business plan constraints

ZenBusinessPlans

Home » Business Plan Tips

5 Types of Constraints That May Affect a Business Plan

In everyday language, “constraint” might simply mean any inconvenience, limitation, setback, restriction or fluctuation in capacity. ​Sometimes it seems like constraints are lurking everywhere. ​But in Dr. George’s Theory of Constraints, the word “constraint” refers to something very specific.

What is a Business Constraint?

According to Dr George Friedman, a business constraint is anything that interferes with the profitability of a company or business endeavour. Improving profitability requires the removal or reduction of business constraints. Common business constraints include time, financial concerns, management and regulations.

Indeed, every businessperson with a vision of where they are going, and specific strategies and goals to get there, will face challenges or barriers that limit them from achieving success. Most times, when confronted with solving problems or making improvements, business owners or managers feel overwhelmed. They lack the time, money, or resources to correct the problems they are experiencing. They often feel like their hands are tied, and they don’t know where to begin.

In other words, every business operation has something limiting it from reaching its full potential. Note that some of these conditions exist to limit sales or production output. This limit or constraint determines the maximum capacity of the system. Have it in mind that by removing or improving the single constraint, the system is elevated to a higher level of performance.

A business plan needs to be realistic so it is important to set out in detail the constraints that are likely to act as limitations to business activity. Business plans , according to Investopedia, are important documents used to attract investment before a company has established a proven track record. They are also a good way for companies to keep themselves on target going forward.

Even though they are very useful for new businesses, every company is expected to have a business plan . Normally, the plan is reviewed and updated periodically to see if goals have been met or have changed and evolved. Sometimes, a new business plan is created for an established business that has decided to move in a new direction.

There are several constraints that can affect how well a business plan is implemented. The constraints that may affect the implantation of a successful business plan include;

What are the Types of Constraints That May Affect a Business Plan?

Legal constraint.

Have it in mind that when a business is setting up a business plan, it is expected to abide by the laws to ensure that the business will not face any legal action against it. Legal changes tend to happen all the time over the course of a business’ running.

Legal changes can force the business to change the way it operates and also have an impact on how employees have to set up rules to ensure the safety of its employees. Also note that changes to tax laws and minimum wage can have a massive effect on the finance of a business.

The categories that legislation changes fall into are Health and safety. Health and safety can look at how the business is protected against fire and precautions that are taken for various dangers. Examples of laws that may affect these rules are food hygiene, environmental health – weights and measures. Employment laws also changes the way that businesses are allowed to handle employees and regulations that they are expected to follow to ensure that employees are chosen fairly.

Financial Constraint

Note that to implement a business plan with success, having enough money to back up the business plan is imperative. Ideally, there are many things that can be considered as collateral, assets such as your house and car can be used as the backup strength behind your loan.

Banks are more likely to offer loan services to someone who has a good credit history. Funding may not just come from external sources, funding could also come from your own savings and inheritance, this type of finance providing may be a lot safer than taking out a loan as you do not stand to lose personal assets , as you are not in debt to a bank.

Additionally, as part of a successful business plan, considering financial implications is very crucial. Looking at finance required for the startup cost will allow you to analyze how much money you are going to need for start up and running costs.

Technological Constraint

Many customers now opt to use the internet to buy products as it is an easier and more convenient way to shop, in many cases the internet is also cheaper. Businesses have adapted to this change by creating websites to visit and purchase items from. The younger generation prefers to use digital technology to shop online. Older people will perhaps stick to their traditional methods. You must also understand that these changing factors take a toll on businesses too.

Environmental Constraint

The implementation of a business plan can be constrained by a host of factors in the business environment. For instance, legal constraints determine how they produce (e.g. Health and Safety and Product Safety laws). Social constraints determine the tastes and buying patterns of consumers.

For instance, in recent years consumers have turned increasingly to healthy foods as an alternative to ones that are heavily saturated in fats and contain high levels of sugar. During the process of putting together a business plan, you will need to be constantly aware of these environmental constraints and how they alter over time.

You may need to take what is termed an anticipatory approach i.e. to anticipate changes that are likely to take place in the future in the business environment. By anticipating change, businesses are able to adjust the way they operate to be ahead of competitors.

Competitive Constraint

When building a business, it is very much unlikely that you are going to have a product or service that does not already exist. Note that when there are existing similar products to your own this is called competition. Competitors will always have an effect on how much profit your business makes.

Therefore, when marketing your product you must ensure that you are showing how it is better than competitors in the sense of value for money and quality. The strength of the competition is a key constraint on business plan success. Businesses need to position themselves in such a way as to limit the effect of the competition.

Studying business constraints are important to businesses that want to plan ahead. Businesses that take a reactive approach i.e. which only change when or after the environment alters, will be left behind. By anticipating change, businesses are able to adjust the way they operate to be ahead of competitors.

More on Business Plan Tips

• All Articles , Financial strategy

How To Overcome Business Constraints Throughout a Business’ Lifecycle

As an entrepreneur, have you ever hit a “growth wall”? No, not the cement kind, but what feels like an enormous barrier preventing your business from growing at the rate it was previously experiencing? It’s puzzling, as the strategies that once worked to accelerate your business and solve your growth obstacles are no longer effective.

You feel stuck, overwhelmed, and frustrated. To understand how to conquer these growth obstacles, we need to dive into what your constraints are and how to navigate through them.

Growth Walls Are Business Constraints 

These growth walls are the result of different constraints a business experiences throughout a business life cycle.  A business constraint is a force that every business must face in order to grow and execute a strategy to achieve its business and revenue goals. Let’s first explore what a business life cycle is, and then unpack the different constraints it can expect to experience.

What is a Business Life Cycle?

A business life cycle is the progression of a business in phases over time. Visually, your business begins as a start-up phase, then moves into a growth phase, typically your business matures, ( maybe you exit, and then your business declines.

This is very similar to the economy where there are natural expansion, peaks, and contraction phases.

When your business begins to scale and hit new revenue milestones, it will have new constraints. To ensure your business can grow past these plateaus, we need to solve the constraints for each business growth cycle.  Let’s explore what a growth cycle is and how they work.

What is a Growth Cycle?

A growth cycle is a commitment to work on either maximizing profit OR maximizing growth in your business over a fixed period of time.

Profit requires efficiently using fewer resources to maximize your bottom line, while growth requires investing more resources to maximize your top-line revenue.  However, profit and growth are like oil and water. They are always in direct conflict with each other. If you try to maximize both at the same time, you’ll end up accomplishing neither! 

What Major Constraints Do We Solve When Scaling Our Business?

The graphic below illustrates the constraints we’ve seen with our clients:

Interpreting The Major Business Constraints Diagram

At the bottom of the graph, you will see a constant constraint: the continual development of your product or service offering.  Every business needs to continually improve its product and service offering, and therefore it is a perpetual constraint. Think of this as an R&D expense. While you are always developing your offer, your product/service will always be a constraint in the business. It is not categorized as a significant constraint – because we need to assume we are constantly working on it.

Every year, Apple comes out with a new iPhone model. The iPhone 13 today looks nothing like the original iPhone that debuted in 2006. This is the continual development of their core product that took billions of dollars and years of R&D in order to remain competitive in the market.

Looking at the graph, we also see three significant constraints when scaling an online business from $0 – $250k per month. 

Business Constraints When Scaling From $0 – $75,000   per month

During the start-up phase of our business, your greatest constraint will always be Client Acquisition (“CA”). CA is the ability to get people to buy your product or service and you need to spend to do this. So this equals the sum total of your marketing and sales cost. 

Once suitable systems are in place here, whether you’ve brought on the right team (with well-thought-out incentive structures ), or whether you’ve built a paid or organic marketing program, you’ll experience top-line revenue growth. You can then expect to hit the next growth wall, and that is our cue to start solving the next significant constraint.

Business Constraints When Scaling From $75,000 – $150,000 per month

The next constraint you need to solve will be running your business operations efficiently. These constraints are limitations in your internal operations – Fulfillment, HR (hiring), Finance. In this phase, operational systems are predominantly the biggest failure. Your business may not be well-equipped enough for the increase in customers from improving your Client Acquisition systems. It might not have the right back-end systems in place for delivering your product or service, or the talent acquisition machine to fill the gaps in your business. You may need to spend to build operational efficiency so you can service your newly-found clients.

Business Constraints When Scaling from $150,000 – $250,000 per month

In this phase, your business is flying. Without a doubt, when scaling from $150,000 and beyond, the biggest constraint you will experience is your leadership.

Before $150,000/month, you can be both a leader and manager in your company. After that, your time becomes critically valuable and in order to move your business forward, you must hire the right managers to take care of the different business functions and grace your company with the vision, direction, and leadership.

It’s at this point the CEOs should surround themselves with the right people to take the business forward. Have you hired the right team players? Have you built your executive team? It’s essential to be surrounded by the right people and to have a tight leadership team removing your blindspots to challenge you in your decision-making. Making decisions on your own at this stage of your business will not propel it forward. 

Will My Business Ever Reach a Point of No Constraints?

Once we have gone through this cycle of constraints, we keep going through the iterative process – building and solving the new constraints your business encounters. Identifying and solving your business constraints will help you scale your business at any level. Building the right financial foundation is necessary to scale predictably, efficiently, and sustainably.

Our encouragement is to understand these foundations, solve them properly, and you will succeed.

About CleverProfits

We know that running a business is hard, but the good news is that it’s totally possible to reduce the business noise and lead with confidence and focus. To do this, and enable confident decision-making, it’s important to have financial clarity. 

At CleverProfits, we help optimize business performance, enabling long-term financial clarity giving your business and your decision-making the kick-start it needs for sustainable and predictable growth. If you’re stuck, feeling anxious, and need help – reach out.

Book a free call with us here: https://cleverprofits.com/consultation/

The Clever Writing Team

The CleverProfits writing team includes various team members in Advisory, Financial Strategy, Tax, and Leadership. Our goal is to provide relevant and easy-to-understand financial content to help founders and business leaders reach their true potential.

TABLE OF CONTENTS

• Business constraints , CEOs , Growth , plateaus , profit , scaling

Building a Robust Financial Foundation: A Guide for Online Business Owners

The Price of Success: Why Proper Pricing is Crucial for Your Online Business

It’s Not What You Take, It’s What You Make (A Guide to Understanding S Corporations and Pass-Through Taxation)

You may also be interested

How To Hire Your Kids With A Family Management Company in 2022

By paying your kids from your business with the right process, you might be able to save around $2,000 in taxes per child.

In the ever-evolving landscape of online business, establishing a solid financial infrastructure is paramount for success and long-term sustainability. At CleverProfits, we understand the unique challenges and opportunities that this sector faces. In this guide, we’ll provide key steps to consider in order to help you set up a resilient financial foundation for online business. 1. Separate Personal and Business Finances: One of the foundational steps for any online business is to open a dedicated business bank account. This ensures a clear distinction between personal and business finances, simplifying accounting processes and providing a transparent view of your business’s financial

The Ultimate Guide to Tax Planning For Your Online Business in 2022

It’s 7:00 PM on April 15 you’ve just written a check to the Internal Revenue Service for $23,450. You’re scratching your head wondering why Uncle Sam is getting his, and if there’s anything you could’ve done to save on taxes. The scary thought is that without working with a professional on proper tax planning, you have no idea what you’re missing out on. This is why it’s a great idea to work with a tax advisor who will help you identify ways you can save on taxes in your business. Every year that you wait means you’re potentially losing out

Prepare your Business for Opportunity

The financial flywheel™, hang on check these few final steps.

Also, if you accidentally entered the wrong email you can go back and try again by clicking the button bellow.

Check your email and find the one from CleverProfits If you’re using Gmail there's a chance that Gmail put the e-email directly into the “Promotions” tab (in Gmail itself) or sends it to spam. Check your Gmail account then drag it out from Spam or the Promotions Folder and move it to the Inbox. That will tell Gmail that you wish to view the e-mail from me in your Inbox.

Click on the confirm to subscribe link in the email.

Get access to The Financial Flywheel ( + other insight to help you succeed)

Drilling Down

Navigating Business Success: Understanding and Leveraging Constraints and Limits

Learn to leverage business constraints and limits. my guide reveals five steps to use constraints as a springboard for innovation and adapt to change for growth..

This week, I'm pumped to talk about constraints vs limits.

This topic gets twisted often, which leads folks to feel stuck in their business. But get this: understanding constraints and limits can unlock growth and innovation.

So let's dive in!

The Core Idea

The trick to using business constraints and limits to your advantage? Steer clear of these common goofs:

Viewing constraints as roadblocks - When you see constraints as walls, you stop. But constraints aren't the end of the road. They're a detour sign, showing you a new path!

Ignoring limits - Limits aren't a myth. They're real. Overstretching can cause a snap. So, knowing your limits helps you keep your business in the safe zone.

Mixing constraints and limits - Limits are the max you can go. Constraints are conditions you work with. Mixing them up? It's like mistaking apples for oranges.

Limiting ideas due to constraints - Constraints shape ideas, not limit them. When you think they limit your ideas, you shrink your thinking box.

Not using constraints to innovate - Constraints aren't a creativity kill. They're a challenge. They push you to think outside the box.

The root cause of these mistakes? Lack of understanding. So let's uncover how we can sidestep these traps:

Step 1: Understand Constraints vs Limits

The first step to unlocking growth in your business is to grasp the difference between constraints and limits.

Here's why this matters: Understanding the difference is like knowing your game's rules.

Picture this: You're playing soccer, and you mistake the sidelines for the goal line. You'd be kicking in the wrong direction, right?

That's what happens when you mix up constraints and limits in your business.

You might be pushing in a direction that gets you nowhere.

Constraints are the rules of your game - the conditions you play within.

These could be your budget, team size, or even regulations in your industry.

They define your playing field.

But here's the catch - they don't tell you how far you can score.

Limits, on the other hand, are your end zones. They show you how far you can go before you risk a foul.

This could be the max capacity of your team, the upper limit of your budget, or even market saturation.

Crossing these lines might win you a point in the short term, but in the long run, it could cost you the game.

Real World Example

Imagine you're planning a road trip.

Your constraints might be the type of car you have, the roads you'll travel on, and the time you have available.

These factors shape your trip, but they don't limit how far you can go.

Now picture your fuel tank as your limit.

It shows you the max distance you can travel before you need to stop for gas.

Pushing past this limit could leave you stranded on the side of the road, and that's a situation you don't want to be in.

Practical Framework

So how can you put this understanding into practice? Here's a simple framework you can apply right now:

List it out: Write down all the factors you're dealing with in your current project or business goal. Include everything from resources to regulations.

Sort it out: Divide these factors into two columns. One is for constraints - these are conditions that shape your approach but aren't deal-breakers. The other is for limits - these are factors that represent a hard stop, a line you cannot cross without risking damage.

Plan it out: Use your constraints to shape your strategy, and respect your limits to ensure you're moving in a sustainable way. Remember, constraints guide your direction, limits define your max distance.

Key Takeaway

Understanding the difference between constraints and limits is like knowing your game's rules.

Constraints are your playing field - they guide where you can go.

Limits are your end zones - they show how far you can go without fouling.

Mistake one for the other, and you might just be kicking in the wrong direction. Get this right, and you're already a step ahead in the game.

Step 2: Respect the Limits

Rolling forward, the next step is to respect the limits.

Here's why this matters: Respecting the limits in your business is like recognizing the boundaries on a map.

When you're traveling, knowing where the cliff edges are can save you from a fatal fall.

Same goes for your business journey.

If you push past your limits, you risk running your business into the ground.

For instance, let's say you're a baker.

Your oven can only bake 20 loaves of bread at once.

That's a hard limit.

If you try to cram in more, not only will the loaves not bake properly, but you also risk breaking your oven.

The short-term gain of a few extra loaves isn't worth the long-term damage.

This might sound simple, but in the heat of running a business, it's easy to lose sight of your limits.

You might think you can stretch just a bit more, squeeze in just one more client, or work just a few more hours.

But remember, pushing past your limits is a dangerous game.

It leads to burnout, poor service, and even business failure.

Picture a restaurant that's doing really well.

The owner sees the packed house and decides to squeeze in a few more tables.

It works for a while, more customers mean more revenue, right?

But soon, the kitchen can't keep up, the service gets slow, and the food quality drops.

Customers start leaving bad reviews, and soon the extra revenue isn't looking so great.

The owner pushed past the limit, and it cost them.

To respect your limits, follow this actionable framework:

Know your limits: Review the list you made in the previous step. What are your hard limits? Make sure you understand them fully. This could be your max workload, your team's capacity, or a regulatory cap.

Set boundaries: Establish clear boundaries based on your limits. This could be a max number of clients you take on, a hard stop on your working hours, or a strict budget line.

Monitor and adjust: Keep an eye on your boundaries. Are you consistently hitting your limits? Are you frequently tempted to cross the line? If so, it's time to reassess. Maybe you need to adjust your boundaries, or maybe you need to find a way to expand your limits.

Respecting your limits is about understanding where the edges of your map are.

Pushing past your limits can seem tempting in the short run, but it often leads to long-term damage.

To avoid this pitfall, get clear on your limits, set boundaries, and monitor your progress.

Remember, the aim of your business journey isn't to see how far you can push before you fall. It's to see how far you can go while staying safe and sustainable.

Step 3: Use Constraints to Innovate

Moving on, the next step is to use constraints to your advantage. Let's turn those obstacles into opportunities!

Why does this matter?

Constraints are often seen as barriers, walls that block your path.

But what if you could use them as stepping stones instead?

In fact, constraints can spark creativity and lead to innovation.

They force you to think outside the box and find new ways to achieve your goals.

Consider Twitter.

Its 280-character limit might seem like a constraint.

But it’s actually a key feature that sets it apart.

It forces users to get to the point, making posts quick to read and easy to digest.

The limit became an advantage.

Let's say you're running a small coffee shop with limited seating space.

This could be seen as a constraint that limits your revenue. But what if you turned it around?

You could introduce a "coffee to go" service.

Or, create a cozy, intimate atmosphere that larger coffee shops can't offer.

Instead of trying to compete with the big chains, you turn your constraint into your unique selling point.

So how can you use your constraints to innovate? Here's a simple approach to get you started:

Spot the opportunities: Look at the list of constraints you made earlier. Can any of them be turned into a unique feature or a selling point? Could they force you to think creatively and find new ways to stand out?

Experiment: Try out different approaches to each constraint. Don't be afraid to try something new or unconventional. Remember, constraints push you to think differently.

Refine and implement: Once you find an approach that works, refine it and make it a part of your business strategy. Keep iterating and improving as you learn more.

Constraints don't have to be roadblocks. In fact, they can be the catalysts that drive you towards innovation. By forcing you to think outside the box, constraints can help you find unique ways to stand out from the crowd.

Remember, when you hit a wall, don't just turn back. Look for a way to climb over it, break through it, or build a door. That's the power of innovative thinking!

Share Drilling Down

Step 4: Plan with Constraints in Mind

Let's keep going. The next step is to plan with your constraints in mind.

But why is this important?

Just as a sailor charts their course around rocks and shallows, you must plan your business strategy around your constraints.

This can save you from costly mistakes and help you make the most of your resources.

Remember, a good plan takes into account all factors, including the limits and constraints.

Consider a delivery business.

If you're planning your routes without considering traffic, you're going to run into delays.

But if you plan with traffic in mind, you can find the fastest route and make more deliveries in less time.

Imagine you're planning a large event.

You know that the venue has a strict limit on capacity.

If you ignore this constraint and sell too many tickets, you'll have to turn people away at the door. Not only will those attendees be disappointed, but your reputation could take a hit.

But if you plan with the venue capacity in mind, you can avoid this issue. You could even turn it into a positive by marketing the event as an exclusive experience.

So how can you plan with constraints in mind? Here's a step-by-step guide:

Acknowledge your constraints: Start by acknowledging your constraints. Remember the list you made earlier? Keep it handy when planning.

Develop scenarios: For each constraint, develop a few different scenarios. What will you do if the constraint tightens? What if it loosens?

Plan for each scenario: Create a plan for each scenario. This way, you'll be prepared no matter what happens.

Stay flexible: Be ready to pivot and adjust your plans as needed. Remember, planning isn't a one-time task, but an ongoing process.

Planning with constraints in mind is like sailing around the rocks. It helps you navigate safely and efficiently towards your goals.

So, before you set your course, know your constraints.

Plan for different scenarios and stay ready to adjust your sails as needed. Because in the sea of business, the sailor who knows their waters is the one who reaches the shore.

Step 5: Adapt as Constraints and Limits Change

Now, the final step is to stay flexible. You've got to adapt as your constraints and limits change.

So, why is this important?

In business, the only constant is change.

Markets shift, customer needs evolve, and yes, your constraints and limits can change too.

When they do, rigid plans won't help. You've got to be nimble, ready to adapt and react.

It's this flexibility that can keep you one step ahead of the game.

Take Netflix as an example.

They started as a DVD rental service, with physical logistics and postal service times as key constraints.

But as technology evolved, these constraints changed.

So, Netflix adapted.

They switched to streaming, turning the changing constraints into an opportunity to lead a whole new market.

But how can you stay adaptable? Here's a simple guide to follow:

Keep an eye on the horizon: Stay aware of changes in your industry, technology, and customer behavior that could impact your constraints or limits.

Assess the impact: When a change occurs, assess how it affects your constraints and limits. Does it tighten them? Loosen them? Change them altogether?

Update your plans: Based on your assessment, update your plans. This might mean a small tweak or a major pivot. Either way, don't be afraid to change course.

Communicate the changes: Make sure everyone in your team knows about the change and understands the new plan. Keep your crew informed so they can steer the ship correctly.

The ability to adapt to changing constraints and limits is a superpower in the ever-changing world of business.

