formal and informal business planning

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• Entrepreneurship

How to Write an Informal Business Plan

If you’re not seeking investors, or want to jump into the market quickly to launch your product or service, then an informal business plan can help you clarify your startup’s goals, sales strategy, and target market. At the least, writing it all down will help you crystallize your thoughts, set your priorities, and keep you on track.

An informal business plan should contain, at the minimum:

A company description and mission statement. Describe your business in a few brief paragraphs, including your legal structure (for more on that, see pages 70–75) and the type of unique services or products you provide. Also include a brief description of the management team, detailing each person’s responsibilities.

An overview of your target market. Be specific about the customers you serve, including any demographics you might have, such as age, income, location, purchasing habits, buying cycles, and willingness to adopt new products and services. A goal in this section is to prove that you know your customer, which is important for marketing your company.

Elon Musk's first business plan for tesla

"Build sports car. Use that money to build an affordable car. Use that money to build an even more affordable car. While doing above, also provide zero emission electric power generation options. Don't tell anyone."

- ELON MUSK, summarizing his business plan in 2006 in a blog post on Tesla's website

An overview of the competition. Identify the current (or potential) competitors in your area or online who sell a service or product similar to yours, and identify their strengths and weaknesses. Gather this information by checking out their websites and marketing materials, or visiting their locations.

Marketing and sales strategy. Describe how you will promote your business, whether that’s through advertising, social media campaigns, promotional literature, or public relations. Define how you will get your product or service to customers, including whether you need sales representatives (inside or external) to promote your products. Identify what differentiates you, particularly when it comes to price, product, or service.

An overview of your finances. Include your startup costs, your operating costs, and revenue estimates. Keep your expectations realistic and honest: The biggest mistake entrepreneurs can make is to be overly optimistic with sales estimates. Include a cash-flow statement, as lack of cash is one of the biggest reasons small businesses fail.

Colleen DeBaise

Colleen DeBaise is contributing editor at Inc., podcast host at The Story Exchange, founder of the Hampton Bee, and author of The Wall Street Journal Complete Small Business Guidebook. She has written for The New York Times, Entrepreneur, BusinessWeek, SmartMoney, and other national publications.

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What Is the Difference Between an Informal & Formal Organization?

People are social creatures, they seek to connect with groups that share their values. There are many types of organizations that form for various reasons. Some organizations are formed to conduct business and generate profit. Other organizations form for social reasons or to perform volunteer work.

Businesses and governments are examples of formal organizations. Clubs or social networks are examples of informal organizations. Both types of organizations share many features in common, but they also have meaningful differences.

What Is an Organization?

An organization consists of multiple people coming together to serve a purpose, and they can be designed to be permanent or temporary. Both formal and informal organizations can serve vital needs for people.

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There are many different purposes for formal and informal organizations. That purpose might be profit through a business. Another example would be a family unit providing fundamental needs for each member. Both formal and informal organizations are useful in their own ways. Each type of organization is necessary for different reasons.

More For You

The technical definition of an organization, the differences between limited partnerships and joint ventures, teamwork & encouragement on the job, the advantages of a normative organization, negative effects of group cohesiveness, the differences between an informal and formal organization.

There are key differences between formal and informal organizations. Formal organizations are oriented toward reaching specific goals. Informal organizations are more oriented toward human psychological needs.

Often, formal organizations are more publicly visible than informal organizations. Informal organizations can form within formal organizations and also become formal over time.

The primary differences between an informal and formal organization are levels of structure and hierarchies that determine how members interact. Formal organizations are more structured and rely on authority based upon chains of command. Informal organizations do not require hierarchies of authority or structured internal processes. They are not formed in order to reach specific goals like a formal organization.

Formal organizations have clear hierarchies of leadership. These hierarchies and power relationships are clearly documented. Authority is appointed from upper levels of the hierarchy, such as management. For example, only management usually holds the authority to hire or fire employees.

Informal organizations typically do not follow hierarchies for authority. There is less emphasis on established authorities or multiple levels of hierarchy. Rather, authority is equal among all members. An example would be a book club where members are all equal because they are not pursuing a goal that would require authority.

Formal organizations are very structured in order to reach stated goals. A formal structure enables members to work together toward the same objectives. There are established laws and rules that govern labor and norms within a formal organization. An organizational chart would be an example of documented structure.

Informal organizations often are not very structured because their goals might be temporary or entirely social. There is no need for the extensive requirements of a formal organization. However, an informal organization may become formal over time. A study group of students for a semester-long course would typically not need a formal structure for organizing.

Formal organizations rely on status through predetermined authority roles for influence. Members of a formal organization look to leadership roles to provide guidance. There is a clear flow of influence through a formal organization. For example, a subordinate employee would not hold the same influence as a manager within a company.

Informal organizations tend to have more subtle norms that are expressed through customs, morals or beliefs that are often not written. Members are not pressured to perform by superiors. Members of an informal organization mostly have equal influence. For example, a volunteer group might rotate leadership among members on an ad hoc basis.

Formal organizations possess involved rules and laws regarding behavior and the outcomes of labor. There are also processes in place for hiring, firing and replacing members. Expectations for each member are outlined and documented. A job description is an example of a formal document describing the specific requirements for the members of a formal organization.

Informal organizations provide a psychological or social benefit for members. Relationships among members are more personal than role-related. Behavior is determined by group consensus. For example, social groups will follow norms that are not explicitly written.

Communications

Formal organizations may have rules regarding the flow of information and communication. The chain of command will determine how members communicate. Communication flow is determined by hierarchy. Often, information flows from leadership down to other members.

Informal organizations do not have specific guidelines for communication. All members are able to interact with each other without considering hierarchy. Members of informal organizations communicate freely with one another. An example might be a musical group where members do not need to inform a specific leader when they will be absent from a performance.

Formal organizations are formed to serve a specific purpose or meet set goals. There is a constitution or plan and extensive guidelines directing the organization toward its purpose. Leadership will regularly review how well goals are being met and plan accordingly. A formal organization will exist even if specific members leave the organization.

Informal organizations serve the needs of individuals and can be created spontaneously with a purpose that is not well-defined. Goals are not always clear because informal organizations primarily serve social requirements for members. An informal organization might dissolve if certain members leave the organization.

What are the Benefits of Informal and Formal Organizations?

Formal organizations are useful for reaching defined goals. The structure of a formal organization makes it effective for realizing profit or conducting business. The components and structure of a formal organization are necessary in order to efficiently meet stated objectives.

Informal organizations can be more responsive to change due to the lack of rigid structure. They are inherently more oriented around people rather than outcomes. An example would be a company softball team that allows employees to interact socially away from the formal hierarchies in order to build morale.

Both formal and informal organizations serve human needs and meet goals ranging from financial to values-based. They allow people to build communities and achieve goals that would not be possible alone.

• Definition of a Formal Organization
• Difference between Formal and Informal Organization
• Formal and Informal Organization: Features, Advantages and Disadvantages
• The differences between formal and informal organization

Hashaw Elkins is a financial services and tax professional, as well as a project management consultant. She has led projects across multiple industries and sectors, ranging from the Fortune Global 500 to international nongovernmental organizations. Hashaw holds an MBA in Real Estate and an MSci in Project Management. She is further certified in organizational change management, diversity management, and cross-cultural mediation.

• Library of Congress
• Research Guides

Small Business Hub: A Research Guide for Entrepreneurs

Write a business plan.

• Introduction
• Market Research
• Finance Your Business
• Find a Location
• Licenses and Regulations
• Protect Your Business
• Manage Your Business
• Going International
• Franchising
• Book a Librarian
• Using the Library of Congress

Create a document that details your business operations, which can be used to attract potential investors, business partners and clients. Depending on the audience, a business plan can be formal and detailed in terms of financial plans and forecasts, marketing strategy, staffing plans, and industry trends that could affect your business, or it can be informal and provide a simple overview of business operations and future goals.  

One component of a business plan used to secure financing is forecasting future sales. With established businesses, they can look at past sales data and trends to estimate future revenue. However, a new business with no historical data available has to use a combination of sales data from the product market or industry as a whole, available data from similar businesses, surveys from buyers and sellers in the supply chain, and relevant contextual information such as consumer trends. 

Starting points:

• Find a business plan template you like.
• Find a sample plan or similar company to give you example information. 

Suggested strategies:

• Finding startup costs and calculating sales for a new business can be difficult, and any you do find can vary dramatically based on your product, service or location. There is no one standard formula. Sample business plans, trade journals and small business handbooks can give you some ideas of one-time costs, but you may need to source the actual costs by contacting suppliers/vendors and service providers.  
• Visit the Small Business Administration's website External to see business plan formats and sample plans.

Select Resources

• Available at the Library of Congress
• Free Online Resources
• Related Research Guides

The following materials link to fuller bibliographic information in the Library of Congress Online Catalog . Links to additional online content are provided when available.

These are freely available online sources provided by government agencies, trade publications, and organizations.

• Write Your Business Plan (U.S. Small Business Administration) Learn how to write a business plan quickly and efficiently with a business plan template.
• Business Plans Index (Carnegie Library of Pittsburgh) External This is an index of business plans that are available online and in print format. Organized by industry categories.
• Bplans.com External Website with guides and templates on writing a business plans, and includes over 500 free sample business plans.

The following guide was created by the Library of Congress to give an in-depth list of resources on a specific topic. 

• Entrepreneur's Reference Guide: Business Planning This annotated list of books and websites provides additional sources for writing business plans.
• << Previous: Market Research
• Next: Finance Your Business >>
• Last Updated: Aug 22, 2024 12:04 PM
• URL: https://guides.loc.gov/small-business-hub

Want to create or adapt books like this? Learn more about how Pressbooks supports open publishing practices.

Chapter 13: Business Proposals

Venecia Williams

Learning Objectives

• Describe the basic elements of a business proposal
• Discuss the main goals of a business proposal
• Identify effective strategies to use in a business proposal

Business proposals are documents designed to make a persuasive appeal to the audience to achieve a defined outcome, often proposing a solution to a problem. Much like a report, with several common elements and persuasive speech, a business proposal makes the case for your product or service. In order to be successful in business and industry, you should be familiar with the business proposal.

Let’s say you work in a health care setting. What types of products or services might be put out to bid? If your organization is going to expand and needs to construct a new wing, it will probably be put out to bid. Everything from office furniture to bedpans could potentially be put out to bid, specifying a quantity, quality, and time of delivery required. Janitorial services may also be bid on each year, as well as food services, and even maintenance. Using the power of bidding to lower contract costs for goods and services is common practice.

Effective business proposals are built around a great idea or solution. While you may be able to present your normal product, service, or solution in an interesting way, you want your document and its solution to stand out against the background of competing proposals. What makes your idea different or unique? How can you better meet the needs of the company than other vendors? What makes you so special? With the competitive nature of business proposals, your aim is to make your proposal stand out and ultimately win the contract.

Planning a Proposal

To begin planning a proposal, remember the basic definition: a proposal is an offer or bid to do a certain project for someone. Proposals may contain other elements—technical background, recommendations, results of surveys, information about feasibility, and so on. But the difference with a proposal is that it asks the audience to approve, fund, or grant permission to do the proposed project. If you plan to be a consultant or run your own business, written proposals may be one of your most important tools for bringing in business. And, if you work for a government agency, nonprofit organization, or a large corporation, the proposal can be a valuable tool for initiating projects that benefit the organization or you the employee/proposer (and usually both).

A proposal should contain information that would enable the audience of that proposal to decide whether to approve the project, to approve or hire you to do the work or both. To write a successful proposal, put yourself in the place of your audience and think about what sorts of information that person would need to feel confident having you do the project.

It’s easy to get confused about proposals. Imagine that you have a terrific idea for installing some new technology where you work and you write up a document explaining how it works and why it’s so great, showing the benefits, and then end by urging management to go for it. Is that a proposal? No, at least not in this context. It’s more like a feasibility report, which studies the merits of a project and then recommends for or against it. Now, all it would take to make this document a proposal would be to add elements that ask management for approval for you to go ahead with the project. Certainly, some proposals must sell the projects they offer to do, but in all cases, proposals must sell the writer (or the writer’s organization) as the one to do the project.

Persuasion- Ethos, Pathos, and Logos

Proposals are built on the three elements of persuasion: ethos, pathos and logos. A proposal’s ethos refers to credibility, pathos to passion and enthusiasm, and logos to logic or reason. All three elements are integral parts of your business proposal that require your attention. Who are you and why should they do business with you? Your credibility may be unknown to the potential client and it is your job to reference previous clients, demonstrate order fulfillment, and clearly show that your product or service is offered by a credible organization. By association, if your organization is credible the product or service is often thought to be more credible.

In the same way, if you are not enthusiastic about the product or service, why should the potential client get excited? How does your solution stand out in the marketplace? Why should they consider you? Why should they continue reading? Passion and enthusiasm are not only communicated through “!” exclamation points. Your thorough understanding, and your demonstration of that understanding, communicates dedication and interest.

Each assertion requires substantiation, each point clear support. It is not enough to make baseless claims about your product or service; you have to show why the claims you make are true, relevant, and support your central assertion that your product or service is right for this client. Make sure you have sources to support your points. Be detailed and specific.

Types of Proposals

Consider the situations in which proposals occur. A company may send out a public announcement requesting proposals for a specific project. This public announcement—called a request for proposals (RFP)—could be issued through newspapers, trade journals, Chamber of Commerce channels, or individual letters. Firms or individuals interested in the project would then write proposals in which they summarize their qualifications, project schedules and costs, and discuss their approach to the project. The recipient of all these proposals would then evaluate them, select the best candidate, and then prepare a contract.

But proposals come about much less formally. Imagine that you are interested in doing a project at work (for example, investigating the merits of bringing in some new technology to increase productivity). Imagine that you visited with your supervisor and tried to convince her of this. She might respond by saying, “Write me a proposal and I’ll present it to upper management.” As you can see from these examples, proposals can be divided into several categories:

• Solicited or unsolicited. Proposals are solicited or unsolicited. A solicited proposal is one in which the recipient has requested the proposal. Typically, a company will send out requests for proposals (RFPs) through the mail or publish them in some news source. But proposals can be solicited on a very local level: for example, you could be explaining to your boss how great it would be to install a new technology in the office; your boss might get interested and ask you to write up a proposal to do a formal study of the idea. Unsolicited  proposals are those in which the recipient has not requested proposals. With unsolicited proposals, you sometimes must convince the recipient that a problem or need exists before you can begin the main part of the proposal.
• Internal or externa l. Proposals can be internal or external. A proposal to someone within your organization (a business, a government agency, etc.) is an  internal  proposal. With internal proposals, you may not have to include certain sections (such as qualifications) or as much information in them. An  external  proposal is one written from one separate, independent organization or individual to another such entity. The typical example is the independent consultant proposing to do a project for another firm.
• Informal or formal. Another type of proposal is informal or formal.  An informal proposal is a short document, only a few pages long, normally in the format of a memo or letter and includes fewer sections than a formal proposal. Informal proposals generally include six sections: introduction, background, plan, staffing, budget and authorization (Guffey et al., 2019). Formal proposals are longer, more complex documents, and in addition to the six sections from the informal report, they include many of the other sections found in a typical report: a letter of transmittal, title page, table of contents, list of figures, executive summary , and additional information in the appendices . They may also include a copy of the RFR.

Common Sections in Proposals

You can be creative in many aspects of the business proposal but follow the traditional categories. Businesses expect to see information in a specific order, much like a résumé or even a letter. Each aspect of your proposal has its place and it is to your advantage to respect that tradition and use the categories effectively to highlight your product or service. Every category is an opportunity to sell and should reinforce your credibility, your passion, and the reason your solution is simply the best. Keep in mind that the sections included in your proposal are based on the type of proposal and the audience’s needs. Figure 13.1 highlights some of the common sections found in a proposal. Figure 13.1 provides an example of a proposal.

Copy of RFP

Include a copy of the RFP you are responding to when submitting a proposal. A company undertaking a major project may send out different RFPs for different parts of the project, so it is best to include the RFP to identify which issue you are planning to address.

Letter of Transmittal

As with a formal report, include a letter of transmittal which should briefly identify the issue you are aiming to solve and the benefits of your proposed plan.

Executive Summary

The executive summary provides a summary of the proposal and highlights the main aspects of the proposal. If some information seems repetitive, remember that business reports are not always read in the order written.

Write a title that clearly and accurately describes your proposal. Include the name of the organization the proposal is for, the RPF number and the date. The title page should also have the name of the author(s) and the author’s organization.

Table of Contents

The table of contents enables the reader to quickly find the desired sections in your report. Format this page the way you would format the table of contents in a formal report.

List of Figures and Tables

Include a list of figures and tables if your report contains numerous illustrations, diagrams and charts.

Introduction

Plan the introduction to your proposal carefully. Make sure it does the following things (but not necessarily in this order) that apply to your particular proposal:

• Indicate that the document to follow is a proposal.
• Refer to some previous contact with the recipient of the proposal or to your source of information about the project.
• Find one brief motivating statement that will encourage the recipient to read on and to consider doing the project (if it’s an unsolicited or competitive proposal) and to give you the contract to do the project.
• Give an overview of the contents of the proposal.

Background on the Problem, Opportunity, or Situation

Often occurring just after the introduction, the background section discusses what has brought about the need for the project—what problem, what opportunity there is for improving things, what the basic situation is. It’s true that the audience of the proposal may know the problem very well, in which case this section might not be needed. Writing the background section still might be useful, however, in demonstrating your particular view of the problem. And, if the proposal is unsolicited, a background section is almost a requirement as you will need to convince the audience that the problem or opportunity exists and that it should be addressed.

Benefits and Feasibility of the Proposed Project

Most proposals discuss the advantages or benefits of doing the proposed project. This acts as an argument in favour of approving the project. Also, some proposals discuss the likelihood of the project’s success. In the unsolicited proposal, this section is particularly important as you are trying to “sell” the audience on the project.

When writing the plan, you want to explain how you’ll go about doing the proposed work. This acts as an additional persuasive element; it shows the audience you have a sound, well-thought-out approach to the project. Also, it serves as the other form of background some proposals need. Remember that the background section (the one discussed above) focuses on the problem or need that brings about the proposal. However, in this section, you discuss the background relating to the procedures or technology you plan to use in the proposed work. Once again, this gives you the proposal writer a chance to show that you know what you are talking about and to build confidence in the audience. Give enough information in your plan to secure the contract, but don’t include all the specifics (Guffey et al., 2019).

Most proposals contain a section that shows not only the projected completion date but also key milestones for the project. If you are doing a large project spreading over many months, the timeline would also show dates on which you would deliver progress reports. And if you can’t cite specific dates, cite amounts of time for each phase of the project.

Qualifications

Most proposals contain a summary of the proposing individual’s or organization’s qualifications to do the proposed work. It’s like a mini-resume contained in the proposal. The proposal audience uses it to decide whether you are suited for the project. Therefore, this section lists work experience, similar projects, references, training, and education that shows familiarity with the project.

Budget and Resources

Most proposals also contain a section detailing the costs of the project, whether internal or external. With external projects, you may need to list your hourly rates, projected hours, costs of equipment and supplies, and so forth, and then calculate the total cost of the complete project. Internal projects of course are not free, but you should still list the project costs: for example, you can list hours you will need to complete the project, equipment and supplies you’ll be using, and assistance from other people in the organization.

Conclusions

The final paragraph or section of the proposal should bring readers back to a focus on the positive aspects of the project. In the final section, you can end by urging them to get in touch to work out the details of the project, to remind them of the benefits of doing the project, and reiterate the reasons your organization is the right choice for the project.

Special project-specific sections

Remember that the preceding sections are typical or common in written proposals, not absolute requirements. Think about the following questions:

• What else might your audience need to understand the nature and scope of the project?
• What else might your audience need to understand the benefits arising from the project?
• What other information might your readers need to be convinced to allow you to do the project?
• What else do they need to see in order to approve the project?

Format of Proposals

A professional document is a base requirement. If it is less than professional, you can count on its prompt dismissal. There should be no errors in spelling or grammar, and all information should be concise, accurate, and clearly referenced when appropriate. Information that pertains to credibility should be easy to find and clearly relevant, including contact information. If the document exists in a hard copy form, it should be printed on a letterhead. If the document is submitted in an electronic form, it should be in a file format that presents your document as you intended. Word processing files may have their formatting changed or adjusted based on factors you cannot control—like screen size—and information can shift out of place, making it difficult to understand. In this case, a portable document format (PDF)—a format for electronic documents—may be used to preserve content location and avoid any inadvertent format changes when it is displayed.

