As a business plan reviewer and analyst, I find it amazing how many entrepreneurs give this section the least weight or skip it altogether. The operational plan is an essential component to your business plan and it tells the reviewer how your going to get your product/service out to market.
Operational Plan Definition
The definition of operational planning is a plan that describes how are you going to get your product out of the production stage to the doorstep of your target customer. The plan describes what you want to achieve, what it costs, how you are going to do it, and if you met plan objectives.
Operation Plan Components
I know, the operational plan may seem mundane but it will outline some very important answers to such fundamental questions such as:
- Who is doing what?
- What are the day to day activities?
- How will the suppliers and vendors be used?
- Who are the suppliers?
- What are the labor requirements?
- What are the sources of raw materials?
- How much will it cost?
- How do you know if objectives are met?
Why is this section so important? First off, it will outline to the reader how you are going to carry out the delivery of your product or service. What's the use of having a product or service if you don't have a way to get it from the development stage to the consumers home?
Believe me, a business plan reviewer gives this section a lot of weight because she wants to know what you and your employees are doing to get your product/service out to market.
How you keep track of inventory or what type of equipment you need may seem obvious to you, but remember, the reader doesn't know this.
These activities may seem like the kind of details that take care of themselves but these are fundamental and critical for your business success. Why? This is where you translate theory into the real world.
It is important that you understand why this section is important. It's because you are now dealing with practice and not theory.
You see, there's a far greater chance that a business will fail because fundamentals aren't handled properly than because the basic business concept is faulty.
The fundamentals being the core of your business such as the operations. If your assuming that the operations are going to take care of themselves, you'd better think again.
Business plan reviewers know the importance of a well thought out operational plan and place considerable weight on this section since it can mean the success or failure of a business.
Forecasting vs. Planning
Planning involves determining how to change the future vs. forecasting the future. It is more art than science and needs to change as business conditions change. The plan should seek to change behavior.
As an internal planning document, the plan should be a detailed, in-depth operational plan. This will give the entrepreneur an opportunity to work out many potential problems on paper prior to commencing operations.
However, if you are using your plan to potentially leverage additional funds, remember not to get too complicated. Understand that the reader wants to know that you have worked out your operations and how your product or service fits into the big picture.
Don't leave your reader sitting there scratching their heads trying to figure out every detail. Keep it simple and remember, you want to convey to your reviewer that you have everything under control.
If you are planning to present your plan to a third party reviewer, ask yourself these two questions:
- Will the reviewer understand the content?
- How important is the content to the overall understanding and appreciation of the business plan?
The relative importance of an operational plan will depend on the nature of the business. A production facility will probably require significant attention to operational issues.
On the other hand, most retail businesses and some service businesses will probably have less operational complexity. However, don't get the impression that an operational plan is not needed because it is.
What Should An Operations Plan Cover?
I would like to point out that an operational plan should be specific to your business. Not all businesses require the same level of complexity when it comes to the operational plan. The topics that I cover here will not all apply to your particular business.
In your own plan, you do not necessarily need to address each topic. Rather, limit your operations section to those issues that are needed and considered essential to the nature and success of your business.
If your business is a manufacturing business in which product distribution is often a major difficulty, you may want to include a couple of paragraphs clarifying your company's approach to improve this difficulty. However, if your business is a retail operation, distribution may not be a problem and you might not have to discuss it.
On the other hand, if you business is an operation that develops or relies on a lot of new technology, you need to explain those aspects thoroughly. You need to explain who will be using that technology and what the implications are.
Basically, you want to explain to your reader how you are going to deliver your product. What are you and/or your employees going to be doing on a daily basis from the time you open up to time you close. This is what your reader wants to know.
Some issues often addressed in an operational plan include:
- Production or manufacturing
- Maintenance and service - Order fulfillment and customer service
Production or Manufacturing
Every manufacturing business has a production process - the way it goes about fabricating a raw or component material and creating an item with greater usefulness or desirability. However, even if your business is a service or retail operation, you have to use a method of producing something of value for your customers.