So, keep a keen eye on the horizon. Watch for changes that could affect your constraints or limits, and be ready to adapt your plans accordingly.

Remember, in the world of business, those who adapt survive. Those who don't, well, they're left behind. So, stay nimble, stay flexible, and always be ready to adapt!

So, there you have it! We've taken a deep dive into the world of business constraints and limits.

But why does all this matter?

To run a successful business, you've got to know your waters.

That means knowing and respecting your limits, and using your constraints as a springboard to innovation.

But just knowing isn't enough. It's about what you do with what you know. So, let's recap the steps you can take to turn constraints and limits into opportunities:

Understand constraints vs limits: Remember, constraints are the rules of the game, while limits are the outer bounds. Don't confuse the two.

Respect the limits: Going beyond your limits is risky and can harm your business. It's better to work within your limits and expand them over time.

Use constraints to innovate: Constraints can spark creativity and lead to better solutions. Don't fight them. Embrace them.

Plan with constraints in mind: A good plan takes into account all factors, including limits and constraints. Always chart your course with them in mind.

Adapt as constraints and limits change: In business, the only constant is change. So, always be ready to adjust your sails as your waters change.

So, what now? It's time to get going!

Look at your business. Identify your constraints and limits. Use them to plan, innovate, and adapt.

And remember, in the sea of business, the best sailor isn't the one with the fastest ship, but the one who knows their waters best. So, know your waters, chart your course, and set sail!

As always, thanks for reading.

I'd love to hear from you. What did you find most insightful this week? Reply to this email and let's discuss.

Look forward to connecting with you next Monday.

Thanks for reading Drilling Down! Subscribe for free to receive new posts and support my work.

Ready for more?

5 Chapter 5 – The Business Plan

Developing your strategy.

As mentioned in Chapter 2 , it is critically important for any business organization to be able to accurately understand and identify what constitutes customer value. To do this, one must have a clear idea of who your customers are or will be. However, simply identifying customer value is insufficient. An organization must be able to provide customer value within several important constraints. One of these constraints deals with the competition—what offerings are available and at what price. Also, what additional services might a company provide? A second critically important constraint is the availability of resources to the business organization. Resources consist of factors such as money, facilities, equipment, operational capability, and personnel.

Here is an example: a restaurant identified its prime customer base as being upscale clientele in the business section of a major city. The restaurant recognized that it has numerous competitors that are interested in providing the same clientele with an upscale dining experience. Our example restaurant might provide a five-course, five-star gourmet meal to its customers. It also provides superlative service. If a comparable restaurant failed to provide a comparable meal than the example restaurant, the example restaurant would have a competitive advantage. If the example restaurant offered these sumptuous meals for a relatively low price in comparison to its competitors, it would initially seem to have even more of an advantage. However, if the price charged is significantly less than the cost of providing the meal, the service in this situation could not be maintained. In fact, the restaurant inevitably would have to go out of business. Providing excellent customer service may be a necessary condition for business survival but, in and of itself, it is not a sufficient condition.

So how does one go about balancing the need to provide customer value within the resources available while always maintaining a watchful eye on competitors’ actions? We are going to argue that what is required for that firm is to have a strategy .

The word strategy is derived from the Greek word strategos , which roughly translates into the art of the general, namely a military leader. Generals are responsible for marshaling required resources and organizing the troops and the basic plan of attack. Much in the same way, executives as owners of businesses are expected to have a general idea of the desired outcomes, acquire resources, hire and train personnel, and generate plans to achieve those outcomes. In this sense, all businesses, large and small, have strategies, whether they are clearly written out in formal business plans or reside in the mind of the owner of the business.

There are many different formal definitions of strategy with respect to business. The following is a partial listing of some of the definitions given by key experts in the field:

“A strategy is a pattern of objectives, purposes or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or to be .” [1] “The determination of the long-run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals .” [2] “What business strategy is all about, in a word, is competitive advantage .” [3]

We define the strategy of a business as follows: A firm’s strategy is the path by which it seeks to provide its customers with value, given the competitive environment and within the constraints of the resources available to the firm.

Whatever definition of strategy is used, it is often difficult to separate it from two other terms: strategic planning and strategic management. Both terms are often perceived as being in the domain of large corporations, not necessarily small to midsize businesses. This is somewhat understandable. The origin of strategic planning as a separate discipline occurred over fifty years ago. It was mainly concerned with assisting huge multidivisional or global businesses in coordinating their activities. In the intervening half-century, strategic planning has produced a vast quantity of literature. Mintzberg, Lampel, Ahlstrand, in a highly critical review of the field, identified ten separate schools associated with strategic planning. [4] With that number of different schools, it is clear that the discipline has not arrived at a common consensus. Strategic planning has been seen as a series of techniques and tools that would enable organizations to achieve their specified goals and objectives. Strategic management was seen as the organizational mechanisms by which you would implement the strategic plan. Some of the models and approaches associated with strategic planning and strategic management became quite complex and would prove to be fairly cumbersome to implement in all but the largest businesses. Further, strategic planning often became a bureaucratic exercise where people filled out forms, attended meetings, and went through the motions to produce a document known as the strategic plan. Sometimes what is missed in this discussion was a key element—strategic thinking. Strategic thinking is the creative analysis of the competitive landscape and a deep understanding of customer value. It should be the driver (see “Strategy Troika”) of the entire process. This concept is often forgotten in large bureaucratic organizations.

Strategy Troika

Strategic thinkers often break commonly understood principles to reach their goals. This is most clearly seen among military leaders, such as Alexander the Great or Hannibal. Robert E. Lee often violated basic military principles, such as dividing his forces. General Douglas MacArthur shocked the North Koreans with his bold landings behind enemy lines at Inchon. This mental flexibility also exists in great business leaders.

Solomon and Friedman recounted a prime example of true strategic thinking. [5] Wilson Harrell took a small, closely held, cleaning spray company known as Formula 409 to the point of having national distribution. In 1967, the position that Formula 409 held was threatened by the possible entry of Procter & Gamble into the same spray cleaning market. Procter & Gamble was a huge consumer products producer, noted for its marketing savvy. Procter & Gamble began a program of extensive market research to promote its comparable product they called Cinch. Clearly, the larger firm had a much greater advantage. Harrell knew that Procter & Gamble would perform test market research. He decided to do the unexpected. Rather than directly confront this much larger competitor, he began a program where he reduced advertising expenditures in Denver and stopped promoting his Formula 409. The outcome was that Procter & Gamble had spectacular results, and the company was extremely excited with the potential for Cinch. Procter & Gamble immediately begin a national sales campaign. However, before the company could begin, Harrell introduced a promotion of his own. He took the Formula 409 sixteen-ounce bottle and attached it to a half-gallon size bottle. He then sold both at a significant discount. This quantity of spray cleaner would last the average consumer six to nine months. The market for Procter & Gamble’s Cinch was significantly reduced. Procter & Gamble was confused and confounded by its poor showing after the phenomenal showing in Denver. Confused and uncertain, the company chose to withdraw Cinch from the market. Wilson Harrell’s display of brilliant strategic thinking had bested them. He leveraged his small company’s creative thinking and flexibility against the tremendous resources of an international giant. Through superior strategic thinking, Harrell was able to best Procter & Gamble.

Do You Have a Strategy and What Is It?

We have argued that all businesses have strategies, whether they are explicitly articulated or not. Perry stated that “small business leaders seem to recognize that the ability to formulate and implement an effective strategy has a major influence on the survival and success of small business.” [6]

The extent to which a strategy should be articulated in a formal manner, such as part of a business plan, is highly dependent on the type of business. One might not expect a formally drafted strategy statement for a nonemployee business funded singularly by the owner. One researcher found that formal plans are rare in businesses with fewer than five employees. [7] However, you should clearly have that expectation for any other type of small or midsize business.

Any business with employees should have an articulated strategy that can be conveyed to them so that they might better assist in implementing it. Curtis pointed out that in the absence of such communication, “employees make pragmatic short-term decisions that cumulatively form an ad-hoc strategy.” [8] These ad hoc (realized) strategies may be at odds with the planned (intended) strategies to guide a firm. [9] However, any business that seeks external funding from bankers, venture capitalists, or “angels” must be able to specify its strategy in a formal business plan.

Clearly specifying your strategy should be seen as an end in itself. Requiring a company to specify its strategy forces that company to think about its core issues, such as the following:

• Who are your customers?
• How are you going to provide value to those customers?
• Who are your current and future competitors?
• What are your resources?
• How are you going to use these resources?

One commentator in a blog put it fairly well, “It never ceases to amaze me how many people will use GPS or Google maps for a trip somewhere but when it comes to starting a business they think that they can do it without any strategy, or without any guiding road-map.” Harry Tucci, comment posted to the following blog: [10]

Types of Strategies

In 1980, Michael Porter a professor at Harvard Business School published a major work in the field of strategic analysis— Competitive Strategy . [11] To simplify Porter’s thesis, while competition is beneficial to customers, it is not always beneficial to those who are competing. Competition may involve lowering prices, increasing research and development (R&D), and increasing advertising and other expenses and activities—all of which can lower profit margins. Porter suggested that firms should carefully examine the industry in which they are operating and apply what he calls the five forces model. These five forces are as follows: the power of suppliers, the power of buyers, the threat of substitution, the threat of new entrants, and rivalry within the industry. We do not need to cover these five forces in any great detail, other than to say that once the analysis has been conducted, a firm should look for ways to minimize the dysfunctional consequences of competition. Porter identified four generic strategies that firms may choose to implement to achieve that end. Actually, he initially identified three generic strategies, but one of them can be bifurcated. These four strategies are as follows (see “Generic Strategies”): cost leadership, differentiation, cost focus, and differentiation focus. These four generic strategies can be applied to small businesses. We will examine each strategy and then discuss what is required to successfully implement them.

Generic Strategies

Low-Cost Advantage

A  cost leadership strategy requires that a firm be in the position of being the lowest cost producer in its competitive environment. By being the lowest-cost producer, a firm has several strategic options open to it. It can sell its product or service at a lower price than its competitors. If price is a major driver of customer value, then the firm with the lowest price should sell more. The low-cost producer also has the option of selling its products or services at prices that are comparable to its competitors. However, this would mean that the firm would have a much higher margin than its competitors.

Obviously, following a cost leadership strategy dictates that the business be good at curtailing costs. Perhaps the clearest example of a firm that employs a cost leadership strategy is Walmart. Walmart’s investment in customer relations and inventory control systems plus its huge size enables it to secure the “best” deals from suppliers and drastically reduce costs. It might appear that cost leadership strategies are most suitable for large firms that can exploit economies of scale. This is not necessarily true. Smaller firms can compete on the basis of cost leadership. They can position themselves in low-cost areas, and they can exploit their lower overhead costs. Family businesses can use family members as employees, or they can use a web presence to market and sell their goods and services. A small family-run luncheonette that purchases used equipment and offers a limited menu of standard breakfast and lunch items while not offering dinner might be good example of a small business that has opted for a cost leadership strategy.

Differentiation

A  differentiation strategy involves providing products or services that meet customer value in some unique way. This uniqueness may be derived in several ways. A firm may try to build a particular brand image that differentiates itself from its competitors. Many clothing lines, such as Tommy Hilfiger, opt for this approach. Other firms will try to differentiate themselves on the basis of the services that they provide. Dominoes began to distinguish itself from other pizza firms by emphasizing the speed of its delivery. Differentiation also can be achieved by offering a unique design or features in the product or the service. Apple products are known for their user-friendly design features. A firm may wish to differentiate itself on the basis of the quality of its product or service. Kogi barbecue trucks operating in Los Angeles represent such an approach. They offer high-quality food from mobile food trucks.” [12] They further facilitate their differentiation by having their truck routes available on their website and on their Twitter account.

Adopting a differentiation strategy requires significantly different capabilities than those that were outlined for cost leadership. Firms that employ a differentiation strategy must have a complete understanding of what constitutes customer value. Further, they must be able to rapidly respond to changing customer needs. Often, a differentiation strategy involves offering these products and services at a premium price. A differentiation strategy may accept lower sales volumes because a firm is charging higher prices and obtaining higher profit margins. A danger in this approach is that customers may no longer place a premium value on the unique features or quality of the product or the service. This leaves the firm that offers a differentiation strategy open to competition from those that adopt a cost leadership strategy.

Focus—Low Cost or Differentiation

Porter identifies the third strategy—focus. He said that focus strategies can be segmented into a  cost focus and a differentiation focus .

In a focus strategy, a firm concentrates on one or more segments of the overall market. Focus can also be described as a niche strategy. Focus strategy entails deciding to some extent that we do not want to have everyone as a customer. There are several ways that a firm can adopt a focus perspective:

• Product line. A firm limits its product line to specific items of only one or more product types. California Cart Builder produces only catering trucks and mobile kitchens.
• Customer. A firm concentrates on serving the needs of a particular type of customer. Weight Watchers concentrates on customers who wish to control their weight or lose weight.
• Geographic area. Many small firms, out of necessity, will limit themselves to a particular geographic region. Microbrewers generally serve a limited geographic region.
• Particular distribution channel. Firms may wish to limit themselves with respect to the means by which they sell their products and services. Amazon began and remains a firm that sells only through the Internet.

Firms adopting focus strategies look for distinct groups that may have been overlooked by their competitors. This group needs to be of sufficiently sustainable size to make it an economically defensible option. One might open a specialty restaurant in a particular geographic location—a small town. However, if the demand is not sufficiently large for this particular type of food, then the restaurant will probably fail. Companies that lack the resources to compete on either a national level or an industry-wide level may adopt focus strategies. Focus strategies enable firms to marshal their limited resources to best serve their customers.

As previously stated, focus strategies can be bifurcated into two directions—cost focus or differentiation focus. IKEA sells low-priced furniture to those customers who are willing to assemble the furniture. It cuts its costs by using a warehouse rather than showroom format and not providing home delivery. Michael Dell began his business out of his college dormitory. He took orders from fellow students and custom-built computers to their specifications. This was a cost focus strategy. By building to order, it almost totally eliminated the need for any incoming, work-in-process, or finished goods inventories.

A focus differentiation strategy concentrates on providing a unique product or service to a segment of the market. This strategy may be best represented by many specialty retail outlets. The Body Shop focuses on customers who want natural ingredients in their makeup. Max and Mina is a kosher specialty ice cream store in New York City. It provides a constantly rotating menu of more than 300 exotic flavors, such as Cajun, beer, lox, corn, and pizza. The store has been written up in the New York Times and People magazine. Given its odd flavors, Max and Mina’s was voted the number one ice cream parlor in America in 2004. [13]

Evaluating Strategies

The selection of a generic strategy by a firm should not be seen as something to be done on a whim. Once a strategy is selected, all aspects of the business must be tied to implementing that strategy. As Porter stated, “Effectively implementing any of these generic strategies usually requires total commitment and supporting organizational arrangements.” [14] The successful implementation of any generic strategy requires that a firm possess particular skills and resources. Further, it must impose particular requirements on its organization (see “Summary of Generic Strategies”).

Even successful generic strategies must recognize that market and economic conditions change along with the needs of consumers. Henry Ford used a cost leadership strategy and was wildly successful until General Motors began to provide different types of automobiles to different customer segments. Likewise, those who follow a differentiation strategy must be cautious that customers may forgo “extras” in a downturn economy in favor of lower costs. This requires businesses to be vigilant, particularly with respect to customer value.

Summary of Generic Strategies

Key Takeaways

• Any firm, regardless of size, needs to know how it will compete; this is the firm’s strategy.
• Strategy identifies how a firm will provide value to its customers within its operational constraints.
• Strategy can be reduced to four major approaches—cost leadership, differentiation, cost focus, and differentiation focus.
• Once a given strategy is selected, all of a firm’s operations should be geared to implementing that strategy.
• No strategy will be successful forever and therefore needs to be constantly evaluated.

The Necessity for a Business Plan

An intelligent plan is the first step to success. The man who plans knows where he is going, knows what progress he is making and has a pretty good idea of when he will arrive. Planning is the open road to your destination. If you don’t know where you’re going, how can you expect to get there? – Basil Walsh

In Chapter 1, we discussed the issue of failure and small businesses. Although research on small business failure has identified many factors, one reason that always appears at the top of any list is the failure to plan. Interestingly, some people argue that planning is not essential for a start-up business, but they are in a distinct minority. [15] The overwhelming consensus is that a well-developed plan is essential for the survival of any small (or large) business. [16] Perry found that firms with more than five people benefit from having a well-developed business plan. [17]

A recent study found that there was a near doubling of successful growth for those businesses that completed business plans compared to those that did not create one. It must be pointed out that this study might be viewed as being biased because the founder of the software company whose main product is a program that builds business plans conducted the study. However, the results were examined by academics from the University of Oregon who validated the overall results. They found that “except in a small number of cases, business planning appeared to be positively correlated with business success as measured by our variables. While our analysis cannot say the completing of a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business plan is also more likely to produce a successful business.” [18]

Basically, there are two main reasons for developing a comprehensive business plan: (1) a plan will be extraordinarily useful in ensuring the successful operation of your business; and (2) if one is seeking to secure external funds from banks, venture capitalists, or other investors, it is essential that you be able to demonstrate to them that they will be recovering their money and making a profit. Let us examine each reason in detail.

Many small business owners operate under a mistaken belief that the only time that they need to create a business plan is at the birth of the company or when they are attempting to raise additional capital from external sources. They fail to realize that a business plan can be an important element in ensuring day-to-day success.

The initial planning process aids the operational success of a small business by allowing the owner a chance to review, in detail, the viability of the business idea. It forces one to rigorously consider some key questions:

• Is the business strategy feasible?
• What are the chances it will make money?
• Do I have the operational requirements for starting and running a successful business?
• Have I considered a well-thought-out marketing plan that clearly identifies who my customers will be?
• Do I clearly understand what value I will provide to these customers?
• What will be the means of distribution to provide the product or the service to my customers?
• Have I clarified to myself the financial issues associated with starting and operating the business?
• Do I have to reexamine these notions to ensure success?

Possessing an actual written plan enables you to have people outside the organization evaluate your business plan. Using friends, colleagues, partners, or even consultants may provide you with an unbiased evaluation of the assumptions.

It is not enough to create an initial business plan; you should anticipate making the planning process an annual activity. The Prussian military theorist von Moltke once argued that no military plan survives the first engagement with the enemy. Likewise, no company evolves in the same way as outlined in its initial business plan.

Overcoming the Reluctance to Formally Plan

By failing to prepare, you will prepare them to fail . -Benjamin Franklin

Unfortunately, it appears that many small businesses do not make any effort to build even an initial business plan, let alone maintain a planning process as an ongoing operation, even though there is clear evidence that the failure to plan may have serious consequences for the future success of such firms. This unwillingness to plan may be understandable in nonemployee businesses, but it is inexcusable as a business grows in size. Why, therefore, do some businesses fail to begin the planning process?

• We do not need to plan. One of the prime reasons individuals fail to produce a business plan is that they believe that they do not have to plan. This may be attributable to the size of the firm; nonemployee firms that have no intention of seeking outside financing might sincerely believe that they have no need for a formal business plan. Others may believe that they so well understand the business and/or industry that they can survive and prosper without the burdensome process of a business plan. The author of Business Plan for Dummies , Paul Tiffany, once argued that if one feels lucky enough to operate a business successfully without resorting to a business plan, then he or she should forget about starting a business and head straight to Las Vegas.
• I am too busy to plan. Anyone who has ever run a business on his or her own can understand this argument. The day-to-day demands of operating a business may make it seem that there is insufficient time to engage in any ancillary activity or prepare a business plan. Individuals who accept this argument often fail to recognize that the seemingly endless buzz of activities, such as constantly putting out fires, may be the direct result of not having thought about the future and planned for it in the first place.
• Plans do not produce results. Small-business owners (entrepreneurs) are action- and results-oriented individuals. They want to see a tangible outcome for their efforts, and preferably they would like to see the results as soon as possible. The idea of sitting down and producing a large document based on assumptions that may not play out exactly as predicted is viewed as a futile exercise. However, those with broader experience understand that there will be no external funding for growth or the initial creation of the business without the existence of a well-thought-out plan. Although plans may not yield the specified results contained within them, the process of thinking about the plan and building it often yield results that the owner might not initially appreciate.
• We are not familiar with the process of formal planning. This argument might initially appear to have more validity than the others. Developing a comprehensive business plan is a daunting task. It might seem difficult if not impossible for someone with no experience with the concept. Several studies have indicated that small business owners are more likely to engage in the planning process if they have had prior experience with planning models in their prior work experience. [19] Fortunately, this situation has changed rather significantly in the last decade. As we will illustrate, there are numerous tools that provide significant support for the development of business plans. We will see that software packages greatly facilitate the building of any business plan, including marketing plans and financial plans for small businesses. We also show that the Internet can provide an unbelievably rich source of data and information to assist in the building of these plans.

Although one could understand the reticence of someone new to small business (or in some cases even seasoned entrepreneurs), their arguments fall short with respect to the benefits that will be derived from conducting a structured and comprehensive business planning process.

Plans for Raising Capital

Every business plan should be written with a particular audience in mind. The annual business plan should be written with a management team and for the employees who have to implement the plan. However, one of the prime reasons for writing a business plan is to secure investment funds for the firm. Of course, funding the business could be done by an individual using his or her own personal wealth, personal loans, or extending credit cards. Individuals also can seek investments from family and friends. The focus here will be on three other possible sources of capital—banks, venture capitalists, and angel investors. It is important to understand what they look for in a business plan. Remember that these three groups are investors, so they will be anticipating, at the very least, the ability to recover their initial investment if not earn a significant return.