Effective persuasive proposals are often brief, even limited to one page. “The one-page proposal has been one of the keys to my business success, and it can be invaluable to you too. Few decision-makers can ever afford to read more than one page when deciding if they are interested in a deal or not. This is even more true for people of a different culture or language,” said Adnan Khashoggi, a successful multi-billionaire (Riley, 2002). Clear and concise proposals serve the audience well and limit the range of information to prevent confusion.

You have the following options for the format and packaging of your proposal. It does not matter which you use as long as you use the memorandum format for internal proposals and the business-letter format for external proposals.

• Cover letter or memo with separate proposal :  In this format, you write a brief “cover” letter or memo and attach the proposal proper after it. The cover letter or memo briefly announces that a proposal follows and outlines the contents of it. In fact, the contents of the cover letter or memo are pretty much the same as the introduction (discussed in the previous section). Notice, however, that the introduction to the proposal proper that follows the cover letter or memo repeats much of what preceded. This is because the letter or memo may get detached from the proposal or the recipient may not even bother to look at the letter or memo and just dive right into the proposal itself.
• Consolidated business-letter or memo proposal: In this format, you consolidate the entire proposal with a standard business letter or memo. You include headings and other special formatting elements as if it were a report. This consolidated memo format is illustrated in the left portion of Figure 13.2.

Figure 13.2 | Consolidated vs Letter Memo

Revision Checklist for Proposals

As you reread and revise your proposal, watch out for problems such as the following:

• Make sure you use the right format. Remember, the memo format is for internal proposals; the business-letter format is for proposals written from one external organization to another.
• Write a good introduction.
• Make sure to identify exactly what you are proposing to do.
• Make sure that a report—a written document—is somehow involved in the project you are proposing to do.
• Make sure the sections are in a logical, natural order. For example, don’t present the audience with schedules and costs before you’ve gotten them interested in the project.
• Break out the costs section into specifics; include hourly rates and other such details. Don’t just include the final cost.
• For internal projects, don’t omit the section on costs and qualifications: there will be costs, just not direct ones. For example, how much time will you need, will there be printing, binding costs? Include your qualifications if you think your proposal will go to somebody in the organization who doesn’t know you.
• Watch out for generating technobabble. Yes, some of your proposal readers may know the technical side of your project—but others may not. Challenge yourself to bring difficult technical concepts down to a level that non-specialists can understand.
• Proofread and revise for grammar, mechanics and style.

An effective business proposal informs and persuades efficiently. It features many of the common elements of a report, but its emphasis on persuasion guides the overall presentation. Writing effective business proposals is a skill every business writer needs. Plan your proposal well and only include the sections necessary to both inform and persuade your audience. Remember that though you are offering a solution to a problem, your main intention is to sell your service.

End of Chapter Activities

13a. thinking about the content.

What are your key takeaways from this chapter? What is something you have learned or something you would like to add from your experience?

13b. Discussion Questions

Discussion Questions

• Have you ever written a proposal? If yes, what were the sections you included?
• Search for an RFP (request for proposal) or similar call to bid, and post it to your class. Compare the results with your classmates, focusing on what is required to apply or bid.
• Identify a product or service you would like to produce or offer. List three companies that you would like to sell your product or service to and learn more about them. Post your findings, making the link between your product or service and company needs. You may find the Web site on creating a business plan ( https://www.scu.edu/mobi/business-courses/starting-a-business/session-2-the-business-plan/#3 ) useful when completing this exercise.

13c. Applying chapter concepts to a situation

Proposing a new software

Nate was recently hired at the Green Grocers Supermarket as a part-time cashier. He only does the evening shifts as he has classes in the day time and wants to avoid having any conflicts in his schedule. A part of his daily duties includes balancing the cash register drawer at the end of his shift. When his colleagues do the evening shift, they have to complete this task as well.

The owner of the supermarket is concerned as she notices that the cashiers are struggling to balance the drawer some evenings. She tries to resolve this issue as inaccurate information is affecting the reliability of the record-keeping process.

Nate is aware of a free software that the cashiers can use to complete their cash register balancing task. This software can save time, eliminate human error and store worksheets digitally instead of having the team file hard copies each day. He shares this idea with his boss who tells him to submit it as a written proposal instead.

Write an executive summary outlining what Nate’s proposal to his boss will include. 

13d. Writing Activity

Watch this video from TED.com on Dance vs. PowerPoint, a modest proposal . Summarize the video. What do you think of this idea of using dance instead of a “boring” PowerPoint? Would it work in a business setting, why or why not?

Attribution

This chapter contains information from Business Communication for Success  which is adapted from a work produced and distributed under a Creative Commons license (CC BY-NC-SA) in 2010 by a publisher who has requested that they and the original author not receive attribution. This adapted edition is produced by the  University of Minnesota Libraries Publishing  through the  eLearning Support Initiative ,  Business Communication For Everyone  (c) 2019 by Arley Cruthers and is licensed under a  Creative Commons-Attribution-NonCommercial-ShareAlike 4.0 International license , and Online Technical Writing by David McMurrey and is licensed under a  Creative Commons Attribution 4.0 International License .

Guffey, M. E., Loewy, D., & Almonte, R. (2019). Essentials of Business Communication, Eighth Edition . Toronto, ON: Nelson Education /Cengage Learning.

Riley, P. G. (2002).  The one-page proposal: How to get your business pitch onto one persuasive page  (p. 2). New York, NY: HarperCollins.

Chapter 13: Business Proposals Copyright © 2020 by Venecia Williams is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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What is Formal and Informal Communication? (Complete Guide)

• Formal & Informal Communication Importance, Purpose, Examples   Part 1
• Internal Communications State, Advantages & Disadvantages   Part 2
• Challenges of Formal and Informal Communication   Part 3
• Informal and Formal Communication Best Practices   Part 4

In this article, we will provide comprehensive information on formal and informal communication: definition, difference between formal and informal communication, examples for both types of communication, importance, advantages, disadvantages, challenges, as well as tips and best practices.

What is formal communication?

Formal communication  is communication through predefined channels set by organizations. It is backed by organizational procedure, and it is necessary to fulfill the goals of the organization. Formal communication is used in professional and academic settings to provide information and discuss topics in a structured and organized manner. It typically involves the use of more formal language than informal communication, using terms and concepts that are specific to the subject being discussed. Formal communication is often used to convey information in an efficient way. It is also used to maintain a level of professionalism among the participants.

What is informal communication?

Informal communication is more relational than formal. Informal communication is defined as the type of communication that takes place between two or more parties in a casual and unstructured manner, and it is often characterized by the use of informal language. It is not backed by any predetermined channels and can happen anywhere within the organization. Since it is not defined by any channels, messaging moves a lot faster, but it is without any paper trail or official documentation. Informal communication is often used to build relationships and facilitate conversations in social settings, and can be beneficial when developing new ideas or resolving conflicts. The primary goal of this type of communication is to preserve and establish relationships with colleagues. Grapevine communication is a common form of informal communication in a workplace.

Other types of communication in organizations include: Vertical Communication and Horizontal Communication Upward Communication and Downward Communication

Part 1 Why Are Formal and Informal Types of Communication Important?

In its purest form, formal communication is created to increase efficiency within an organization. Predetermined channels of communication are meant to provide a smooth and streamlined method of communication that travels upward and downward . It is the way to easily communicate rules, procedures, and company policy to lower level employees. A formal notification is also favorable in situations where documentation is needed to prove or disapprove a claim or complaint. If someone violated company policy or broke a rule against another coworker, it is easy for employees to point to formal communications between staff and upper management.

Informal communication, as stated above, is all about relationships; if a culture of goodwill and relationship is adequately fostered by the company, then informal discussions can create solidarity and strengthen teams . However, one of the most important reasons for why informal communication is critical to businesses is that it allows employees to give feedback to their superiors. It facilitates the action of upward interface and enables messaging to go both ways efficiently. When employees are given the opportunity to comment on their experiences in the company informally, it puts the ball back in the court of upper management to improve and meet their expectations. This action then leads to higher employee morale.

Also, informal communication can pick up where formal discussions end. A great example of this is conflict resolution. If employees or managers and employees can resolve their problems informally, then this can prevent the need for upper management to have to get involved and elongate the matter.

How does formal communication differ from informal communication?

Formal communication is the exchange of information between two or more individuals in a structured and professional manner. It is often used in the workplace or in any environment where there is a need for clear and organized communication. In contrast, informal communication is more relaxed, open, and casual. It allows for freedom of expression as it does not require the same level of structure and etiquette as formal communication. Both forms of communication are important for different scenarios, depending on the context and the message being conveyed.

When do we use formal communication?

Formal communication is typically used in business and professional settings, such as in emails, presentations, or other written documents. It is also used when communicating with people outside of one’s organization, such as clients and customers. Formal communication can help create a professional image, as well as demonstrate respect for the recipient. It is often characterized by using precise language and avoiding slang or colloquialisms. Formal communication should be written with clarity and conciseness in order to ensure an accurate understanding of the message being conveyed.

When do we use informal communication?

Informal communication is used in many different scenarios, including casual conversations between friends or colleagues. This type of communication is often more relaxed and informal than formal communication, and it does not follow the same strict guidelines that formal communication does. Informal communication gives us the freedom to express ourselves more openly and honestly, without worrying about making mistakes. It can help to build stronger relationships and foster an atmosphere of trust and understanding.

When to use formal or informal communication?

Understanding the difference between formal and informal communication is key. Formal communication should be used in professional settings, such as making a business proposal or submitting a report. In contrast, informal communication is best used in more relaxed settings with friends and colleagues.

What is the purpose of formal communication?

Formal communication is an essential part of any professional setting, as it allows for clear, concise and structured communication between individuals. It is used to convey specific information, such as instructions, policies or procedures and is generally done in a more formalized manner than informal communication. It also provides a sense of order and structure to workplace interactions and helps to maintain a professional atmosphere. Formal communication can take many forms, including written documents, emails, phone calls or face-to-face conversations. When it is used properly, formal communication can be an effective tool for conveying important information in a professional setting.

What are some examples of formal communication?

Examples of formal communication include:

• business emails,
• presentations,
• formal meetings.

What are some examples of informal communication?

Examples of informal communication include conversations between friends and colleagues:

• text messages,
• social media posts,
• phone calls,
• informal face-to-face interactions.

What are some examples of formal communication in different settings?

• In business settings, formal communication can take place in the form of emails, meetings, reports, presentations, memos and other documents.
• In educational contexts, formal communication is often used to explain concepts or provide instruction to students.
• In government settings, formal communication may be used to announce decisions or policies or to communicate between different branches or levels of government.

What is the process of formal communication?

Formal communication generally follows certain protocols in order to ensure clarity and understanding. It requires both the sender and receiver of the message to be aware of the rules, conventions, and expectations of formal communication. Formality can be communicated through the choice of words, tone, body language, and other nonverbal cues.

Properly managed formal communication can help ensure that information is accurately and quickly disseminated throughout the organization. Ineffective formal communication can lead to confusion, inefficiency, and poor decision-making.

Part 2 What Is the State of Modern Internal Communications?

Many factors are impacting the state of internal communication in today’s workplace. Technology is changing the way people want to interact with each other, and it is creating a disruption in the workplace in ways never before seen.

RingCentral, a provider of cloud-based communications and collaboration solutions for businesses, listed some of their findings from a survey about modern communication trends in the workplace.

• 97 percent of their respondents believed that communication impacted tasks on a daily basis.
• 44 percent of respondents want more widespread adoption of internal communication tools.
• When asked about how they would like these tools to evolve in 2015, 17 percent wanted better usage of these tools.

A conversation about formal and informal communication cannot happen without acknowledging the impact of technology. To see how information is funneling from management to employees and from employees to co-workers it would be helpful to gain insight on how email, text messages, and tools like ProsperForms.com have a hand in how these messages are happening. Here are a few other statistics that business leaders should be concerned about concerning formal and informal communications within the company.

• An infographic and survey compiled by ClearCompany revealed that only 14 percent of companies have employees who understand the organization’s strategies, goals, and direction.
• Another stat from that survey showed that only 5.9 percent of companies communicate the organization’s goals every day.

In today’s world, communication is as critical as it ever was. The only problem is that companies might not be utilizing all the tools and procedures at their disposal to better facilitate effective communications from upper management to lower employees, and from employees to their colleagues.

What are formal communication advantages and disadvantages?

• Advantages: formal communication allows for efficient, reliable communication in a controlled manner.
• Disadvantages: lack of flexibility and the potential for misunderstandings due to the lack of personal interaction. Excessive use of formal communication can lead to decrease in creativity as it typically follows a set structure.

What are informal communication advantages and disadvantages?

• Advantages: informal communication can help to build relationships quickly, as people can relate to each other more easily through informal communication.
• Disadvantages: informal communication can lead to misunderstandings and conflict, as the lack of structure can lead to messages being misinterpreted or taken the wrong way. Informal communication can also lead to a lack of consistency and reliability in the workplace, making it difficult for teams to coordinate their efforts effectively.

Part 3 The Challenges of Formal and Informal Communication

Formal communication challenges, acknowledging a new generation.

With the increase of social media and a favoring of more informal communication methods by millennials, companies are going to have to go easy on the formal board meeting and email memos. Younger generations prefer having multiple ways of communicating whether it be through social media platforms, text messaging, and co-working software. Business leaders are trying to find effective ways to incorporate new mediums of communicating company vision, policy and procedures .

Buy-In from Employees

Many times, it can be more comfortable for formal messaging to be accepted by employees if it is done in a way that is more about the “why” than the “what.” Authoritative tones can be a turn-off, so upper management has to be sure to balance conversations about rules and procedures with how they align with the overall goal of the company. If not, employees may not be ready to buy in totally.

Inflexibility

As a result of the messaging coming through pre-determined channels, many voices in upper management have to be heard before a message is sent down the ranks . A lot of people have to agree and approve what is being sent out. This makes it difficult for anyone to change a formal message if something needs to be tweaked or left out.

Contributes to a Lack of Understanding

Mass formal communications that are not tailored to everyone’s communication style can create confusion and stress . A new procedure can be worded in a way that it means one thing to one employee and an entirely different thing to another. It is challenging for upper management to account for a general lack of communication.

Slow Decision Making

Some employees and departments depend on formal messaging from upper management to make important decisions . As mentioned above, because it takes a lot of people to sign off on a decision or message from top management it can take a lot longer to reach who it needs to. Therefore, formal communication can be frustrating to managers or employees who need it. It can even cause the demise of a product or project.

Informal Communication Challenges

Rumors can spread rapidly.

While informal communication is excellent for creating relationships and producing unity among staff, those same communication flows can also present opportunities for rumors to spread. Because messaging is not pre-determined or controlled, it makes this event even more likely. This means that other employees might be receiving incorrect information about procedures, critical changes, or policies from colleagues or managers .

Lack of Control

Informal communication is impossible to control . It is not affiliated with management-approved channels, and as a result, it does not necessarily obey the same messaging rules as formal communication. As a result, problematic issues such as harassment, bullying, or sensitive information sharing could be taking place. If an employee does not alert management about these predicaments, it would be impossible for them to know and stop any problems.

An Increase in Conflict

As in any setting, as humans interact with each other, a conflict has a higher chance of happening . It can breed competition among employees or departments or problems between superiors and subordinates. In turn, this can decrease or halt productivity.

Contradict Formal Communications

Informal communication can directly contradict information sent from pre-defined channels . Someone may say they heard something different than the official memo sent from upper management, or a manager might confuse formal communications and provide an inaccurate explanation to an employee with a question. Upper management can dictate when and how messaging flows from their channels, but they cannot determine how those messages are interpreted or spread to others.

Lack of Secrecy

Again, a lack of control increases the chance for company secrets to travel . A rumored promotion, coming retirement, or the advent of a new product not yet released to all parts of the company might be leaked to others who do not need to know. This can potentially damage a new product release or breach the trust of employees.

Part 4 Informal and Formal Communication Best Practices

• Foster a Culture of Effective Communications Employees respond well if they feel they can trust that upper management has their best interest at heart. Formal communication does not start when the messages are sent; it begins the second an employee begins their first day. Upper management should reach out to employees in ways that do not always feel rigid and formal to increase their trust and buy-in. This will make it easier for them to accept more essential messages and stay away from potential rumors.
• Streamlined Decision Making Employees can become agitated if a work task depends on formal communication channels of upper management. Leaders can decrease this frustration by better assessing who needs to be involved in the decision-making process and utilizing an approach to get decisions to employees faster.
• Talk About the “Why” Behind the Rules To ensure a safe environment for everyone, there should be established policies for formal and informal communications. However, business leaders should explain why these rules exist and why breaking them can impact the work environment of those around them. The conversation should center on behaviors and how they should align with the mission and vision of the company.

What must be avoided in formal communication situations?

• Poor grammar, spelling, and punctuation must be avoided.
• When engaging in formal communication, it is important to be mindful of the language and tone used.
• Unprofessional language (slang and jargon) should all be avoided as they can create an impression of a lack of professionalism or can result in misunderstandings or awkwardness.
• Unprofessional topics, such as politics or religion are considered inappropriate in formal settings.
• Excessive use of exclamation points or emojis.
• Sarcasm should be avoided in order to prevent any misunderstandings or misinterpretations of the message being communicated.
• It is important to ensure that the language used is respectful and appropriate for the situation.

How to improve written formal communication?

• Take your time to carefully craft the message.
• Make sure that all relevant information is included, and that you are using language that is appropriate for the situation.
• Make sure your message is clear and concise.
• Ask questions to confirm understanding.
• If applicable, consider including examples, diagrams, or charts to help illustrate your point in order to make it easier for your audience to understand.

How to improve formal communications skills?

To improve your ability to communicate formally, practice active listening, use appropriate language, and demonstrate respect for others. Active listening involves paying attention and responding to the speaker’s words with appropriate eye contact, body language, and questions. It is also important to use professional language and avoid slang, as well as being aware of cultural differences and avoiding bias .

• Upward Communication & Downward Communication (Full Guide)
• What is Grapevine Communication? 5 Solutions and Challenges
• 5 Methods of Workspace Communication Improvement
• 7 Actionable Techniques to Improve Internal Communication
• Why Asynchronous Communication Is the Future? Best Practices
• 4 Main Types of Organizational Communication [Pros and Cons]

Types of Planning

Everything you need to know about the types and classification of planning. The planning covers the entire organization. It is a comprehensive process of determining the long term objective of the organization and evolving inter-connected and interdependent plans to be carried out inside the organization.

This plan covers corporate growth, research and development, divestment, unprofitable product/section modernization, expansion, diversification, merger and acquisition.

The types of planning can be classified under the following heads:-

1. Hierarchy Based Classification 2. Classification on the Basis Of Scope 3. Classification on the Basis of Time Horizon 4. Classification on the Basis of Challenges 5. Classification on the Basis of Formalities 6. Classification Based on Utility.

Hierarchy based classification of planning includes:- i. Top Level Planning or Corporate Planning ii. Middle Level Planning or Functional Planning iii. Lower Level Planning.

Classification of planning on the basis of scope includes:- i. Strategic Planning ii. Tactical Planning iii. Operational Planning.

Classification of planning on the basis of time horizon includes:- i. Long Range Planning ii. Medium Term Planning iii. Short Range Planning.

Classification of planning on the basis of challenges includes:- i. Proactive Plans ii. Reactive Planning.

Classification of planning on the basis of formalities includes:- i. Formal Planning ii. Informal Planning.

Classification of planning based on utility includes:- i. Single Use Plans- Budgets, Programmes, Schedules, Projects, Methods ii. Multi Use Plans- Objectives, Strategies, Policies, Procedures, Rules.

Some of the other types of planning includes:- 1. Formal and Informal Planning 2. Short and Long-Range Planning 3. Single Use and Standing Planning 4. Corporate Planning and Long-Range Planning.

Additionally, learn about some of the types such as:- 1. Strategic Plans including vision, mission, values, objectives, strategies and goals 2. Contingency Plans 3. Tactical Plans 4. Operational Plans.

Types and Classification of Planning in Business and Management: On Basis of Hierarchy, Scope, Time Horizon, Challenges, Formalities, Utility and a Few Others

Types of planning – formal and informal planning, short and long-range planning, single use and standing planning and corporate and long-range planning.

The process of planning may be classified into different categories on the basis of nature of planning, duration of planning or the use of planning.

Type #   1. Formal and Informal Planning:

Planning is formal when it is reduced to writing. It would be advantageous to prepare a formal plan for the success of the enterprise when the number of action is large, as it will facilitate adequate control and pinpoint the weaknesses, if any.

An informal plan is one which is not reduced to writing but is conceived in the mind of the manager. Informal planning may be adopted if the number of actions to be taken is less and the actions have to be taken in a short period.

