How to … Draw up a business plan

business plans have become central to effective management of social housing for both local authorities and registered social landlords. But what exactly is a business plan? What should it contain, how should it be used and what are its limitations?

What to include
In the housing sector, a business plan is a relatively long-term forecast of planned activity and strategies. The full document will typically also include details of:

• the organisation's history, areas of operation, structure and management
  
• the local economy, industries, main employers and demographic trends
  
• detailed long-term financial forecasts
  
• risk-management strategy and contingency plans
  
• standards and targets.

The plan normally covers a 30-year period – sometimes longer. Although landlords can expect properties to last much longer, funders normally require loans to be repaid within 30 years. Crucially, a shorter forecast is unlikely to capture the impact of normal fluctuations in building components' life-cycles, risking underprovision for their renewal costs.

Making financial forecasts
Many landlords use complex, spreadsheet-based financial models to prepare business forecasts. These can be acquired or developed in-house. Whichever model you use, it must be flexible enough to allow for rapid appraisal of new proposals or assessment of key variable changes when necessary.

Some of the key items to include in a financial forecast are:

• economic variables such as interest rates and real-terms increases in operating costs over the long term
  
• loan portfolio and treasury management strategy
  
• rent levels, including the impact of restructuring to target rents
  
• stock reinvestment requirements
  
• rent loss to voids and bad debts
  
• stock turnover rates.

As well as long-term financial forecasts, a properly constructed business plan will include unit costs and key ratios in both tabular and graphic form. Key ratios will cover gearing, interest cover and asset cover, calculated in accordance with loan documentation where relevant.

Preparation in context
RSLs will normally need to submit an updated plan to their funders by a specified time each year (typically just before or after the financial year-end).

The business plan sets the framework for the annual budget, so it is best prepared in conjunction with strategic planning and budgeting arrangements.

Whereas year one of the business plan should match the budget exactly for that year, and years two to five tend to represent firm intentions – possibly contractual commitments – the assumptions for later years will inevitably be more tentative.

Nevertheless, the forecasts for later years need to be sufficiently robust so that they can:

• accommodate future stock reinvestment needs
  
• make realistic provision for future management costs
  
• demonstrate capacity to repay loans and adhere to loan agreements
  
• capture underlying factors that may impact on forecasts.

The plan in practice
The plan should not be left on the finance director's shelf to gather dust until it is next revised; it should be central to all strategic decisions made throughout the year.

Actual performance should be reviewed in relation to the plan each quarter. Projected variables can then be amended or corrective action taken in the light of new developments.

In this increasingly dynamic sector, it is not unusual for RSLs to seek funders' consent to a revised plan part-way through the year to pursue new opportunities.

Limitations
Clearly, the business plan will never be exactly "correct" and may rapidly become out of date. Strategies should be refined until the expected impact of plausible adverse outcomes is considered acceptable, according to the organisation's appetite for risk. Given the inherent uncertainties in long-term planning, a prudent margin for risk in this process is clearly essential.