Bankers, like all businesspeople, are interested in earning a profit; they want to see a return on their investment. However, unlike other investors, bankers are under a legal obligation to ensure that the borrower pledge some form of collateral to secure the loan. [20] This often means that banks are unwilling to fund a start-up business unless the owner is willing to pledge some form of collateral, such as a second mortgage on his or her home. Many first-time business owners are not in a position to do that; securing money from a bank occurs most frequently for an existing business that is looking to expand or for covering a short-term cash-flow need. Banks may lend to small business owners who are opening a second business provided that they can prove a record of success and profitability.

Banks will require a business plan. It should be understood that bank loan officers will initially focus on the financial components of that client, namely, the income statement, balance sheet, and the cash-flow statement. The bank will examine your projections with respect to known industry standards. Therefore, the business plan should not project a 75 percent profit margin when the industry standard is 15 percent, unless the author of the plan can clearly document why he or she will be earning such a high return.

Some businesses may raise funds with the assistance of a Small Business Administration (SBA) loan. These loans are always arranged through a commercial bank. With these loans, the SBA will pledge up to 70 percent of the total value of the loan. This means that the owner still must provide, at the very least, 30 percent of the total collateral. The ability to secure one of these loans is clearly tied to the adequacy of the business plan.

Venture Capitalists

Another possible source of funding is venture capitalists . The first thing that one should realize about venture capitalists is that they are not in it just to make a profit; they want to make returns that are substantially above those to be found in the market. For some, this translates into the ability to secure five to ten times their initial investment and recapture their investment in a relatively short period of time—often less than five years. It has been reported that some venture capitalists are looking for returns in the order of twenty-five times their original investment. [21]

The financial statement, particularly the profit margin, is obviously important to venture capitalists, but they will also be looking at other factors. The quality of the management team identified in the business plan will be examined. They will be looking at the team’s experience and track record. Other factors needed by venture capitalists may include the projected growth rate of the market, the extent to which the product or the service being offered is unique, the overall size of the market, and the probability of producing a highly successful product or service.

Businesses that are seeking financing from banks know that they must go to loan officers who will review the plan, even though a computerized loan assessment program may make the final decision. With venture capitalists, on the other hand, you often need to have a personal introduction to have your plan considered. You should also anticipate that you will have to make a presentation to venture capitalists. This means that you have to understand your plan and be able to present it in a dynamic fashion.

Angel Investors

The third type of investor is referred to as angel investors , a term that originally came from those individuals who invested in Broadway shows and films. Many angel investors are themselves successful entrepreneurs. As with venture capitalists, they are looking for returns higher than they can normally find in the market; however, they often expect returns lower than those anticipated by venture capitalist. They may be attracted to business plans because of an innovative concept or the excitement of entering a new type of business. Being successful small business owners, many angel investors will not only provide capital to fund the business but also bring their own expertise and experience to help the business grow. It has been estimated that these angel investors provide between three and ten times as much money as venture capitalists for the development of small businesses. [22]

Angel investors will pay careful attention to all aspects of the proposed business plan. They expect a comprehensive business plan—one that clearly specifies the future direction of the firm. They also will look at the management team not only for its track record and experience but also their (the angel investor’s) ability to work with this team. Angel investors may take a much more active role in the management of the business, asking for positions on the board of directors, taking an equity position in the firm, demanding quarterly reports, or demanding that the business not take certain actions unless it has the approval of these angel investors. These investors will take a much more hands-on approach to the operations of a firm.

• Planning is a critical and important component of ensuring the success of a small business.
• Some form of formal planning should not only accompany the start-up of a business but also be a regular (annual) activity that guides the future direction of the business.
• Many small business owners are reluctant to formally plan. They can produce many excuses for not planning.
• Businesses may have to raise capital from external sources—bankers, venture capitalists, or angel investors. Each type of investor will expect a business plan. Each type of investor will be more or less interested in different parts of the plan. Business owners should be aware of what parts of the plan each type of investor will focus on.

Building a Plan

Before talking about writing a formal business plan, someone interested in starting a business might want to think about doing some personal planning before drafting the business plan. Some of the questions that he or she might want to answer before drafting a full business plan are as follows:

• Why am I going into this business?
• What skills and resources do I possess that will help make the business a success?
• What passion do I bring to this business?
• What is my risk tolerance?
• Exactly how hard do I intend to work? How many hours per week?
• What impact will the business have on my family life?

What do I really wish from this business?

• Am I interested in financial independence?
• What level of profits will be required to maintain my personal and/or family’s lifestyle?
• Am I interested in independence of action (no boss but myself)?
• Am I interested in personal satisfaction?
• Will my family be working in this business?
• What other employees might I need? [23]

Having addressed these questions, one will be in a much better position to craft a formal business plan.

Gathering Information

Building a solid business plan requires knowing the economic, market, and competitive environments. Such knowledge transcends “gut feelings” and is based on data and evidence. Fortunately, much of the required information is available through library resources, Internet sources, and government agencies and, for a fee, from commercial sources. Comprehensive business plans may draw from all these sources.

Public libraries and those at educational institutions provide a rich resource base that can be used at no cost. Some basic research sources that can be found at libraries are given in this section— be aware that the reference numbers provided may differ from library to library .

Library Sources

Background sources.

• Berinstein, Paula. Business Statistics on the Web: Find Them Fast—At Little or No Cost (Ref HF1016 .B47 2003).
• The Core Business Web: A Guide to Information Resources (Ref HD30.37 .C67 2003).
• Frumkin, Norman. Guide to Economic Indicators , 4th ed. (Ref HC103 .F9 2006). This book explains the meanings and uses of the economic indicators.
• Solie-Johnson, Kris. How to Set Up Your Own Small Business , 2 volumes (Ref HD62.7 .S85 2005). Published by the American Institute of Small Business.

Company and Industry Sources

• North American Industry Classification System, United States (NAICS), 2007 (Ref HF1042 .N6 2007). The NAICS is a numeric industry classification system that replaced the Standard Industrial Classification (SIC) system. An electronic version is available from the US Census Bureau .
• Standard Industrial Classification Manual (Ref HA40 .I6U63 1987). The industry classification system that preceded the NAICS.
• Value Line Investment Survey (Ref HG4751 .V18). Concise company and industry profiles are updated every thirteen weeks.

Statistical Sources

• Almanac of Business and Industrial Financial Ratios (Ref HF5681 .R25A45 2010).
• Business Statistics of the United States (Ref HC101 .A13123 2009). This publication provides recent and historical information about the US economy.
• Economic Indicators (1971–present). The Council of Economic Advisers for the Joint Economic Committee of Congress publishes this monthly periodical; recent years are in electronic format only. Ten years of data are presented. Electronic versions are available in ABI/INFORM and ProQuest from September 1994 to present and Academic OneFile from October 1, 1991.
• Industry Norms and Key Business Ratios (Dun & Bradstreet; Ref HF5681 .R25I532 through Ref HF5681 .I572 [2000–2001 through 2008–2009]).
• Rma Annual Statement Studies (Ref HF5681 .B2R6 2009–2010). This publication provides annual financial data and ratios by industry.
• Statistical Abstract of the United States (Ref HA202 .S72 2010). This is the basic annual source for statistics collected by the government. Electronic version is available at www.census.gov/compendia/statstatab .
• Survey of Current Business (1956–present). The Bureau of Economic Analysis publishes this monthly periodical; recent years are in electronic format only.

At some libraries, you may find access to the following resources online:

• Mergent Webreports. Mergent (formerly Moody’s) corporate manuals are in digitized format. Beginning with the early 1900s, the reports include corporate history, business descriptions, and in-depth financial statements. The collection is searchable by company name, year, or manual type.
• ProQuest Direct is a database of general, trade, and scholarly periodicals, with many articles in full text. Many business journals and other resources are available.
• Standard and Poor’s Netadvantage is a database that includes company and industry information.

Internet Resources

In addition to government databases and other free sources, the Internet provides an unbelievably rich storehouse of information that can be incorporated into any business plan. It is not feasible to provide a truly comprehensive list of useful websites; this section provides a highly selective list of government sites and other sites that provide free information.

Government Sites

• US Small Business Administration (SBA) . This is an excellent site to begin researching a business plan. It covers writing a plan, financing a start-up, selecting a location, managing employees, and insurance and legal issues. A follow-up page at http://www.sba.gov provides access to publications, statistics, video tutorials, podcasts, business forms, and chat rooms. Another page— http://www.sba.gov/about-offices-list/2 —provides access to localized resources.
• SCORE Program . The SCORE program is a partner of the SBA. It provides a variety of services to small business owners, ranging from online (and in-person) mentoring, workshops, free computer templates, and advice on a wide range of small business issues.

In developing a business plan, it is necessary to anticipate the future economic environment. The government provides extensive statistics online.

• Consumer Price Index . This index provides information on the direction of prices for industries and geographic areas.
• Producer Price Index . Businesses that provide services or are focused on business-to-business (B2B) operations may find these data more appropriate for estimating future prices.
• National Wage Data . This site provides information on prevailing wages and can be broken down by occupation and location down to the metropolitan area.
• Consumer Expenditures Survey . This database provides information on expenditures and income. It allows for a remarkable level of refinement by occupation, age, or race.
• State and Local Personal Income and Employment . These databases provide a breakdown of personal income by state and metropolitan area.
• GDP by State and Metropolitan Region . This will provide an accurate guide to the overall economic health of a region or a city.
• US Census . This is a huge site with databases on population, income, foreign trade, economic indicators, and business ownership.

There are nongovernment websites, either free or charging a fee, that can provide assistance in building a business plan. A simple Google search for the phrase small business plan yields more than 67 million results. Various sites will either help with writing the plan, offer to write the plan for a fee, produce reports on industries, or assist small businesses by providing a variety of support services. The Internet offers a veritable cornucopia of information and support for those working on their business plans.

Forecasting for the Plan

Prediction is very difficult, especially about the future. Nils Bohr, Nobel Prize winner

Any business plan is a future-oriented document. Business plans are required to look between three and five years into the future. To produce them and accurately forecast sales, you will need estimates of expenses and other items, such as the required number of employees, interest rates, and general economic conditions. There are many different techniques and tools that can be used to forecast these items. The type of techniques used will be influenced by many factors, such as the following:

• The size of the business. Smaller businesses may have fewer resources to apply a wide variety of forecasting techniques.
• The analytical sophistication of people who will be conducting the forecast. The owner of a home business may have no prior experience with forecasting techniques.
• The type of the organization. A manufacturing concern that sells to a stable and relatively predictable environment that has been in existence for years might be able to employ a variety of standard statistical forecasting techniques; however, a small firm operating in a new or a chaotic environment might have to rely on significantly different techniques.
• Historical records. Does the firm have historical records for sales that can be used to project into the future?

There is no universal set of forecasting techniques that can be used for all types of small and midsize businesses. Forecasting can fall into a fairly comprehensive range of techniques with respect to level of sophistication. Some forecasting can be done on an intuitive basis (e.g., back-of-the-envelope calculations); others can be done with standard computer programs (e.g., Excel) or programs that are specifically dedicated to forecasting in a variety of environments.

A brief review of basic forecasting techniques shows that they can be divided into two broad classes:  qualitative forecasting methods and quantitative forecasting methods . Actually, these terms can be somewhat misleading because qualitative forecasting methods do not imply that no numbers will be involved. The two techniques are separated by the following concept: qualitative forecasting methods assume that one either does not have historical data or that one cannot rely on past historical data. A start-up business has no past sales that can be used to project future sales. Likewise, if there is a significant change in the environment, one may feel uncomfortable using past data to project into the future. A restaurant operates in a small town that contains a large automobile factory. After the factory closes, the restaurant owner should anticipate that past sales will no longer be a useful guideline for projecting what sales might be in the next year or two because the owner has lost a number of customers who worked at the factory. Quantitative forecasting, on the other hand, consists of techniques and methods that assume you can use past data to make projections into the future.

“Overview of Forecasting Methods” provides examples of both qualitative forecasting methods and quantitative forecasting methods for sales forecasting. Each method is described, and their strengths and weaknesses are given.

Overview of Forecasting Methods

Forecasting key items such as sales is crucial in developing a good business plan. However, forecasting is a very challenging activity. The further out the forecast, the less likely it will be accurate. Everyone recognizes this fact. Therefore, it is useful to draw on a variety of forecasting techniques to develop your final forecast for the business plan. To do that, you should have a fairly solid understanding of the strengths and weaknesses of the various approaches. There are many books, websites, and articles that could assist you in understanding these techniques and when they should or should not be used. In addition, one should be open to gathering additional information to assist in building a forecast. Some possible sources of such information would be associations, trade publications, and business groups. Regardless of what technique is used or the data source employed in building a forecast for business plan, one should be prepared to justify why you are employing these forecasting models.

Web Resources for Forecasting

• Three methods of sales forecasting ( sbinfocanada.about.com/od/cashflowmgt/a/salesforecast.htm ). This site provides three simplified approaches to sales forecasting.
• Time-critical decision making for business administration ( home.ubalt.edu/ntsbarsh/stat-data/forecast.htm ). This site has an e-book format with several chapters devoted to analytical forecasting techniques.

Building your first business plan may seem extremely formidable. This may explain why there are so many software packages available to assist in this task. After building your first business plan, that steep learning curve should make subsequent plans for the business or other businesses significantly easier.

In preparing to build a business plan, there are some problem areas or mistakes that you should be on guard to avoid. Some may be technical in nature, while others relate to content issues. For the technical side, first and foremost, one should make sure that there are no misspellings or punctuation errors. The business plan should follow a logical structure. No ideal business plan clearly specifies the exact sections that need to be included nor is there an ideal length. Literature concerning business plans indicates that the appropriate length of the body of a business plan line should be between twenty and forty pages. This does not include appendixes that might provide critical data for the reader.

In developing a lengthy report, sometimes it is easy to fall into clichés or overused expressions. These should be avoided. Consider the visuals in the report. Data should be placed in either clearly mapped-out tables or well-designed graphs. The report should be as professional-looking as possible. Anticipate the audience that will be reading the report and write in a way that easily reaches them; avoid using too much jargon or technical terms.

The content in any business plan centers on two areas: realism and accuracy.

Components of the Plan

There is no idealized structure for a business plan or a definitive number of sections that it must contain. The following subsections discuss the outline of a plan for a business start-up and identify some of the major sections that should be part of the plan.

The cover page provides the reader with information about either the author of the plan or the person to contact concerning the business plan. It should contain all the pertinent information to enable the reader to contact the author, such as the name of the business, the business logo, and the contact person’s address, telephone number, and e-mail address.

The table of contents enables the reader to find the major sections and components of the plan. It should identify the key sections and subsections and on which pages those sections begin. This enables the reader to turn to sections that might be of particular importance.

Executive Summary

The  executive summary is a section of critical importance and is perhaps the single most important section of the entire business plan. Quite often, it is the first section that a reader will turn to, and sometimes it may be the only section of the business plan that he or she will read. Chronologically, it should probably be the last section written. [24] The executive summary should provide an accurate overview of the entire document, which cannot be done until the whole document is prepared.

If the executive summary fails to adequately describe the idea behind the business or if it fails to do so in a captivating way, some readers may discard the entire business plan. As one author put it, the purpose of the executive summary is to convince the reader to “read on.” [25] The executive summary should contain the following pieces of information:

• What is the company’s business?
• Who are its intended customers?
• What will be its legal structure?
• What has been its history (where one exists)?
• What type of funding will be requested?
• What is the amount of that funding?
• What are the capabilities of the key executives?

All this must be done in an interesting and captivating way. The great challenge is that executive summaries should be relatively short—between one and three pages. For many businesspeople, this is the great challenge—being able to compress the required information in an engaging format that has significant size limitations.

Business Section

Goals. These are broad statements about what you would like to achieve some point in the near future. Your goals might focus on your human resource policies (“We wish to have productive, happy employees”), on what you see as the source of your competitive advantage (“We will be best in service”), or on financial outcomes (“We will produce above average return to our investors.”) Goals are useful, but they can mean anything to anyone. It is therefore necessary to translate the goals into objectives to bring about real meaning so that they can guide the organization. Ideally, objectives should be SMART —specific, measurable, achievable, realistic, and have a specific timeline for completion. Here is an example: one organizational goal may be a significant rise in sales and profits. When translating that goal into an objective, you might word the objectives as follows: a 15 percent increase in sales for the next three years followed by a 10 percent increase in sales for the following two years and a 12.5 percent increase in profits in each of the next five years. These objectives are quite specific and measurable. It is up to the decision-maker to determine if they are achievable and realistic. These objectives—sales and profits—clearly specify the time horizon. In developing the plan, owners are often very happy to develop goals because they are open to interpretation, but they will avoid objectives. Goals are sufficiently ambiguous, whereas objectives tie you to particular values that you will have to hit in the future. People may be concerned that they will be weighed on a scale and found wanting for failing to achieved their objectives. However, it is critical that your plan contains both goals and objectives. Objectives allow investors and your employees to clearly see where the firm intends to go. They produce targeted values to aim for and, therefore, are critical for the control of the firm’s operations.

Vision and Mission Statements. To many, there is some degree of confusion concerning the difference between a vision statement and a mission statement.  Vision statements articulate the long-term purpose and idealized notion of what a business wishes to become. In the earliest days of Microsoft, when it was a small business, its version of a vision statement was as follows: “A computer on every desk and in every home.” In the early 1980s, this was truly a revolutionary concept. Yet it gave Microsoft’s employees a clear idea (vision) that to bring that vision into being, the software being developed would have to be very “user-friendly” in comparison to the software of that day. Mission statements , which are much more common in small business plans, articulate the fundamental nature of the business. This means identifying the type of business, how it will leverage its competencies, and possibly the values that drive the business. Put simply, a mission statement should address the following questions:

• Who are we? What business are we in?
• Who do we see as our customers?
• How do we provide value for those customers?

Sometimes vision and mission statements are singularly written for external audiences, such as investors or shareholders. They are not written for the audience for whom it would have the greatest meaning—the management team and the employees of the business. Unfortunately, many recognize that both statements can become exercises of stringing together a series of essentially meaningless phrases into something that appears to sound right or professional . You can find software on the web to automatically generate such vacuous and meaningless statements.

Sometimes a firm will write a mission statement that provides customers, investors, and employees with a clear sense of purpose of that company. Zappos has the following as its mission statement: “Our goal is to position Zappos as an online service leader. If we can get customers to associate Zappos as the absolute best in service, then we can expand beyond shoes.” [26] The mission statement of Ben & Jerry’s Ice Cream focuses both on defining their product and their values: “To make, distribute and sell the finest quality all-natural ice cream and euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment.” [27]

Keys to Success . This section identifies those specific elements of your firm that you believe will ensure success. It is important for you to be able to define the competencies that you intend to leverage to ensure success. What makes your product or service unique? What specific set of capabilities do you bring to the competitive scene? These might include the makeup of and the experience of your management team; your operational capabilities (e.g., unique skills in design, manufacturing, or delivery); your marketing skill sets: your financial capabilities (e.g., the ability to control costs); or the personnel that make up the company.

Industry Review

In this section, you want to provide a fairly comprehensive overview of the industry. A thorough understanding of the industry that you will be operating in is essential to understand the possible returns that your company will earn within that industry. Investors want to know if they will recover their initial investment. When will they see a profit? Remember, investors often carefully track industries and are well aware of the strengths and limitations within a particular industry. Investors are looking for industries that can demonstrate growth. They also want to see if the industry is structurally attractive. This might entail conducting Porter’s five forces analysis; however, this is not required in all cases. If there appear to be some issues or problems with industry-level growth, then you might want to be able to identify some segments of the industry where growth is viable.

Products or Services

This section should be an in-depth discussion of what you are offering to customers. It should provide a complete and clear statement of the products or the services that you are offering. It should also discuss the core competencies of your business. You should highlight what is unique, such as a novel product or service concept or the possession of patents. You need to show how your product or service specifically meets particular market needs. You must identify how the product or the service will satisfy specific customers’ needs. If you are dealing with a new product or service, you need to demonstrate what previously unidentified needs it will meet and how it will do so. At its birth, Amazon had to demonstrate that an online bookstore would be preferable to the standard bookstore by offering the customer a much wider selection of books than would be available at an on-site location.

This section could include a discussion of technical issues. If the business is based on a technological innovation—such as a new type of software or an invention—then it is necessary to provide an adequate discussion of the specific nature of the technology. One should take care to always remember the audience for whom you are writing the plan. Do not make this portion too technical in nature. This section also might discuss the future direction of the product or service—namely, where will you be taking (changing) the product or the service after the end of the current planning horizon? This may require a discussion of future investment requirements or the required time to develop new products and services. This section may also include a discussion of pricing the product or the service, although a more detailed discussion of the issue of pricing might be found in the marketing plan section. If you plan to include the issue of pricing here, you should discuss how the pricing of the product or the service was determined. The more detailed you are in this description, the more realistic it will appear to the readers of the business plan. You may wish to discuss relationships that you have with vendors that might have an impact on reducing cost and therefore an impact on price. It is important to discuss how your pricing scheme will compare with competitors. Will it be higher than average or below the average price? How does the pricing fit in with the overall strategy of the firm?

This section must have a high degree of honesty. Investors will know much about the industry and its limitations. You need to identify any areas that might be possible sources of problems, such as government regulations, issues with new product development, securing distribution channels, and informing the market of your existence. Further, it is important to identify the current competitors in the industry and possible future competitors.

Marketing Plan

An introductory marketing course always introduces the four Ps: product, price, place, and promotion. The marketing section of the business plan might provide more in-depth coverage of how the product or the service better meets customer value than that of competitors. It should identify your target customers and include coverage of who your competitors are and what they provide. The comparison between your firm and its competitors should highlight differences and point to why you are providing superior value. Pricing issues, if not covered in the previous section, could be discussed or discussed in more detail.