Type #   2. Short and Long-Range Planning:

The difference between short and long-range planning is based on the period which is kept in view while formulating a plan. Generally, short-term planning is one which covers a period from one to twelve months. Long-range planning usually covers a period of usually more than five years. In between, there may be medium-term plans. Short-term plans must be formulated in a manner consistent with long-term plans.

Both the plans are complementary and not competitive to each other. Short-term planning is considered as ‘tactical planning’ and long-term planning is taken as ‘strategic planning’.

Long-term planning has an enduring effect on the business and is the responsibility of the top management. It involves determination of the long-range goals and the laying down of procedures, programmes and policies to achieve those goals. It is concerned more with distant future.

It involves the work of increasing or reducing the re sources of the business also. Short-term plans are concerned with immediate futures. It takes into account the available resources only and is mainly concerned with the current operations of the business.

Type #   3. Single Use and Standing Planning:

A single use planning is one which sets a course of action for a particular set of circumstances and is used up once the particular goal is achieved. They may include programmes, budgets, projects and schedules. This plan is prepared by lower-level management. These plans are also called ‘specific planning’.

Standing planning is one which is designed to be used over and over again. Standing plans are of a permanent nature and are meant for repeated use. Objectives, policies, procedures, methods, rules and strategies are included in standing plans. Its nature is mechanical. It helps the higher executives to reduce their work load Standing planning is also called ‘Routine planning’. These plans are prepared by top-level management.

Examples of Plans or Planning :

i. Architectural planning

ii. Business plan

iii. Comprehensive planning

iv. Enterprise architecture planning

v. Event planning and production planning

vi. Family planning

vii. Financial planning

viii. Land use planning

ix. Marketing plan

x. Network resource planning

xi. Strategic planning

Type # 4. Corporate Planning and Long-Range Planning :

Corporate planning and long-range planning is the process of determining the major objectives, policies and strategies that will govern the acquisition, use and disposition of resources to achieve those objectives of an organisation and is done at high /top level of the organisation.

It provides the answer to the basic questions like:

i. Where are we now?

ii. Where we want to go?

iii. Why do we want to go?

iv. How we will go? Etc.

Features of Corporate Planning :

i. Systematic – Corporate planning is a systematic way of setting the Long-term goals of a company and deciding the means to achieve them – taking internal as well as external factors into account.

ii. Continuous – Corporate planning is a continuous, on-going process. Corporate plans move in tune with internal as well as external changes. They are subject to revision and updating from time to time.

iii. Company-wide plan – Corporate plan is a kind of master plan covering the company as a whole. All functional plans are offshoots of the corporate plan.

iv. Long-term view – Corporate planning takes a long-term view of business and does not deal with day-to-day operations.

v. Top level activity – Establishing long-term corporate goals and the means of achieving these, is a top management responsibility. Of course, in the process of building corporate goals, inputs from executives working at various levels are also taken into account.

vi. Forward looking – Corporate planning tries to put the company ahead of its rivals through a careful evaluation of all relevant internal as well as external factors having a bearing on overall performance. The whole exercise is forward looking in nature, in that it tries to match a company’s internal strengths with external opportunities and utilize the corporate resources in the best possible way.

vii. Comprehensive – Corporate planning covers both strategic planning and operational planning. Strategic planning is designed to help companies achieve competitive advantage by trying to exploit external opportunities through unique internal capabilities. Operational plans such as production plan, marketing plan, and finance plan are designed to implement strategic plans.

Every company has its own strategies, corporate mission, planning, organisation vision etc.

E.g., public sector giant HMT which prided itself, for a long time on its dominance in the Indian wrist watch market. The company was on a high tide for a long time and failed to understand the shift in the consumer preference towards the trendier, sleek quartz watches. It took the market for granted and in the meantime HMT’s traditional markets captured by TITAN with its innovative marketing strategies and changed the face of the Indian watch market.

Corporate Planning vs. Long-Range Planning :

Corporate planning is the comprehensive planning of business operations for effective implementation of corporate policies and attainment of corporate goals. It involves preparation of strategic plans and determination of objectives to be pursued in the long-run as well as short-run. It commits resources for a future period that can be clearly looked into. It has nothing to do with the range.

For example, in groundnut cultivation, resources are deployed for a few months and the time frame of a corporate plan is less than a year. On the other hand, in iron and steel industry, the resources are deployed, having a long-term framework in mind.

Long-range planning is a part of corporate planning. It is a plan that covers many ears and affects many departments or divisions of an organisation in a major way. It is concerned with the preparation of realistic estimates for distant future. It indicates the extent of future time horizon which is fairly long in nature and which can be meaningfully expressed in the form of tentative goals by management.

The time horizon of a long-term plan is usually dependent on the nature of industry in which it is pressed into service. Such planning is basically concerned with the economic, financial and technological aspects of the environment with special reference to the problems of corporate growth.

Types of Planning – On Basis of Hierarchy, Time Horizon, Scope, Challenges, Formalities and Utility

I. hierarchy based classification:.

1. Top Level Planning or Corporate Planning :

This planning covers the entire organization. It is a comprehensive process of determining the long term objective of the organization and evolving inter-connected and interdependent plans to be carried out inside the organization. This plan covers corporate growth, research and development, divestment, unprofitable product/section modernization, expansion, diversification, merger and acquisition.

i. It has a long term perspective.

ii. It is developmental in nature and focuses on the growth of the company.

iii. It covers the organization as a whole. It involves using all resources of the organization.

iv. It is a continuous process. It keeps on identifying newer opportunities, avoiding threats and reviewing the programmes in view of ever-changing environments.

v. It integrates strategic plan with operational plans.

Process of Corporate Planning:

i. Defining the long term objectives of the company.

ii. Determining the time span of the enterprise.

iii. Scanning the environment both internal and external.

iv. Apprasing resources position both in the current and future period, and assessing the strength and weakness of the organization.

v. Devising alternative strategies.

vi. Transforming corporate planning into operational plans for different functional domains.

vii. Reviewing the accomplishments and failures.

viii. Sustained revision of plans.

2. Middle Level Planning or Functional Planning :

This refers to plans made in various departments. It lays down the objectives, policies and programmes for various domains like purchase, production, marketing, human resources, finance and other functional areas. The heads of various departments are involved in this planning.

The departmental plans are made within the framework of top-level plans. The smooth accomplishment of various departmental plans contributes to successful execution of corporate plans. Departmental heads through their periodical review meetings, integrate the functional plans into corporate plans.

3. Lower Level Planning :

This is also called sectional planning. It covers the activities associated with a given functional domain. Unit planning is highly specific and very much detailed as it encompasses the work details for the day to day guidance of human resources employed in different departments.

It determines work, duties, specific instructions, work scheduling, arranging tools, raw materials and other facilities. Effective performances of unit level plans leads to accomplishment of organizational goals.

II. Classification on the Basis Of Scope:

1. Strategic Planning :

Strategic planning envisages the possible changes that may take place in the competitive environment and other environmental conditions and making provisions for meeting them successfully.

Characteristics of Strategic Planning:

i. It is a long range one.

ii. It deals with the basic activities like product development, discovery of new geographical area, new technology, invention and social responsibility.

iii. It is purely a top level activity.

iv. It is an all-out effort made by the organization and strongly backed up by the commitment of long term assets.

v. It is a continuous process.

Process of Strategic Planning:

It involves the following:

i. Formulation of goals.

ii. Environmental scanning.

iii. Resources assessment.

iv. Identification of threats and opportunities through SWOT analysis.

v. Putting in place alternative strategies.

vi. Review of alternative strategies.

vii. Absorption of the strategy.

Advantages :

i. It provides consistency and shows direction to the organizational development.

ii. It enables them to deal with environmental changes.

iii. It minimizes the probability of mistakes and unpleasant surprises.

iv. It facilitates long term decision-making and shortens the lead time of any project.

v. It eases downward communication.

Shortcomings:

i. It is expensive as it involves the use of time and energy of those involved in it.

ii. It takes a longer time to structure this plan. Hence, small organizations hardly engage in devising this type of planning.

iii. It is useless in addressing current crisis.

iv. It restricts its choice to most rational and less risky projects. It avoids those projects which involve higher uncertainty. But such projects may prove profitable in the long term.

2. Tactical Planning :

This type of planning is narrower in scope. However it is a detailed one. The thrust of tactical planning is short term i.e., one to two years. These plans are changed quite often in line with the change in the environment. It focuses on the means of accomplishing the objectives of sub-goals and action plans. Middle level managers are mostly engaged in this type of planning. It is devised mostly in terms of internal environment.

This planning is coordinative in nature and it is concerned with implementation of strategic plan by coordinating the diverse activities of different departments. For example, if strategic planning involves development of a new product by production department, tactical planning involved includes design, testing, quality control and installation of production facilities.

3. Operational Planning :

This type of plan limits itself to devising procedures and processes to execute the plans in work stations in different departments. It is highly detailed. Usually supervisors, foremen or superintendents are engaged in evolving the operational plans. It is short tenured plan aimed at carrying out routine tasks like production runs, work scheduling, arrangement of tools and machinery, readying raw materials, machine maintenance, etc.

In short, these plans are evolved at shop floor level implemented by frontline workers or core workers like operators, machinists, assemblers, clerks and sales persons.

III. Classification on the Basis of Time Horizon :

1. Long Range Planning :

This type of plan covers a time period of two to five years. At times, the tenure of plan may go beyond five years. It takes the form of goal setting for various functional domains, framing strategies, policies and programmes. This type of plan can be more suited to industries which are not mainly hit by ever changing environmental variables.

This is quite common in textiles, railways, defence, public utilities, etc. It is the top level management which is usually engaged in evolving long term plans. The goals of long term plan may be attaining market leadership, technological leadership, globalization of operations, building up employer brand and so on.

2. Medium Term Planning :

The duration of medium term planning ranges between one year and three years. However, it may vary given the nature of business, risk and uncertainties, market conditions, level of technology absorption, etc. It is more detailed and specific one. The medium term plans are evolved by departmental heads.

3. Short Range Planning :

The tenure of short term plan is up to one year. It is more specific, detailed and instructional in nature. It is action centric plan. It is mainly carried out by those at lower echelons of the management. For example, sales quota, work scheduling, work assignment, choice of machine to work, decision on shift working, repairs and maintenance, quality inspection, waste control, material economy, etc.

IV. Classification on the Basis of Challenges :

The environment dynamics influence the planning in no small measure. In such a case, planning is made to weather the storm emerging from environmental forces. Accordingly, planning is divided into proactive and reactive planning.

1. Proactive Plans :

Proactive planning involves devising suitable course of action in anticipation of likely changes in the relevant environment. Organizations have to scan the environment very deeply and have decentralized control. They should keep in readiness the resources required for meeting anticipated eventualities.

The organizations using the proactive plans do not wait for the environment to change. Managers challenge the environment. Only very big entities with financial soundness and other resources support can afford to go for proactive planning. In India, Reliance, TATA etc., engage in proactive planning.

2. Reactive Planning :

This type of planning reacts to the events unfolding in the environment. This planning happens after the occurrence of events. In the contemporary business world, organizations have to respond to the changes swiftly so as not to lose the opportunity. In cellular telephone market, Nokia lost to Samsung due to delayed or non-response to changes unfolding in the cell phone market.

In India, Hindustan Automobile Ltd., lost its market share to Maruti Udyog Ltd., due to very belated response to changes in consumer behaviour in automobile market. Hence, reactive planning holds good only in stable business environment. In other words, reactive planners have to lose to proactive planners in changing business environment.

V. Classification on the Basis of Formalities :

1. Formal Planning :

This connotes a well-structured process, involving clearly identifiable and sequentially arranged steps. Persons cast with the responsibility of making formal plans are empowered by the organization. Some organizations have a separate department dedicated to planning. Thus planning is centralized.

This department makes plans for the organization as a whole. But most of the organizations nowadays adopt decentralized planning. The very structure of the organization is changed to enable the employees across the levels make plans at their respective levels. Formal planning is a well-documented exercise. It serves as a reference material for future planners in the organization.

2. Informal Planning :

This connotes unstructured plans based on the memory of events and evaluation of environment factors of the managers. This is mainly adopted in small organizations where operations are small and simple.

VI. Classification Based on Utility:

Plans under this head are grouped as follows:

1. Single Use Plans :

Single use plans are called adhoc plans. It intends to achieve objectives in a given situation. They are tailored to meet a specific situation. These plans are formulated for addressing non-repetitive and unique problems. Once the specific objective is achieved, this plan ceases to exist and new plan is devised, e.g., budgets, programmes, projects, schedules and methods.

a. Budgets:

This represents a single use plan containing expected results in quantitative term. It is expressed in terms of time, money and material. It is prepared for various functional areas like production, sales, finance, human resources and materials.

It may be a fixed budget or variable budget. A fixed budget is one prepared for a given level of production activity. It does not provide for changes in cost for various levels of activity. A flexible budget is one prepared for different levels of production activities.

Characteristics of Budget:

i. It is expressed in numerical terms.

ii. It is related to future period.

iii. It is prepared in advance and derived from the long term strategy of the organization.

iv. It sets standards of performance against which actual performance is matched for control purpose.

v. There are separate budgets for different functional departments. A budget called master budget is prepared for the whole organization.

vi. It is both planning and control device.

Objectives of Budget:

i. Determination of target of performance for each department or section of the enterprise.

ii. Fixation of responsibilities for each executive so that one knows what is expected of him and how he will be evaluated.

iii. Provision of measures for performance evaluation.

iv. Enabling better utilization of available resources to maximize output or profit subject to constraints.

v. Initiating corrective action to address deviations from the targeted performance.

vi. Centralisation of control.

vii. Decentralisation of responsibility to each manager.

Advantages of Budget:

1. Charting future course – Budget enables business enterprises to chart a future course of action.

2. Performance measurement device – It facilitates measurement of performance and efficiency of functional departments.

3. Blueprint for goal attainment – It serves as a blueprint for attainment of the objective.

4. Motivation to staff – Target fixation through budgeting exercise serves as motivation to staff members to put in their best efforts to attain it.

5. Coordination device – Budget serves as a tool for coordination through which the functions of various departments are coordinated. Each department becomes aware of limitations faced by others. It results in reduction of inter-departmental conflict. It enables the department to cooperate with one another in realising objectives of one another.

6. Foundation for standard costing – It is a foundation on which standard costing and other cost control techniques are put in place.

7. Feedback on plans – It provides a feedback for revision and alteration of future plans.

8. Sense of commitment – Since staff of each department are engaged in framing the budget of a department, there may prevail a sense of commitment among the staff to actualize the target.

Limitations:

1. Uncertainty factor – The effectiveness of a budget depends on the accuracy of budget figures. Besides, uncertainty of future events may tone down the potency of budgetary system.

2. Expensive – The prohibitive cost of installation of budgetary control system does not allow small businesses to embrace it.

3. Interdepartmental conflict – Interdepartmental conflict, if any, may diminish the value of budgetary control.

4. Lowering morale – Lesser budget allocation to any department than the actual expectation may tone down the morale of the staff of the department concerned.

5. Infusion of rigidity – When the budget is not revised according to the major shift in the circumstances, it becomes irrelevant. Rigidity may impair the efficacy of budgetary mechanics.

6. Time consuming – It is a time consuming and expensive process requiring different kinds of data and specialized service.

7. Self-centric attitude – Managers may tend to forget their commitments to the attainment of overall goals of the organization in their zeal to meet the departmental target expressed through budget.

8. Restricting freedom – Budgetary controls restrict the freedom of departmental manager in managing their domains.

Types of Budgets:

There are broadly two types of budgets namely financial and non-financial budgets.

A. Financial Budget:

1. Revenue Budget – It estimates the revenue earned in a given years.

2. Expenses Budget – It estimates the expenses involved in running the business in a given year, e.g., raw material, labour, fuel, rent, etc.

3. Capital Revenue Budget – It estimates the capital income earned in a given year.

4. Capital Expenditure Budget – It estimates the value of capital expenditure to be incurred in capital assets like land, machines, building, etc.

B. Non-Financial Budget:

1. Sales Budget – It estimates the quantities of products which can be sold in the next operating period.

2. Production Budget – It estimates the volume of goods to be produced during the next operating period.

3. Labour Budget – It estimates the different kinds of labour requirements to produce the budgeted output.

4. Material Budget – It estimates the quantities of materials to be consumed in the production of budgeted output.

5. Overhead Budget – It estimates the value of overheads to be incurred in the manufacturing process.

6. Master Budget – The consolidation of all functional budgets is called master budget.

Budgeting Based on Level of Activity:

Sometimes budgets may be prepared for a single level of activity. It is called fixed budget. On the other hand, when it is prepared for different levels of activities it is called flexible budget. This budget is considered to be superior to fixed budget as it distinguishes fixed and variable costs and indicates cost variations activity-wise.

Zero Based Budget:

This forces the manager to review the budget every year a fresh. If the outcomes of budget do not justify the resources invested, it is dropped. Further funding is stopped.

Prerequisites for Effective Budgeting:

i. Clear cut objective – Objectives of the budget should be clearly laid down so that budgets can be made in keeping with those objectives.

ii. Sincere data collection – Budgetary data should be collected with utmost seriousness and sincerity.

iii. Involvement of those concerned – Subordinates who are to be charged with implementation should be involved in budgeting process.

iv. Provision for review – There should be provision for review of budget in the light of change in circumstances.

v. Freedom for modification – Operating managers should be allowed room to make necessary modification in the course of implementation, if necessary.

b. Programmes:

Programme is a complex or blend or admixture of objectives, goals, strategies, policies, rules and job arrangements as well as the fiscal, physical and human resources required to implement them.

For example, airliner company may like to acquire 20 jet planes in 10 years at 2 per year; Deputing x and y for supervisory training in IIM for the year 2014. A television manufacturing company may plan to have production programme as follows – Jan. 2014, 200 sets; Feb. 2014, 250 sets; March 2014, 300 sets; and so on.

Steps involved in evolving programmes:

i. Objectives should be quantifiable.

ii. Identification of task involved in realization of the objective.

iii. Making reference to the policies framed.

iv. Laying down the procedure most appropriate for performing those tasks.

v. Splitting the procedures into a number of steps.

vi. Sequencing the aforesaid steps.

vii. Determining the resources required to achieve the objectives.

viii. Preparing action plan corresponding to each step.

ix. Identification of persons responsible for each activity.

x. Fixing start and end time of each activity.

Advantages and Disadvantages of Programme:

Advantages:

1. It concretises the plan and facilitates its implementation.

2. It aids in framing budgets and contributes to the planned allocation of resources.

3. It enables the employee to work with enthusiasm as every staff knows the task he/she has to do.

4. It minimizes the wastage of time in the work place.

5. Consultation and engagement of employees in evolving programmes promote employees’ active participation in its implementation.

Disadvantages:

1. It requires a great deal of time, energy and other resources to make programmes.

2. Once programme is evolved, employees tend to think within framework of programmes. It incapacitates their creativity.

3. The influence of extraneous factors hinders the smooth execution of a programme.

c. Schedules:

A schedule is a time table of work. It specifies the beginning and ending time of each task. Scheduling involves three components; identifying activities or tasks to be performed, determining the sequence and specifying starting and ending dates for each and every activity.

Scheduling is the process of establishing a time sequence for the work to be performed. Schedules facilitates smooth transition of programmes. Schedules are concerned with technical operation. For example, time tables prepared by educational institution; various events scheduled in any meeting. Training agenda and work schedule prepared in any manufacturing industry represent schedule.

d. Projects:

Division of a larger programme into a number of sub programme is a project. It is also defined as a scheme for investing resources which can be analysed as an independent unit.

i. It is a non-recurring plan.

ii. Each project is distinct, adhoc and temporary.

iii. It involves time-bound activities.

iv. It has distinct mission and has a termination point.

v. It has its own manager, budget and manpower drawn from other departments.

vi. It is a self-contained activity with distinct goal and time frame.

Suitability:

Project approach is suited where:

i. Work done is of special nature requiring expertise from different departments.

ii. Work is of complex nature.

iii. Cost of the work to be executed is high.

iv. Work is to be completed in a fixed time frame.

e. Methods:

A method is a manner prescribed for performing a given task with due consideration to objectives, facilities and total expenditure of time, money and effort.

i. It represents standard ways of doing things.

ii. It seeks to enhance the efficiency of operations.

iii. Methods are prescribed after research and analysis.

iv. There is no penalty for violation of method.

v. It is directly connected with control.

vi. It is mostly related to physical and other tasks.

vii. It provides detailed and specific guidance for day to day operations.

viii. It is more limited in scope than a procedure.

i. It facilitates performance of operation on the planned lines.

ii. It prevents confusion and adhocism.

iii. It simplifies the work.

iv. They serve as uniform norms to guide and control operations and performance.

v. It makes it possible for efficient and consistent work performance.

