business.
(6) Determining your approach to the market. Since the volume of sales and sales income
depend on the marketing strategies and activities of a company, it is important to plan the
best approach to the market.
(7) Establishing an efficient records system. Simple records and information systems must be
designed to keep track of activities and obligations and to collect information demanded by
outside organizations.
(8) Setting up a time schedule. You should establish a time schedule to provide orderly and
coordinated programs to follow.
5. What is involved in financial planning?

Financial planning involves (1) estimating income and expenses, (2) estimating initial
investment, and (3) locating sources of funds. Income can be estimated by studying the market. Expenses
can be obtained from past experience, knowledgeable people, library research, or trade associations.
Variable and fixed costs need to be considered in estimating expenses.
A worksheet is helpful in listing the items needing initial investments. Initial income is slow
coming in, and assets must build up.
There are two sources of funds—your own funds (equity) and those of others (debt)—and each
has a related cost. To maintain control, the owner must continue to invest more personal funds than all the
other investors combined.
6. What is the purpose of a business plan? Explain.

An effective business plan investigates in detail the feasibility of an idea. It is used to obtain loans
from lenders and money from venture capitalists. Also, it gives a detailed blueprint for the activities
needed to finance the business, develop the product, market it, and otherwise manage the new business. It
provides a yardstick by which to measure progress and evaluate needed changes. A business plan keeps
your thinking on track, focuses your creativity, and concentrates your power on reaching goals.
7. How can a business plan be useful even to a prospective business owner who does not need
outside capital?
The business plan is useful whether or not the business owner needs outside capital. It defines and
clarifies production, marketing, and management of the firm. It provides standards that are used in the
control process.
A properly developed plan serves as:
(1) An effective communication tool to convey ideas, research findings, and proposed plans for
others.
(2) The basis for managing the new venture.
(3) A measuring device by which to gauge progress and evaluate needed changes.
6-34
whole or part.
8. What should the business plan include?

The business plan should include a cover sheet, executive summary, table of contents, history of
the proposed business, definition of the business, description of the market, description of the product,
management structure, objectives and goals, financial data, and appendixes, as needed.
9. Who should prepare the plan? Why? Why should the writer get help from outside professionals
and business people?
The prospective owner is the best person to write the business plan if he or she is the only one
involved in the business. If the firm has a few to several managers, all of them should serve as a team to
prepare the business plan. Help from outside professionals and business people can be invaluable,
particularly if these people possess the necessary expertise, through their knowledge, skills, and
experience, to critique the content and presentation of the plan. The particular firm can capitalize on
successful business plan practices and applications in other firms.
There are many software packages available to help plan and prepare the business plan, including
the planning software provided with this text.
6-35
whole or part.
BONUS EXERCISES
6.1 The Model Business

One option is to have the students—individually or in small groups—go into the field and locate a
business that can be used as their “model business.” It should be explicitly understood that the students
will establish an effective rapport with the owner(s) of the model firm by telling them “up front” what
they intend to do. Students should communicate to the business person that they will be visiting the
business periodically to gather information and suggestions for their class discussions and for further
projects. The students should then study the firm against the backdrop of the material in this and the
following chapters. They may use the model business to develop a master plan for it.
One reason for assigning the work in small groups is to help students learn to operate as a team,
which they will have to do in real business later. Also, since each person will see the activities a little
differently, better learning should occur. This experience may be used to demonstrate the value of
delegation if the team members divide themselves up into a semiformal organization. Also, it may make
them aware of the problems that confront a group effort.
6.2 Test Your Planning Skills

This exercise is designed to let students use the planning principles discussed in this chapter. Use
Handout 6-A: Test Your Planning Skills on the page 6.32. You can divide the class into small groups to
work on the exercise or assign it as an individual exercise.
6.3 Career SWOT Analysis

SWOT analysis, the key tool in the strategic planning process, can also be applied to career
planning. A SWOT analysis focuses on the internal and external environments, examining strengths and
weaknesses in the internal environment and opportunities and threats in the external environment.
Students can use Handout 6-B: SWOT Analysis on page 6.33 and the figure on page 131 in the text as a
starting point and conduct an analysis of your career planning.
6.4 Writing a Business Plan