The issue of location, particularly in retail, should be covered in detail. Perhaps one of the most important elements of the marketing plan section is to specify how you intend to attract customers, inform them of the benefits of using your product or service, and retain customers. Initially, customers are attracted through advertising. This section should delineate the advertising plan. What media will be used—flyers, newspapers, magazines, radio, television, web presence, direct marketing, and/or social media campaigns? This section should cover any promotional campaigns that might be used.

The Management Team

Physical resources are not the only determinant of business success. The human resources available to a firm will play a critical role in determining its success. Readers of your business plan and potential investors should have a clear sense of the management team that will be running a business. They should know the team with respect to the team’s knowledge of the business, their experience and capabilities, and their drive to succeed. Arthur Rock, a venture capitalist, was once quoted as saying, “I invest in people, not the idea.” [28]

This section of the business plan has several elements. It should contain an organizational chart that will delineate the responsibilities and the chain of command for the business. It should specify who will occupy each major position of the business. You might want to explain who is doing what job and why. For every member of the management team, you should have a complete résumé. This should include educational background (both formal and informal) and past work experience, including the jobs they have held, responsibilities, and accomplishments. You might want to include some other biographical data such as age, although that is not required.

If you plan to use specific advisers or consultants, you should mention the names and backgrounds of these people in this section of the plan. You should also specify why these people are being used.

An additional element of your discussion of the management team will be the intended compensation schemes. You should specify the intended salaries for the management team while also including issues of their benefits and bonuses or any stock position that they may take in the company. This section should also identify any gaps in the management team and how you intend to fill these positions.

Depending on the nature of the business, you might wish to include in this section the personnel (employees) that will be required. You should identify the number of people that are currently working for the firm or that will have to be hired; you should also identify the skills that they need to possess. Further discussion should include the pay that will be provided: whether they will be paid a flat salary or paid hourly, if and when you intend to use overtime, and what benefits you intend to provide. In addition, you should discuss any training requirements or training programs that you will have to implement.

Financial Statements

The financial statements section of the business plan should be broken down into three key subsections: the income statement, the balance sheet, and the cash-flow statement. Before proceeding with these sections, we discuss the assumptions used to build these sections. The opening section of the financial statements section should also include, in summary format, projections of sales, the sales growth rate, key expenses and their growth rates, net income across the forecasting horizon, and assets and liabilities. [29]

As previously discussed, bankers—and to lesser extent venture capitalists—will be primarily concerned with this section of the business plan. It is vital that this section—whether you are an existing business seeking more funding or a start-up—have realistic financial projections. The business plan should contain clear statements of the underlying assumptions that were used to make these financial projections. The clearer the statements and the more realistic the assumptions behind these statements, then the greater the confidence the reader will have in these projections. Few businesspeople have a thorough understanding of these financial statements; therefore, it is advisable that someone with an accounting or a financial background review these statements before they are included in the report. We will have a much more in-depth discussion of these statements in Chapter 9 .

The future planning horizon for financial projections is normally between three and five years. The duration that you will use will depend on the amount of capital that the business is seeking to raise, the type of industry the business is in, and the forecasting issues associated with making projections. Also, the detail required in these financial statements will be directly tied to the type and size of the business.

Income Statement

The  income statement examines the overall profitability of a firm over a particular period of time. As such, it is also known as a profit-and-loss statement. It identifies all sources of revenues generated and expenses incurred by the business. For the business plan, one should generate annual plans for the first three to five years. Some suggest that the planner develop more “granulated” income statements for the first two years. By granulated, we mean that the first year income statement should be broken down on a monthly basis, while the second year should be broken down on a quarterly basis.

Some of the key terms (they will be reviewed in much greater detail in Chapter 10 ) found in the income statement are as follows:

• Income. All revenues and additional incomes produced by the business during the designated period.
• Cost of goods sold. Costs associated with producing products, such as raw materials and costs associated directly with production.
• Gross profit margin. Income minus the cost of goods sold.
• Operating expenses. Costs in doing business, such as expenses associated with selling the product or the service, plus general administration expenses.
• Depreciation. This is a special form of expense that may be included in operating expenses. Long-term assets—those whose useful life is longer than one year—decline in value over time. Depreciation takes this fact into consideration. There are several ways in which this declining value can be determined. It is a noncash expenditure expense.
• Total expenses. The cost of goods sold plus operating expenses and depreciation.
• Net profit before interest and taxes. This is the gross profit minus operating expenses; another way of stating net profit is income minus total expenses.
• Interest. The required payment on all debt for the period.
• Taxes. Federal, state, and local tax payments for the firm.
• Net profit. This is the net profit after interest and taxes. This is the term that many will look at to determine the potential success of business operations.

Balance Sheet

The  balance sheet examines the assets and liabilities and owner’s equity of the business at some particular point in time. It is divided into two sections—the credit component (the assets of the business) and the debit component (liabilities and equity). These two components must equal each other. The business plan should have annual balance sheet for the three- or five-year planning horizon. The elements of the credit component are as follows:

• Current assets. These are the assets that will be held for less than one year, including cash, marketable securities, accounts receivable, notes receivable, inventory, and prepaid expenses.
• Fixed assets. These assets are not going to be turned into cash within the next year; these include plants, equipment, and land. It may also include intangible assets, such as patents, franchises, copyrights, and goodwill.
• Total assets. This is the sum of current assets and fixed assets.

Liabilities consist of the following:

• Current liabilities. These are debts that are to be paid within the year, such as lines of credit, accounts payable, other items payable (including taxes, wages, and rents), short-term loans, dividends payable, and current portion of long-term debt.
• Long-term liabilities. These are debts payable over a period greater than one year, such as notes payable, long-term debt, pension fund liability, and long-term lease obligations.
• Total liabilities. This is the sum of current liabilities and long-term liabilities.
• Owner’s equity. This represents the value of the shareholders’ ownership in the business. It is sometimes referred to as net worth. It may be composed of items such as preferred stock, common stock, and retained earnings.

Cash-Flow Statement

From a practical and survival standpoint, the  cash-flow statement may be the most important component of the financial statements. The cash-flow statement maps out where cash is flowing into the firm and where it flows out. It recognizes that there may be a significant difference between profits and cash flow. It will indicate if a business can generate enough cash to continue operations, whether it has sufficient cash for new investments, and whether it can pay its obligations. Businesspeople soon realize that profits are nice, but cash is king.

Cash flows can be divided into three areas of analysis: cash flow from operations, cash flow from investing, and cash flow from financing. Cash flow from operations examines the cash inflows from revenues and interest and dividends from investments held by the business. It then identifies the cash outflows for paying suppliers, employees, taxes, and other expenses. Cash flow from investing examines the impact of selling or acquiring current and fixed assets. Cash flow from financing examines the impact on the cash position from the changes in the number of shares and changes in the short- and long-term debt position of the firm. Given the critical importance of cash flow to the survival of the small business, it will be covered in much more detail in Chapter 10 .

Additional Information

Depending on the nature of the business and the amount of funding that is being sought, the plan might include more materials. For an existing business, you may wish to include past tax statements and/or personal financial statements. If the business is a franchise, you should include all legal contracts and documents. The same should be done for any leasing, licensing, or rent agreements. This section should be seen as a catchall incorporating any materials that would support the plan. One does not want to be in the position of being asked by readers of the plan—“Where are these documents?”

The financial section of the business plan should include summaries of the three key financial elements. The details behind the financial statements should be included as an appendix along with clear statements concerning the assumptions that were used to build them. The appendixes may also include different scenarios that were considered in building the plan, such as alternative market growth assumptions or alternative competitive environments. Demonstrating that the author(s) considered “what-if” situations tells potential investors that the business is prepared to handle changing conditions. It should include items such as logos, diagrams, ads, and organizational charts.

Developing Scenarios

Business plans are analyses of the future; they can err on the side of either optimistic projections or conservative projections. From the standpoint of the potential investor, it is always better to err on the side of conservatism. Regardless of either bias, business plans are generally built on the basis of expected futures and past experience. Unfortunately, the future does not always emerge in a clearly predicated manner. One can have a dramatic change that can have significant impact on the business. Often such changes occur in the external environment and are beyond the control of the business management team. These external changes can occur within the technical environment; it can be based on changes in customer needs, changes with respect to the suppliers, changes in the economic environment—at the local, national, or global level. Dramatic change can also occur within the organization itself—the death of the owner or members of the management team. [30]

One way for an organization to deal with significant changes is a process known as scenario planning . The real origins of scenario planning can be traced back to the early nineteenth century activity known as Kreigsspiel—war gaming—a system for training officers developed by the Prussian command. This process of looking at future wars was adopted by many militaries in the later nineteenth century. In the 1950s, a more formal format was used at the RAND Institute for examining possible future changes in the military and geopolitical environments. The early 1980s saw it applied to industrial settings. Royal Dutch Shell examined the question of what would happen if there were a significant drop in the price of oil. This was after two oil crises that pushed the price of oil up significantly. The notion that oil prices would drop was considered to be an extremely unlikely event, but it did occur. Royal Dutch Shell was one of the few oil companies that did not suffer because its scenario analyses enabled them to be ready to deal with that situation. [31]

What could be the possible use of scenario planning for small businesses? There are several areas in which small businesses should apply scenario planning to be better prepared for future disruptions.

Identify Significant Changes That Might Impact the Business

Consider major shifts in the customer’s notion of value. As mentioned in Chapter 2 , the firm should always be examining what constitutes value in the eyes of the consumer and how that might shift. Henry Ford’s model T car was a global success because customers initially valued a reliable vehicle at a low price. Ford Motor Company continued to meet the customer’s notion of value by constantly driving down the unit cost. However, by the mid-1920s, customers’ notion of value included not only price but also issues such as styling and improved technologies. General Motors was able to recognize that there were changes in the customer’s value notion and provided them with a range of vehicles. Ford failed to recognize that change and suffered a significant drop in sales.

Shifts in the economic environment. The recent recession clearly indicates that economies can suffer significant shifts in a short period of time. These shifts can have dramatic impact on all business operations. Small-business owners have seen significant tightening of bank credit and changes with respect to the requirements for using credit cards. One could easily imagine the critical importance for small businesses to consider the impacts that would follow significant changes in interest rates. Southwest Airlines, in anticipation of possible fluctuations in oil prices, used futures contracts to deal with dramatic shifts in the price of oil. When oil prices rose significantly, they were in a much better position than their competitors.

The entrance of new competitors. Small businesses should always be ready to consider the impact of facing new competitors and new types of competition. Consider the case of small local retail outlets when a Walmart superstore opens in the area.

Consideration of Disasters

The best way to deal with any potential disaster is not while it is occurring or after it has happened but before it occurs. Small businesses should anticipate what they will do in the case of physical disasters, such as fire, earthquakes, or floods. Other disasters might involve the bankruptcy or loss of a major supplier or a major customer. A restaurant or a food market should have a contingency plan in the case of a power failure that might lead to food spoilage. Such a business might also want to conduct a scenario planning exercise to see what its responses would be in the case of a customer complaining of food poisoning. Other disaster scenarios that should be considered by small businesses include the impact and ramifications of having the computer system crash; having the service for the website crash; or having the website hacked, with the possible loss of customer information.

New Opportunities

Almost all businesses, large and small, must be prepared to seize new opportunities. This may mean that they have to consider the impact of technological change on the business or how technology can offer them new business opportunities. The technology of stereo lithography, a process by which three-dimensional objects are built layer by layer, has been available for more than a decade. Bespoke Innovations saw the potential for using this technology. Bespoke Innovations can develop, in a short period of time, custom artificial legs for a price of $5,000–$6,000 and with features that are not found in $60,000 prostheses. [32]

Scenario planning should be a periodic exercise, but it should be conducted no more than once a year. The actual frequency might be dependent on the perceived rate of change for the industry or the presence of storm clouds on the horizon. Scenario planning has several distinct activities, which may be as follows:

• Pick one area that might occur in the future that would have significant impact on the business. What if the national joblessness rate remains at over 9 percent for the next three to five years? What if a major customer decides to buy from a competitor or that customer is in financial trouble? What if there are changes in the national defense budget? A luncheonette in New London, Connecticut, where Electric Boat builds nuclear submarines, wants to consider the impact of changes in the defense budget. A decrease in the budget for building nuclear submarines would reduce the number of subs made in New London, which might lead to layoffs at Electric Boat and fewer customers for the luncheonette.
• Identify factors that might impact that issue. This sometimes is referred to as a PEST analysis, where the P stands for political issues, E stands for economic issues, S stands for sociocultural issues, and T stands for technology issues. Each factor would be analyzed to see how it might impact the scenario. In our previous luncheonette example, the restaurant might want to consider an upcoming election to see how each party would support defense appropriations, and it might look at the overall economy to determine whether a downturn in the economy might lead to a cut in defense appropriations. It is unlikely that sociocultural issues would impact defense appropriations. Technology issues, whether a breakthrough in some design by the United States or by some other country, might determine the number and location of submarines built in the United States.
• Rank the relative importance of the previous factors. Not all factors under consideration can be considered equally important. It is critical in a scenario planning exercise to see which factors are most important so that decision-makers can focus on the ramifications of those factors in the analysis.
• Develop scenarios. Having identified the relative importance of the factors, the next stage would be to develop a limited number of possible scenarios (no more than two or three). Each scenario would map out possible outcomes for each key factor. Based on these values, the group conducting the scenario planning exercise would develop insights into this possible future world.
• How do the scenarios impact your business? For each future scenario, the team should examine how that possible future state would impact the operation of the business. Continuing with the luncheonette example, the owner might see that a particular political party would be elected in the next election and the economy will still be in the doldrums. Together, this might indicate a cut in the naval building budget. This will translate into a reduced number of submarines built in New London and a reduction in employment at Electric Boat. The luncheonette’s sales will obviously drop off. Now the owner must consider what it might do in that situation.

Scenario planning offers the opportunity for small business owners to examine the future on a long-term basis. It should force them to look at external environments and conditions that can have a dramatic impact on the survival of their firm. It broadens their thinking and creates an environment of increased flexibility. It enables a business to respond to those sudden shocks that might destroy other firms.

Computer Aids

Business plans can be built using a combination of word-processing and spreadsheet programs by those who are adept at using them. However, the entire process of constructing a comprehensive business plan can be greatly simplified by using a dedicated business plan software package. These packages are designed to produce reports that have all the required sections for a business plan, they greatly facilitate the creation of the financial statements with charts, and they often allow for the inclusion of materials from other programs. Most of them are fairly reasonably priced from $50 to $150.

There are many such packages on the market, and they range from those designed for novices to those that can generate annual plans by easily incorporating data from external sources, such as the accounting programs of a business. When evaluating competing programs, there are some primary and secondary factors that should be considered. [33] The primary factors are as follows:

• Ease of building the report. The various sections of the report should be clearly identified, and the authors should be able to work on each section independent of their sequence within the report. Text and data entry should be simple and allow for easy corrections or revisions.
• Financial statements. The software should facilitate building the income statement, the balance sheet, and the cash-flow statement. For multiyear projections, the software should support the forecasting process.
• Import from other programs. The software should be able to incorporate data from a variety of programs, such as Word and Excel. Ideally, it should be able to import data from a variety of accounting programs.
• Support services. The software company should bundle a variety of support services, including clear instructions, tutorials, and access to Internet or call-number support. Many packages provide sample business plans for different industries.

The secondary factors are as follows:

• Access to research support. Some software packages include access to business publications and databases to aid with market research.
• Export options. These packages allow for the report or parts of the report to be exported to different formats—Word, Excel, PowerPoint, HTML, or PDF.
• Ancillary analysis tools. Some packages either directly include or offer additional programs for market planning, budgeting, or valuation.

The following is a partial listing of companies that have business planning software:

• Business Plan Pro . This company provides business planning software with sample plans for a wide number of industries plus options for acquiring industry data at national, state, or local levels. The company also has programs for marketing planning and legal issues advice.
• Business Plan Software . This company offers a number of products, including business planning software, a strategic planning program, financial projection and cash-flow forecasting programs, and marketing planning software.
• Plan Magic . This company offers a suite of planning products ranging from particular industries to financial and marketing planning software.
• The business planning for a start-up business should consider if the owner(s) is/are ready to accept the challenges of operating a business.
• Comprehensive business plans will require information about the industry, competitors, and customers. Owners or the writers of the business plan should be aware of where they can obtain this information.
• Forecasting is critical to the success of any business. There are many different approaches to forecasting: some are simple extrapolations of trends, while others can be computationally complex. The business should use a forecasting system that is not only accurate but also makes the users feel comfortable.
• Although business plans come in different “sizes and shapes,” they should have some key sections: executive summary, mission statement, industry analysis, marketing plan, description of the management team, and financial projections.
• Some businesses should make it a practice of conducting scenario analyses. This is a process of examining possible future events and what should be the response of the business.
• The complexity and difficulty of building a comprehensive business plan can be significantly reduced by using one of the available business-planning software packages.
• Kenneth Arrow, The Concept of Corporate Strategy (Homewood, IL: Irwin, 1971), 28. ↵
• Alfred Chandler, Strategy and Structure (Cambridge, MA: MIT Press, 1962), 13. ↵
• Kenichi Ohmae, The Mind of the Strategist (Harmondsworth, UK: Penguin Books, 1983), 6. ↵
• Henry Mintzberg, Joseph Lampel, and Bruce Ahlstrand, Strategic Safari: A Guided Tour through the Wilds of Strategic Management (New York: Free Press, 1998). ↵
• Paul Solman and Thomas Friedman, Life and Death on the Corporate Battlefield: How Companies Win, Lose, Survive (New York: Simon and Schuster, 1982), 24–27. ↵
• Stephen C. Perry, “A Comparison of Failed and Non-Failed Small Businesses in the United States: Do Men and Women Use Different Planning and Decision Making Strategies?,” Journal of Developmental Entrepreneurship 7, no. 4 (2002): 415. ↵
• Stephen C. Perry, “An Exploratory Study of U.S. Business Failures and the Influence of Relevant Experience and Planning,” (Ph.D. diss., George Washington University, 1998; dissertation available through UMI Dissertation Services, Ann Arbor, MI), 42. ↵
• David A. Curtis, Strategic Planning for Smaller Businesses: Improving Corporate Performance and Personal Reward (Cambridge, MA: Lexington Books, 1983), 29. ↵
• Henry Mintzberg, The Rise and Fall of Strategic Planning (New York: Free Press, 1994), 46. ↵
• Rieva Lesonsky, “A Small Business Plan Doubles Your Chances for Success, Says a New Survey, Small Business Trends, June 20, 2010, accessed October 10, 2011, smallbiztrends.com/2010/06/business-plan-success-twice-as-likely.html. ↵
• Michael Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 21. ↵
• Kogi Truck Schedule,” Kogi BBQ, accessed October 10, 2011, kogibbq.com. ↵
• Max and Mina’s Ice Cream, accessed October 10, 2011, www.maxandminasicecream.com. ↵
• Jason Cohen, “Don’t Write a Business Plan,” Building43, January 27, 2010, accessed October 10, 2011, www.building43.com/blogs/2010/01/27/dont-write-a -business-plan. ↵
• T. C. Carbone, “Four Common Management Failures and How to Avoid Them,” Management World 10, no. 8 (1981): 38. Patricia Schaeffer, “The Seven Pitfalls of Business Failure and How to Avoid Them,” Business Know-How, 2011, accessed October 10, 2011, www.businessknowhow.com/startup/business-failure.htm. Isabel M. Isodoro, “10 Rules for Small Business Success,” PowerHomeBiz.com , 2011, www.powerhomebiz.com/vol19/rules.htm . Rubik Atamian and Neal R. VanZante, “Continuing Education: A Vital Ingredient of the ‘Success Plan’ for Small Business,” Journal of Business and Economic Research 8, no. 3 (2010): 37. ↵
• Rieva Lesonsky, “A Small Business Plan Doubles Your Chances for Success, Says a New Survey,” Small Business Trends, June 20, 2010, accessed October 10, 2011, smallbiztrends.com/2010/06/business-plan-success-twice-as-likely.html. ↵
• H. Hodges and T. Kent, “Impact of Planning and Control Sophistication in Small Business,” Journal of Small Business Strategy 17, no. 2 (2006–7): 75. ↵
• Tim Berry, “What Bankers Look for in a Business Plan…and What You Should Expect When Taking Your Business Plan to a Bank,” AllBusiness.com, November 7, 2006, accessed October 10, 2011, www.allbusiness.com/business-planning-structures/business-plans/3878953-1.html. ↵
• Marc Mays, “Small Business Venture Capital Strategies,” eZine Articles, 2010, accessed October 10, 2011, ezinearticles.com/?Small-Business-Venture-Capital-Strategies &id=4714691. ↵
• “The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures,” Small Business Notes, September 2008, accessed October 10, 2011, www.smallbusinessnotes.com/aboutsb/rs331.html. ↵
• Melinda Emerson, “Life Plan before Business Plan,” Small Business Trends, March 22, 2010, accessed October 10, 2011, smallbiztrends.com/2010/03/life-plan -before-business-plan.html. ↵
• Jeffry Timmons, Andrew Zachary, and Stephen Spinelli, Business Plans That Work—A Guide for Small Business (New York: McGraw-Hill, 2004), 113. ↵
• Carolyn Brown, “The Dos and Don’ts of Writing a Winning Business Plan,” Black Enterprise, April 1996, 114–122. ↵
• “Inc. 500 Mission Statements,” MissionStatements.com, accessed October 10, 2011, www.missionstatements.com/inc_500_mission_statements.html. ↵
• “Mission Statement,” Ben & Jerry’s, accessed October 10, 2011, www.benjerry.com/activism/mission-statement. ↵
• “Invest in People, Not Ideas,” Michael Karnjanaprakorn, January 15, 2009, accessed October 10, 2011, www.mikekarnj.com/blog/2009/01/15/invest-in-people-not-ideas. ↵
• Amir M Hormozi, Gail S. Sutton, Robert D. McMinn, Wendy Lucio, “Business Plans for New or Small Businesses: Paving the Path to Success,” Management Decision 40, no. 8 (2002): 755. ↵
• “Workshops and Events,” SCORE, accessed October 10, 2011, www.score.org/events/workshops. ↵
• P. McNamee, Tools and Techniques for Strategic Management (New York: Pergamon Press, 1985), 187. ↵
• Ashlee Vance, “A Technology Sets Inventors Free to Dream,” New York Times, September 14, 2010. ↵
• “2012 Business Plan Software Product Comparisons,” TopTenReviews.com, accessed October 10, 2011, business-plan-software-review.toptenreviews.com. ↵

The path by which a firm seeks to provide its customers with value, given the competitive environment and within the constraints of the resources available to the firm.