2. Multi Use Plans:

a. Objectives:

Objectives represent the end towards which all the managerial functions are directed. It indicates the destination of ah organization. The entire planning process begins with the setting up of objectives. In the words of Allen, “Objectives are goals established to guide the efforts of the company and each of its components. It provides a standard against which the organization can measure its performance and results”.

“Objectives are goals; they are aims which management and administration wish organizations to achieve”. — Robert C. Appleby

“Objectives are goals, aims or purposes that organization wish to achieve over varying periods of time”. — Dalton E. Mcfarland

i. Organization has different objectives like earning a given level of profit, expansion of product line, geographical expansion, modernization, service to society and so on.

ii. Objectives have time span.

iii. They form a hierarchy.

iv. The objectives of various segments of an organization collectively contribute to the accomplishment of overall objectives of the organization.

v. There are tangible and intangible objectives.

vi. It may be short term or long term.

vii. Objectives take different forms namely, vision, mission, target standard, goals, quota and deadline.

b. Strategies:

According to Koontz, “strategy is a plan made in the light of plans of the competitor”. It connotes unified, integrated and comprehensive plan of action to achieve an objective or set of objectives. This may also refer to plan devised in response to changes in environmental forces. It deals with how to achieve an objective. For example, passing IAS may be one of the objectives of a person. There are different ways to accomplish the said objective.

Joining a coaching class, choice of options, hardworking, group study, attending mock interviews etc., connotes strategy. Similarly, achieving a turnover of 25 crores is an objective. Strategies for accomplishing the objective include price, opening own outlet, e-marketing, personal selling, advertisement, increasing product line, etc. Thus strategy is born from objective.

Strategies are long term in nature. They are action oriented. They are dynamic and flexible. They are formulated both at top level and middle level managements. They aid in achieving objectives.

c. Policies :

Policies are general statements that guide in decision-making. Policy decisions are usually taken by top level management. It takes the form of written statement. Policies should be clear, stable, understandable and observable. They serve as guides to thought and action. They transform objectives into workable form. They are of different types like originated policies, implied policies, appealed policies and externally imposed policies. There are various phases involved in formulation of policy viz., formulation, communication, application and review and appraisal.

d . Procedures :

“A procedure is a series of inter-related sequential steps that can be used to respond to a well-structured problem”. — Mary Coulter

Benefits or Significance of Procedures:

i. It routinizes recurring jobs so that employees need not find out creative solution to address repetitive problems.

ii. Uniformity – It helps in bringing about uniformity in work performance.

iii. Work simplification – It simplifies the work to be performed and eliminates unnecessary work steps.

iv. Reducing subjectivity – It reduces subjectivity in judgement which facilitates delegation of work to lower level management.

v. Freedom of communication – It speeds up flow of information and enables the top management to practice management by exception.

vi. Creating orderly function – It creates order, tidiness and expediency in the enterprise.

vii. Relief to managers – It relieves the manager of the burden of directing the subordinates due to standardization of steps to be followed by them in performing their work activity.

i. Absence of flexibility – Procedures laid down do not offer any flexibility. Once it is established, it is to be unquestionably followed. Hence it dampens individual initiative.

ii. Rigidity – Procedures creates rigidity in functioning as they do not allow the individuals the scope to interpret it. They are customized.

iii. Absence of periodical review – Procedures formulated need a constant review given the dynamics in a given situation. But they are reviewed.

iv. Red-tapism – Too much of procedures cause delay in decision-making. It may give rise to bureaucracy.

Hallmarks of a Good Procedure:

i. Procedures should be fact based and not be evolved on personal whims and fancies.

ii. It should be focused on accomplishing a desired objective.

iii. It should minimize the paper work.

iv. It should ensure faster flow of work.

v. It should be standardized so as to fix accountability.

vi. It should be stable but should be altered according to changes in work environment. In other words, it should be constantly reviewed.

vii. It should be pragmatic and action oriented.

The term rule may be defined as the prescribed directive to people on their conduct and behaviour. It is a specific instruction of what should be done in a given environment.

i. Rigidity – Rule is a rigid and definite plan. It leaves no scope for discretion or deviation.

ii. Discipline – It brings discipline in the organization.

iii. Uniformity – It ensures uniformity of action in the organization.

iv. Relief to top management – Rule is to avoid repeated reference to higher level authorities for authorization of routine matters.

v. No bias – Rules are applicable to all employees across the organizational hierarchy.

vi. No room for personal prejudice – No personal likes, dislikes, bias and personal judgement can interfere with rules.

vii. Distinct rules for domains – Rules are prescribed for different functional domains.

viii. Violation leads to penalty – It is highly rigid and their non-compliance attracts penalty.

ix. No standardised condition – Rules do not require standardization of condition.

x. No connection with performance efficiency – Rules have nothing to do with performance efficiency.

i. No chaos – Application of rules promotes smooth functioning of an organization. It averts chaos and confusion.

ii. Uniformity of action – It ensures uniformity and consistency in work performance.

iii. Relaxed supervision – It reduces the need for tight supervision.

iv. No scope for interpretation – Rules are specific instructions and commandments. They do not provide any scope for individual interpretation. Hence there is no scope for judgement and bias.

v. No discrimination – Rules do not provide room for partiality and discrimination.

vi. Sense of security – Employees who go by rules gets a sense of security.

vii. Orderly behaviour – It brings in orderly behaviour in the organization.

i. Red-tapism – Too much emphasis on rules breeds red-tapism and bureaucracy.

ii. Demoralizing impact – Punishment awarded while applying rules may result in demoralizing the employees.

iii. Rigidity – Rules are rigid and their non-compliance attracts penalty. They do not give consideration to individual needs and type of situation.

iv. Killing initiative – Rules are said to be killing individual initiative.

v. Mechanical behaviour – It tends to straitjacket human behaviour and make them behave like a robot in an organization.

Types of Planning – Strategic Plans, Contingency Plans, Tactical Plans and Operational Plans

Plans are of various types. Let us discuss them and try to understand their utility in different scenarios.

1. Strategic Plans :

These are long-term plans spanning a planning horizon of about 3 to 10 years. Strategic plans set out the overall direction for the firm keeping in view the long-term objectives to be achieved. In strategic planning, the top management tries to answer such questions as- “What is the environment we are operating in?”, “Where are we heading?”, “How do we take the organization from the cur­rent state to a higher state of success?” The various types of strategic plans are mission (including vision and values), objectives, and strategies.

A desired future state of the organization. Imagination and inspiration are important components of a vision. Typically, a vision can be viewed as the ultimate goal of the organization, one that may take 5 or even 10 years to achieve.

ii. Mission:

The purpose or reason for the organization’s existence, i.e. what busi­ness we are in, what we do, and whom we serve.

iii. Values:

What the organization stands for and believes in. These are the prin­ciples to be observed to meet the vision or principle to be served.

iv. Objectives:

These are the desired outcomes in such areas as customer service, profitability, and social responsibility, that the management of an organization hopes to attain.

v. Strategies:

Once the top management of an organization has created the mis­sion, vision, values and objectives, they are ready to create the strategies or grand plans for achieving them. Strategies are long-term plans which are chosen from a set of possible options after careful analysis of the opportunities and threats offered by the external environment as well as the strengths and weaknesses of the organization vis-a-vis competitors.

The terms objective and goal are often used synonymously. However, there is a subtle difference between the two. Goals are more concrete aims of the organization and more specific than the objectives. Goals are the specific means by which the ultimate objectives of the organization are achieved. For example, during the late 1950s, General Electric (GE) had the objective “Provide fair return on investment” and its corresponding goal as “20% on investment (after taxes); 7% on sales (after taxes)”.

The strategic objectives are translated into (say annual) goals, while the strategy is broken down into (say annual) tactical plans.

2. Contingency Plans :

Today’s business environment has become highly volatile and unpredictable due to global competition. Organizations, therefore, have to be prepared to change their strategies in the wake of drastic changes often encountered in the environ­ment. It is much more beneficial if organizations follow a proactive approach of developing alternative strategies for various scenarios which may prevail over a period of time. These alternative plans are called contingency plans.

Thus, contingency planning involves identifying alternative courses of action which can be implemented if and when the original plan proves inadequate because of changing circumstances. Contingency plans are kept ready alongside the business grand strategy currently under implementation.

3. Tactical Plans :

The strategy developed by the top management is helpful in winning the corpo­rate “wars” against the competition, while the tactical plans help in winning the shorter duration “battles”. As we know, winning many battles leads to winning the war. In a similar way, well thought of tactical planning (say for a duration of a year) derived from the business grand strategy aids in long-term survival and growth of the organization.

Strategic planning has the focus of providing directions on what the organization would be doing in the future (in the long-term), while tactical planning is all about deciding how these activities would be accomplished (in the medium-term).

For example, the strategy of Laxmi Niwas Mittal group for the past decade has been to grow inorganically by acquisitions of steel companies worldwide. The successful acquisition of Luxembourg-based Archelor in 2006 was a tactical plan in line with this overall strategy through which Mittal Steel acquired many plants over the years in Mexico, Canada, Germany, and Kazakhstan.

4. Operational Plans :

Operational plans (also called functional plans) are very specific, focused and short-term plans in line with the tactical (say annual) plans. These plans per­tain to the various functional departments of an organization like finance, opera­tions, marketing, HR, and IT. The time duration covered by these plans can be monthly, weekly, or even daily. For example, the production plans prepared by a manufacturing organization fall into this category.

If the tactical goal is, say, to increase the revenue by 20% this year (in line with the business objective of, say, doubling the revenue in the coming 5 years) and the corresponding tactical plan is to gain 10% new business (from new clients) while increasing 10% business from existing clients, the operational plan of the marketing department may be to create a new advertisement for electronic media to attract new clients while arousing the interest (and business volumes) from existing clients.

Similarly, the corresponding operational plan of the production department may be to reduce production costs by 10% which in turn will help in offering better pricing to the clients and thus, in attracting new clients would be easier (while gaining more business from the existing clients). Hence, operational plans strive to utilize the available resources optimally in order to support the tactical plan (and achievement of the tactical goals).

There are two types of operational plans, namely standing plans and single-use plans. Standing plans (also called continuing or on-going plans), are usually made once and retain their value over a period of a year (or a couple of years), while undergoing periodic revisions and updates during this time frame. These periodic revisions and updates ensure that the standing plans remain in tune with the (annual) tactical plans.

There are basically three types of standing plans:

i. Procedures,

ii. Policies, and

iii. Rules and regulations.

i. Procedure :

A set of step-by-step directions that explains how activities or tasks are to be carried out is called a procedure. By defining the steps to be taken and the order in which they are to be done, procedures provide a standardized way of responding to a repetitive problem. For example, standard operating procedures (SOPs) are pictorially displayed over complex machines in factories to aid (as well as remind) the operator to follow the exact sequence of steps as explained there. This becomes a useful mechanism to ensure quality of products processed by the operator on the machine.

Similarly, the purchase departments of an organization usually have standard procedures to be followed. For example, in India, the public sector units (PSUs) like Indian Oil Corporation Ltd (IOCL), Steel Authority of India Ltd (SAIL), Bharat Heavy Electricals Ltd (BHEL), etc. have the standard procedures prescribed by the Comptroller and Auditor General of India (CAG) to purchase items from vendors.

As per this procedure, a PSU has to float an open tender and invite proposals from vendors. Out of the proposals received, the procedure prescribes the selection of the lowest bidder (popularly known as the LI). The merits (and demerits) of this procedure are however debatable.

ii. Policies :

Policies are guides to managerial action. Policies are general statements that explain how a manager should attempt to handle routine management responsibilities. An organization may have policies in a number of areas- quality, environment, safety, human resources, etc. These policies guide day-to-day decision-making. For example, an organization may have the policy of providing “equal employment opportunity to all” implying that no biases would be done in relation to caste, creed, religion, or nationality.

iii. Rules and Regulations:

These are explicit statements that tell an employee what he or she can and cannot do. These are “do” and “don’t” statements put into place to promote the safety of employees and the uniform treatment and behaviour of employees. For example, it is a rule in Maruti Suzuki plant at Gurgaon that anybody entering the factory premises must wear a helmet provided by the main gate security in order to ensure the safety of the visitor inside the factory.

Single-use plans, as the name suggests, are made for activities which do not recur or repeat. Thus, such plans are required for activities which have one-time occurrence.

The types of single-use plans are:

a. Budgets,

b. Projects, and

c. Programmes.

These are financial plans which predict sources and amounts of income and how much they are used for a specific organization, activity or department. For example, an annual budget is announced by the Union Railways Minister for the Indian Railways. Every year, the Railway budget has some unique features or the other, which distinguish it from the budgets for the previous years.

b. Project:

It is a temporary endeavour undertaken to create a unique product or service. Due to the uniqueness of the product or service to be created by it, every project is unique in itself and thus, qualifies to be categorized under single-use plans. For example, the Indian Oil Corporation Limited (IOCL) has numerous refinery and pipeline projects, many of which have been completed while the others are on-going.

c. Programme:

It is a schedule or an ordered list of events to take place. For example, an inauguration programme for a new facility which includes the ribbon cutting, speeches by key officials/invited guests, tour of the new facility for the guests, etc. in a predetermined sequence.

Directional Plans versus Specific Plans :

McCaskey (1974) challenged conventional descriptions of planning as necessarily tied to setting specific goals (specific plans). In his view, instead of specifying concrete measurable goals, the planners should work more from who they are and what they like to do. This type of planning without goals is called planning from thrust or directional planning which points to the positive characteristics of the process.

A device sometimes used to identify direction for an individual is to consider events and activities in the recent past which have been most deeply satisfying to him. From those events, the individual tries to identify a pattern which describes a direction for him. Objects which lie along the path in which the direction is moving may become goals. But even when goals are chosen, one goal might easily be substituted for another as long as it lies on the general path of the direction.

Directional planning thus has a lot of flexibility compared to specific planning, however it is much more stressful and cumbersome for planners who are accustomed to planning with specific goals. Therefore, directional planning is more suitable for top management who are involved in strategic planning and the entrepreneurs creating their new business ventures.

Managers in lower hierarchies of the organization, involved in tactical and operational planning are better off working with specific plans based upon specific goals (which are guided by the overall directional plans provided by the top management).

Figure 2.2 shows an example to demarcate between directional and specific plans. The directional plan only provides a general direction for a traveller in a city map depicted in this figure. The traveller has the liberty to choose any set of routes suitable to him as per personal preference. However, in a specific plan, the traveller is given a specific route between the source A and the destination B (a predetermined goal).

Types of Planning – 11 Types  

There are different ways in which plans are classified. Basically plans are of two types, formal and informal. Formal planning is comprehensive and rational. Informal planning is exclusive for managers who develop plans but never formally put them on paper and may not even communicate them to others. The informal planning remains only within the minds of the managers as an image of what should or shall be done.

It lacks definiteness expression and even rationality in the sense that it is instinctive in nature and not systematic. But, however, it is interesting to note that, at times, informal plans are more significant than formal ones. Another classification of planning can be done according to the time dimension i.e. – (1) Short-term plans extending up to one year, (2) Medium-term plans of more than one year but less than five years, (3) Long-terns plans of five years or a longer period.

Plans could also be classified in terms of functions like production planning, marketing planning and so on as against overall company planning.

Another way to classify plans is to divide them into:

1. Objectives,

2. Policies,

4. Procedures,

5. Programmes,

6. Schedules,

7. Budgets,

8. Methods,

9. Strategies and tactics,

10. Standards,

11. Forecasting.

These are now briefly described below:

Type # 1. Objectives or Goals:

The end results to be achieved or towards which an activity is to be directed, are described as objectives or goals. Objectives are plans for the futures that will serve to provide direction for subsequent activity. We have a hierarchy of objectives. Primary or basic objectives are determined by top management. Each department has its own objectives within the framework of basic goals.

Objectives of the organisation have to be crystalized for the enterprise as a whole which would constitute the basic plan of the organisation. This requires creative thinking and foresight. These objectives constitute a part of the planning activity.

Effective management is always management by objectives, corporate objectives influence the management philosophy and practice. They have a great influence on the organisation, policies, personnel and leaderships as well as managerial control. All other elements of planning such as policies, procedures, rules and budgets assist and guide in selecting those alternatives that permit the achievement of predetermined objectives in the most economical and efficient manner. They guide on the path leading to achievement.

Type # 2. Policies:

Policies are general statements aimed at guiding and thinking during making decisions. It is a guide to action or decision of Manager. They constitute broad boundaries, permitting initiative of the Manager to the extent of interpreting the particular policy. Policies need not necessarily be written as they may be implied from the past actions of managers. Policies are directives, providing continuous frameworks for executive actions on recurrent managerial problems.

A policy helps in keeping work in line with objectives. Both objectives and policies guide the mental and physical actions of a manager. Policy assists decision making, but there may be deviations in certain extraordinary circumstances. That only means there is a limited scope for discretion in dishonoring a policy.

Type # 3. Rules:

Rules are also looked upon as plans as they prescribe the course of action required. Rules are related to procedure as they guide action but there is no time sequence attached to them.

Rules are the simplest type of plan chosen from alternatives. Rules provide for a specific action to be taken or not with respect to a situation. It is more rigid and more specific than policy. It guides action but provides no discretion in its strict application. Rules are essential for discipline and smooth operations of the business. A rule is designed to define in advance as to what alternative must be selected or what decision must be made. Rules are related to procedure.

Type # 4. Procedure:

Procedure is another kind of plan as it involves selections and establishment of a logical series of tasks within the framework of predetermined policies and objectives. Procedures are, therefore, more definite than policies. It is a standing action plan as a means of implementing the policy.

For example, the sales department lay down a policy to execute all orders within 24 hours. The procedures of execution of orders will prescribe a sequence of steps that must be followed after the receipt of an order till the dispatch of goods to the customer. These chronologically arranged series of steps or tasks constitute a procedure. Procedures are, therefore, more definite than policies, defining specific activities to be completed towards a predetermined goal.

Procedures exist throughout the organisation. Once a procedure is established, it ensures uniformly high level of performance. It results in work simplification and eliminates overlap or duplication of efforts. A procedure lays down the manner or method by which work is to be performed in a standard and uniform way.

Type # 5. Programmes:

A programme integrates policies, procedure etc. required for effecting a certain course of action. It thus integrates activities which are diverse but related. It may be looked upon as “planned actions” integrated into a unity and designated to bring about the stated objective. In other words, it is a sequence of activities designed to implement policies and accomplish objectives. It gives step by step approach to guide action necessary to reach predetermined targets.

It is an instrument of coordination i.e. a timetable of action. A good programme ensures smooth and efficient operation. Procedure tells how it is to be done whereas programme tells what is to be done. It enables a manager to prepare himself carefully and systematically for difficulties before they arise.

Type # 6. Schedules:

Schedules are the timings fixed for completing the programmed operations. They lay down timings when each step in a programme is to be executed. Schedules are necessary part of planning in order to ensure continuity in production, to secure constant flow of product into market and to avoid delays in various operations.

A schedules specifies the time when each of a series of actions should take place. Once the tasks to be done and persons who must do them are clear according to our standing plans, scheduling may be only element needing immediate management attention.

Type # 7. Budgets:

Budget is described as both a planning and a controlling device. A budget is a project of defining anticipated costs of attaining an objective. It is an appraisal of expected expenditure against anticipated income for a future period. A budget is a statement of expected results expressed in numerical terms like rupees, product units and man hours. It is also used as an instrument of managerial control. It provides the standard by which actual operations can be measured and by which variations can be checked.

But it should not be forgotten that preparing a budget is clearly planning. A budget is a forecast of an enterprise to make, in advance, a numerical compilation of expected cash flow, expenses and revenues, capital outlays or machine hour utilisation, etc. Budgeting is essential for control coordinates the activities of various departments of a business enterprise by adjusting and incorporating the departmental budgets into the master budget.

However, to be effective means of planning budgets should have functional flexibility. They should not be rigid instruments. They should be able to cope with unforeseen circumstances within a predictable range of activities.

Type # 8. Methods:

The method prescribes specifically and in detail how a task is to be performed constituting the best manner. Methods are sub-units of a procedure. They show clearly as to how a step of a procedure should be performed. They indicate the techniques to be employed to make the procedure effective. The primary focus is on finding out the best way of doing a piece of work.

For example in a manufacturing concern, product sampling may be a method used as a part of quality control procedure. A method is the manual or mechanical means by which each operation is performed. It means an established manner of performing an operation. Thus, a method is more limited in scope, than a procedure, because it deals with a task that is only one step of a procedure.

For example in the procedure for processing an order, there are methods for acknowledging the incoming order, checking the credit status of the customer, preparing the sales invoice and distributing its copies.