Integral to the overall understanding of a production oriented business is an appreciation of how the company will manufacture its products. One straight forward way of conveying such information is to examine this activity in terms of resources, processes, and output.
Resources may be characterized as those elements the firm must utilize in an effort to manufacture a desired product. Typically, these include manufacturing facilities, machinery, equipment, materials and related assets, and labour. Depending on their relative importance, attention might be focused on each of these elements.
In the case of a production facility, it is important to discuss the process by which a company will manufacture its products. This usually involves some description of the plant, equipment, material, and labour requirements.
What techniques and processes are going to be used in combining these resources, such as assembly lines and robotics; and the capability of the business in terms of production rates, critical constraints such as productive capacity, or quality assurance programs.
The operational plan might include a profile of the facility, that will be used, including comments regarding size, location, and related specifications - clearance, loading docks, and proximity to other outlets such as railways and airports.
There should be some comment as to the nature of the machinery and equipment being used or acquired. Also, sources of raw materials or components availability, price volatility, and key supplier relationships are often worth mentioning.
The number one question being asked here is how you are going to implement the techniques and processes to get your product out the door. What sort of machinery are you going to be using and who's going to be using it?
Take the time to evaluate your production process and assess the plan to see if you can enhance efficiencies and improve the quality of the finished product.
In doing so, you may find little gaps here and there that may serve impede the bottom line - profit. Look at the various stages involved in creating your product or service, can these stages be shortened?
Remember, you must use your judgement in deciding how much detail should be offered in the operational plan. Just remember that you want to convey to your reader that you have covered all of your bases when it comes to production.
Here are some points you may want to consider when putting your operational plan together:
Capacity is the measure of how much work your facilities, labour force, and equipment can handle. Does your production process have the capacity to keep orders up? Do you have too much capacity? Not enough capacity?
Productivity measures how long and how many people it requires to produce your product or service. If you can produce more goods in less time, you can improve the bottom line from every dollar spent on equipment and operating costs such as salaries and rent.
What kinds of and how many employees do you require to produce your product or service? How are you going to use them? Are you going to be using seasonal workers? Full time? Casual?
How are you going to keep consistent and maintain the same standards with each product or service? Such activities include regular inspections throughout the production process, occasional testing or sampling of goods.
In business, the location of your facilities can prove a critical factor for your success. If your business is going require a large outlay of capital assets at the onset, you will need to make sure the facilities are adequate and are positioned properly.
What's the use of setting up a manufacturing facility in a rural setting with no transportation mechanisms? You will need to decide how you are going to get your product to your consumer and position your facility that will be both cost effective and efficient.
When evaluating your facilities, examine those aspects most important for your particular business. Do you need to be close to certain transportation facilities? Do you need to be close to key suppliers? Do you need to be downtown?
Keep these points in mind when you are completing your operational plan for facilities:
Include the location of company headquarters, retail store (s), branch offices, additional plants, and others. Describe the size and how each will be allocated. Mention why you are located at your particular location and the benefits associated with it.
Describe access to parking and transportation; air, rail, and surface shipping access, and loading docks, warehouse, and other facilities.
What improvements are needed to get the building in working condition and how much will it cost to fix it up.
Are you leasing? This is very important and make sure you understand all aspects of the lease. You don't want to be stuck in a 5 year lease if your business fails after the first year (I've seen this happen - a few times). Can you sublet? What restrictions are in the lease? Can you get out early if things go sour?
What are the operational costs associated with the building? Include the cost of gas, water and electricity. What are the costs for janitorial, trash removal and other operational costs.
Different businesses will have different inventory requirements. Of course, a large retail operation will have much more inventory than an engineering consultant so remember to use those points that apply to your business.
Most of the retail operations I deal with overlook the importance of inventory management. An effective inventory management process can make all the difference in the world when it comes to making a huge profit.