A firm is in the position of being the lowest cost producer in its competitive environment.

A firm provides products or services that meet customer value in some unique way.

A firm seeks to provide value through low cost for a subset of the market given the competitive environment and within the constraints of the resources available to the firm.

A firm concentrates on providing a unique product or service to a segment of the market.

Individuals who provide money for start-up businesses or additional capital for a business to grow. They invest to make not only a profit but also returns that are substantially above those found in the market.

Individuals who initially invested in Broadway shows and films. As with venture capitalists, they are looking for returns higher than they can normally find in the market; however, they often are expecting returns lower than those anticipated by the venture capitalist.

Methods that assume that one does not have historical data or cannot rely on past historical data.

Methods that consist of techniques that assume you can use past data to make projections of the future.

The introduction to the business plan that describes the company’s business, the intended customers, the legal structure, the type and amount of funding that will requested, and the capabilities of the key executives.

A document that articulates the long-term purpose and idealized notion of what the business wishes to become.

A document that articulates the fundamental nature of the business. It should address what business the company is in, the company’s potential customers, and how customer value will be provided.

A report that provides an examination of the overall profitability of a firm over a particular period of time.

A report that examines the assets, liabilities, and owner’s equity of the business at some particular point in time.

A document that maps out where cash is flowing into a firm and where it flows out. It recognizes that there may be a significant difference between profits and cash flow.

A process that examines the impact and possible responses to events that may be unlikely but that would have significant impact on a business.

Small Business Management Copyright © by Jason Anderson is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

Share This Book

Identifying and managing project constraints

Lucid Content

Reading time: about 7 min

Unless your company has unlimited budget, time, and resources, your project will come with constraints. As a project lead, your job is to determine what those constraints are, how to prioritize them, and how they might impact your project so you can meet stakeholder expectations.

This article discusses some of the constraints you might encounter and what you can do to work around them to keep your project on track.

What are project constraints?

A project constraint is any kind of limitation that can be a risk or have an impact on your project. The various constraints you may encounter are usually interconnected, meaning that a change to one constraint will impact the other constraints.

For example, when you set the deadline for completion and final release, you’ve just given your project a time constraint. Your team is limited by a specified number of days or weeks to complete and deliver the product. In addition to a deadline, you probably have asked for a certain amount of money to complete the project (a budget constraint), and you have decided which features and enhancements will go into this version of the product (a scope constraint).

If you move the deadline to an earlier date, the project scope might be at risk. If you move the deadline to a later date, the project’s budget could be at risk. The scope could also be at risk because when teams perceive that they have more time, they might be tempted to add a feature or two.

The Theory of Constraints and Agile

While there will always be a constraint in any given system, you don’t have to let the constraint ruin your business. With TOC, you find ways to make the constraint work for you rather than against you.

For example, if your constraint is an employee, you can fire the employee. But letting an employee go could also become a constraint. You’ll have to bring in a new person who may or may not be able to do the job. Instead, figure out why the employee is the constraint and work to fix the problem through training, distributing tasks, or moving the employee to a different area. 

How do you apply TOC to Agile?

Goldratt developed TOC to improve processes related to product manufacturing. But it has also been applied to many different industries, including IT and software development. 

Just like in any system, you will find constraints in an Agile environment. Your organization is only as agile as its least agile member. But your organization is more than just the software developers. It includes teams such as HR, finance, marketing, sales, legal, operations, and so on. Constraints can be introduced by any of these members during the development process. 

Agile software development teams can usually adapt to and apply TOC to their processes much faster than the business side of the organization. Agile is all about improving and optimizing processes in IT and software development, but it doesn’t focus on the business divisions.  

TOC can help you find business problems that constrain your ability to meet goals. Use the following five steps to identify and fix constraints:

Identify the constraint: What is keeping you from meeting your goals?

Exploit the constraint: What needs to happen to reduce or eliminate the constraint’s impact on the process?

Subordinate and synchronize to the constraint: Make sure that all other parts of the process recognize the constraint and lend support and assist the constraint to reduce its impact.

Elevate the constraint: If the constraint persists, it becomes a higher priority that needs to be addressed. Do you need to provide more training? Hire new employees? Update equipment?

Repeat as needed: You will need to repeat the process every time a new constraint is introduced into your process.

What are common project constraints?

You may have heard about the three most common constraints: scope, time, and cost. Together, these three constraints are known as the Triple Constraint. You can’t change one of these constraints without impacting the other two. So you need to find a way to balance all three.

When looking at these three constraints, it’s important to understand and keep your business goal in mind. 

Scope: The scope should be well documented and clearly communicate what will and won’t be included in the final product to reduce scope creep . The product you deliver depends on its schedule, budget, and available resources to develop it.

A work breakdown structure (WBS) chart is a great visual for breaking the project down into actionable tasks and getting a better understanding of the complete scope.

Time: Set timelines for each iteration. Identify the deadline for final release. The timelines need to be realistic. To create a realistic schedule , look at the resources you have, team member skills, and the amount of time it took to do similar tasks in a past project. 

To help you determine realistic timeframes for your project, you might want to use a project evaluation and review technique (PERT) chart. A PERT chart lets you visually map out the time required for each task and dependencies to estimate how long a project might take.

Cost: Every project has a budget. You can estimate what the project will cost by analyzing previous projects. If your resources and time are limited, you will need to adjust the budget to avoid overages. If your budget increases, you might be able to add more people and features to the project while staying within the specified timeframe.

For every project, you need to decide whether scope, time, or cost is most important. Then you need to align the other two constraints to match it. For example, if the deadline is the highest priority and can’t be moved, then time and scope need to be adjusted to reflect what can actually be accomplished within the time constraint.

Other constraints to consider include:

Quality: The quality constraint is closely related to the Triple Constraint. Any change to scope, time, or cost might impact product quality. A change in quality expectations affects the project’s scope, time, and cost. For example, if your project is plagued by scope creep and the time and cost don’t change, the quality will likely suffer.

Making a critical-to-quality tree (CTQ) can help you identify customer needs and expectations.   

Risks: Every project comes with risks. To manage risks as a constraint, you need to define a range of responses to potential risks that customers and stakeholders will tolerate. For example, if a risk involves potential equipment failure, what is the tolerance zone for the price of a replacement, the time for equipment delivery, and quality of the replacement?

Perform a risk assessment to help you identify potential risks, determine the likelihood of risks happening, and measure that will be taken to stop the risks. 

Benefits: Determine what the project’s value will be. Your projected value helps you to justify costs, resources, scope, and time needed to complete the project. You’ll want to be able to explain the potential benefits to all stakeholders to ensure that you can get what you need to get the job done. 

Create a value stream map to provide a visual overview of every step in the development process. This will help you identify areas that don’t add value where constraints might be introduced.

Resources: When planning a project, you need to look at the resources you already have—human availability, skill, and location, available equipment, and so on. This constraint is often tied to costs. You can’t expect the company to hire more people and buy new equipment if the funds are not available.

Customer satisfaction: Delivering your project on time within the scope, time, and cost constraints doesn’t mean customers will like it. Before you start your project, brainstorm ideas and talk to customers to determine what you can deliver that will make them happy.

A customer journey map will help you understand how your customers interact with your products and services. This information helps you to understand what they need and expect from future offerings.

Every project will be different, and it’s not really possible to plan for everything that could go wrong. But when you plan for the likely constraints in your project and the ways you’ll address them, you can more quickly identify and fix problem areas so you can reach your goals.

Find out how you can use Lucidchart to plan your next project.

About Lucidchart

Lucidchart, a cloud-based intelligent diagramming application, is a core component of Lucid Software's Visual Collaboration Suite. This intuitive, cloud-based solution empowers teams to collaborate in real-time to build flowcharts, mockups, UML diagrams, customer journey maps, and more. Lucidchart propels teams forward to build the future faster. Lucid is proud to serve top businesses around the world, including customers such as Google, GE, and NBC Universal, and 99% of the Fortune 500. Lucid partners with industry leaders, including Google, Atlassian, and Microsoft. Since its founding, Lucid has received numerous awards for its products, business, and workplace culture. For more information, visit lucidchart.com.

Bring your bright ideas to life.

or continue with

• Create an account
• Business Analyst
• Mathematical Optimization
• Risk Analysis and Simulation
• Data Science Machine Learning
• Business Rules / Decision Tables
• Deployment - Business Value
• By Functional Area
• By Industry
• Analytic Solver Overview
• Analytic Solver Optimization
• Analytic Solver Simulation
• Analytic Solver Data Science
• Analytic Solver Academy
• RASON Decision Services
• Solver Engines
• Optimization and Simulation
• Forecasting and Data Mining
• Case Studies
• Optimization Webinar
• Simulation Webinar
• Data Science Webinar
• Optimization Tutorials
• Simulation Tutorials
• Data Science Tutorials
• Finance Examples
• Investment Examples
• Production Examples
• Distribution Examples
• Purchasing Examples
• Scheduling Examples
• Video Demos
• Technical Support
• Consulting Help
• Academy Courses
• Excel Solver Help
• Data Science Help
• Excel User Guides
• SDK User Guides
• Recommended Books
• Product Catalog
• Types of Licenses
• License Agreement
• Limited Warranty
• Standard vs Custom Terms
• Invoicing Payment

Business constraints are your friend: How understanding limits can unlock business value

Business leaders are operating in an environment of limited resources, limited time, and other business constraints. It’s a fact of everyday life for business leaders: you need to make tradeoffs for optimal resource allocation. Constraints make these business decisions more complicated. But that doesn’t mean that constraints are “bad,” or that you should see them as an obstacle to your success. Instead, business constraints are something that need to be faced head-on, examined, analyzed, and dealt with. 

With the right strategic analytic approach, business constraints can actually be helpful to your business performance by giving you a framework to innovate. If business constraints are a “box” of limits on what you can do, they also present a kind of creative freedom within that box. When you know the defined limits of what you’re working with, you can start solving for constraints within that box. Constraints give you focus and motivation to find a way forward. 

Let’s learn more about how business constraints affect your business performance – and how you can use them to boost your success. 

Business Constraints: What They Are and How They Work 

Business constraints are real-world rules, boundaries, and limitations that affect your business operations. These constraints can include material resources, budget limits, or product design specifications. 

Business constraints are also used in predictive modeling, such as parameter constraints, structural constraints, and data constraints. Imposing constraints on a predictive model helps make sure that the model provides useful and interpretable results that are not too complex or overfitted to a certain data set.  

Every business leader has to make informed business decisions based on the real-world constraints that they’re facing. You can do that with guesswork and hope your outcomes are successful. Or, you can leverage data analytics and factor the constraints into a predictive model to identify optimal decision paths with cost-benefit analysis that takes all your variables into account and achieves constraint satisfaction. 

What Life Is Like With and Without Constraints

It might sound better to run a business or manage a project that has no constraints, where the sky’s the limit to pursue ideas and develop solutions. But recent research from the Harvard Business Review shows that business constraints can be useful for innovation.

When there are no constraints, people tend to follow the “path of least resistance” in solving problems. Constraints can provide useful boundaries that help people focus, synthesize information, and develop new solutions. 

For example, the Harvard Business Review article explains how GE Healthcare created a revolutionary MAC 400 Electrocardiograph (ECG) machine, by imposing strict constraints of time (18 months), budget ($500,000) and product specifications (the ECG should cost $1 per scan and should be battery-powered and portable for rural locations). 

Another example is how Jony Ive, former Design Chief at Apple, created a constraint on the design of the iPhone 4. He required the design team to use a specific type of scratch-resistant aluminosilicate glass; all other design and production decisions had to work around this limitation.

In the same way that children need limits to help them grow, business teams also need guidelines to help them innovate – with creative focus and cost-effective discipline. Business constraints can help your team focus their thinking, manage costs, and ship projects on-time and on-budget.    

How to Leverage Business Constraints

Constraints are not your enemy; they can be a helpful guide that gives your team a clearer framework to focus and succeed. Constraints can be leveraged to ensure that business leaders have data-driven information in order to make business decisions. 

By understanding constraints, analysts can create better predictive models, and provide analytics to business leaders, who can then make a truly informed decision based on logical conditions. 

For an example of how this works in a business analytics solution: Analytic Solver® makes it easy for users to add real-world constraints to their optimization or stochastic optimization model. The constraints are bound on the variable that reflects reality. They express real-world limits. A constraint is always going to have a formula in it, such as “less than” (<) or “equal to” (=). 

Building real business constraints into your modeling and optimization projects can help you get better visibility into the true cost-benefit analysis of your business decisions. It can also help you build better relationships with business stakeholders to get buy-in for high-level decisions. 

Real-World Example of Solving for Business Constraints: Canadian Football League 

The Canadian Football League (CFL) used Analytic Solver® to optimize their game schedule, which included nine teams playing a total of 81 games across a 20-week season. Multiple objectives vied for priority in building the schedule:

• Revenue: the most lucrative time slots must be assigned to the largest revenue-generating teams
• TV Ratings: optimize TV ratings
• Rest Days: all teams must be given an equal number of days off before their next game

The League ultimately decided to optimize the schedule for Rest Days, so the teams would be relatively equally rested, and would create a more competitive, exciting product on the field. In order to optimize the schedule for this strategic goal, the CFL used several business constraints within Analytic Solver®, including:

• Game times must be viable for the most viewers in all four Canadian time zones
• Since all CFL games are broadcast on the same Canadian TV network, overlapping double-headers were not allowed
• Each team must have at least five days of rest between games (except for a few specific instances)
• All traditional rivalry games must be played on Labor Day

By working within these known business constraints, the CFL was able to create a season schedule that was optimized for its most important strategic goal: competitive, fun-to-watch football between well-rested teams. But the CFL didn’t stop there. They took the “rough draft” schedule back to negotiations with teams and TV broadcast partners, listened to their feedback, and made adjustments benefiting all parties. 

The optimization model, and subsequent schedule, required flexibility. Games between high-profile rivalries were moved to Saturdays in order to optimize TV ratings. Trevor Hardy of the CFL, optimization modeler, believes that scheduling is “25% science and 75% art.” Using Analytic Solver® and his knowledge of the model components, he adjusted the model to be, perhaps, less mathematically perfect, but more perfect for the business needs of the CFL and its stakeholders.

Want to see how Analytic Solver® can drive better business outcomes for your team? Start your Free Trial.

• Business Cycle
• Business Environment
• Consumer Protection
• Corporate Responsibility
• External Influences
• Globalisation
• Government Influence
• International Business
• Financial Risk
• Investment Appraisal
• Sources of Finance
• Competitive Advantage
• Customer Focus
• International Marketing
• Market Research
• Marketing Planning
• Marketing Strategies
• Product Launch
• Product Life Cycle
• Product Portfolio
• Segmentation
• The Marketing Mix
• Continuous Improvement
• Customer Service
• Health and Safety
• Lean Production
• Location of Business
• Management of Change
• Merger and Acquisition
• New Product Development
• New Technology
• Product Development
• Production Process
• Research and Development
• Supply Chain
• Communications
• Developing People
• Equal Opportunities
• Managing Change
• Organising People
• Protecting People
• Recruitment and Selection
• Roles and Responsibilities
• Skills and Competencies
• Aims and Objectives
• Business Expansion
• Business Organisation
• Business Planning
• Business Start-Up
• Business Strategy
• Decision Making
• Sectors of Industry
• Stakeholders
• Strategic Planning
• Types of Organisation
• External environment
• External Environment
• eBook Collections
• Audio Case Studies
• Printed Books By Edition
• Employee Retention
• HR Software
• Hybrid Working
• Managing People
• Motivating People
• Performance Management
• Recruitment
• Time Management
• Training and Development
• Business Aquisition
• Business Growth
• Business Plan
• Business Startup
• Entrepreneurship
• Small Business
• Strategic management
• Types of Business
• Accountants
• Bookkeeping
• Budgeting and Cash Flow
• Business Debt
• Business Financing
• Business Funding
• Business Insurance
• Business Investment
• Business Loans
• Business Payments
• Business Taxation
• Market Trading
• Advertising
• Affiliate Marketing
• Business Branding
• Business Events
• Content Marketing
• Conversion Rate Optimisation
• Customer Experience
• Digital Marketing
• Email Marketing
• Lead Generation
• Link Building
• Marketing Agencies
• Marketing Strategy
• Pay Per Click Advertising
• Public Relations
• Social Media
• Business Efficiency
• Business Innovation
• Business Location
• Business Management
• Business Security
• Manufacturing
• Outsourcing
• Project Management
• Quality Management
• The Supply Chain
• Business Law
• Coronavirus
• Sustainable Business
• The Economy
• Stakeholder
• Ethical Business
• Business of Gambling
• Casino Bonuses
• Casino Games
• Casino Guides
• Mobile Gambling
• Online Casino
• Sports Betting
• Tips and Tricks
• Online Learning
• Schools and Colleges
• Students and Teachers
• Studying Internationally
• Universities
• Writing Services
• Cosmetic Procedures
• Cannabidiol (CBD)
• Cannabis/Marijuana
• Dental Care
• Mental Health
• Office Wellbeing
• Relationships
• Supplements
• Banking and Savings
• Credit Cards
• Credit Score and Report
• Debt Management
• International Money Transfers
• Investments
• Payday Loans
• Personal Insurance
• Personal Law
• Motor Accidents
• Motor Finance
• Motor Insurance
• Motoring Accessories
• Virtual Reality
• Gaming Accessories
• Mobile Gaming
• Online Gaming
• Video Games
• Buying Selling and Renting Property
• Construction
• Property Cleaning
• Property Investments
• Property Renovation
• Business Travel
• Camping Activities
• Travel Guides
• Travel Safety
• Visas and Citizenship
• Antiques and Art
• TV, Film & Music
• Mobile Apps
• Mobile Phone
• Photography
• Digital Transformation
• Crypto Exchange
• Crypto in Business
• Crypto Mining
• Crypto Regulation
• Crypto Trading
• Accessories
• Artificial Intelligence
• Programming
• Security & Privacy
• Software Development
• Web Analytics
• Website Design
• Website Development
• Website guides
• Website Hosting
• Guest Posting
• Membership Billing
• Membership Cancel
• Membership Invoice
• membership levels
• Your Profile
• Account Details
• Lost Password

No products in the basket.

A business plan needs to be realistic, so it is important to set out in detail the constraints that are likely to act as limits on business activity.

Typical constraints facing the business include:

• The size of the market. The extent of the market determines a business’s ability to make sales. You can’t make sales if there are no customers out there.
• The nature of demand in the market. It is important to identify the nature of your customers and their requirements through detailed market research.
• The availability of supply. A business often depends on supplies. For example, a clothes retailing business needs to acquire garments, in the appropriate quantities, prices and at the right times.
• The nature of the competition. The strength of the competition is a key constraint on business success. Businesses need to position themselves in such a way as to limit the effect of the competition.
• The availability of finance. Businesses need to have the right quantities of finance at the right times to match their needs. Liquidity and cash flow are thus very important. It is necessary to have funds when they are required to meet the pressing needs of the business.
• The quality and skills of employees. Human resource is one of the most important resources of any organisation. It is essential to have the right number of people with the appropriate skills to enable the business to achieve its business objectives.
• The quality of direction and management. Directors and managers of a business need to have the right skills and abilities e.g. to create well-structured plans and to motivate and lead other members of the organisation. In creating a business plan you, therefore, need to identify the key constraints and set out plans for dealing with any pressing constraints.

A constraint: is a factor that limits or holds back the possible success of a plan.

Most Read >

2021’s 5 best wholesale cbd vendors – buyer’s guide, top 5 uk cbd oil brands for 2022, tips for the best online gambling experiences at casinos without a swedish license, top free youtube converter tools online, ethical business practices, aims and functions of the production department, creating an effective organisational structure, rights and responsibilities of employers and employees, the advantages and disadvantages of a swot analysis, recent articles, how lucrative is the gambling market for the uk government, the definitive guide to navigating online courses in the uk: insightful reviews you need to explore, balancing data with instinct: the key to strategic business decision-making, what is company culture and how to build a thriving workplace environment, the role of founders in shaping company culture and long-term vision: key influences and strategies, techberry review: social trading re-defined, five reasons why manufacturers and distributors need a pim, navigating the maze of construction accounting: key strategies for success.

Subscribe | Write for Us  | Contact | Terms of Service | Privacy Policy | Copyright © Copyright 1995 - 2023 GC Digital Marketing

Step-by-Step Guide to Writing a Simple Business Plan

By Joe Weller | October 11, 2021

• Share on Facebook
• Share on LinkedIn

Link copied

A business plan is the cornerstone of any successful company, regardless of size or industry. This step-by-step guide provides information on writing a business plan for organizations at any stage, complete with free templates and expert advice. 