Type # 9. Strategies and Tactics:

“Strategy” is a military term which means to counter the moves of the enemy forces. This term is widely used in business also. A strategy involves preparing oneself for unforeseen and unpredictable events. In other words a strategy means placing oneself in the position of competitors and seeing what one’s own reaction will be in a similar situation. Strategies may be regarded as interpretative planning or plans made in the light of the plans of a competitor.

They are, therefore, a special type of plans based on the background of the plans of the competitor. Obviously, the best kind of strategy can be developed. The Manager has perfect knowledge of his competitors, plans. He can then weigh his own plan in the light of those of his competitor, modify them to take advantage of what his competitor is planning to do and reach his own goals with greater certainty.

Strategic programmes are planned in accordance with top management policies, for accomplishing the company’s objectives by properly managing resource allocation, environmental adaptation, internal co-ordination and organisational strategic awareness. Operational planning or tactical planning which systematises the operational activities to produce best results, is effectively guided by strategic planning while strategic plans are designed to accomplish the broad objectives of the organisation.

Operational, plans provide details of how objectives can be achieved at the operational level to fulfill the expectation of the strategic plans. Thus operational tactical plans are meant to achieve the objectives enshrined in the plans through effective operations.

Type # 10. Standards:

A standard is a measure of the level of expected achievement. It is a model for comparison or evaluation. Standards are therefore very useful in measuring deviations from the plan. Basically standards are set up to compare the standard with actual achievement and if there is any deviations, to find out the measures to do away from deviations.

Circumstances, situations are always changeable, therefore, everything may not happen according to plans. The standards help in measuring the achievements as well as evaluation of achievements. It is an important tool in the hands of management.

Type # 11. Forecasting:

Forecasting is an integral part of managerial planning. The purpose of forecasting is to offer the best available basis for management’s expectation of the future and to help management understand the implications for alternative course of action.

Forecasting implies the act of making a detailed analysis of the future to gain a foresight of background situations and talents forces. Planning is essentially based on forecasting. If the future could be forecasted accurately, planning would be relatively simple. But the future is unforeseen, uncertain, and unpredictable and thus creates difficulties in designing the plans. The need of forecasting is self-evident in the field of planning. But it has values otherwise also.

It improves quality of management by compelling it to look into the future and provide for it. The very act of forecasting may disclose areas where control is lacking and where adequate control is necessary. It helps in smooth functioning of an enterprise. Henri Fayol speaks of provenance as the essence of management i.e. looking ahead which includes both assessing the future and making provisions for it. He further refers the plan as the synthesis of the various forecasts whether short or long term, special or otherwise.

It is interesting that Fayal recommends yearly forecasts and ten yearly forecast, the latter being revised at least each five years and earlier one if proved necessary by the yearly ones. Each forecast is to include a wide range of subsidiary and elemental forecasts, comprising of such data as capital output, production, costs, selling price and sales etc.

Although accurate forecasting is highly desirable, yet it is always subject to a degree of error. Guesswork can never be omitted from forecasts, although guessing can be reduced to a minimum. Forecasts should therefore, carefully be made and still more carefully be relied upon by the managers.

Related Articles:

• Classification of Plans: 4 Types | Management
• Top 3 Planning Activities Carried out in Firms | Management
• Planning: Meaning, Types and Advantages
• Steps to Make Planning Effective | Planning | Functions | Management

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Formal vs. Informal Communication: Differences, Similarities, and Tips for Improvement

Sudarshan Somanathan

Head of Content

August 9, 2024

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If you ask employees what makes them work better, they might say flat hierarchies, supportive management, or even office culture. But what they’re really suggesting is efficient communication. 

From friendly interactions and teamwork to regulated channels and formats—clear communication ensures that ideas and feedback are shared effectively, making everyone’s job easier and more impactful.

According to Grammarly’s The State of Business Communication report, 93% of business leaders believe their ability to work effectively hinges on the way people communicate around them. 

Communications in an organization are either formal or informal. Both are important within contexts, but things get dicey when people conflate the two

In this article, we’ll discuss formal vs. informal communication, explain when to use either, and help you improve your overall communication skills within an organizational setting. 

Types of formal communication

Characteristics of formal communication, examples of formal communication, advantages and disadvantages of formal communication, the role of formal communication in organizations, types of informal communication, characteristics of informal communication, examples of informal communication, advantages and disadvantages of informal communication, the role of informal communication in organizations, key differences between formal and informal communication, similarities between formal and informal communication, balancing formal and informal communication in internal settings, examples where formal and informal communication intertwine, tools for effective communication, improve internal communication with clickup.

Understanding Formal Communication 

Most workspaces have official communication protocols that reinforce the company’s image and culture, which are designed to reduce errors and distractions in employee interactions. 

Formal communication refers to a structured way of exchanging information through official channels . These conversations are monitored and trackable and follow a pre-defined hierarchy . Email chains, task requests, video conferences, whitepapers, project updates, and company-regulated chat channels are some prominent examples. 

It’s completely practical and aims to formalize communication to share information as the company wants. 

Depending on how the ideas are shared, formal communication can be of three types:

• Vertical: When formal communication takes place across organizational levels in a hierarchical chain. Superiors can talk to their subordinates (top-down), and subordinates can share ideas with their superiors (bottom-up) 
• Lateral or Horizontal: When employees from different departments working at the same level communicate with each other. For example, product development team members engage in collaborative communication with their marketing colleagues to orchestrate a product launch
• Diagonal or Crosswise: This means that employees from different departments working at various levels can communicate diagonally. An example would be a product team lead talking to a sales development representative (SDR) to determine the feature requests to prioritize in the next sprint

You can identify formal communication by identifying some distinct traits:

• Consistency around protocols and professional vocabulary
• Asynchronous and approval-based nature , often making it slow and laborious
• Written form of execution, which makes it detailed, task-oriented, and easily referenceable
• Focus on privacy, which makes formal communication an ideal option for a need-to-know basis approach to project confidentiality

A good way to identify formal communication is to see whether it’s being officially documented. The supporting documents within the internal communication matrix may include 

• email threads
• orders and inventory updates
• task requests
• asynchronous video communications and live webinars

Formal communication effectively smooths internal operations between departments, colleagues, and hierarchies. 

Since this communication flow is all about systems and guidelines, a streamlined communication strategy can help you push information more efficiently. As an all-in-one productivity management platform, ClickUp focuses heavily on team communication and ways to make workspace interactions better. 

For instance, the ClickUp Internal Communication Template is tailor-made for people who want to establish a strong company culture internally.

With this template, you can implement how information should be passed around, scale the communication touchpoints to keep up with complexities, and comply with various data privacy laws—all without starting from scratch. 

Here’s how you can go about it:

• Set communication goals, tasks, and subtasks with ClickUp Goals and ClickUp Tasks , delegate tasks to stakeholders, and set timelines and deadlines with ClickUp Calendar
• Set up internal channels such as emails, chats, and meetings and prescribe thumb rules to contain information flow
• Modify custom statuses, fields, and views to sift through updates and monitor the content

This template is great for maintaining transparency across the board and helping employees be productive at work. It also serves as a centralized hub for keeping company-wide conversations, announcements, and communications-related documents in one place.

Formal communication has strengths and weaknesses. Understanding these pros and cons is crucial for knowing when to use official predefined channels.

Advantages of formal communication 

Formal communication is an essential part of a high-functioning company because

• It fosters discipline and professionalism among workers
• It brings transparency and efficiency to conversations
• Since most of it is documented , it supports audits and data compliance

Disadvantages of formal communication

Having said that, the factors that make formal communication so effective also make it rigid. 

• Such communication has little room for individuality as it prioritizes work over personal feelings and opinions
• The long-running threads maintained for the sake of regulations can eat up a lot of time 
• It may appear cold and discourage employee bonding  

Also read : 10 Best Team Communication Apps and Tools in 2024

It’s hard to imagine a company without a formal communication strategy . Adherence to these rules means that information is shared transparently, without distortion, and in ways that can be tracked for reference.

In organizations with complex internal hierarchies, it also establishes authority and fosters employee discipline. 

Understanding Informal Communication 

Not all conversations need to go through formal channels. Some personal and instantaneous conversations get the job done by saving time. 

You must have heard of grapevine communication —the unofficial ways in which colleagues share information with each other.

Informal communication is the unofficial flow of information based on the social relationships shared by employees. It’s spontaneous, free-flowing and rapid. Verbal communication about tasks, helping out a colleague at work, or having stress-free chats in informal language during lunch break—anything that doesn’t follow company-regulated communication channels, is part of informal communication. 

Informal communication doesn’t follow strict rules or structures, making it highly flexible and dynamic. It can take many forms, each serving different purposes and contexts within a workplace. 

Here are its four main types:

• Single-strand chain: When a person says something to another person, and that person relays the same message to someone else, the chain continues. It’s the most natural type of informal communication
• Cluster chain: When someone confides in their trusted peer, and the peer shares the information with other people they trust. This type of conversion is based on trust but gets passed around between selected groups of people. An example would be the manager separately discussing client changes with the product team and the product team members discussing the same with the design team  
• Gossip chain: The most common type of informal communication—gossip chain involves people talking to groups of people and those groups sharing the same with other groups of people. It’s the fastest way to disseminate information informally 
• Probability chain: Sometimes, an employee can randomly pick a few colleagues to share information, and those colleagues continue the trend by randomly relaying the content to others. An example would be someone mentioning new HR policies to a colleague who sat at the same table at lunch

Informal communication happens beyond emails and dashboards, and it has some key traits for easy identification:

• It’s instant, personal, and carefree
• As a synchronous mode of communication, it cuts down the time needed to go through the formal route, making employees more productive
• Informal communication is good for employee morale as they have friends to share feelings with
• Despite the comfort of informal talks, it might be inaccurate since the content is not documented, verified, or trackable 
• Disgruntled employees often create communication challenges by spreading misinformation through informal channels

Any informal conversation not required to be logged into the system is part of informal communication. This may include

• Verbal updates on tasks and projects  
• Water cooler talks and hallway greetings
• Group lunch and company retreats 

You might find colleagues talking informally about how they spent the weekend, the game they watched last night, or the new HR department policy.

Informal communication can be incredibly effective, but its success largely depends on the context in which it’s used. Understanding where informal communication excels and where it might fall short can help you leverage its strengths and mitigate its drawbacks.

Advantages of informal communication

Informal communication supplements the limitations of formal communication. 

• It makes the office experience more natural and conversational
• It helps employees open up to their colleagues and creates bonds that help during teamwork
• Informal communication builds confidence and a sense of belonging —two key things you find in highly productive employees.

Disadvantages of informal communication

However, informal communication is not without its flaws. 

• It’s unregulated and can cause misinformation to spread fast
• If employees are too invested in small talk and gossip, that may negatively impact team culture and productivity
• Leadership cannot track informal convos, so there is no accountability

A lot of flaws in informal communication stem from a lack of structure in internal communication, as updates get passed around verbally. One of the best ways to mitigate that is to use a project plan communication template , such as the ClickUp Employee Communication Template . It’s a simple yet comprehensive way to disseminate information so the relevant people stay updated with authentic details. 

As you might have guessed, HR teams find this one particularly helpful. 

Here’s how you can make the best use of it:

• Plan and implement your communication strategy using the Communication Plan Strategy View
• Use the ‘Getting Started Guide’ view to explain the communication matrix and ground rules to avoid miscommunication 
• Use the ‘Communication Updates’ view to track old and upcoming updates 
• Reduce the need for informal communication by monitoring interactions in ClickUp Dashboards
• Create an easy-to-follow visual layout by adding custom statuses to monitor the progress of tasks and subtasks within your communication plan

This template merges project management with employee management for seamless communication. 

At its best, informal communication builds connections with other employees. It breaks down hierarchies, facilitates the free flow of information, and fosters empathy. A gentle pat on the back for good work, helping a junior solve an issue, or lending an ear to make peers feel heard are gestures that are not entirely possible in a formal setting.

The Hawthorne Studies, conducted by Elton Mayo, demonstrated that informal communication affects the development and reinforcement of performance standards and member expectations within workgroups. This suggests that informal interactions can shape organizational culture and norms more effectively than formal communication

Formal vs. Informal Communication 

Workplaces cannot choose a default channel over the other as both types of communication are important in contexts. Let’s understand where they differ and how to switch between them.

Here is an overview of the key differences between formal and informal communication:

Despite their markedly different approaches, formal and informal communication work together to establish a positive company culture. 

• They give people the freedom to share ideas and contexts through various channels and formats
• Both formal and informal communication help in decision-making and productivity
• People absorb information faster when you combine different channels for dissemination  

The secret to a highly productive workplace is balancing formal and informal communications. If you’re struggling to understand when to use which format, look for company policies on official communication. Formal communication strategies are often well-documented by HR and team leads. You’ll find approved channels, timelines, processes, and rules in them. 

As a general rule of thumb, if something is strictly work-related, requires others to know, and is confidential, it goes through the formal channel. 

The key difference between formal and informal communication channels is in your headspace. You should use informal communication when you’re taking a break or quickly catching up with a coworker. But remember not to overshare through informal channels or act on information you cannot verify . By observing when and how others use formal and informal communication, you can learn to balance them.

Imagine Sarah, a project manager, juggling both formal and informal communication in her daily work. She starts her day with a structured team meeting, following a strict agenda and documenting action items. Later, she catches Bob from marketing in the break room, and they brainstorm a brilliant campaign idea over coffee. This blend of formal structure and casual interaction keeps her team aligned while sparking innovation.

Meanwhile, Alex, a new hire, experiences the power of mixed communication styles firsthand. He attends a formal onboarding session, digesting company policies and procedures. But it’s the informal lunch with his mentor, Javier, where he really learns the unwritten rules of office culture. As Alex navigates his first performance review—a formal process—he’s grateful for the informal feedback Javier has been providing all along, helping him feel prepared and supported in his new role.

Also read : 10 Best Workplace Communication Tools and Software in 2024

Establishing communication guidelines is difficult, and it’s more difficult to maintain them over time. As the company grows in terms of operations, workforce, partners, and clients, little gaps start to appear that lead to miscommunication, false information, and lack of clarity. 

Using an internal communication tool like ClickUp will simplify information flow. Here’s how:

• Use ClickUp Docs to strategize communication plans, invite people to collaborate on the communication wiki, add relevant links and files, and use the rich text editor for better navigation
• Run through content creation and distribution by using ClickUp Brain . Ask the AI tool to analyze formal communication plans and highlight areas for improvement, create content outlines, and even ask it to suggest the next steps. It’s your AI assistant that lives in your ClickUp space, ready to serve you relevant content
• Use ClickUp Chat to bring all the real-time conversations in one place. You can assign tasks, share project-related content, create individual chat views, and manage access privileges. This greatly improves the speed of formal communication

• For conversations where text messages don’t capture the complete context, try ClickUp Clips . Record your screen and walk your team through instructions, training modules, software features, marketing plans, project workflows, feedback, and more, with supporting voiceovers

• Switch between Kanban board, list, table, and Gantt views to help stakeholders understand the work in progress and how to communicate with other stakeholders
• Visualize strategic initiatives with ClickUp Whiteboards so stakeholders get the correct information from the beginning. Add ideas, arrange them with a drag-and-drop feature, and turn them into individual tasks. It’s easy to follow and reduces the time wasted on email chains

Instead of starting from scratch, try the ClickUp Communication Plan Template . You can further modify and develop this fully customizable document to suit your use cases. 

For example, suppose the sales manager is implementing a program for a new demographic. In that case, they can explain to SDRs how to communicate, follow protocols, and update deal status. This way, SDRs will know what entails formal communications and what they can discuss informally. 

With this documented plan of action, you can

• Create a framework in ClickUp Docs for teams to follow a consistent communication strategy with 
• Establish roles and stakeholders through ClickUp Tasks so people know what to discuss and with whom
• Define formal communication channels and edit custom views and fields for better visibility 
• Use ClickUp Milestones to track and measure performance 

The best part about the template is that companies can use it to organize internal communication and fix their messaging to customers and vendors. 

Honest, transparent, and real-time conversions build corporate culture and help employees become more productive. Both formal and informal channels encourage employees to be at their productive best. 

As an enterprise collaboration tool , ClickUp aids managers and employees in communicating efficiently without switching between too many platforms. It has a series of digital tools made for on-the-go communications. 

Sign up to ClickUp today and strengthen your internal communication. 

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How to Write an Informal Business Report

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To see what Databox can do for you, including how it helps you track and visualize your performance data in real-time, check out our home page. Click here .

The main problem with writing only formal reports in your company is that you won’t be able to quickly and efficiently communicate important urgent messages and the latest updates to your management and team leaders.

You always have strict rules and formats that you have to follow, which will disable you from conveying crucial information in a timely manner.

The biggest issue is that your management needs that information in order to make the day-to-day decisions and create efficient strategies.

This problem can easily be solved by implementing informal reports.

Informal reports are shorter reports that are used for quickly communicating recent findings and information to internal members of the company. They are much faster to write since you won’t have to follow any strict guidelines.

In this article, we are going to walk you through what informal reports are, why you should use them, and how to create them.

What Is Informal Reporting?

What is an informal business report.

• What Is the Purpose of an Informal Business Report?

Informal vs. Formal Business Reporting: What Is the Difference?

Informal report types, how to structure an informal business report, how do you write an informal report for a company, how to share informal reports, improve business reporting with databox.

Informal reporting is a type of business reporting where the information presented doesn’t need to be formatted or structured in any specific way. These reports include critical but brief information.

They are typically much shorter than formal reports and have lesser sections. In recent years, informal reporting has become one of the most common types of business reporting within companies.

While formal reporting is a great way to present some important findings, not every piece of information has to be formally presented. In some situations, it’s better to convey data and information quickly rather than formally. This is why many employees will overlook the formal structure and use informal reports to maintain quick and efficient communication.

By using informal reporting, you can communicate your findings without having to waste time on specific rules, formats, or structures.

However, these reports are only useful for internal purposes. Conveying information through informal reports to external parties can make your business look unprofessional.

Related : How to Write a Great Business Development Report: A Step By Step Guide with Examples

Informal business reports are the shortest and simplest types of business reports , and they are used for presenting certain information in a brief manner. They usually come in the form of person-to-person communication and they do not have any strict formation or structure.

You can create these types of reports rather quickly and you won’t need to do any comprehensive planning. They are typically from one to ten pages long and have fewer sections compared to formal reports. For this reason, they are also referred to as short reports.

Informal reports also don’t strictly follow any writing style – the information is presented in a natural language.

The main goal of informal reports is to quickly communicate important messages to internal members of the company. Adding any sort of personal comment or opinion is unnecessary.

When it comes to the nature of the report, they are either informational or analytical.

Informational informal reports include routine information that should allow company members to acquire additional insight into specific cases. The sections are typically introduction, main findings, and conclusion.

On the other hand, analytical informal reports provide answers and solutions to specific issues. It includes all the same sections as the informational report, with the addition of a ‘recommendations’ section.

In the context of business operations, for example, running scheduled reports in Salesforce can also be a valuable tool for generating both informational and analytical informal Salesforce reports , facilitating efficient communication within your organization.

Related : How to Write a Great Business Consulting Report: Best Practices and Report Examples

When to Use an Informal Business Report?

The main purpose of informal reporting is to quickly communicate relevant findings and information to internal members of the company.

Informal business reports include information and data that can be critical for making day-to-day decisions and developing operational strategies.

Employees who create informal reports only focus on making the information clear and understandable, they don’t waste time on following any structures that could delay the conveyance of the message.

Formal reports have a similar objective, but when creating them it is impossible to overlook the structure and formatting guidelines.

By implementing only formal reports, companies risk losing the efficiency and quickness that informal reports bring to the table.

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Like most marketers and marketing managers, you want to know how well your efforts are translating into results each month. How much traffic and new contact conversions do you get? How many new contacts do you get from organic sessions? How are your email campaigns performing? How well are your landing pages converting? You might have to scramble to put all of this together in a single report, but now you can have it all at your fingertips in a single Databox dashboard.

Our Marketing Overview Dashboard includes data from Google Analytics 4 and HubSpot Marketing with key performance metrics like:

• Sessions . The number of sessions can tell you how many times people are returning to your website. Obviously, the higher the better.
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• Marketing Performance KPIs . Tracking the number of MQLs, SQLs, New Contacts and similar will help you identify how your marketing efforts contribute to sales.
• Email Performance . Measure the success of your email campaigns from HubSpot. Keep an eye on your most important email marketing metrics such as number of sent emails, number of opened emails, open rate, email click-through rate, and more.
• Blog Posts and Landing Pages . How many people have viewed your blog recently? How well are your landing pages performing?

Now you can benefit from the experience of our Google Analytics and HubSpot Marketing experts, who have put together a plug-and-play Databox template that contains all the essential metrics for monitoring your leads. It’s simple to implement and start using as a standalone dashboard or in marketing reports, and best of all, it’s free!