This exercise lets students evaluate what information is needed in a well-prepared business plan.
You can use Handout 6-C: Writing a Business Plan on page 6.34 for this exercise.
HANDOUT 6-A
Test Your Planning Skills
Anise Terrisian, General Manager at Spinnacle Electronics’ Pricedale Facility, has just named
you as chairperson of the first annual blood drive, to be conducted at the site headquarters. A strong
believer in the company’s participation in community affairs and herself a member of the local Red Cross
Board of Directors, Terrisian has committed the division’s 200 employees to the blood drive.
6-36
whole or part.
Your committee will set the exact dates for the drive, which is to be held in three or four months.
As chairperson, you have been assigned a team of four other company employees to plan and implement
the project. All members are highly respected, competent people, representing a true cross section of the
employees. One is a production worker who is president of the local union; another, an engineer,
represents the professional segment; the human resources manager represents the management group; and
a payroll clerk represents the administrative office group. Terrisian was given your name by your boss,
who expressed confidence in your ability to lead a successful donor campaign at the plant. At 27, you are
the youngest person on the committee and anxious to do a good job.
You have called the first committee meeting, which you have advertised as a “preliminary
planning meeting,” to identify key factors that must be planned for in order for the committee to meet its
objective: having a successful blood drive at Spinnacle Pricedale.
INSTRUCTIONS:
1. Make a list of what you consider the key planning issues to be addressed at this initial planning
meeting.
2. Of the items on your list, which two or three do you believe are the most crucial? Why?
3. Identify major problems that could prevent accomplishment of your objective. What contingency
planning could be done to avert them or minimize their impact?
4. To help in your preparation for the planning meeting, identify six to ten steps that you feel will be
needed to achieve a successful blood drive. These steps might be such things as
 Determine a date
 Identify a location
 Secure commitment from Red Cross
6-37
whole or part.
HANDOUT 6-B
Career SWOT Analysis
SWOT analysis, the key tool in the strategic planning process, can also be applied to career
planning. A SWOT analysis focuses on the internal and external environments, examining strengths and
weaknesses in the internal environment and opportunities and threats in the external environment. Use the
figure on page 131 in the text as a starting point and conduct an analysis of your career planning.
1. STRENGTHS:
 What advantages do you have?
 What do you do well?
 What relevant resources do you have access to?
 What do other people see as your strengths?
2. WEAKNESSES:
 What could you improve?
 What do you do badly?
 What should you avoid?
3. OPPORTUNITIES:
 Where are the good opportunities facing you?
 What are the interesting trends you are aware of?
 What changes in technology and markets are occurring on both a broad and narrow scale?
 What changes are occurring in social patterns, population profiles, lifestyle changes, etc?
4. THREATS:
 What obstacles do you face?
 Are the required specifications for your career changing?
 Is changing technology threatening your plan?
 Do you have bad debt or cash flow problems?
 Could any of your weaknesses seriously threaten your future?
6-38
whole or part.
HANDOUT 6-C
Writing a Business Plan
One of Mike McNeely’s favorite pastimes as a teenager was taking his old car apart and putting it
back together again. After graduation, Mike started working as a mechanic for his Uncle Larry’s auto
repair shop. Many of the customers have specifically asked Mike to work on their cars, because they
know he is knowledgeable and honest.
It’s been ten years since Mike started his job. Now he is considering opening his own auto repair
shop. He saved up some money and he thinks his rich Uncle Buck will lend him the rest. He has started
writing a business plan and so far has:
 A description and appraisal of the market area
 An analysis of the competition
 A list of potential suppliers
 A list of purchasing and pricing procedures
 A list of personnel needed and their job descriptions.
1. What important items are missing from Mike’s plans?
2. What steps can Mike take to insure success if he starts his own business?
6-39
whole or part.

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Chapter 06 - Planning, Organizing, and Managing a Small Business

Solution Manual for Small Business Management An

Solution manual: https://testbankpack.com/p/solution-manual-for-small-

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Learning Objectives 6.3

Chapter Overview 6.3

Brief Chapter Outline 6.3

Chapter Outline and Teaching Notes 6.4

Learning Objectives Revisited 6.29

Key Terms Used in this Chapter 6.30

Notes for Discussion Questions 6.32

Bonus Exercises 6.34

BRIEF CHAPTER OUTLINE

I. WHY IS PLANNING SO IMPORTANT TO SMALL BUSINESSES?

II. THE ROLE OF STRATEGIC PLANNING

III. THE ROLE OF OPERATIONAL PLANNING

IV. THE ROLE OF FINANCIAL PLANNING

V. THE ROLE OF THE BUSINESS PLAN IN STRATEGIC AND OPERATIONAL

VI. PREPARING THE PLAN

VII. COMPONENTS OF THE PLAN

VIII. PRESENTING THE PLAN

IX. IMPLEMENTING THE PLAN

X. SAMPLE BUSINESS PLAN

CHAPTER OUTLINE AND TEACHING NOTES

CHAPTER OPENING PROFILE:

I. WHY IS PLANNING SO IMPORTANT TO

CHAPTER OUTLINE AND TEACHING NOTES

f. Never rest on your own laurels.

II. THE ROLE OF STRATEGIC PLANNING

CHAPTER OUTLINE AND TEACHING NOTES

A. STRATEGIC PLANNING provides

CHAPTER OUTLINE AND TEACHING NOTES

CHAPTER OUTLINE AND TEACHING NOTES

c. OBJECTIVES are the purposes,

CHAPTER OUTLINE AND TEACHING NOTES

a. HUMAN RESOURCES are the

CHAPTER OUTLINE AND TEACHING NOTES

III. THE ROLE OF OPERATIONAL PLANNING

CHAPTER OUTLINE AND TEACHING NOTES

B. Setting Up Policies, Methods,

CHAPTER OUTLINE AND TEACHING NOTES

most of your location decisions.

CHAPTER OUTLINE AND TEACHING NOTES

CHAPTER OUTLINE AND TEACHING NOTES

a. If the environmental study shows

7. Establishing an efficient records

CHAPTER OUTLINE AND TEACHING NOTES

d. Inventories, accounts receivable,

IV. THE ROLE OF FINANCIAL PLANNING

CHAPTER OUTLINE AND TEACHING NOTES

b. Total expenses move up and

CHAPTER OUTLINE AND TEACHING NOTES

5. Funds obtained from investments in

CHAPTER OUTLINE AND TEACHING NOTES

3. Using Funds of Others.

CHAPTER OUTLINE AND TEACHING NOTES

E. Jump-start Our Business Startup Act

REAL WORLD EXAMPLE 6.4

V. THE ROLE OF THE BUSINESS PLAN

CHAPTER OUTLINE AND TEACHING NOTES

A. All planning should to be formalized into a

C. The business plan should include a

CHAPTER OUTLINE AND TEACHING NOTES