Industrial plans for SMEs: what they contain and how to assess their credibility

The three requirements for a credible industrial plan

In practice, the credibility of an industrial plan can be assessed against three fundamental requirements: financial sustainability, consistency and reliability. These criteria apply regardless of the specific purpose for which the plan is prepared. They also help explain how banks, investors and other parties dealing with the company may assess it.

1. Financial sustainability. The plan must be compatible with the financial resources needed to implement the strategy. As a general rule, cash flows from operations should be sufficient to cover at least working capital requirements and maintenance capital expenditure. Any additional borrowing or equity financing should be assessed in light of the investments needed for growth, the company’s actual borrowing capacity and its risk profile.
2. Consistency. Strategic decisions must be reflected in operational actions, which must in turn be reflected in the financial projections. If, for example, the plan envisages expansion into a new geographic market, it should explain how that objective will be pursued—through new offices, sales staff, marketing investment or other initiatives—and establish whether the timelines, people, organisational capacity and financial resources are consistent with the action plan.
3. Reliability. The assumptions underpinning the plan must be realistic and capable of adequate justification. One particularly useful indicator is how well the projected figures can be substantiated. Revenue projections supported by orders already secured, multi-year contracts or established commercial relationships can normally be verified more readily than forecasts based solely on acquiring new customers or entering markets the company has yet to explore.

More generally, the further projections depart from historical results, the more important it becomes to explain and document the reasons for the difference. An ambitious objective does not, in itself, make a plan unreliable, but it does require stronger evidence that it can be achieved.

Sensitivity analysis of an industrial plan

Every industrial plan is necessarily prepared in conditions of uncertainty. It is therefore good practice to supplement the scenario considered most likely with a sensitivity analysis: a series of what-if simulations showing how the plan’s results would change if its main assumptions changed.

In practical terms, it may be useful to ask:

• What would be the impact if demand were lower than expected?
• What would happen if a competitor responded with particularly aggressive pricing?
• What would be the effect of a delay in opening a new retail outlet, starting up a production facility or completing an investment?

The analysis should focus primarily on the variables with the greatest effect on the plan’s results: the so-called key value drivers. Depending on the company, these may include sales volumes, prices, margins, raw material costs, production capacity, the opening of new retail outlets, the award of particular contracts or other factors central to value creation.

The aim is not to predict every possible event, but to understand which assumptions truly matter and how much deviation from expectations the plan can withstand. Identifying the most critical variables in advance allows management to consider possible responses and present the project’s risk profile more transparently to external parties.

Why industrial plans are useful for SMEs too

Industrial plans are not reserved for large companies. For an SME, a plan can play an important role when dealing with banks and lenders, new shareholders or investors; managing a generational transition; assessing a merger or acquisition; accessing subsidised financing; or addressing financial difficulties through Italy’s negotiated business crisis settlement procedure.

In these situations, the plan translates the entrepreneur’s intentions into objectives, actions, resources and expected results, giving those dealing with the company a clearer picture of the proposed course of action.

Its usefulness, however, does not necessarily depend on an extraordinary transaction or an external request. Preparing and updating an industrial plan can help an entrepreneur to:

• set out the strategy clearly and discuss it with shareholders and management;
• check that objectives, available resources and implementation timelines are consistent;
• monitor results and deviations from the plan using key performance indicators (KPIs).

An industrial plan, therefore, is not a document to prepare only “when needed”. Above all, it is a business management tool: it requires the assumptions behind decisions to be made explicit, their sustainability to be tested, and actual results to be compared with expected results over time.

Its value lies not in claiming to predict the future precisely, but in helping the company make more informed decisions as it faces it.