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When comparing informal and formal reports, there are a few differences that stand out.

However, the main difference between the two is the one we already mentioned – structure.

Employees who conduct formal business reports have a preset structure and a strict format that they have to follow. Informal business reporting has neither.

Also, formal reporting is most often used to communicate information to external parties, while informal reporting is more suitable for internal parties.

By using formal reports, employees aim to help the management make better strategic decisions. On the other hand, informal reports shift the focus to operational decisions.

The size of the report is also one of the bigger differences. Formal reports can take up dozens of pages while informal reports are typically only 1-10 pages long. 

Companies are generally more reliant on informal reports since they are necessary for making standard day-to-day decisions.

Related : What Is Strategic Reporting? 4 Report Examples to Get Inspiration From

There are several types of informal reports that you should consider before you start writing them.

Let’s explain how each type works.

Meeting minutes

Expense reports, status updates, trip or conference reports, proposals or feasibility reports.

Meeting minutes are standard practice in companies and it involves taking notes on meetings that require official recording.

Informal meeting minutes reports are used to highlight the key findings that were discussed, proposed, or voted on during the meeting. It is essentially a summary of the meeting’s discussion, ideas, and outcome.

This type of informal report is strictly informational since it only involves summaries, there isn’t an attendee statement collection included. 

Informal expense reports are the most similar to formal reports since they do have a prescribed format that makes the writing process easier.

These reports typically include the exact amount of expenditures categorized by expense types. There shouldn’t be any sort of free writing included in the informal expense report.

Status update reports have the purpose of informing management and team leaders on all the regular updates that are taking place within the company.

These reports are purely informative and they provide information to internal parties about certain business situations or inform external parties on how specific projects are progressing.

Trip or conference reports are informal reports that provide information on why you attended a specific conference, who did you meet, and what did you learn.

You can also include some suggestions or recommendations based on the findings and knowledge you acquired.

An informal feasibility report is used for proposing examining the different solutions to occurring issues in the business. It determines which solutions are the most viable and have the highest chance of resolving the issue.

This type of informal report is mostly integrated for smaller projects. Feasibility reports are also strictly analytical since they propose the next steps based on previous analysis.

Here is a good example of how you can structure your informal business report:

• Introduction or background
• Support or reasons

Recommendations

• Conclusion or summary

Now let’s talk about these sections a bit more in-depth.

Introduction or Background

Support or reasons, conclusion or summary.

The introduction will be the first section of your informal report and you can use it to describe the reasons why you are conducting the report.

For reports that are a bit more complex, you can also add a background, specific goal, or problem statement.

In this section of the report, you should include all the relevant data, information, facts, and findings.

Some practitioners make the mistake of simply presenting a collection of data in this section, but this isn’t enough. You should also include a summary of your main findings and ideas based on research.

Also, you can choose to add a research methodology as well.

The ‘Recommendations’ section only appears in analytical informal reports. It is primarily used to display how the data that you gathered backs up the given recommendations.

Keep in mind, making recommendations without backing them up with data can make your report look extremely unprofessional.

This is the final section of your informal report and you should make it as short as possible. Give a brief overview of the pain points that you have gone through and include a short summary.

Before you start organizing and structuring your report, you should always first think about the audience that will read it. Based on the audience, you will know which information you have to include and why the readers will be interested in going through the report’s content.

For example, if you assume that the reader’s reaction to the report will be either neutral or positive, you can consider adding the recommendation section somewhere at the beginning of the report. The section should be followed by sufficient data and evidence to back it up.

On the other hand, if you expect the audience to have a negative reaction, it’s better to position the recommendation section at the end of the report.

This way, you first introduce all of the important information, research, and findings, which would eventually lead the audience to come up with a similar conclusion to yours. Even if they don’t particularly like the idea, they will know it is the right conclusion based on the data.

Compared to other types of business reporting processes, writing an informal report is much easier due to the lack of strict rules and guidelines.

However, that doesn’t mean that a certain amount of planning isn’t involved. To write an informal business report, it’s best to follow the PWR rule that stands for Planning, Writing, and Revising.

Follow these few steps to create a great informal business report.

Step 1: Planning the Report

Step 2: writing the report, step 3: formatting the report, step 4: revising the report.

If it’s your first time conducting an informal business report, check beforehand if there is a certain template that your organization expects you to use.

This isn’t the same as having strict rules about the structure, it’s just a form that could be helpful when organizing the report.

Next, you want to make sure that you understand what the purpose of the report will be.

For instance, let’s say that you are one of the employees in the IT department and there has been a sudden increase in laptop malfunctions. Your boss asks you to write a report on this issue. First, you need to determine whether your boss wants to know the cause of the malfunctions, or what happens with the laptops after they are received (the way they are handled or stored). Depending on what the purpose of the informal report is, you will have to gather different data and conduct different research.

After determining the purpose, you should move on to data collection. Once you gather enough data to analyze, you can create an overall outline of the report.

Avoid adding any side issues or information that isn’t relevant to the purpose of the report. PRO TIP: To keep your reports standardized and published in a certain period of time, use automated reporting software . For example, Databox can automate the reporting process, so you can schedule reports to be sent to your team or clients on a regular basis.

If you have created a clear outline that you can follow, the writing process shouldn’t take up too much time.

Your main focuses will be wording, paragraph structure, and phrasing.

Many times, when writers think about creating reports, they automatically assume that they will have to change their writing style.

While there are some overall guidelines that should be followed, that doesn’t mean you will have to create longer and more complex-sounding sentences. The primary focus should be on communicating the main message by going a bit more into details.

Remember that different companies use different styles, so you should always be familiar with your organization’s specific style before you start writing.

Keep in mind, you are always better off using a slightly more professional tone since you never know for how long the report will be retained and how many readers will go through it. 

As we said, informal reports don’t use any strict formats, but you can’t have the information in your report all over the place.

By using headings, summary statements, separate sections, and clear paragraphs, you make the informal report much more understandable and you will have an easier time conveying your important message.

Make sure that you use a catchy heading for each new section and write a few attention-grabbing lines in the beginning as an introduction.

Don’t just add sections because ‘you should’, focus on giving each section a purpose and make sure they support the overall goal of the report. Remember, your headings should always suit the content, not the other way around.

The writing style in informal reports should be more relaxed since the main purpose is to make the information easily understandable to readers.

It’s understandable that after spending a few days writing the report, you will want to submit it as quickly as possible.

However, revising your report is a crucial step that can’t be overlooked.

You can use certain reviewing tools for proofreading and finding grammar mistakes, but make sure you read it yourself at least once more. A good idea is to also ask a friend or a colleague to also read the report, so you have an extra set of eyes.

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Formal and informal entrepreneurship: a cross-country policy perspective

• Open access
• Published: 27 October 2021
• Volume 59 , pages 807–826, ( 2022 )

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• Elaine Laing 1 ,
• André van Stel   ORCID: orcid.org/0000-0003-4512-654X 1 , 2 &
• David J. Storey 3  

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This article has been updated

This paper distinguishes between formal and informal entrepreneurship. It theorises that each are influenced by very different combinations of macro-economic factors and strongly moderated by country income levels. Empirically, we show the ease of starting a business and high-quality governance, exert a powerful influence on formal, but not informal entrepreneurship. The latter is influenced by self-employment rates in low-income countries and by female labour force participation in high-income countries. Policy-makers seeking to improve economic welfare through enhancing entrepreneurship therefore have to choose the ‘type’ of entrepreneurship on which to focus and then select appropriate policies. By providing a novel grouping of these policies, we are able to assist them in making these choices.

Plain English Summary

Policy-makers: Decide what type of entrepreneurship you want for your country and, only then, choose your policies, because ‘one size doesn’t fit all.’ Entrepreneurs come in all shapes and sizes, ranging from informal street market traders on the one hand to formal tech giants in majestic offices on the other. The view of most governments is that entrepreneurship is ‘good’ because it not only provides employment for the market trader and for the tech giant, but also for many others in the economy. Governments therefore spend taxpayers’ money funding entrepreneurs to start and grow their businesses, but this raises two key questions: first, should it be the formal tech giant, or the informal street trader, that receives public funds and second, how should these be provided? Our conclusion, based on evidence from more than 80 high- and low-income countries, is that effective policy not only has to take account of the formal/informal distinction and the income level of the country, but also how that policy is delivered. We show that, in low-income countries, formal entrepreneurship is more likely to be enhanced by state policies to promote education and female activity rates; it is less likely to be stimulated by the creation of more enterprises. This is because relatively few informal enterprises subsequently make the transition to formality and to significant job creation.

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1 Introduction

There is now clear evidence that the scale of entrepreneurship varies considerably between countries (Klapper et al., 2010 ); there is also a second body of empirical work that links these cross-country variations to differences in institutional frameworks (Aidis et al., 2012 ; Van Stel et al., 2007 ). This link is important because of a third, more contentious, body of work that links the scale and nature of entrepreneurship to economic growth (Carree & Thurik, 2010 ). The inference is that the nature of institutions influences entrepreneurship (Autio et al., 2013 ) which, in turn, influences economic welfare (Urbano et al., 2019 ). There is therefore a powerful policy-based case for investigating the nature of these links.

The theory-based case has been somewhat less well-developed, but many Footnote 1 consider it was Baumol ( 1990 ) who first distinguished between different ‘types’ of entrepreneurship—productive, unproductive, and destructive. He argued that the incentives and disincentives provided by institutions influenced whether, at a point in time, individuals were entrepreneurs or non-entrepreneurs and also the ‘type’ of entrepreneurship in which they engaged. In this spirit, Young et al. ( 2018 ) recently found that the institutional framework also influences the type of entrepreneurial opportunities (imitative versus innovative) that emerge in a country.

This paper follows Baumol by assuming the individual chooses to enter and either remain in, or exit from, a type of entrepreneurship. These choices are influenced, at least in part, by governments because of their role in setting the institutional framework (Bowen & De Clercq, 2008 ; Dilli et al., 2018 ). Where we move on from Baumol is by distinguishing between formal and informal entrepreneurship (Autio et al., 2019 ; Bennett, 2010 ; Williams et al., 2017 ). Conceptually, formal entrepreneurship is equated with being registered with the state, but operationally we see it as a limited liability company. All other forms of entrepreneurship are viewed as informal. Footnote 2 In the present paper, we investigate the determinants of country rates of formal and informal entrepreneurship, and whether these differ between high- and low-income countries. The distinction between high- and low-income countries is justified because the size of the informal sector varies with income levels. A recent report by ILO ( 2019 ) estimates that, worldwide, 62% of total employment is in the informal sector. This percentage differs considerably across countries, ranging from 85% for the group of low-income countries to 18% for the group of high-income countries (ILO, 2019 , p. 15). Hence, particularly in low-income countries, the economic contribution of informal entrepreneurs and their businesses is substantial.

We consider this paper makes five contributions. First, it provides a novel categorisation for governments when making decisions that influence both the scale and type of entrepreneurship. We identify three groups comprising what we refer to as policy instruments. Group 1 are policies that are expected to have an impact on the scale and nature of entrepreneurship in the short to medium term, and over which entrepreneurship policy-makers exert a strong influence. Group 2 are policy instruments that, although they influence the scale and nature of entrepreneurship, are not easily amenable to change by governments, even in the medium term. Group 3 are policies which, although influencing the scale and nature of entrepreneurship, do not have this as a key objective.

Second, we show empirically how the three groups of policies influence entrepreneurship rates, and how this varies between high- and low-income countries and between types of entrepreneurship (formal and informal entrepreneurship). Footnote 3 Third, before doing so, we briefly theorise about the expected sign of each determinant of formal and informal entrepreneurship rates, and in high- and low-income countries, i.e. four different contexts per determinant. Footnote 4 As we consider 12 (potential) determinants in total, this involves 48 expected signs. We believe this is the first study to provide such brief theorising for four different contexts per determinant of macro-level entrepreneurship and for as many as 12 determinants. Footnote 5

Fourth, we provide the first empirical (macro-level) test of the ‘stepping stone’ hypothesis as theorised by Bennett ( 2010 ), i.e. that current informal self-employment is a stepping stone to subsequent formal entrepreneurship.

Fifth, we point to the very different roles played by female labour force participation rates in high- and low-income countries and to its impact on formal and informal entrepreneurship.

The remainder of the paper is organised as follows. Section  2 distinguishes between formal and informal entrepreneurship; it makes the case that the scale and composition of entrepreneurship is influenced by different factors in high- and low-income countries. Based upon this review, it sets out our expectations of twelve determinants of entrepreneurship in four different contexts as explained above (48 expected signs). Section  3 provides a detailed explanation of how formal and informal entrepreneurship are measured. Section  4 presents results. We conclude in Section  5 by providing a focus for policy-makers and set new challenges for the research community.

2 Formal and informal entrepreneurship

This section sets out the entrepreneurship choices facing both the individual and governments. The former faces two choices; the first is whether or not to become an entrepreneur and, if so, a second choice whether to exercise this option formally or informally. The choices facing governments relate to the creation of an institutional framework which facilitates or inhibits entrepreneurship in general, and its distribution between formal and informal types (Capelleras et al., 2008 ). Footnote 6

2.1 Individual choice

The occupational choice model of entrepreneurship has a well-established history in economics (Parker, 2018 ) with individuals choosing between entrepreneurship and other options such as waged employment, retirement or unemployment, based on expected utility in those states.

Our focus is on their second choice which is between performing this role formally or informally. A formal entrepreneur is one whose business is registered with the government authorities, as a result of which he or she incurs tax payments and has to comply with strict and extensive operational, governance and reporting requirements. We view the legal form that best captures formality to be the Limited Liability Company (LLC). All other forms of entrepreneurship that do not satisfy these requirements are classified as informal. Footnote 7

The individual is assumed to assess the costs and benefits of formality and informality. The potential benefits of formality are fourfold. First, only formal businesses are eligible for government funding and support which the owner may believe enhances the survival and growth of the business (Straub, 2005 ). Second, registration and periodic updating imposes a financial discipline upon the new/small enterprise which also enhances short-term performance (Frankish et al., 2013 ). Footnote 8 Third, the extra credibility of formality provides reassurance both to customers and to suppliers of trade and bank credit. This makes them more likely to extend forms of credit, so supplementing the financial buffer that enables new and small firms to offset temporal variations in cash receipts (Coad et al., 2016 ); customers, in turn, have also long seen formality as a proxy for reliability (Freedman & Godwin, 1994 ). Finally, formality—as in the choice of limited liability status—may reflect the confidence of the owner about the business. Levine and Rubinstein ( 2017 ) make the case that the choice of legal form can be considered to be a valid proxy, not only for a confidence and willingness to take risks, but also to achieve subsequent success.

Formality, however, imposes pecuniary and non-pecuniary costs upon an enterprise. The former include not only the eligibility to pay taxes and the direct registration costs but also, for example, any sales foregone imposed by a time-consuming registration process. A third pecuniary cost is that of compliance with legislation—such as the payment of a minimum wage to employees—which can increase the cost base of the enterprise (Bannerji & Jain, 2007 ). The non-pecuniary costs include the unease characteristic among entrepreneurs in sharing information, perhaps particularly with government, on the grounds that this could leak to competitors (Virglerova et al., 2016 ).

However, the choice made by the entrepreneur between formality and informality is not fixed and the enterprise can switch. Bennett ( 2010 ) theorises a set of circumstances in which a new enterprise begins informally, and then switches to become formal—the so-called ‘stepping stone’. The availability of a low-cost option at start-up means the owner can test the viability of the enterprise. It can be viewed as a pilot, or apprenticeship, that encourages the individual to start, and then either to quit having incurred few costs, to continue informally, or to switch once the uncertainty has reduced. Footnote 9 However, at least in the USA, switchers are comparatively rare (Levine & Rubinstein, 2017 ).

2.2 Government choices

Governments across the world make different choices in the set-up of their institutions (Fainshmidt et al., 2018 ). We now examine how these choices influence the scale and nature of entrepreneurship and distinguish between short and long-run effects. In the short run, we assume Government is able to make changes to the institutional framework influencing the scale and nature of entrepreneurship but, only in the longer run, is it able to make structural changes in, for example, the sectoral composition of the economy.

Assume Government A wishes to increase both the number of enterprises in the economy and also the proportion of all enterprises that are formal. It made this decision on the grounds that formal enterprises potentially provide a stream of tax revenue; that they are more likely to comply with environmental legislation, so enhancing social welfare; that they are more likely to comply with health and safety and any minimum wage legislation, so providing a safer and better-paid environment for their employees. It also favours formality on the grounds that such firms are less likely to be constrained in their ability to survive and/or expand by a lack of access to funding. This expansion generates employment and other social benefits.

Government B takes a different view. It places more weight upon the benefits of informality. It argues that, although there may be an increase in tax revenue from formality, there are increased costs of collection and enforcement which may be considerable. It believes registration is a disincentive to expansion, to which firms respond by not expanding beyond the given threshold at which they believe their activities will be detected (Giugale et al., 2000 ). For this reason, greater formality serves to depress expansion and so reduces potential economic benefits.

We now identify three groups of government policies, decisions on which comprise the institutional framework for entrepreneurship, so influencing its scale and nature. Our approach, in all three policy groups, is to identify variables that capture these policy choices. We set out the rationale for their inclusion and our expectation of their impact on formal and informal entrepreneurship and in high- and low-income economies. All variables referred to in this section are defined in full in Online Appendix Table A1 (available online separately).

Group (i): policies that are expected to change the scale and nature of entrepreneurship in the short to medium term

Two clear policy options are open to government. These are the lowering of business burdens/improving governance and raising rates of self-employment. In both cases, entrepreneurship policy-makers exert a strong influence over the nature and delivery of the policy.

Lowering business burdens/improving governance

Djankov et al. ( 2002 ) showed the costs and time taken to start a new (formal) business were generally considerably higher in low-, than in high-, income countries. Since then, governments have sought to make it easier to ‘do business’. This is most clearly reflected in reducing the number of days required to register a business and lowering the costs of registration (i.e. a greater ‘ease’ of doing business) and is captured by a higher value of the variable DTF_Starting , Footnote 10 so lowering the costs of starting a formal business. However, because there are no costs of registering an informal business these changes do not directly influence rates of informal business creation (Van Stel et al., 2007 ).

The expected sign for DTF_Starting on formal entrepreneurship is positive but for informal entrepreneurship the sign is indeterminate, in both high- and low-income countries.

The speed and efficiency of enforcement of legal and financial contracts, together with other measures of good governance captured in the Worldwide Governance Indicators ( WGI ) index (Kaufmann et al., 2011 ), are expected to provide confidence to a potential new business owner (Ngobo & Fouda, 2012 ). Once again, this is likely to primarily benefit formal, rather than informal, enterprises.

The expected sign for WGI index on formal entrepreneurship is positive but for informal entrepreneurship the sign is indeterminate, in both high- and low-income countries.

Self-employment

A second policy option for government is to directly encourage self-employment—even if these businesses are not formally registered when they first begin to trade. This is because individuals who are currently self-employed are likely to be more aware of, and have greater confidence in, their ability to manage entrepreneurial opportunities than those without this experience. Initially, such opportunities are likely to be exploited by informal enterprises, but with little impact on the number of formal businesses. However, as noted earlier, a second round effect theorised by Bennett ( 2010 ) is that those beginning informally view their new enterprise as a ‘testing of the water’ which, if successful, encourages them to make the stepping-stone to formality.

Alternatively, the individual who has developed a business within the informal economy may be reluctant to leave and, as noted above, direct expansion towards creating new enterprises which operate below the legal minimum threshold of formality. They may even forgo expansion entirely. However (successful), self-employed individuals may act as a role model to other individuals (Bosma et al., 2012 ) who establish their own—in most cases informal—business.

The expected sign of self-employment on both formal and informal entrepreneurship is positive, in both high- and low-income countries.

Group (ii): factors influencing the scale and nature of entrepreneurship, but which are difficult to change, even in the medium term

The within-country spatial distributions of enterprise rates are strongly persistent over long periods of time (Fritsch and Wyrwich 2014 ) for two reasons. The first reflects sectoral structures that change only slowly. The second is that aggregate enterprise rates, and their composition, reflect income levels which also change only slowly over time. We now examine evidence of the impact of each.

Sectoral composition

In all countries new business creation rates vary considerably by sector (Chenery 1960 ; Fain 1980 ). These are generally low in agriculture because farms traditionally pass across the generations, so there are few “new” farms; those wishing to begin a new agricultural enterprise are also required to have access to significant capital. In contrast, rates are high in professional and business services where entry costs can be close to zero and where technology has created new opportunities. The sectoral composition of an economy therefore strongly influences aggregate rates of new business creation. The employment shares of agriculture and services are our two measures of the sectoral composition of the economy.