Included on this page, you’ll find a step-by-step guide to writing a business plan and a chart to identify which type of business plan you should write . Plus, find information on how a business plan can help grow a business and expert tips on writing one .

What Is a Business Plan?

A business plan is a document that communicates a company’s goals and ambitions, along with the timeline, finances, and methods needed to achieve them. Additionally, it may include a mission statement and details about the specific products or services offered.

A business plan can highlight varying time periods, depending on the stage of your company and its goals. That said, a typical business plan will include the following benchmarks:

• Product goals and deadlines for each month
• Monthly financials for the first two years
• Profit and loss statements for the first three to five years
• Balance sheet projections for the first three to five years

Startups, entrepreneurs, and small businesses all create business plans to use as a guide as their new company progresses. Larger organizations may also create (and update) a business plan to keep high-level goals, financials, and timelines in check.

While you certainly need to have a formalized outline of your business’s goals and finances, creating a business plan can also help you determine a company’s viability, its profitability (including when it will first turn a profit), and how much money you will need from investors. In turn, a business plan has functional value as well: Not only does outlining goals help keep you accountable on a timeline, it can also attract investors in and of itself and, therefore, act as an effective strategy for growth.

For more information, visit our comprehensive guide to writing a strategic plan or download free strategic plan templates . This page focuses on for-profit business plans, but you can read our article with nonprofit business plan templates .

Business Plan Steps

The specific information in your business plan will vary, depending on the needs and goals of your venture, but a typical plan includes the following ordered elements:

• Executive summary
• Description of business
• Market analysis
• Competitive analysis
• Description of organizational management
• Description of product or services
• Marketing plan
• Sales strategy
• Funding details (or request for funding)
• Financial projections

If your plan is particularly long or complicated, consider adding a table of contents or an appendix for reference. For an in-depth description of each step listed above, read “ How to Write a Business Plan Step by Step ” below.

Broadly speaking, your audience includes anyone with a vested interest in your organization. They can include potential and existing investors, as well as customers, internal team members, suppliers, and vendors.

Do I Need a Simple or Detailed Plan?

Your business’s stage and intended audience dictates the level of detail your plan needs. Corporations require a thorough business plan — up to 100 pages. Small businesses or startups should have a concise plan focusing on financials and strategy.

How to Choose the Right Plan for Your Business

In order to identify which type of business plan you need to create, ask: “What do we want the plan to do?” Identify function first, and form will follow.

Use the chart below as a guide for what type of business plan to create:

Is the Order of Your Business Plan Important?

There is no set order for a business plan, with the exception of the executive summary, which should always come first. Beyond that, simply ensure that you organize the plan in a way that makes sense and flows naturally.

The Difference Between Traditional and Lean Business Plans

A traditional business plan follows the standard structure — because these plans encourage detail, they tend to require more work upfront and can run dozens of pages. A Lean business plan is less common and focuses on summarizing critical points for each section. These plans take much less work and typically run one page in length.

In general, you should use a traditional model for a legacy company, a large company, or any business that does not adhere to Lean (or another Agile method ). Use Lean if you expect the company to pivot quickly or if you already employ a Lean strategy with other business operations. Additionally, a Lean business plan can suffice if the document is for internal use only. Stick to a traditional version for investors, as they may be more sensitive to sudden changes or a high degree of built-in flexibility in the plan.

How to Write a Business Plan Step by Step

Writing a strong business plan requires research and attention to detail for each section. Below, you’ll find a 10-step guide to researching and defining each element in the plan.

Step 1: Executive Summary

The executive summary will always be the first section of your business plan. The goal is to answer the following questions:

• What is the vision and mission of the company?
• What are the company’s short- and long-term goals?

See our  roundup of executive summary examples and templates for samples. Read our executive summary guide to learn more about writing one.

Step 2: Description of Business

The goal of this section is to define the realm, scope, and intent of your venture. To do so, answer the following questions as clearly and concisely as possible:

• What business are we in?
• What does our business do?

Step 3: Market Analysis

In this section, provide evidence that you have surveyed and understand the current marketplace, and that your product or service satisfies a niche in the market. To do so, answer these questions:

• Who is our customer? 
• What does that customer value?

Step 4: Competitive Analysis

In many cases, a business plan proposes not a brand-new (or even market-disrupting) venture, but a more competitive version — whether via features, pricing, integrations, etc. — than what is currently available. In this section, answer the following questions to show that your product or service stands to outpace competitors:

• Who is the competition? 
• What do they do best? 
• What is our unique value proposition?

Step 5: Description of Organizational Management

In this section, write an overview of the team members and other key personnel who are integral to success. List roles and responsibilities, and if possible, note the hierarchy or team structure.

Step 6: Description of Products or Services

In this section, clearly define your product or service, as well as all the effort and resources that go into producing it. The strength of your product largely defines the success of your business, so it’s imperative that you take time to test and refine the product before launching into marketing, sales, or funding details.

Questions to answer in this section are as follows:

• What is the product or service?
• How do we produce it, and what resources are necessary for production?

Step 7: Marketing Plan

In this section, define the marketing strategy for your product or service. This doesn’t need to be as fleshed out as a full marketing plan , but it should answer basic questions, such as the following:

• Who is the target market (if different from existing customer base)?
• What channels will you use to reach your target market?
• What resources does your marketing strategy require, and do you have access to them?
• If possible, do you have a rough estimate of timeline and budget?
• How will you measure success?

Step 8: Sales Plan

Write an overview of the sales strategy, including the priorities of each cycle, steps to achieve these goals, and metrics for success. For the purposes of a business plan, this section does not need to be a comprehensive, in-depth sales plan , but can simply outline the high-level objectives and strategies of your sales efforts. 

Start by answering the following questions:

• What is the sales strategy?
• What are the tools and tactics you will use to achieve your goals?
• What are the potential obstacles, and how will you overcome them?
• What is the timeline for sales and turning a profit?
• What are the metrics of success?

Step 9: Funding Details (or Request for Funding)

This section is one of the most critical parts of your business plan, particularly if you are sharing it with investors. You do not need to provide a full financial plan, but you should be able to answer the following questions:

• How much capital do you currently have? How much capital do you need?
• How will you grow the team (onboarding, team structure, training and development)?
• What are your physical needs and constraints (space, equipment, etc.)?

Step 10: Financial Projections

Apart from the fundraising analysis, investors like to see thought-out financial projections for the future. As discussed earlier, depending on the scope and stage of your business, this could be anywhere from one to five years. 

While these projections won’t be exact — and will need to be somewhat flexible — you should be able to gauge the following:

• How and when will the company first generate a profit?
• How will the company maintain profit thereafter?

Business Plan Template

Download Business Plan Template

Microsoft Excel | Smartsheet

This basic business plan template has space for all the traditional elements: an executive summary, product or service details, target audience, marketing and sales strategies, etc. In the finances sections, input your baseline numbers, and the template will automatically calculate projections for sales forecasting, financial statements, and more.

For templates tailored to more specific needs, visit this business plan template roundup or download a fill-in-the-blank business plan template to make things easy. 

If you are looking for a particular template by file type, visit our pages dedicated exclusively to Microsoft Excel , Microsoft Word , and Adobe PDF business plan templates.

How to Write a Simple Business Plan

A simple business plan is a streamlined, lightweight version of the large, traditional model. As opposed to a one-page business plan , which communicates high-level information for quick overviews (such as a stakeholder presentation), a simple business plan can exceed one page.

Below are the steps for creating a generic simple business plan, which are reflected in the template below .

• Write the Executive Summary This section is the same as in the traditional business plan — simply offer an overview of what’s in the business plan, the prospect or core offering, and the short- and long-term goals of the company. 
• Add a Company Overview Document the larger company mission and vision. 
• Provide the Problem and Solution In straightforward terms, define the problem you are attempting to solve with your product or service and how your company will attempt to do it. Think of this section as the gap in the market you are attempting to close.
• Identify the Target Market Who is your company (and its products or services) attempting to reach? If possible, briefly define your buyer personas .
• Write About the Competition In this section, demonstrate your knowledge of the market by listing the current competitors and outlining your competitive advantage.
• Describe Your Product or Service Offerings Get down to brass tacks and define your product or service. What exactly are you selling?
• Outline Your Marketing Tactics Without getting into too much detail, describe your planned marketing initiatives.
• Add a Timeline and the Metrics You Will Use to Measure Success Offer a rough timeline, including milestones and key performance indicators (KPIs) that you will use to measure your progress.
• Include Your Financial Forecasts Write an overview of your financial plan that demonstrates you have done your research and adequate modeling. You can also list key assumptions that go into this forecasting. 
• Identify Your Financing Needs This section is where you will make your funding request. Based on everything in the business plan, list your proposed sources of funding, as well as how you will use it.

Simple Business Plan Template

Download Simple Business Plan Template

Microsoft Excel |  Microsoft Word | Adobe PDF  | Smartsheet

Use this simple business plan template to outline each aspect of your organization, including information about financing and opportunities to seek out further funding. This template is completely customizable to fit the needs of any business, whether it’s a startup or large company.

Read our article offering free simple business plan templates or free 30-60-90-day business plan templates to find more tailored options. You can also explore our collection of one page business templates . 

How to Write a Business Plan for a Lean Startup

A Lean startup business plan is a more Agile approach to a traditional version. The plan focuses more on activities, processes, and relationships (and maintains flexibility in all aspects), rather than on concrete deliverables and timelines.

While there is some overlap between a traditional and a Lean business plan, you can write a Lean plan by following the steps below:

• Add Your Value Proposition Take a streamlined approach to describing your product or service. What is the unique value your startup aims to deliver to customers? Make sure the team is aligned on the core offering and that you can state it in clear, simple language.
• List Your Key Partners List any other businesses you will work with to realize your vision, including external vendors, suppliers, and partners. This section demonstrates that you have thoughtfully considered the resources you can provide internally, identified areas for external assistance, and conducted research to find alternatives.
• Note the Key Activities Describe the key activities of your business, including sourcing, production, marketing, distribution channels, and customer relationships.
• Include Your Key Resources List the critical resources — including personnel, equipment, space, and intellectual property — that will enable you to deliver your unique value.
• Identify Your Customer Relationships and Channels In this section, document how you will reach and build relationships with customers. Provide a high-level map of the customer experience from start to finish, including the spaces in which you will interact with the customer (online, retail, etc.). 
• Detail Your Marketing Channels Describe the marketing methods and communication platforms you will use to identify and nurture your relationships with customers. These could be email, advertising, social media, etc.
• Explain the Cost Structure This section is especially necessary in the early stages of a business. Will you prioritize maximizing value or keeping costs low? List the foundational startup costs and how you will move toward profit over time.
• Share Your Revenue Streams Over time, how will the company make money? Include both the direct product or service purchase, as well as secondary sources of revenue, such as subscriptions, selling advertising space, fundraising, etc.

Lean Business Plan Template for Startups

Download Lean Business Plan Template for Startups

Microsoft Word | Adobe PDF

Startup leaders can use this Lean business plan template to relay the most critical information from a traditional plan. You’ll find all the sections listed above, including spaces for industry and product overviews, cost structure and sources of revenue, and key metrics, and a timeline. The template is completely customizable, so you can edit it to suit the objectives of your Lean startups.

See our wide variety of  startup business plan templates for more options.

How to Write a Business Plan for a Loan

A business plan for a loan, often called a loan proposal , includes many of the same aspects of a traditional business plan, as well as additional financial documents, such as a credit history, a loan request, and a loan repayment plan.

In addition, you may be asked to include personal and business financial statements, a form of collateral, and equity investment information.

Download free financial templates to support your business plan.

Tips for Writing a Business Plan

Outside of including all the key details in your business plan, you have several options to elevate the document for the highest chance of winning funding and other resources. Follow these tips from experts:.

• Keep It Simple: Avner Brodsky , the Co-Founder and CEO of Lezgo Limited, an online marketing company, uses the acronym KISS (keep it short and simple) as a variation on this idea. “The business plan is not a college thesis,” he says. “Just focus on providing the essential information.”
• Do Adequate Research: Michael Dean, the Co-Founder of Pool Research , encourages business leaders to “invest time in research, both internal and external (market, finance, legal etc.). Avoid being overly ambitious or presumptive. Instead, keep everything objective, balanced, and accurate.” Your plan needs to stand on its own, and you must have the data to back up any claims or forecasting you make. As Brodsky explains, “Your business needs to be grounded on the realities of the market in your chosen location. Get the most recent data from authoritative sources so that the figures are vetted by experts and are reliable.”
• Set Clear Goals: Make sure your plan includes clear, time-based goals. “Short-term goals are key to momentum growth and are especially important to identify for new businesses,” advises Dean.
• Know (and Address) Your Weaknesses: “This awareness sets you up to overcome your weak points much quicker than waiting for them to arise,” shares Dean. Brodsky recommends performing a full SWOT analysis to identify your weaknesses, too. “Your business will fare better with self-knowledge, which will help you better define the mission of your business, as well as the strategies you will choose to achieve your objectives,” he adds.
• Seek Peer or Mentor Review: “Ask for feedback on your drafts and for areas to improve,” advises Brodsky. “When your mind is filled with dreams for your business, sometimes it is an outsider who can tell you what you’re missing and will save your business from being a product of whimsy.”

Outside of these more practical tips, the language you use is also important and may make or break your business plan.

Shaun Heng, VP of Operations at Coin Market Cap , gives the following advice on the writing, “Your business plan is your sales pitch to an investor. And as with any sales pitch, you need to strike the right tone and hit a few emotional chords. This is a little tricky in a business plan, because you also need to be formal and matter-of-fact. But you can still impress by weaving in descriptive language and saying things in a more elegant way.

“A great way to do this is by expanding your vocabulary, avoiding word repetition, and using business language. Instead of saying that something ‘will bring in as many customers as possible,’ try saying ‘will garner the largest possible market segment.’ Elevate your writing with precise descriptive words and you'll impress even the busiest investor.”

Additionally, Dean recommends that you “stay consistent and concise by keeping your tone and style steady throughout, and your language clear and precise. Include only what is 100 percent necessary.”

Resources for Writing a Business Plan

While a template provides a great outline of what to include in a business plan, a live document or more robust program can provide additional functionality, visibility, and real-time updates. The U.S. Small Business Association also curates resources for writing a business plan.

Additionally, you can use business plan software to house data, attach documentation, and share information with stakeholders. Popular options include LivePlan, Enloop, BizPlanner, PlanGuru, and iPlanner.

How a Business Plan Helps to Grow Your Business

A business plan — both the exercise of creating one and the document — can grow your business by helping you to refine your product, target audience, sales plan, identify opportunities, secure funding, and build new partnerships. 

Outside of these immediate returns, writing a business plan is a useful exercise in that it forces you to research the market, which prompts you to forge your unique value proposition and identify ways to beat the competition. Doing so will also help you build (and keep you accountable to) attainable financial and product milestones. And down the line, it will serve as a welcome guide as hurdles inevitably arise.

Streamline Your Business Planning Activities with Real-Time Work Management in Smartsheet

Empower your people to go above and beyond with a flexible platform designed to match the needs of your team — and adapt as those needs change. 

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. 

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time.  Try Smartsheet for free, today.

Discover why over 90% of Fortune 100 companies trust Smartsheet to get work done.

What Is a Business Constraint?

by Meredyth Glass

Published on 26 Sep 2017

The Theory of Constraints is a business management approach proposed by Dr. George Friedman at the University of Southern California. According to his theory, a business constraint is anything that interferes with the profitability of a company or business endeavor. Improving profitability requires the removal or reduction of business constraints. Common business constraints include time, financial concerns, management and regulations.

Time Constraints

Time constraints include not only the amount of time required to complete a task, but also the amount of time needed to obtain supplies, hire employees and drive to meetings. Once identified as a primary constraint, management can take steps to address time factors and improve business performance. For example, larger supply orders might reduce time constraints imposed by long wait times. Similarly, allocating office space to meeting rooms might allow more meetings to be held in house, thereby reducing travel time between clients.

Financial Constraints

Financial factors are often limiting constraints for businesses. They can range from inadequate budget allocations to excessive salaries or overhead expenditures. For example, if a store does not have the money to buy more inventory, its ability to sell is constrained. Similarly, if more employees are needed, but the budget cannot accommodate additional salaries, growth is limited. Corrections for financial constraints are often complicated; however, shifts within the existing budget are often possible in the absence of increased overall allowance. For example, bonus money can be deferred in favor of increased inventory purchases. Should the increased inventory purchases relieve enough of the budgetary constraints that growth resumes, bonuses can either be reinstated or can be transformed into commission payments to reward strong sellers and further promote growth.

Company Policies

Company policies -- either cultural or management-driven -- sometimes act as constraints to growth or profitability. For example, a policy that establishes a dress code that is too formal for the business climate might contribute to a public perception that the company is old-fashioned, which can limit growth. This is a management policy that is easy to change. Cultural policies are often more intractable. The amount of time spent socializing, for example, might constrain productivity but enhance teamwork. Attempts to reduce time spent socializing might contribute to an angry work environment, which would also reduce productivity. Therefore, attempts to modify cultural policy constraints are often difficult and can sometimes be counterproductive.

Management and Staffing

As businesses grow and change, their staffing and management needs change, as well. This can constrain business growth and productivity when employees cannot adapt to new demands or when additional employees are needed but the capitol to pay them is not yet available. Management needs also change over time and sometimes poor management constrains growth by fostering low employee morale or allocating resources inappropriately.

Regulations

Regulations sometimes constrain profitability. These can range from governmental restrictions to import and exports to environmental restrictions regulating the materials used. While regulations must be followed, their impact on growth can often be mitigated. For example, exceeding environmental restrictions can be used in marketing as a selling feature that can enhance growth and offset the expense incurred in meeting the initial regulation.

Filter by Keywords

Project Management

Mastering time constraints in a project: strategies, examples, and tools.

February 13, 2024

A constraint is a limitation, a set of boundaries within which you must work. Most people would see constraints as a negative, curbing what you can achieve.

Within project management, the opposite can be true. Imagine if you had infinite time to develop a feature. You’d never complete it!

Without constraints on the project scope , you’ll be pushed and pulled in all directions, significantly affecting your focus. Without resource constraints , your workflows might not be optimized for efficiency or productivity.

Project constraints enable efficiency and effectiveness, helping teams deliver software in small increments. Various types of constraints have different impacts on project outcomes. Let’s look at them one by one.

Scope constraint

Cost constraint, time constraint, what are time constraints, 1. project planning, 2. task prioritization, 3. realistic time estimation, 4. time tracking, 5. regular progress monitoring, 6. risk identification and mitigation, 7. streamlined communication, 8. agile project management, 9. managing meetings, 10. continuous improvement.

The Triple Constraints of Project Management

A typical project can face three kinds of constraints: Time, cost, and scope. These are commonly known as triple constraints. They are also known as the project management triangle, iron triangle, or project triangle.

The scope refers to a product’s features or functions that the team has agreed to deliver or the tasks the project team has agreed to complete. 

It outlines what needs to be done and at what quality. The project scope typically also determines the time and cost.

A good project scope gives development teams the clarity and freedom to build software. A bad one allows scope creep and throws the team off track.

Cost constraint is the budget, placing limitations on financial resources. This can include several things. For instance, an agile software development team can have constraints on the following project costs.

• Team salaries
• Equipment like laptops, servers, etc.
• Allowances and travel expenses
• Any software or automation tools needed for project completion

Effective cost constraints ensure return on investment (ROI) and business outcomes. A bad one leaves everyone demotivated and restrained.

The boundaries of time applicable to a project. In other words, deadlines. The time constraint is applied in the form of deadlines for each task, milestone, and the entire project.

A reasonable time constraint allows the team to build good products that meet all the acceptance criteria. An unreasonable time constraint or a tight deadline will force the team to cut corners and build a low-quality product, piling up technical debt.

Of the trifecta of constraints that keep a project manager up at night, today, we focus on time constraints. We see why they’re important and what you can do to avoid them from derailing your project.

Time constraints are the limitations of duration placed on you through the course project. By when you should finish the project, when you should push features to production, how many person-hours you can spend on a feature, and so on. 

Time constraints are often visualized as a schedule. For example, you would schedule a project with deadlines for the planning phase, development, testing, final review, production push, and hand-off. 

Any delay in one of the phases may have a snowball effect, pushing the entire project down a few days/weeks. These delays create unnecessary and artificial constraints on project delivery. 

A project manager strives to avoid artificial constraints that arise in the middle of the project. Here are some ways to do that.

10 Strategies to Avoid Time Constraints

Avoiding time constraints is not a one-off activity but a continuous process. Project teams set structures and systems to avoid creating pressure on themselves. Some of the most effective ones use a project management tool like ClickUp. Here’s how.

A robust plan avoids half the constraints. Create a comprehensive project plan outlining the tasks, deliverables, and deadlines. Use the ClickUp Calendar view to see how your tasks map.

Pay special attention to dependencies. If you have a task that depends on another, pushing the latter might derail the former. Gantt chart view can assist in tracking overlapping tasks and dependencies . 

Use this project stage to evaluate the financial resources needed to complete in time.

First time planning a project? Here are some excellent project planning templates to get you started on the right foot.

There is a natural limit to how much work you can get done within a specified period. Prioritizing the right tasks is vital for effective time management.

If you stack too much, you’ll miss deadlines. If you schedule too little, you might have unutilized resources, which is a waste of time. So, prioritize and schedule to optimize outcomes. 

Use a priority list to guide your decisions. Try resource leveling , allocating more resources for complex tasks, and letting the team stay on track.