On the other hand, a poor inventory management plan can take you right out of business - I've seen it happen. What happens if you sink a large portion of your operations budget to your inventory and have no way of monitoring the process? Disaster.
How much money you have tied up in supplies or finished product sitting in your warehouse makes a direct impact on your bottom line. Every box of raw material is not just taking up space, it's costing your hard cash and it's money sitting around - losing value. What about too little inventory?
If you don't have sufficient inventory, you occasionally can't make the sale. Every business dreads the possibility of receiving large orders but can't seem to fill them because of the lack of inventory.
How do you keep inventory on a level and consistent basis? Develop systems that increases the flow of information from the sales point to the production and purchasing units. The most important thing to remember is to know how your sales are going - At all times.
Here's a some advice if you rely on goods or materials for your business; Keep up a good relationship with your suppliers. You see, most businesses will experience different levels of difficulties at different parts of the year.
So it's important to work at developing excellent relationships with your suppliers and distributors; You want them to feel that you are in a partnership together so that they will try to do everything possible to meet your needs. Believe me, there will be a time when this relationship will be invaluable to your business.
It's also important that you try not to be too dependent on just one supplier or distributor. The reason? Your business' financial future will be too vulnerable if they fail you. Imagine a supplier going under who is your only supplier during your peak season. Always have back ups.
Use suppliers that understands the needs of your business. Look for companies that can deliver on time, and have excellent customer service. Don't make the mistake of using a supplier based on price alone.
Select suppliers with whom you can communicate well; make certain they understand your specifications and can consistently meet your standards.
Maintenance and Service - Order Fulfillment and Customer Service
In some instances, it is important for a company to define the services and support it will provide. Specifically, the plan should address the level of support a company will provide after a customer has purchased a product or service. This is particularly important in the case of new or technical product.
The service and support of a company's goods are often critical to the business's success. As a consequence, they often merit attention in the business plan. The need to include such a description is dependent on the nature of the company's products. Some goods are sufficiently simple or inexpensive not to need service and support.
In other cases, such as technical or new products, support may be necessary if a customer is to use and maintain properly the company's products. A company can benefit in two ways from providing quality customer service.
First, a company can preserve and enhance its reputation and its relationship with customers by providing guidance and support after a sale. This support may range from simply providing an operating manual to having a staff of service people on call, ready to address customer problems.
Second, this activity may prove to be an additional source of revenue. This is the value of a lifetime customer. By keeping in touch with your customer on a regular basis and providing them with quality information and special deals, you give them a reason to trust you. People only buy from people they trust.
Customers are constantly demanding better and better service. The expect to get what they want, when they want it, and to be treated graciously and fairly in the process.
So, it's your job to make certain customers have little reason for complaints. Build sufficient flexibility into your policies so that you can easily handle unusual or difficult requests.
Also look at your order fulfillment process. Often, orders are not communicated clearly or quickly to the processing department, and valuable time is lost due to inadequate internal communication. Assess the methods by which you prepare goods for shipping and deliver good to customers.
Careful planning in the operational area can bring you meaningful rewards. Analysing the day to day operations of your business will pay off in the form of increased profits as you find ways to reduce costs and improve productivity.
In this section, you want to convey to your reader that you can effectively get your product or service out to the market. Business plan reviewers want to know how you are going to deliver your product to the market, so show them how you are going to do it. Remember not to get too complicated. You want to make sure they understand but don't leave them scratching their heads in confusion.
Let's see an operational plan sample using our fictional company: Terra Engineering
Common Operational Planning Terms
What will you do or functions that will be undertaken to meet the objectives.
The dependencies that exist between what is going to happen or being planned by the various teams.
Measurable, specific, realistic and actionable statements of what the company should accomplish within a specific period of time.
Volume or amount of product that results from an activity.
Outcome measures or defined output that demonstrates successful activity.
The facilities, equipment, time, people and money that is required.
A measure of what has been accomplished or what you want to do.
The actions or steps that will be completed to yield the required output.