Since farms usually operate in the informal, rather than the formal, sector in low-income countries: The expected sign of Share agriculture on formal entrepreneurship in low-income countries is negative, but positive for informal entrepreneurship. In high-income countries, farms are formal but entry into farming is rare:

The expected sign of Share agriculture on formal entrepreneurship in high-income countries is indeterminate and negative for informal entrepreneurship. In services, firms are usually small and entry has low barriers:

The expected sign of Share services is positive for both forms of entrepreneurship in both high- and low-income economies.

Per capita income

In low-income countries, economic development is associated with a transformation from agriculture to manufacturing which is likely to go hand in hand with a decrease of informal entrepreneurship (in agriculture) and an increase in formal entrepreneurship (in manufacturing):

The expected sign of Per capita income in low-income countries is positive for formal entrepreneurship but negative for informal entrepreneurship.

In high-income economies, there is more opportunity for (innovative) entrepreneurship due to an increased demand for a variety of products and services delivered by innovative start-ups occupying various niche markets (Wennekers et al., 2010 ). Moreover, entrepreneurship—through its autonomy at work—may contribute to satisfying ‘higher’, non-monetary, needs (Scott Morton & Podolny, 2002 ). In high-income economies, small-scale, high-tech enterprises can begin as an incorporated business anticipating firm growth (Levine & Rubinstein, 2017 ). Others may start as unincorporated businesses to obtain higher work autonomy. Footnote 11

The expected sign of Per capita income in high-income countries is positive for both formal and informal entrepreneurship.

Group (iii): government policies that influence the scale and nature of entrepreneurship but where this is not the main objective of policy

This section identifies four government policy areas that prior work has shown influence the scale and type of entrepreneurship. Some have a positive, and others a negative, effect on entrepreneurship, but their common characteristic is that the enhancing of entrepreneurship is not their prime focus. It is therefore more difficult for entrepreneurship policy-makers to influence their scale and delivery.

Education policies

Education budgets take account of a wide range of social and economic factors, but considerations of their impact on entrepreneurship is usually minimal. This is despite evidence that the scale and nature of educated individuals in a country influences entrepreneurship (Van der Sluis et al., 2008 ).

There are two main reasons why education levels in a country are correlated both with enterprise creation rates and with a high proportion of these enterprises being formal. The first is that the management, particularly of a successful business, requires considerable intellectual skills and is therefore more likely to be restricted to those having these skills. Formal education may be seen as a proxy for such skills. The second is that the establishment of a, potentially, high-growth technology business is likely to be restricted to those with the highest levels of education. Such businesses, although they may start in a garage or in a front-room will, if they succeed, require external resources normally only available on a sufficient scale to a formal enterprise.

There are however also reasons why education levels might be either negatively or uncorrelated with business creation rates. For example, several high-profile entrepreneurs—Gates, Zuckerberg—either never went to, or never completed, college and it is suggested this gave them the motivation to start and grow their enterprise. Their shortage of capital was addressed by beginning informally—what Winborg and Landstrom ( 2001 ) refer to as bootstrapping.

Parker ( 2018 ) reviews these relationships and concludes that the bulk—but certainly not all—studies in high-income countries find that start-up, survival and growth rates are higher when the founders have higher (tertiary) education. However, in low-income countries, (tertiary) educated individuals were more likely to enter low-risk government or professional employment rather than establish higher risk business creation (Van der Sluis et al., 2008 ).

Our measure of education is the share of the labour force holding secondary educational qualifications. In high-income countries, this has to be benchmarked against tertiary education. In low-income countries, where tertiary education is much less common, this has to be benchmarked against primary education.

The expected sign of Secondary Education in high-income countries is negative for formal entrepreneurship and indeterminate for informal entrepreneurship.

The expected sign of Secondary Education in low-income countries is positive for formal entrepreneurship and indeterminate for informal entrepreneurship.

Policies to promote Foreign Direct Investment

A second policy open to governments is to seek to raise rates of Foreign Direct Investment (FDI), primarily on the grounds that large externally owned companies are able to directly provide employment. Nevertheless, a secondary consideration is whether this, in turn, raises supply chain opportunities for indigenous and normally small-scale enterprises (Nell et al., 2011 ). The evidence for this is clearer in high-income countries where De Clercq et al. ( 2008 ) and Lee et al. ( 2014 ) find FDI has positive spillover effects on the local economy.

In low-income countries, these positive effects may be offset by crowding-out effects because local, primarily informal, firms then experience competition from foreign firms (De Backer & Sleuwaegen, 2003 ). This is because multinational enterprises, attracted by such policies, place a premium on quality and reliability from local suppliers, so stimulating primarily formal, rather than informal, domestic enterprises.

The expected sign of FDI in high-income countries is positive for both formal and informal entrepreneurship.

In low-income countries the expected sign of FDI is positive for formal entrepreneurship but indeterminate for informal entrepreneurship.

Policies influencing the scale and nature of Government Consumption

The tax regime in a country reflects a wide range of both social and economic choices. Some countries may seek to make themselves ‘enterprise attractive’ by having policies that focus on lowering all forms of taxes and so leading to ‘small government’. Others place more emphasis on achieving social objectives which are likely to be delivered by public organisations paid for from general taxation (Nyström, 2008 ).

Once again, the evidence that these decisions have on the scale and nature of entrepreneurship in an economy is mixed. Those pointing towards a positive link—particularly in high-income countries—emphasise the role of public infrastructure in providing an environment in which businesses can trade. Clear modern examples are the provision of technological infrastructure (Woolley, 2014 ) but more mundane examples are crime-reduction initiatives that enable (small) businesses to prosper (Drinkwater et al., 2018 ).

The contrasting argument is that, because such expenditure is normally funded through higher taxes, this depresses entrepreneurial activity (Henrekson & Sanandaji, 2011 ), although its impact depends on the type of tax [profits tax; income tax; inheritance tax] and on the scale and nature of enforcement.

The effect of small government (i.e. lower taxes) on the ratio of formal to informal entrepreneurship is also unclear; it could encourage more formal entrepreneurship because the tax advantages of being informal are reduced. Alternatively, it may encourage more individuals to start a business, perhaps initially informally, because they are able to legally retain a higher proportion of their profits and use them for expansion.

All in all, the evidence (Bosma et al., 2018 ; Henrekson & Sanandaji, 2011 ) points to ‘big government’ being funded from higher tax rates, so making formal entrepreneurial activity less attractive. Its impact on informal entrepreneurship is less clear:

The expected sign of Government Consumption —our measure of government size — on formal entrepreneurship is negative, in both high- and low-income countries.

The expected sign of Government Consumption on informal entrepreneurship is indeterminate, in both high- and low-income countries.

Policies to increase female activity rates

Ardichvili et al. ( 2003 ) argued that the key factor influencing the take-up of entrepreneurship was the ability of individuals to identify business opportunities, and that such opportunities were more apparent to those with current labour market experience. A second influence is that of firm size: Johnson and Cathcart, as long ago as 1979, showed business founders were five times more likely to have worked in a small, rather than a larger firm immediately prior to starting their enterprise.

Government can alter economic activity and enterprise rates, particularly for females, but this is difficult in some countries because of strongly-held religious beliefs. OECD ( 2013 ), for example, made the case that the low rates of female labour force participation in the Middle-East and North African (MENA) countries was a key factor underpinning low enterprise rates in these countries. Footnote 12 A second effect of these low participation rates is that females starting such businesses may be more uncertain about their likelihood of success than males (e.g. by a lack of successful female role models). On those grounds, the business is more likely to be of a smaller scale and be informal rather than formal (Oppedal Berge & Garcia Pires, 2020 ).

By contrast, in (low-income) countries with relatively high female labour force participation rates, there are more women with current labour market experience who are potentially able to identify promising business opportunities and start a business. Moreover, the higher (female) labour supply in these countries makes it easier for all firms (whether male-led or female-led) to find qualified employees, thereby making it easier to run an employer firm. These examples of opportunity-based entrepreneurship are expected to be more characteristic of the formal, rather than the informal, sector.

In high-income countries female activity rates are considerably higher than in low-income countries but, when asked about entrepreneurship, many women claim to favour starting businesses in the informal sector because this enables them to optimally combine work and family (Verheul, 2005 ). A second factor is that, in high-income countries, females are disproportionately more likely to be employed in the public sector which generally provides a family-friendly environment, so lowering their likelihood of engaging in (formal) entrepreneurship where the hours worked are considerably longer and less predictable (Hopp & Martin, 2017 ).

The expected sign of Female labour force participation in low-income countries is positive for formal entrepreneurship and indeterminate for informal entrepreneurship.

The expected sign of Female labour force participation in high-income countries is indeterminate for formal entrepreneurship and positive for informal entrepreneurship.

Group (iv): controls

Finally, we identify the role played by two key controls—GDP growth and unemployment—which have been shown to influence the scale and composition of enterprise rates.

Macro-economic conditions are theorised to influence types of entrepreneurship differently. In prosperous conditions (i.e. high GDP growth), it is argued that those starting a new business are more likely to be influenced by good market prospects—they are ‘pulled’ into entrepreneurship (Sedláček & Sterk, 2017 ). In contrast, in recessions (i.e. low or negative GDP growth), entrants are more likely to be ‘pushed’ into entrepreneurship by the lack of employment opportunities (Brünjes & Revilla Diez, 2013 ). Those that are pulled are more likely to begin formally since, as noted earlier, this decision reflects their optimism about the growth of the business, whereas those that are pushed are likely to have more modest aspirations and skills.

The expected sign of GDP growth is positive for formal entrepreneurship and negative for informal entrepreneurship, for both high- and low-income countries.

Unemployment

High unemployment rates may be positively associated with entrepreneurship when unemployed individuals are motivated to start their own business by a lack of employment options (‘recession-push’-effect). However, if high unemployment signals low aggregate demand, then this may lower the likelihood of a start-up being successful (‘prosperity-pull’-effect) (Storey, 1991 ; Thurik et al., 2008 ).

More widely, the link between macro-economic conditions, unemployment and business creation in high-income countries points to different roles for formal and informal entrepreneurship. It suggests the unemployed are more likely to enter informal entrepreneurship, in line with the positive association between unemployment rates and rates of informal entrepreneurship. As a counter-argument, entrepreneurs aiming to start a small (informal) business, may be waiting for the right moment to start up, i.e. when aggregate demand is high (and unemployment is low), according to the prosperity-pull effect.

Evidence for low-income countries is sparse but Brünjes and Revilla Diez ( 2013 ) conclude that, when employment opportunities improved, entrepreneurs were more likely to state they started their business for positive reasons.

All in all, it is difficult to predict whether ‘recession-push’ or ‘prosperity-pull’ effects dominate:

The expected sign of Unemployment is indeterminate from theory, for both formal and informal entrepreneurship, and both high- and low-income countries.

3 Our approach to testing

Online Appendix Table A1 sets out, in full, all variables used in the analysis. Column 1 shows the name and definition of each dependent and independent variable. Column 2 describes the variable and column 3 specifies the data source used. The table also shows the expected signs of each of the twelve (potential) determinants discussed in Section  2 , for each of four contexts per determinant (high-income versus low-income crossed with formal versus informal entrepreneurship).

For the two dependent variables, the fourth column shows the prior studies that were drawn upon in the literature review in Section  2 . This is also provided for the independent variables, together with their expected relationship with the dependent variables, as theorised in Section  2 .

We now supplement Online Appendix Table A1 by providing a more detailed description of the dependent variables that capture formal and informal entrepreneurship.

3.1 Formal entrepreneurship

Acs et al. ( 2008 ) argued that formal entrepreneurship was best captured by the normalised number of Limited Liability Companies (LLCs) on the grounds that such enterprises have incurred the cost and time to formally register with a State agency. The case for LLCs—also labelled incorporated businesses—is supported by evidence from Levine and Rubinstein ( 2017 ). They show only a small proportion of unincorporated businesses make the transition to incorporation, suggesting that the choice of the business’s legal form largely reflects the ex-ante views of the business owner(s), not its ex-post performance. They also argue that the choice of legal form reflects the realistic aspirations of its owner(s) because the incorporated self-employed earn more than comparable salaried workers, whereas the unincorporated self-employed earn much less.

We follow Acs et al. ( 2008 ) and take, as our measure of formal entrepreneurship, the rate of new limited liability companies (LLCs) per adult population as measured by the World Bank Group Entrepreneurship Survey (WBGES) (Klapper et al., 2010 ).

3.2 Informal entrepreneurship

Four benchmark studies have measured the nature and scale of informal entrepreneurship: Acs et al. ( 2008 ), Thai and Turkina ( 2014 ), Dau and Cuervo-Cazurra ( 2014 ) and Autio and Fu ( 2015 ). Each used different approaches, but all took the number of young business entrepreneurs according to Global Entrepreneurship Monitor (GEM) as a measure of ‘total’ entrepreneurship and then subtracted the number of new LLCs according to WBGES (as measure of formal entrepreneurship).

As straightforward as this may sound, in reality it is a cumbersome operation because three corrections are made in some, but not in all, studies. The first correction takes into account that the number of new LLCs relates to new businesses registered in the last year, whereas GEM’s young business entrepreneurship rate relates to the number of new entrepreneurs in the last 42 months (Bosma, 2013 ). Footnote 13 Second, while making this correction, some authors (Acs et al., 2008 ; Autio & Fu, 2015 ) recognise that survival rates increase over time; hence, the assumption of a simple linear distribution of new entrepreneurs over the 42 months is questionable. Third, firms may have several business owners and so a correction for average team size is in order (Autio & Fu, 2015 ; Dau & Cuervo-Cazurra, 2014 ).

As a result of the corrections, the scale of informal entrepreneurship reported in the studies varies considerably. These differences relate not only to the absolute numbers but also to the relative prevalence of formal versus informal entrepreneurship in different studies.

Of the corrections, only Autio and Fu ( 2015 ) apply all three but, even here, issues of non-comparability remain because, as noted, GEM uses information from individuals whereas World Bank measures are based upon information from businesses . Ahmad ( 2008 ) and Cieślik ( 2015 ) both note the many sources of incomparability between statistical business registers and population surveys—most notably variations in team-size. Finally, shell companies—incorporated businesses registered for tax or other non-business purposes (Acs et al., 2008 ; Klapper et al., 2010 ) but which cannot be linked to active entrepreneurs—are a further problem in comparing the World Bank measure of the number of new LLCs with the GEM measure of the number of entrepreneurs.

For all these reasons, this paper explicitly avoids constructing a measure of informal entrepreneurship that combines measures from two different data sources. Even when these calculations are quite sophisticated, our view is that a considerable degree of arbitrariness remains.

Our measure of Informal Entrepreneurship, ranging from unregistered enterprises to unincorporated enterprises (Chen, 2012 ) is the young business entrepreneurship (YB) rate as measured by GEM. The YB rate is defined as the number of owner-managers of businesses between 3 and 42 months old, per adult population (Bosma, 2013 ).

In summary, our measures of formal and informal entrepreneurship are taken from separate sources. Although not perfectly comparable with each other, they have the merit of being comparable across countries, so facilitating a cross-country investigation of the determinants of formal and informal entrepreneurship.

4.1 Descriptive statistics and correlations

Table 1 provides the key descriptive statistics. Footnote 14

Even after recognising that the ratio of informal entrepreneurship to formal entrepreneurship is likely to have been an overestimate, Footnote 15 it is clear that informal entrepreneurial activity rates (number of individuals running a young business) are substantially higher than formal entrepreneurship rates (number of new LLCs in a given year).

The ratio of formal to informal entrepreneurship rates is shown graphically in Fig.  1 . It ranks all 58 countries for which both measures are available by GDP per capita, varying from the lowest (India) on the left to the highest (United Arab Emirates) on the right. It shows formal entrepreneurship is minimal in the lowest-income countries, but clearly rises as GDP per head rises. This relationship is, however, not fully consistent, with, for example, low-income South Africa having a higher proportion of formal entrepreneurship than high-income Austria or Canada.

Ratios of formal to informal entrepreneurship across countries ranked by GDP per capita

Table 2 shows the correlation between formal and informal entrepreneurship is negligible, suggesting that the two forms capture very different aspects of entrepreneurship. The table also shows the independent variables correlated with formal entrepreneurship differ markedly from those correlated with informal entrepreneurship. We now explore these differences in more detail.

4.2 Determinants of formal and informal entrepreneurship in high- and low-income countries

Table 3 takes one measure of entrepreneurship capturing informality and one capturing formality. It examines the role of twelve factors—placed in four groups—theorised to influence each metric. The first two columns present the results for all countries; the second two columns show the results for low-income countries and the final two columns show results for high-income countries. Both measures of entrepreneurship are expressed in natural logarithms to enable the coefficients to be directly comparable across the columns.

Our data set is an unbalanced panel of 441 observations distributed across 81 countries for formal entrepreneurship and 319 observations across 72 countries for informal entrepreneurship, and spanning the period 2004–2014. As we are focusing on explaining cross-country differences while also exploiting variations over time, the estimation methods we consider are random effects and pooled OLS (but not fixed effects). Breusch-Pagan tests indicated that for all six models random effects was the preferred estimation method. Footnote 16 We also tested for multicollinearity for which we did not find any indications. Footnote 17

In our random effects estimations, we cluster standard errors by country in order to avoid underestimation of standard errors (and of associated p-values that determine coefficients’ significance levels). Nevertheless, as a robustness test, in Online Appendix Table A3 , we also report results from between-estimator regressions, where, for each country, all model variables are averaged over the years for which data were available for the country in question. The number of observations in these between-estimator regressions thus equals the number of countries, making the ratio of number of observations over number of independent variables relatively low. Notwithstanding, in our discussion of regression results below, we will take a conservative approach, and only consider results from our main Table 3 to be significant if they are robust to applying the between-estimator. Although not all our significant results ‘survive’ this robustness test, most of them do, and overall we judge our main results to be solid, considering the stringent nature of this robustness test. Footnote 18 Since the between-estimator considers pure cross-country variations, cyclical variables like GDP growth and unemployment (i.e. our Group (iv) control variables) have been removed from the regression models reported in Online Appendix Table A3 .

Group (i) variables

The ease of starting a business DTF_Starting is positively associated with the rate of formal entrepreneurship but not, or only weakly, with informal entrepreneurship. This result is in line with our theorising. The WGI index is also positively related with formal entrepreneurship but not with informal entrepreneurship, again confirming our expectations. However, only for low-income countries is this result established beyond any doubt (see Online Appendix Table A3 ). Further exploration revealed that the positive relation between the overall WGI index and the rate of formal entrepreneurship for low-income countries primarily reflects the importance of political stability. Footnote 19

For self-employment , the sign is positive for informal entrepreneurship in low-income countries but not in high-income countries. For formal entrepreneurship, we do not find any statistically significant positive association with self-employment. Hence, for low-income countries, we find evidence for the role-model hypothesis (Bosma et al., 2012 ) where higher rates of (informal) self-employment induce even more entrepreneurial activity in the informal sector. However, our results do not support the stepping stone hypothesis where informal self-employment leads to higher entry rates in formal entrepreneurship (Bennett, 2010 ). In high-income countries we see no link with either formal or informal entrepreneurship.

Group (ii) variables

Our results for Share agriculture in low-income countries in Table 3 are broadly in line with our theorised signs, although no longer significant in the robustness test (see Online Appendix Table A3 ). The non-significant signs for high-income countries possibly reflect the low entry rates in farming. Although we expected Share services to have a positive sign, it was non-significant, possibly reflecting our broad definition of Services. Results for per capita income —our measure of economic development—also do not match our expectations, perhaps because several manifestations of economic development, such as sector structure and the WGI Index , are also included in the model. Reassuringly though, the direct correlations between per capita income and formal and informal entrepreneurship (positive and negative, respectively) are in line with our expectations (see Table 2 ).

Group (iii) variables

Our results for Secondary education are non-significant except for formal entrepreneurship in low-income countries, the latter finding being as expected, but not confirmed in the robustness test. Results for FDI are also non-significant, perhaps indicating that spillover and crowding-out effects cancel each other out. Footnote 20 In high-income countries, Government consumption is clearly negatively related with formal entrepreneurship rates, in line with our ‘big government’ argument. However, this result is not confirmed in the robustness test.

Results for Female labour force participation are in line with our theorising. Higher economic participation rates by women is strongly associated with more formal entrepreneurship in low-income countries and weakly associated with informal entrepreneurship in high-income countries. This result is robust to applying the between-estimator (see Online Appendix Table A3 ).