A project schedule is created based on how much time team members think will be needed to complete each task. This process, called time estimation, is a critical part of project time management .

Project managers and team members typically base their project forecasting on past performance. If GDPR compliance took 20 hours the last time, it’s likely to take the same now.

However, estimates are just likely guesses. To ensure your estimates are as accurate as possible, compare them to actuals. ClickUp’s time estimate and time tracking features are designed for this very purpose.

Clock hours for every task on your project timeline. There are several time management apps that will allow you to do this.

ClickUp’s time-tracking is built into the project management platform, allowing you to start and stop a timer or add manual times for every task you’re working on. Use this information to make your estimates more accurate.

Over time, your ability to estimate and plan will strengthen, reducing time constraints.

If you’re putting together a new team or are newly adopting ClickUp, here are ten time management templates to help you leverage time tracking to avoid future constraints.

If you switch on a project and let it run unattended, you will likely be surprised when the tasks aren’t done on time. So, managing time constraints needs regular monitoring.

Use any free Gantt chart software to track if the timelines are as planned. Customize the ClickUp Dashboards to see the reports you need to track your progress. Use the burn-up and burn-down charts to know how the project might go. Identify delays and make alternate arrangements.

What is the probability of you not meeting the deadline? What are the potential reasons for this?

Answering these two questions will help you identify the risks you face and gauge their impact on the project. These risks could be financial, operational, or even behavioral. Its impact might be anything from a couple of days’ delay to a complete inability to deliver the project.

Before you begin the project, gather the team for a discussion of risks. Identify and mitigate these risks to ensure your time constraints are not exacerbated.

What your team members don’t know, they can’t do. For example, imagine a situation where the acceptance criteria for a specific feature isn’t communicated clearly. The developer might think they delivered the feature, while the quality analyst might disagree. They would send the feature back to the developer, adding unnecessary rework time.

Avoid this by streamlining all project communication.

• Document meeting notes, requirements, and other conversations on ClickUp Docs
• Write detailed descriptions for each feature/user story within the task
• Allow team members to clarify anything they need contextually in the comments section of the task
• Add checklists/action items to ensure the acceptance criteria for each feature are always handy
• In addition to those who are working on the features, add ‘watchers’ to ClickUp tasks so they can intervene, if necessary

Sometimes, the project doesn’t go as planned. The business stakeholder might bring in changes in the requirements. Team members might fall sick and need extended days off. Organizations might run short of cash. Things happen. As a result, you might inevitably face time constraints.

Agile project management is designed to meet precisely such eventualities. Agile project managers are expected to foresee potential problems and make contingency plans. Or, at the least, they must alert the leadership and manage expectations.

“This could have been an email” is an internet meme for good reason. One of the biggest time sucks for the development team is meetings, many of them unnecessary and ineffective.

To consistently prevent unforeseen time constraints, manage meetings better. Review your time management tools to understand how much time goes into meetings. Based on that, optimize your processes.

Conduct meetings only for activities that require active discussion. Timebox them and push towards action items. Document key insights and decisions so you don’t have to reinvent the wheel in the next meeting.

For everything else, use a good collaboration tool. The comments within ClickUp tasks enable nested conversations. ClickUp’s chat view allows you to see all messages in one place and take action from there.

Agile teams are big on continuous improvement, with good reason. A continuously improving team can deliver higher efficiency and value in the long run. For instance, you’ve optimized the containerization process for each feature through continuous improvement.

You can then automate the entire or parts of it, saving even more time and effort. This is a crucial way to avoid time constraints sustainably.

Conquer Your Project Constraints with ClickUp

Constraints are inevitable in every project. We would go as far as to argue that constraints are necessary. 

However, unexpected and unreasonable constraints can derail the project entirely. Good project management should prevent that. ClickUp is designed with this in mind.

With ClickUp, you can follow best practices to avoid time constraints. ClickUp tasks, sub-tasks, and checklists ensure clarity of requirements. Calendar and Gantt chart views enable a bird’s eye view of ongoing work.

The ClickUp Dashboard offers visibility into project progress. With all the resources you need, you’re ready to conquer your project constraints with ClickUp. Try ClickUp now for free .

Questions? Comments? Visit our Help Center for support.

Receive the latest WriteClick Newsletter updates.

Thanks for subscribing to our blog!

Please enter a valid email

• Free training & 24-hour support
• Serious about security & privacy
• 99.99% uptime the last 12 months

.css-s5s6ko{margin-right:42px;color:#F5F4F3;}@media (max-width: 1120px){.css-s5s6ko{margin-right:12px;}} AI that works. Coming June 5, Asana redefines work management—again. .css-1ixh9fn{display:inline-block;}@media (max-width: 480px){.css-1ixh9fn{display:block;margin-top:12px;}} .css-1uaoevr-heading-6{font-size:14px;line-height:24px;font-weight:500;-webkit-text-decoration:underline;text-decoration:underline;color:#F5F4F3;}.css-1uaoevr-heading-6:hover{color:#F5F4F3;} .css-ora5nu-heading-6{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;-webkit-box-pack:start;-ms-flex-pack:start;-webkit-justify-content:flex-start;justify-content:flex-start;color:#0D0E10;-webkit-transition:all 0.3s;transition:all 0.3s;position:relative;font-size:16px;line-height:28px;padding:0;font-size:14px;line-height:24px;font-weight:500;-webkit-text-decoration:underline;text-decoration:underline;color:#F5F4F3;}.css-ora5nu-heading-6:hover{border-bottom:0;color:#CD4848;}.css-ora5nu-heading-6:hover path{fill:#CD4848;}.css-ora5nu-heading-6:hover div{border-color:#CD4848;}.css-ora5nu-heading-6:hover div:before{border-left-color:#CD4848;}.css-ora5nu-heading-6:active{border-bottom:0;background-color:#EBE8E8;color:#0D0E10;}.css-ora5nu-heading-6:active path{fill:#0D0E10;}.css-ora5nu-heading-6:active div{border-color:#0D0E10;}.css-ora5nu-heading-6:active div:before{border-left-color:#0D0E10;}.css-ora5nu-heading-6:hover{color:#F5F4F3;} Get early access .css-1k6cidy{width:11px;height:11px;margin-left:8px;}.css-1k6cidy path{fill:currentColor;}

• Product overview
• All features
• App integrations

CAPABILITIES

• project icon Project management
• Project views
• Custom fields
• Status updates
• goal icon Goals and reporting
• Reporting dashboards
• workflow icon Workflows and automation
• portfolio icon Resource management
• Time tracking
• my-task icon Admin and security
• Admin console
• asana-intelligence icon Asana Intelligence
• list icon Personal
• premium icon Starter
• briefcase icon Advanced
• Goal management
• Organizational planning
• Campaign management
• Creative production
• Marketing strategic planning
• Request tracking
• Resource planning
• Project intake
• View all uses arrow-right icon
• Project plans
• Team goals & objectives
• Team continuity
• Meeting agenda
• View all templates arrow-right icon
• Work management resources Discover best practices, watch webinars, get insights
• What's new Learn about the latest and greatest from Asana
• Customer stories See how the world's best organizations drive work innovation with Asana
• Help Center Get lots of tips, tricks, and advice to get the most from Asana
• Asana Academy Sign up for interactive courses and webinars to learn Asana
• Developers Learn more about building apps on the Asana platform
• Community programs Connect with and learn from Asana customers around the world
• Events Find out about upcoming events near you
• Partners Learn more about our partner programs
• Support Need help? Contact the Asana support team
• Asana for nonprofits Get more information on our nonprofit discount program, and apply.

Featured Reads

• Project planning |
• 6 project constraints and how to manage ...

6 project constraints and how to manage them for project success

Project constraints are the general limitations of a project, including time, costs, and risks. Understanding project constraints is important because they affect project performance. In this piece, we’ll discuss project constraints in detail and explain how to manage them.

Have you ever been to the circus and watched the performers do a balancing act? They somehow manage to hold multiple plates up in the air so gracefully that it feels like they must be using magic. But balancing doesn’t require magic—just focus and skill. If a performer were to misplace their hold on a single plate, all the plates would come crashing down. 

What are project constraints?

Project constraints are the general limitations that you need to account for during the project life cycle. For example, a cost constraint means that you’re limited to a specific project budget, while a time constraint means you must complete your project within a specified timeframe. 

Most project constraints impact one another, which is why constraint management is crucial for project success. If you decide that you must expand the project timeline , then you’ll likely need more money to complete the project as well. Your project scope will also expand when the time and cost of your project expand. 

There are six common project constraints to consider as you make your way through the phases of project management. In this article, we’ll go through each constraint in detail and explain how you can manage it. No matter what type of project you’re working on, using project management software can help you visualize your project schedule and manage all of your project constraints in one place. 

The triple constraints of project management

The triple constraints of project management—also known as the project management triangle or the iron triangle—are scope, cost, and time. You’ll need to balance these three elements in every project, and doing so can be challenging because they all affect one another. 

There are trade-offs when balancing scope, cost, and time, and you must decide what you’re willing to sacrifice in order to maintain project alignment and functionality. 

For example, your project can only stay within scope if your project’s budget and time allotments stay steady. If you want to finish the project in less time, your scope must also decrease to balance out the project unless you’re able to make adjustments to the budget.

Project scope refers to a project’s magnitude in terms of quality, detail, and deliverables. Time and money are dependencies of project scope, because as the project scope grows, the project will require more time and money to complete.

You’ll need to be aware of scope creep throughout each project phase and work hard to prevent it. You can prevent scope creep by creating detailed project plans and getting project stakeholders to sign off on everything before production begins.

Cost constraints include the project budget as a whole and anything of financial value required for your project. Items that may be a cost constraint include:

Project cost

Team member salaries

Cost of equipment

Cost of facilities

Repair costs

Material costs

Include any items in this section that require you to pull from your company’s financial resources.

Time management is essential for project success, and there are various time constraints you’ll face during each phase of your project. When you try to increase your project timeline, there will be consequences like extended deadlines, adjustments to the team calendar , or less time for planning.

Time elements in your project that can lead to constraints may include:

Overall project timeline

Hours worked on project

Internal calendars and goalposts

Time allotted for planning and strategy

Number of project phases

Scope, cost, and time are called the iron triangle because these three constraints can be difficult to maneuver around each other while maintaining project quality. For example, if you cut your budget or increase your scope, you’ll likely need to compensate by loosening up on time. You can do this by extending deadlines, adding hours, or adjusting your project schedule .

Other common project constraints to consider

While scope, cost, and time are the triple constraints of project management, there are three other project constraints you may encounter in your project life cycle: risk, resources, and quality.

Project risks are any unexpected occurrences that can affect your project. While most project risks are negative, some can be positive. For example, a new technology may be released while your project is in progress. This technology may help you finish your project quicker or it may cause more competition in the market and reduce your product value. 

You can determine project risks using risk analysis and risk management strategies to keep them at bay. Some risks you may face include:

Stretched resources

Operational mishaps

Low performance

Lack of clarity

Scope creep

Time crunch

Use a risk register to assess the likelihood and severity for each project risk, then mitigate the most likely and severe risks first.

Resources tie closely with cost constraints on your project because these project requirements cost money. Without proper resource allocation , can experience lower project quality, an increased budget, and timeline delays. 

Some resources to consider include:

Equipment or materials

Use a resource management plan to ensure you have the resources you need for every element of your project so that this constraint doesn’t negatively affect other project areas.

Project quality is the measure of how well your project deliverables meet initial expectations. Every project constraint affects project quality because project quality is the ultimate result of your project. However, project quality is also its own constraint because there are aspects of the project that can result in poor quality that aren’t necessarily related to cost, time, resources, risk, or scope. These include:

Lack of communication

Poor design or development skills

Too many project changes

You must manage project quality as its own entity while also balancing the other five project constraints if you hope to achieve high project performance. If you fail to manage your constraints, the result can be low project quality and low customer satisfaction.

How to manage project constraints

There are strategies you can use to manage and balance project constraints as they arise. Using project management methodologies like the PMBOK Guide’s phases of project management and Agile practices, which encourage flexibility and collaboration, are a few ways to control project constraints.

You can also use the following tips to strengthen your project management plan : 

Understand your constraints: You can’t manage your project constraints unless you understand what they are. Once you know your project constraints, you can plan around them. For example, during project planning, assess what risks you might face as well as what resources you’ll need and what those resources will cost.

Plan and strategize: When you consider all six of the most common constraints in your project plan , you can move forward with a better perspective for what’s ahead. Your project plan should include strategies to mitigate constraints and balance the triple constraints of scope, cost, and time. You can also implement strategies to address additional project constraints , like trying to prevent project risks from occurring.

Control project quality: You can control project quality by regularly monitoring your project plan and processes. As your team handles various tasks throughout project execution, use work management software to ensure everyone is staying on track. Establish a change control process so that if changes occur, you can prevent scope creep.

Manage risk: Use risk analysis to identify, assess, and prepare for potential project risks. With a strong risk management plan in place, you can keep the most damaging project risks at bay and prepare for any unexpected risks that may occur.

Communicate effectively: Team communication is essential for successful management of project constraints. Without strong communication, you may think you’re balancing your constraints while another team member is unknowingly disrupting your hard work. When you discuss every aspect of the project with your team, you can work together to reach project goals. 

Embrace flexibility: You must embrace flexibility in order to effectively balance project constraints. There will be times when you’ll need to compromise on project elements in order to stay within scope. If you aren’t flexible, you’ll end up sacrificing project quality. Keeping your customers or stakeholders satisfied should be your top priority, which means accepting trade-offs when necessary. 

See constraints in real time with project management tools

Keep track of  your project constraints through every phase of the project life cycle in order to ensure the project quality meets stakeholder expectations. When you encounter a situation where you must adjust one project constraint, like the project schedule, consider how that will affect other project areas—like cost and scope—and balance your constraints as necessary. 

Project management software can help you visualize project constraints in real time. When you need an efficient way to control elements of your project and share the information with others, the various tools available within a project management system like Asana make it easy. 

Related resources

How to track utilization rate and drive team profitability

How to accomplish big things with long-term goals

Smooth product launches are simpler than you think

What is stakeholder analysis and why is it important?

Project Constraints: A Comprehensive Guide with Examples

Because every project and its resources are finite, project managers must work with (and around) their limits. One of the biggest project manager responsibilities is managing project constraints in order to ensure that your project gets completed on time, on budget, and with the appropriate allocated resources.

In this project constraint guide you will discover:

What are project constraints?

• Six project constraint examples
• Proceeding with caution and courage
• How to manage project constraints
• Frequently asked questions

Project constraints are limiting factors for your project that can impact quality, delivery, and overall project success.

Some say there are as many as 19 project constraints to consider, including resources, methodology, and customer satisfaction. These are worth planning for depending on your organizational structure and processes, but we’ll cover the six most common project constraints likely to impact nearly every project.

We’ll also discuss how these constraints are interrelated, how to manage them separately and together, and how to balance all constraints with your eye on overall project success.

Six project constraint examples.

Quality is one of six major constraints of every project, as depicted in the classic triple constraint triangle , which also includes scope, time, and cost:

Quality sits slightly apart from the other three project constraints appearing inside the triangle because it is almost always affected by any change to the other three. At the same time, changing quality expectations will most certainly impact the project’s time, scope, and cost.

Most importantly, all project constraints within the classic triangle are interrelated, so a strain on one will affect one or more of the others. Here’s a quality project constraint example:

• If you are unable to meet a sudden rise in cost, the project scope may shrink and the quality may decline
• If the project scope extends due to scope creep, you may not have the time or resources to deliver the promised quality
• If delivery time is cut or rushed, project costs may rise and quality will very likely decline

Learn more about project quality management

One of the most important stakeholder considerations, project time (how long it will take to deliver), is a vital measure of project success. Your task is to estimate project time as accurately as possible, which requires a blend of research and experience.

If you’re a newer project manager , you’ll rely more heavily on past projects for precedent, and use their data to give you a sense of appropriate scheduling for your project.

Look over completed projects’ closing documents and schedules to gain a sense of how long certain work packages typically take. And be sure to study any project constraints surrounding time management.

If you’re a more experienced project manager, rely on both research and your past performance and wisdom when estimating time ranges — including potential delays, change requests, risks, and uncertainties. Overall, your job is to provide stakeholders with the most accurate range possible in order to avoid surprises or making unrealistic promises.

When considering time constraints of a project, you may want to consider:

• The project timeline
• The number of hours worked on each stage of the project
• Use of internal calendars and the goals set for each team member
• Use of time for planning and strategy building
• The number of project phases included within the plan.

For instance, if there is a delay in the delivery of critical materials for build, then the project timeline may need to be adjusted, which will impact the cost and possibly the scale of the whole project. A level of flexibility is required to maintain success within a project.

Learn more about project time management

Equally important to stakeholders is how much a project will cost. As with time constraints of a project, your budget estimates need to be presented in a range. Some key research will lead you to accurate numbers.

Be sure to estimate:

• Market rates — give costs for all for goods and services you need, as well as vendor bids and ranges.
• Hourly costs — how much is your time worth? Provide clear estimates for this.
• Overall budget — consider costs from labor, material, factory, equipment, administrative, software, contractors and more.

To do this, you should look at costs and budgets for similar past projects inside and outside your organization.

Cost management will be an ongoing project management task. You’ll want to stick very closely to your proposed budget, while keeping an open mind about changes that may affect costs.

However, sometimes a sharp rise in costs can unexpectedly impact on a project, such as within Construction. In turn, a sharp rise in costs will introduce further project management constraints, such as the time line of the project and the scale of the project. Both of which may need to be reduced to ensure the project remains within budget.

Learn more about project cost management

Since a project scope is not an estimate but a guaranteed set of deliverables , it’s difficult to imagine creating a range for this project constraint. However, you can consider that stakeholders may be invested in scope risk and scope tolerance ranges.

For example, you may list a set of deliverables that could be created if budget and schedule allow, a wish list that your stakeholders can choose from if there’s money and time left over after mandatory deliverables are completed.

For instance, if your project involves IT that you are upgrading or implementing and your project scope is expanded due to new software that your competitors have implemented that now must become part of your project scope, you will have to increase both the project cost and timeline.

Likewise, you may indicate which deliverables on the scope can be omitted or cancelled, if time or cost grow too constrained. If, for example, a few must-have deliverables end up consuming too much of your budget, your stakeholders can tell you which of the remaining deliverables they will allow to be dropped so that time and budget constraints of the project can still be met.

Learn more about project scope management

eBook: Deliver Meaningful Marketing Work with Quality and Speed On-Demand: Mastering the 3 A's of Work Management: Agility, Alignment, Autonomy

Here, we usually think of threats — the things that might go wrong when we plan for risks . A project manager must be able to reasonably foresee failures at every step of a project, and prepare for them accordingly.

This can involve playing out what-if scenarios and formulating contingency plans.

For example, what if:

• a supplier fails to deliver?
• we lose any number of resources due to illness or transfer?
• the market takes a huge swing?
• our competitor launches a similar product at the same time?

When managing risks as a project constraint, you must find the zone of risk tolerance in your organization and stakeholders, which means determining a tolerable range of responses within appropriate limits.

For example, if a supplier fails, you will seek out another within X price, Y delivery time, and Z quality. By establishing a zone of tolerance, your stakeholders will be able to determine how much risk they are willing to take on in order to reap the proposed benefits of the project.

Another way to look at risk is through the unexpected opportunities that may arise. Seizing a new opportunity will naturally involve risk, so it’s helpful to show your stakeholders scenarios and determine their window of tolerance on this end of the spectrum as well.

If, say, an opportunity arises to capture a larger market share, will stakeholders be willing to raise their investment amount? What would be the limits of their increase?

Learn more about project risk management

The projected benefits of any project should be clearly spelled out in a business case during the very early stages of project planning . To put it simply, a project’s value must be determined early and fully agreed upon before launch.

Therefore, your business case should articulate the project’s justification and what set of measures will be used to assess its benefits to the organization.

These measures include:

• Time — measuring the project’s benefits over time.
• Changes in conditions — any number of changes can alter a project’s benefits.
• Benefit threshold — what is the threshold and what are the project constraints that could impact the benefits.

Actually determining a project’s benefits will most likely have to take place a set period after completion, since impact will need to be measured over time. However, if those benefits disappear or fall below a certain threshold during the project, work should be suspended until further evaluation.

Changes in conditions.

Any number of changes in conditions may also suddenly alter a project’s foreseen benefits. For example, if the cost of construction materials suddenly skyrockets, the benefits of completing a small structure may be completely obliterated. Or, the anticipated rise in sales due to a new marketing campaign may be wiped out if a major supplier goes out of stock.

Benefit threshold.

A project’s benefits are never completely isolated from other factors. The constraints of a project you must continually consider are how a single project’s benefits measure against losses, changes, damages, or rising costs. You should determine at the start of a project what the benefits threshold will be, and what conditions will warrant project cancellation, scaling down, delay, or partial completion.

Proceeding with caution and courage.

We know that no project can be planned or managed down to every single possibility. But you can, within reason, work well within your given limitations to bring about as much predictability as possible.

The key is remembering what your project constraints are, how they impact each other, and when they indicate a change in course is necessary.

Projects constantly change and evolve, requiring a balance of preparation and responsiveness.

How to manage project constraints.

Project management is a balancing act, since constraints will always exist and will differ with every project. By learning effective strategies to manage project constraints you can increase your project performance. Methodologies, such as Agile, Waterfall or Hybrid practices, encourage a flexible approach alongside collaboration, which aid management of project constraints.