Group (iv) variables

GDP growth is positively related with formal entrepreneurship, in line with our theorising, whereas the link with informal entrepreneurship is non-significant. Finally, somewhat surprisingly,  Unemployment is negatively related to informal entrepreneurship in high-income countries, perhaps implying that individuals or groups do wait for the right moment to start up (‘prosperity-pull’).

5 Interpretations and conclusions

This paper has examined formal and informal entrepreneurial activity across 81 countries over the period from 2004 to 2014. These were very different forms of entrepreneurship; their scale and importance differs considerably across countries and very different factors explain their prevalence. There remain marked differences between high- and low-income countries. Footnote 21

We now set out our view of the implications of these findings for scholars and policy-makers. For scholars, our work confirms that the distinction previously made between formal and informal entrepreneurship is a valid one. We show, for example, that higher self-employment rates—which largely capture (incumbent) informal entrepreneurship—are not related to higher new formal entrepreneurship rates, the type of entrepreneurship usually associated with economic growth and job creation (Astebro & Tåg, 2015 ; Autio et al., 2019 ). We believe this reflects a lack of growth potential among informal businesses and is in line with the findings of La Porta and Shleifer ( 2014 , p. 124) who concluded that ‘informal firms stay permanently informal, are unproductive and are unlikely to benefit much from becoming formal’.

The successful firms that start unregistered appear to be the exception rather than the rule, leading to questions over the desirability of a simple ‘scaling-up’ of informal entrepreneurship, particularly in low-income countries, in the expectation it will enhance economic development. In contrast, self-employment rates appear to have positive statistical associations with new informal entrepreneurship, although only in low-income countries, possibly reflecting entrepreneurial role-model effects. For these reasons, Bennett ( 2010 ) ‘stepping-stone’ theory is unsupported by our findings.

The differences between high- and low-income countries are also illustrated by the diverse roles played by female labour force participation. This has a positive relationship with formal entrepreneurship in low-income countries, whereas in high-income countries the link is with informal entrepreneurship.

Despite the clarity of these findings, scholars need to seek to both improve data and refine definitions. We have followed others in regarding GEM-based metrics as either the best measure, or a crucial component, of informal entrepreneurship. However, this dataset is based on cross-section samples of self-report data with considerably lower reliability than, for example, company registrations which measure formal entrepreneurship. A minimum requirement for GEM measures to become comparable in terms of reliability to official registrations, and so fully capture informal entrepreneurship, is for it to become panel-based.

However, the biggest challenge for scholars is to acknowledge, and explicitly respond to, the issues that face entrepreneurship policy-makers. Understandably, policy-makers find it difficult to interpret research that explains entrepreneurship outcomes by clusters of variables (e.g. Stenholm et al., 2013 ; Thai & Turkina, 2014 ) because of the dilemma of choosing which variables, or which combinations, have to be the focus of their attention. Admittedly, our WGI (governance) index included in Table 3 also suffers from this shortcoming as it is an average of six sub-indices. Footnote 22 As reported earlier, further exploration revealed that the positive impact of governance on formal entrepreneurship for low-income countries (our more robust finding regarding WGI), primarily reflects the importance of political stability. A second example is the inclusion of culture-based variables which, although frequently shown to be associated with entrepreneurship (Minola et al., 2016 ), say little about the direction of causation. Third, the time-scale of policy-makers has to be recognised by scholars in this area. All else equal, policy makers favour policies that are expected to have an impact over an electoral cycle, rather than over decades (Fotopoulos & Storey, 2017 ; Fritsch & Wyrwich, 2014 ) or even longer.

Finally, a distinction is drawn between two groups of public policies that influence the scale and nature of entrepreneurship. The first are those over which entrepreneurship policy-makers have a direct influence on their scale and delivery. The second are public policies that have an equal, or even greater, impact on entrepreneurship, but where entrepreneurship policy-makers exert little influence. Our expectation is that entrepreneurship policy-makers will favour areas where they can exert influence, but this risks inefficiencies in delivery.

In recognition of these issues, we have tried to ensure our findings have a more interpretable policy focus. Expressed most baldly, our message to policy-makers is that entrepreneurship is not a homogeneous commodity, increases in which automatically improve economic welfare in all countries and in all situations. Instead, policy-makers have to select the measure of entrepreneurship they consider appropriate for their country—formal or informal—and then identify the policies, or combinations of policies, appropriate to achieving that aim.

We have tried to assist them by acknowledging that, even when policy areas are shown to exert similar statistically significant influences on entrepreneurship, they are not necessarily equally attractive options to policy-makers. By placing policies into three groups, and identifying influential constraints, we acknowledge the reality of entrepreneurship policy-making. It favours policies over which entrepreneurship policy-makers have control and where impact is expected in the short to medium terms. It leads us to conclude, for example, that, for policy-makers in high-income countries seeking to raise formal entrepreneurship, making it easier to start a business and improving governance are more attractive options (as ‘Group (i)’ variables) than seeking to reduce the ‘size’ of government (as a ‘Group (iii)’ variable), even though all three variables were found to be significantly related to formal entrepreneurship in Table 3 . This is because decisions on Group (i) variables are more strongly influenced by entrepreneurship considerations.

In contrast, policy-makers in low-income countries seeking to raise formal entrepreneurship rates also need to make it easier to start businesses and improve governance, but to combine this with policies to raise female activity rates and the level of education, even if, as Group (iii) variables, raising entrepreneurship rates is not the main objective of such policies. If their objective is to raise informal entrepreneurship, we show their most powerful policy is the promotion of self-employment, but this has to acknowledge that our stepping stone result (even though applied at the macro level) implies that this may lead to fewer formal businesses.

We conclude by reflecting upon the observations of an anonymous referee who pointed out to us that our proposal was the reverse of much current practice, where the emerging business economic structure has been the dominant influence on the development of government entrepreneurship and SME policies and programmes. However, our view is that this approach of ‘trial and error’ and following ‘fashionable fads’ is now widely recognised—within some of the academic community at least—as being, at best, wasteful. Even former policy-makers, freed from their responsibilities, acknowledge the limitations of the entrepreneurship policy roller-coaster approach which, in some countries, has characterised policies over long periods of time (Irwin & Scott, 2021 ).

The evidence provided in this paper encourages policy-makers to begin by carefully reviewing the type of entrepreneurship they seek, and then realistically linking this to the policy instruments at their disposal. In this sense, current causality is indeed reversed. This is because our contribution is not only to emphasise that ‘one size doesn’t fit all’, but then to set out the key choices open to policy-makers. These are between formal and informal entrepreneurship, between macro and micro-instruments, and between those likely to influence outcomes in the medium and longer term. Crucially, it recognises that the entrepreneurship policy of a government is, only one, foci of a democratically elected government.

The challenge for researchers is to robustly, and then continuously, review the factors influencing formal and informal entrepreneurship. To do this, they must become more aware of the nature of the policy environment in which these public policy decisions are made. We see real merit in future research focussing on using individual-level data to investigate some of the relationships examined in this paper and how this changes in response to policy delivery.

Change history

15 august 2022.

Missing Open Access funding information has been added in the Funding Note.

Urbano et al. ( 2019 ).

We recognise others have also distinguished between types of entrepreneurship. Examples include entrepreneurship quality and quantity (Chowdhury et al., 2019 ; Szerb et al., 2019 ), Schumpeterian and non-Schumpeterian entrepreneurship (Dilli et al., 2018 ) or private sector and social entrepreneurship (Bridge et al., 2014 ).

Our approach is closest to that of Chowdhury et al. ( 2019 ), although they distinguish between quantity and quality of entrepreneurship, rather than informal and formal entrepreneurship. Their quantity measure is identical to our informal measure, but their measure of entrepreneurship quality is completely different from the measures used in this paper. They also focus on institutional determinants, whereas we use a broader range of determinants.

High-income—formal entrepreneurship; high-income—informal entrepreneurship; low-income—formal entrepreneurship; low-income—informal entrepreneurship.

Naturally, given the number of empirical relationships to be investigated (i.e. 48), we do not have the space to profoundly derive a formal hypothesis for each of the 48 relationships under investigation. Therefore, we avoid the term ‘hypothesis’ but instead use the term ‘expected sign’ in this paper.

Although the formality/informality choices facing both the business owner and governments are set out independently, they clearly interact. So, for example, the business owner is likely to favour formality in an economy where property rights are more strongly enforced.

In particular, since compliance requirements are far less strict and extensive, operationally, we consider entrepreneurs in unincorporated businesses informal entrepreneurs, in line with Chen ( 2012 ). This is not to say that conceptually (in terms of registering a business with the appropriate government agencies), these entrepreneurs are not also formal entrepreneurs. However, since both the costs and benefits of the LLC legal form are greater compared to unincorporated businesses, operationally we limit formal entrepreneurship to LLCs, following the convention in the small field of literature dealing with formal versus informal entrepreneurship (Acs et al., 2008 ; Autio and Fu, 2015 ; Dau and Cuervo-Cazurra, 2014 ; Thai and Turkina, 2014 ).

An anonymous referee pointed out to us that, in some countries, formality can ensure enhanced access to the legal system which could be of value in dispute resolution.

Williams et al. ( 2017 ) make the case that, in low-income countries, the apprenticeship role for informality is beneficial. They show those businesses that are currently formal, but began informally, have higher survival rates than those that began formally. However, not all informal businesses were tracked from inception, in particular those that never switched to formality.

DTF stands for ‘Distance to Frontier’. See Online Appendix Table A1 (available online separately).

A more nuanced discussion of this relationship is provided by Acs et al. ( 2008 ) and Wennekers et al. ( 2010 ).

Only 32% of women of working age in MENA countries participate in the labour force, compared with 56% in low- and middle-income countries and over 61% in OECD countries (OECD 2013 , pp. 14–15).

Acs et al. ( 2008 ), Dau and Cuervo-Cazurra ( 2014 ) and Autio and Fu ( 2015 ) make such a correction, Thai and Turkina ( 2014 ) do not.

The new business density measure capturing formal entrepreneurship divides the original World Bank measure by 10. This enables formal and informal entrepreneurial activity to be expressed as a percentage of the working age population, and so become more validly comparable.

In particular, factors contributing to an overestimation of the number of informal entrepreneurs relative to formal entrepreneurs are (1) the measurement period of 42 months for young business owners relative to one calendar year for new LLCs and (2) the phenomenon of multiple owners per business. The main factor working in the opposite direction is the inclusion of shell companies in the formal entrepreneurship measure. Overall, we consider it likely that the combination of these factors overestimate the number of informal entrepreneurs (relative to formal ones) but we consider it unlikely that such overestimation would explain a gap of a factor 9 (4.07 versus 0.44) as reported in Table 1 .

Test statistics available on request.

The mean variance inflation factors (VIF) for the full, low-income and high-income country samples are 2.99, 7.18 and 2.69, respectively. As these VIF’s are less than the value of 10, multicollinearity is not a cause for concern in the analysis.

Note that in some models in Online Appendix Table A3 , there are just 36 observations for 10 independent variables, making it hardly feasible, technically, for the estimation algorithm to find multiple significant coefficients.

More details can be found at the end of the Online Appendix .

In the robustness test results in Appendix Table A3 (available online separately), we find a highly significant positive coefficient in model (1), in line with our theorising.

We are aware that countries may be classified on the basis of broader considerations than income or the standard of living alone. For instance, in the United Nations’ Human Development Index (HDI), the standard of living is just one out of three basic components comprising the HDI index (the other two being life expectancy and years of schooling; UNDP, 2020 ). Future research may consider using the four Human development groups of countries as reported in the United Nations’ Human Development Reports : Low, Medium, High and Very high Human development (UNDP, 2020 ).

We are grateful to an anonymous reviewer for pointing this out.

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Laing, E., van Stel, A. & Storey, D.J. Formal and informal entrepreneurship: a cross-country policy perspective. Small Bus Econ 59 , 807–826 (2022). https://doi.org/10.1007/s11187-021-00548-8

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Formal and Informal Business in South Africa

Updated on 6 May 2022

If you’re starting a business in South Africa , you’ll need to know how the business will be structured. Running a business isn’t only about the products or services that you offer. You also need to establish how the business will operate and what kind of legal and regulatory requirements the business needs to meet. With this in mind, there are two types of business sectors that exist – formal and informal.  

While any business should become part of the formal sector, a large portion of businesses run informally. It’s important to understand the difference between the formal and informal sectors to know where your business stands.   

We’ll cover this all in our guide below.   

What is Formal Business?  

A formal business in South Africa is any organised business with employers who offer fixed terms of employment. These businesses offer jobs with regular hours, they pay regular wages and they pay taxes. Formal businesses are registered and protected.  

It also includes private businesses as well as public corporations. Furthermore, these are businesses that meet all relevant legal requirements. They are organisations that are clearly structured and regulated.  

What is the Formal and Informal Sector?  

The formal sector is the part of South Africa’s economy that includes all formal businesses that pay their taxes and are regulated. This sector includes the most widely known private businesses.  

It could include anything from grocery stores to restaurants, petrol stations, banks, insurance companies, and many more. As long as the business follows the necessary legal requirements and legally employs people, it is part of the formal sector. This is basically the “recognised” business sector that contributes to the economy.    

The informal sector includes the part of the economy that is not taxed or monitored by the government. A large portion of South Africa’s economy forms part of the informal sector. The economic activities of these businesses are not included in the country’s Gross Domestic Product (GDP). If a business’s activities are “off the books” then it falls under the informal economy.  

Informal businesses are run by people who are not employed in the formal sector. This includes many township businesses and small businesses run from people’s homes.  Many small local businesses and solo entrepreneurs make up the informal sector. However, the informal sector also includes illegal or unregulated business ventures.  

Thousands of South Africans depend on the informal sector to provide them with things like meals, clothing, goods and services at affordable prices. What is more, thousands of South Africans also rely on the informal sector for income as they can’t find formal employment in the country.  

What Are Three Types of Informal Business?  

If you walk down any busy street in South Africa, you’ll likely come across some form of informal trading.   

Many different types of informal businesses exist in the country. While any “unrecognised” business can fall under the informal sector, there are a few types of businesses that this sector of the economy is commonly made up of.   

Three common examples of informal business in South Africa include:  

• Spaza shops  
• Hawkers, pavement sellers, and street vendors  
• Laundromats and other small businesses run from a person’s home  

Informal businesses in South Africa are generally found in rural and informal areas. These businesses are generally cash-based, do not have formal agreements with employees, and are not registered at national or regional levels.    

The informal sector accounts for about 18% of South Africa’s GDP, with over three million workers employed by the informal economy.   The South African government recognises the informal sector as being an important form of employment and a major economic driver in poorer communities.   

What are Examples of Formal Business?  

Unlike informal businesses, formal business includes any trade that is regulated, registered, taxed, and protected. This makes up the vast majority of South Africa’s economy, as it includes any recognised, legal business.     

A few common examples of formal businesses in South Africa could include:  

• Retail businesses  
• Bakeries , hospitality, and food service businesses  
• Motor trade businesses  
• Financial service businesses  
• Service providers  
• And any other type of recognised business  

While the large majority of South Africa’s economy is made up of the formal sector, many South African citizens rely on the informal economy. This is particularly seen in rural and township areas, where most businesses are not registered and properly structured.   

While it’s important to regulate trading and economic activity, putting a stop to informal business in South Africa would have a harsh effect. Right now, both formal and informal businesses coexist in order to fuel the country’s economy.   

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Please note you do not have access to teaching notes, formal and informal scenario-planning in strategic decision-making: an assessment of corporate reasoning.

Journal of Business & Industrial Marketing

ISSN : 0885-8624

Article publication date: 10 December 2018

Issue publication date: 12 March 2019

The theoretical value of scenario-planning as a strategic tool is well recognized in literature. The purpose of this study is to explore the corporate reasoning of formal and informal usage (or non-usage) of scenario-planning in strategic decision-making.

Design/methodology/approach

An overview of the relevant literature on scenario-planning as a strategic decision-making tool in the context of complexity and uncertainty is presented, in combination with 15 case studies on executives in the South African context.

The findings are based on a study in the emerging market context. From the case studies reported, it is evident that industry, organizational and leadership-related factors influence the effective use or non-use of scenario-planning.

Research limitations/implications

Empirical findings are reported, contributing to an assessment framework to revisit the usage of formal and informal scenario-planning in strategic decision-making. Further research to determine which supportive tools and technologies should be used for scenario-planning across multiple contexts is needed.

Practical implications

The study expands upon previous insights into the formal and informal usage (or non-usage) of scenario-planning in strategic decision-making based on an emerging market context.

Originality/value

This study contributes to understanding the value of scenario-planning in complex contexts that require strategic adaptability and offers a hands-on toolkit and shortlist of assessment criteria to conceptualize the organizational reasoning and scholarly framing of formal, informal or non-scenario-planning in strategic decision-making.

• Strategic choice
• Scenario thinking
• Formal and informal usage
• Scenario-planning

Lew, C. , Meyerowitz, D. and Svensson, G. (2019), "Formal and informal scenario-planning in strategic decision-making: an assessment of corporate reasoning", Journal of Business & Industrial Marketing , Vol. 34 No. 2, pp. 439-450. https://doi.org/10.1108/JBIM-03-2018-0096

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Comparing Informal vs Formal Learning: A Quick Guide

Defining formal learning, exploring informal learning, what are the key differences between formal and informal learning, how to integrate formal and informal learning strategies.

Formal learning refers to structured training programs typically found in a classroom setting or through online training platforms. It follows a more traditional delivery method, with clear goals and objectives usually fronted by a certified instructor.

What are some examples of formal learning in the workplace?

• Safety Training: Companies can hold safety training sessions led by a certified instructor. These sessions help employees learn about workplace dangers, safe ways to work, and what to do in emergencies.
• Technical Skills Development: Formal learning programs can help employees gain the specific technical skills they need. This might involve learning how to use certain software or how to operate specialized machines.
• Compliance Training: Formal learning is important for making sure companies follow rules and ethical standards. This includes training on data security, anti-harassment, and the requirements set by compliance boards.

Benefits of Formal Learning for L&D Teams

• Organized Learning: As an L&D leader, you know how crucial it is to ensure consistency in training across the company. Formal training lets you provide organized and uniform learning to your teams in a structured manner. This way, you will be sure that everybody has acquired the same level of knowledge that is considered most important and that it does so in support of shared understanding and alignment to company objectives.
• Knowledge from the Experts: Tapping into subject matter experts as part of your formal training programs is a surefire way to enhance your team’s learning experience. By opening up avenues to quality content and hands-on advice, you are affording your team direct access to those who know best. This not only enriches their learning but also speeds up the development of essential competencies.
• Focused Skill Building: Formal learning programs can be created on analyzing skill gaps or role-specific competency enhancement within the organization. You will be able to choose highly relevant content, design engaging activities, and set clear goals to make sure the training is comprehensive but highly effective in driving the success of your team.

It is a more natural and flexible way to learn. Informal learning happens through social interaction, hands-on experiences, and exploring on your own. It naturally takes place in daily interactions, observations, and when solving problems.

What are some examples of informal learning in the workplace?

• Peer-to-Peer Learning: Workers often ask their coworkers for help, advice, and to share knowledge. This type of informal training happens naturally through talking, mentoring, and working together on projects.
• On-the-Job Learning: A lot of what workers learn comes from hands-on work in their jobs. They improve their skills, solve problems as they arise, and gain real-life knowledge through job training.
• Self-Directed Learning: Employees often look for information and resources on their own to learn more. This can mean watching online videos, joining webinars, or reading articles related to their field.

Advantages of Informal Learning in the Workplace

• Relevance and Context: You already understand how valuable it is to link learning to day-to-day work, having been an L&D leader yourself. Informal learning happens naturally as a matter of course in everyday work; your team will be able to take up the new knowledge and skills that they learn and immediately apply these in their work. This will mean that the learning is highly relevant to them, directly linked to the challenges they face, and therefore practical and impactful.
• Flexibility and Accessibility: Flexibility and accessibility are one of the main advantages of informal learning. Unlike formal training, it does not require rigid schedules or formats. Learning can take place at any time, in diverse social contexts, and through different channels. It becomes easy for your team to learn the way that best fits their preference, which means greater ease in the absorption and retention of information.
• Encourages Curiosity and Initiative: You allow employees to create an environment that embraces informal learning in all its forms. Stimulating independent learning nurtures curiosity and triggers problem-solving activities to bring about continuous improvement. This proactive attitude will keep your team agile, inventive, and ensure long-term success.

Structured vs. Unstructured Settings

Flexibility, assessment type, learning environment, time commitment, examples of successful integration in organizational settings.

Avantika holds an undergrad degree in Political Science and Psychology, bringing a unique blend of analytical and psychological insight to her writing. With extensive experience in content creation and research, she crafts engaging and well-informed content that resonates with readers and drives meaningful conversations.

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