These are our top five project constraint management techniques:

• Understand your projects possible constraints and plan around them. This might mean building buffers into your schedule to provide contingency. This allows for successful management of any constraints.
• Create a project plan that strategically avoids the main constraints highlighted within your project plan.
• Maintain focus within the project. Adopting a ‘task completion’ approach, reducing the number of tasks assigned to each team member and limiting multitasking will allow focus to be achieved.
• Monitor progress and maintain quality.
• Transparency through communication is key. Achieve project objectives through open communication with team members, stakeholders, and by setting priorities.

Every project will require a different level of project management to manage any constraints of a project.

For instance, as small internal project within one department may require a low-key level of project management, whereas a large-scale project that requires a business case , holds stakeholders' interests and is forecasted to provide huge financial gain, will require intensive project management.

For each approach there are multiple methodologies and techniques to utilize.

A knowledgeable and experienced project manager is essential for the successful implementation of the different project management phases :

• Monitoring and Controlling

However, even by planning ahead, managing project management constraints, as well as constraints of a project, is not always successful. Sometimes seeing the constraints in real time through project management tools is the best form of management. Utilizing tools within a project management system can help keep track of your project’s life cycle at every stage.

Frequently asked questions.

What is a project constraint?

Project constraints are simply restrictions that limit your project’s desired outcome. Constraints can be identified at the planning stage of a project, whereby they can be mitigated and planned around. However, some project constraints will arise throughout the life cycle of your project — so project managers need to remain flexible.

What is project limitation?

A project limitation is the same as a project constraint, for instance the scope of a project acts as a constraint since it defines the boundaries of the project through a set of desired goals, tasks and achievements.

The main six project constraints include the following:

Why should you know the constraints of a project?

Every project, no matter how well it is planned and managed, will face constraints. These inevitable and unavoidable constraints are the limits your project must work within. Since project constraints are interlinked, it is essential that you understand how one project constraint can, not only, affect the success of your project, but also how it can lead to further limitations.

Without an understanding of project constraints in project management, you will struggle to succeed.

7 Project Management Challenges and the Keys to Solving Them.

This eBook follows the entire life cycle of projects and explores seven of the most common challenges marketers face when managing projects and what to do to fix them.

Read simple solutions to help better manage work, including how to:

• Streamline incoming project requests
• Improve productivity and efficiency
• Better manage deadlines
• Improve communication
• Gain visibility into project workflows

Download project constraint examples now

Find Study Materials for

• Business Studies
• Combined Science
• Computer Science
• Engineering
• English Literature
• Environmental Science
• Human Geography
• Macroeconomics
• Microeconomics
• Social Studies
• Browse all subjects
• Read our Magazine

Create Study Materials

Dive into the pivotal world of constraints in managerial economics , a core concept within Business Studies. This detailed guide provides vital insights into understanding the definition and importance of recognising constraints, illuminated through real-world examples. You'll explore the theory of constraints, its key principles, and its practical application in managerial economics. Lastly, learn how to effectively manage constraints through popular methods, and witness their success through case studies. By comprehending and managing constraints, you can unlock business potential and drive improved performance.

Explore our app and discover over 50 million learning materials for free.

• Constraints
• Explanations
• StudySmarter AI
• Textbook Solutions
• Business Case Studies
• Business Development
• Business Operations
• Change Management
• Corporate Finance
• Financial Performance
• Human Resources
• Influences On Business
• Intermediate Accounting
• Introduction to Business
• Arc Elasticity
• Bertrand Oligopoly
• Block Pricing
• Cardinal Vs Ordinal Utility
• Commodity Bundling
• Conglomerate Mergers
• Consumer Equilibrium
• Consumer Expectations
• Consumer Search
• Contribution Analysis
• Cost Complementarity
• Cost Function
• Cournot Oligopoly
• Data-driven Decisions
• Decision Tree Method
• Demand Forecasting
• Demand Function
• Econometric Methods
• Economic Trade Off
• Economics Of Effective Management
• Employee Monitoring
• Equi-marginal Principle
• Finitely Repeated Games
• Fixed And Sunk Costs
• Functions In A Business Firm
• Government Regulations
• Incremental Decision Making
• Individual demand vs Market demand
• Industry Classification
• Infinitely Repeated Games
• Information Economics
• Input Prices
• Isoprofit Curves
• Isoquant Curve
• Lagrangian Multiplier Method
• Least-cost Combination Of Inputs
• Manager Performance
• Marginal Rate Of Technical Substitution
• Marginal Returns
• Market Concentration
• Market Uncertainty
• Measuring productivity
• Nash Bargaining
• Net Present Value Method
• Ordinary Least Square Method
• Own Price Elasticity Of Demand
• Pay-back Period Method
• Point Elasticity
• Pricing Decisions
• Pricing Strategies For Market Leaders
• Properties Of Indifference Curve
• Properties Of Isoquants
• Quantitative Demand Analysis
• Research And Development
• Revealed Preference Theory
• Sequential Bargaining
• Signaling & Screening
• Sources Of Monopoly Power
• Specialized Investments
• Stackelberg Oligopoly
• Strategic Thinking
• Supply Function
• Survey Methods
• Sweezy Oligopoly
• Technology Supply and Demand
• The Five Forces Framework
• The Theory Of Individual Behavior
• The Time Value Of Money
• Total Product, Average Product, And Marginal Product
• Total Utility Vs Marginal Utility
• Types Of Monopolies
• Vertical Integration
• Vertical Vs Horizontal Integration
• What Is Dumping
• Nature of Business
• Operational Management
• Organizational Behavior
• Organizational Communication
• Strategic Analysis
• Strategic Direction

Lerne mit deinen Freunden und bleibe auf dem richtigen Kurs mit deinen persönlichen Lernstatistiken

Nie wieder prokastinieren mit unseren Lernerinnerungen.

Understanding Constraints in Managerial Economics

Definition of constraints in business studies.

For instance, financial limitations, limited skilled workforce, regulatory rules, market competition, supply chain issues and much more; all qualify as constraints in a business context.

• Internal constraints: These are challenges that arise from within the organisation.
• External constraints: These aspects are typically outside of the firm's influence.

The Importance of Recognising Constraints

For instance, a constraint in finance will push the management to make budget-friendly decisions, while a constraint in manpower will lead to workforce optimisation.

Real World Examples of Constraints in Business

Take, for instance, the introduction of emission guidelines by governments across the globe. This external constraint forced auto manufacturers to reevaluate their production methods and eventually led to the development of electric and hybrid vehicles, a market that is now seeing exponential growth.

The Theory of Constraints Explained

Key concepts of the theory of constraints.

• Every system must have at least one constraint, if not more.
• The performance of any system is defined by its most prominent constraint.
• The overall system's throughput is improved by managing the constraints effectively.
• Identify the system's constraint
• Exploit the system's constraint
• Subordinate everything else to the above decision
• Elevate the system's constraint
• If the constraint has been broken (resolved), go back to step 1.
• Throughput: The rate at which the system generates money through sales
• Operating Expense: All the money the system spends, even if it does not sell anything

Application of the Theory of Constraints in Managerial Economics

Efficient management strategies for constraints in business, popular constraints management techniques.

• Critical Chain Project Management (CCPM): This technique is typically used in project management scenarios and focuses on resource scheduling. It ensures that projects are completed on time by managing the project's resources effectively.
• Lean management: Originating from the Toyota Production System, Lean management identifies and reduces waste in a system. It recognises constraints as forms of waste and undertakes process improvements to eliminate or reduce these.
• Six Sigma: This method aims to improve the quality of process outputs. It uses statistical methods to identify constraints and reduce variability in processes, thereby increasing operational efficiency.
• Kaizen: A continuous improvement process that engages all members of an organisation. It encourages problem-solving techniques to identify and overcome constraints.
• Total Quality Management (TQM): It is a management approach that focuses on long-term success through customer satisfaction. It recognises constraints and follows a continuous improvement process to exceed customer expectations.

Practical Approach to Handling Business Constraints

• Identification: Identify the constraints within the system. Use tools like SWOT analysis or PESTLE analysis to understand the environment and identify constraints.
• Analysation: Once identified, analyse the negative impact of these constraints on your business operations or project. Prioritise these based on their impact.
• Planning: Develop a plan to overcome these constraints. Use creativity and innovation to find solutions. The solution might involve resource re-allocation, improved technology, process changes, or even changes in organisational culture.
• Execution: Implement the plans and monitor the results. Review the effectiveness of the solutions and make changes if necessary. Remember, managing constraints is a dynamic process and requires continuous effort.

Case Studies: Successful Management of Business Constraints

Starbucks: Facing increasing competition and falling sales, Starbucks identified its constraint - customer satisfaction. It closed 7,100 stores for three hours to retrain baristas to make the perfect espresso. This move improved customer satisfaction, leading to increased sales and market share.

Toyota: By using Lean Management and Kaizen, Toyota identified and managed constraints, enhancing its production system. They continuously look for bottlenecks in their systems and devise solutions to overcome these. This approach has made Toyota one of the most efficient auto manufacturers and a market leader.

Tesco: In the 1990s, Tesco identified a key constraint - a shift in customer buying behaviour. They exploited this constraint by introducing the Clubcard, collecting consumer data, and personalising offers. This strategy transformed Tesco into one of the largest retailers globally.

Constraints - Key takeaways

• Definition of constraints in Business Studies: A 'constraint' refers to any factor that restricts or limits the decision-making and operational capabilities of an organisation. Examples include financial limitations, limited skilled workforce, and market competition.
• Types of constraints: Constraints are generally divided into internal and external. Internal constraints arise from within the organisation, while external ones are typically outside of the firm's influence.
• The theory of constraints (TOC): It suggests that any system, regardless of its complexity, is governed by a few key factors–the constraints, which dictate the pace at which goals are achieved. It proposes an efficient way to manage these constraints with its Five Focusing Steps process.
• Practical application of the Theory of Constraints in managerial economics: Plays a significant role in making pivotal decisions related to operations, supply chain management, and strategic planning by helping identify constraints and optimise resources for improved performance.
• Efficient Management Strategies for Business Constraints: Techniques include Critical Chain Project Management (CCPM), Lean Management, Six Sigma, Kaizen, and Total Quality Management (TQM). These techniques help handle constraints and turn them into opportunities, thus contributing to business success.

Frequently Asked Questions about Constraints

--> what are the different types of constraints in business operations, --> how can businesses effectively manage constraints to improve productivity, --> what strategies can be applied to overcome constraints in a business environment, --> what is the impact of constraints on the decision-making process in business management, --> how do constraints affect the financial performance of a business, test your knowledge with multiple choice flashcards.

What is a 'constraint' in the context of business studies?

What is the difference between internal and external constraints in business?

Why is understanding constraints important in business?

Your score:

Join the StudySmarter App and learn efficiently with millions of flashcards and more!

Learn with 12 constraints flashcards in the free studysmarter app.

Already have an account? Log in

What is a 'constraint' in the context of business studies?

It refers to any factor that restricts or limits the decision making and operational capabilities of an organisation.

Internal constraints arise from within the organisation, while external constraints are aspects typically outside that are beyond the company's control.

It helps management to develop effective strategies, make informed decisions, identify potential areas of risk and opportunity, and steer the company towards its goals.

Can constraints lead to innovation in business? Provide an example.

Yes, for example, the introduction of emission guidelines was an external constraint that led auto manufacturers to invent electric and hybrid vehicles.

What does the Theory of Constraints (TOC) explain?

TOC explains that any system, no matter how complex, is governed by very few factors or constraints. These constraints dictate the pace at which value is generated or goals are achieved in an organisation.

What are the three main concepts of the Theory of Constraints (TOC)?

1) Every system has at least one constraint, 2) A system's performance is defined by its most prominent constraint, 3) The system's throughput can be improved by managing constraints effectively.

of the users don't pass the Constraints quiz! Will you pass the quiz?

How would you like to learn this content?

Free business-studies cheat sheet!

Everything you need to know on . A perfect summary so you can easily remember everything.

Join over 22 million students in learning with our StudySmarter App

The first learning app that truly has everything you need to ace your exams in one place

• Flashcards & Quizzes
• AI Study Assistant
• Study Planner
• Smart Note-Taking

Sign up to highlight and take notes. It’s 100% free.

This is still free to read, it's not a paywall.

You need to register to keep reading, create a free account to save this explanation..

Save explanations to your personalised space and access them anytime, anywhere!

By signing up, you agree to the Terms and Conditions and the Privacy Policy of StudySmarter.

Entdecke Lernmaterial in der StudySmarter-App

Small Business Resources is now the Center for Business Empowerment.

Suggested Keywords

Center for Business Empowerment

How to create a budget for your business

January 16, 2024 | 7 minute read

If you want to increase the odds of having a successful small business, start by creating a budget. A budget is a powerful tool. It helps you understand how much money you have and what you’ve spent where — and provides clues about how much money you’ll need in the short and long term. It can also help shape key business decisions like whether to add staff and equipment or where to cut expenses to avoid cash flow issues .

A budget is critical, particularly at a time when companies are coping with rising costs. Seventy-nine percent of small business owners polled in Bank of America’s 2023 Small Business Owner Report said they are concerned about inflation and 68% said they are worried about commodity prices. Here’s how to create a budget and use it to make the best decisions today, tomorrow and in the future.

What is a business budget?

Simply put, a budget is a spending plan based on your business’ income and expenses. It shows your available capital, estimates spending and assists in predicting revenue. The information in your budget can help you plan your company’s next moves. A budget looks at activities for a specified time. Think of it as a tool to help you allocate resources toward the strategic priorities in your business plan.

What are the benefits of creating a business budget?

Budgeting enables you to allocate financial resources more effectively, track variances and make changes to your spending plan as needed. A budget provides a much-needed assist in maintaining daily operations, giving you the intel to deploy your cash more strategically so you don’t face a cash flow crunch. It can identify when you need to raise financing. Debt is a fact of life in many businesses. A budget can help you manage debts with controlled and planned financial activities.

A budget can also help you stay ready for the unexpected. Staying within your budget and creating a safety net for emergencies will give you a firmer financial foundation.

Types of business budgets

When it comes to business budgets, it’s not one and done. There are several types that may be helpful in your business.

Master budget

This type of budget uses inputs from financial statements, your cash forecast and your financial plan to create a single document you can use to keep your finger on the pulse of your business. Your management team can use it to plan the activities needed to reach business goals. Typically, small businesses use spreadsheets to create their master budgets or consider using budgeting software too, as it may help minimize mistakes.

Operating budget

This budget shows your projected revenue and expenses for a given period. Think of it as a profit and loss report , but for the future. The operating budget includes fixed and variable costs, as well as non-operating expenses. Capital expenditures are usually excluded from an operating budget. Each line item should be backed up with key details.

Fixed costs occur monthly.

Variable costs, like utilities , change depending on factors like usage.

Capital costs are one-time expenses, such as the purchase of a building.

The operating budget gives you a reality check on whether you’re spending according to plan. While this budget is often prepared at the start of each year, don’t set it and forget it. Update it throughout the year, be it monthly or quarterly, so you always know where your business stands.

Capital budget

Companies sometimes create a capital budget when they are looking to make a large purchase, such as a large piece of factory equipment or a new technology system that will require a substantial investment. This allows the finance team to determine the impact on cash flow and plan accordingly.

Cash budget or cash flow budget

This document will give you an estimate of how money comes in and goes out during a certain time horizon. You create a cash budget using the conclusions you draw from sales forecasts and production, and by estimating payables and receivables.

Labor budget

If you will hire employees , this type of budget is helpful in planning for the money you’ll need to meet payroll, not only for regular employees, but also for any temporary and seasonal staff.

Budgeting methods you can use

There’s more than one way to budget. Here are some common methods:

An incremental budget

This takes the current period’s budget or actual performance, uses it as a base and then adjusts it in incremental amounts to account for any increases in costs. Typically, when you put together an incremental budget, you use the rate of inflation as a guide for fine-tuning the amounts. One plus of budgeting this way is that it is relatively easy to do.

Zero-based budgeting

Here, you’re budgeting from scratch. You must scrutinize every expense or potential expense before deciding to add it to your budget. This helps you align your business goals with your expenses. Unlike other types of budgeting, it doesn’t focus on historical results. A zero-based budget is ideal when you’re looking to reduce expenses.

Activity-based budgeting

Actions speak louder than words. This type of budgeting looks at the inputs required to reach the targets or outputs set by the company. Say your business wants to achieve $5 million in revenue. First, you need to figure out the activities that need to happen to make that revenue a reality and then determine the costs of carrying out those activities.

Participative budgeting

There are more cooks in the kitchen with participative budgeting, which is often used by larger small businesses. Both middle management and lower levels of management share in the responsibility of putting together the budget. The budget begins with lower management then moves to middle managers before top management weighs in and signs off. An upside of this type of budgeting is that information is shared, and when management and staff are on the same page in terms of goals, they’re more likely to achieve those goals.

How to create a business budget

Creating a business budget takes several steps:

• Calculate your revenue . Include all your revenue streams, preferably over at least the last 12 months, to determine your monthly income. If your business is new, you can research what’s typical in your industry and use that as a guide to come up with estimates.
• Add up your fixed costs . Fixed costs are things like rent, payroll and debt repayment.
• Determine variable costs . In addition to utilities, these may include billable labor, materials, transaction fees and commissions.

Using a budget to make better decisions

If you make your budget a regular resource, you’ll be rewarded for your budgeting efforts. As you make spending decisions, consult your budget frequently and use it as a reality check. If you have budgeted for X amount and go beyond it, you’ll have some explaining to do, even if you’re only answering to yourself. Being disciplined can be challenging, but ultimately it will position your business for growth , both today and in the future.

Explore more

How to create a sales forecast

Understanding free cash flow

Important Disclosures and Information

QuickBooks is registered trademark of Intuit, Inc., used under license. Bank of America does not deliver and is not responsible for the products, services or performance of Intuit, Inc. You are responsible for separately purchasing QuickBooks, QuickBooks Online, or QuickBooks Online Payroll, and Bank of America makes no warranties nor accepts any liability for such software.

Internet access may be required. Internet service provider fees may apply. Other bank fees may apply. See the Business Schedule of Fees available at  bankofamerica.com/businessfeesataglance for details.

Bank of America and/or its affiliates or service providers may receive compensation from third parties for clients' use of their services.

Bank of America, Merrill, their affiliates and advisors do not provide legal, tax or accounting advice. Consult your own legal and/or tax advisors before making any financial decisions. Any informational materials provided are for your discussion or review purposes only. The content on the Center for Business Empowerment (including, without limitations, third party and any Bank of America content) is provided “as is” and carries no express or implied warranties, or promise or guaranty of success. Bank of America does not warrant or guarantee the accuracy, reliability, completeness, usefulness, non-infringement of intellectual property rights, or quality of any content, regardless of who originates that content, and disclaims the same to the extent allowable by law. All third party trademarks, service marks, trade names and logos referenced in this material are the property of their respective owners. Bank of America does not deliver and is not responsible for the products, services or performance of any third party.

Not all materials on the Center for Business Empowerment will be available in Spanish.

Certain links may direct you away from Bank of America to unaffiliated sites. Bank of America has not been involved in the preparation of the content supplied at unaffiliated sites and does not guarantee or assume any responsibility for their content. When you visit these sites, you are agreeing to all of their terms of use, including their privacy and security policies.

Credit cards, credit lines and loans are subject to credit approval and creditworthiness. Some restrictions may apply.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S" or “Merrill") makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp."). MLPF&S is a registered broker-dealer, registered investment adviser,  Member SIPC , and a wholly owned subsidiary of BofA Corp.

Banking products are provided by Bank of America, N.A., and affiliated banks, Members FDIC, and wholly owned subsidiaries of BofA Corp.

“Bank of America” and “BofA Securities” are the marketing names used by the Global Banking and Global Markets division of Bank of America Corporation. Lending, derivatives, other commercial banking activities, and trading in certain financial instruments are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Trading in securities and financial instruments, and strategic advisory, and other investment banking activities, are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, BofA Securities, Inc., which is a registered broker-dealer and Member of SIPC , and, in other jurisdictions, by locally registered entities. BofA Securities, Inc. is a registered futures commission merchant with the CFTC and a member of the NFA.

Investment products:

Recto's GEARs plan aims to boost investment-driven growth

The Department of Finance (DOF) said the government is determined to drive pro-business reforms, enhance the regulatory framework, reduce the cost of doing business, and tackle existing constraints in the country.

Finance Secretary Ralph G. Recto said these initiatives are integral part of their Growth-Enhancing Actions and Resolutions (GEARs) plan, aimed at ensuring the country's progress towards achieving growth-enhancing fiscal consolidation.

According to the finance chief, these efforts will create an enabling environment for investment that fosters job creation.

Under the GEARs plan, the DOF will prioritize the amendments to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

Recto said these amendments will address investor concerns, customize incentives, and attract strategic investments to the country.

“The ease of doing business is what builds investment-led growth that creates more quality jobs in a land whose talents far outstrip opportunities that could harness them,” Recto said.  

With its high multiplier effect on the economy, he said the government will also vigorously implement President Marcos’ Build Better More program to generate more employment and investments. 

The government targets an annual infrastructure spending of five percent to six percent of the economy, or gross domestic product (GDP).

“The government will leverage private sector capital and expertise through the recently enacted Public-Private Partnership (PPP) Code to cut the infrastructure backlog, free up fiscal space for social services, and generate jobs that boost domestic consumption,” the DOF said.

Meanwhile, Recto said that his goal to meet revenue collection targets through the continued enhancement of tax administration efficiency that will result in increased funds for education, upskilling, worker training, healthcare, and other human capital development programs. 

These initiatives are vital for improving the readiness of Filipinos for high-quality job opportunities, he cited.

“Our greatest asset is our people. This is something even countries worldwide recognize. Thus, we will prioritize empowering them further by investing heavily in human capital development to prime and prepare them for the best and the brightest opportunities ahead,” Recto said.