Bahir Dar University, IOT Entrepreneurship for Enineers

School of Mechanical & Industrial Eng. Lecture Note on Business Plan Development

3.6 BUSINESS PLAN DEVELOPMENT

3.6.1 Introduction
3.6.2 Why write a business plan?
3.6.3 Who prepares the business plan?
3.6.4 Overview of business planning aspects
3.6.5 Business planning format

Compiled by: Alemayehu M. 1

3.6.1 Introduction
Planning is an essential tool to become successful both for new ventures and existing companies
but more essential for new ventures as they can not relay on existing plans.
As part of the preparations for launching a new venture, the prospective entrepreneur should
prepare business plan. A business plan is a comprehensive set of guidelines for a new venture. It
describes the new venture idea and projects the marketing, operational and financial aspects of
the proposed business. It lay out your idea, describe where you are, point out whole you want to
go, and how you propose to go there. Although planning is a mental process, it must go beyond
the realm of thought. Thinking about a proposed business becomes more rigorous as rough ideas
must be crystallized and quantified on paper.
When you make business plans:
Make them simple
Choose the most suitable period
Make them before you need to use them
Look for information
3.6.2 Why write a business plan?
The business plan is the most essential document involved when starting, building and managing
a successful business and it is an effective tool for raising the necessary capital as well as
capturing the interest of investors. The business plan is the document that clearly and concisely
defines the goals and objectives of a business, outlining the methods for achieving them. The
business plan is also an excellent communication instrument for investors and suppliers
interested in understanding the operations and goals of the business.
Many businesses fail due to the lack of planning and preparation. To help plan for a successful
business venture, guidelines in this publication would help an operator better understand what
information is needed in the business plan. The more complete and accurate the information, the
more promptly institutions, banks, investors, and suppliers will be able to respond to requests for
business deals.

The main purposes of developing business plan can be summarized as follow:

It can help the owner/manager crystallize and focus his/her idea.

It can help the owner/manager set objectives and give him a yardstick against which to
monitor performance.

It can be used as a vehicle to attract any external finance needed by the business.

It can convince investors that the owner/manager has identified high growth
opportunities.

It entails taking a long-term view of the business and its environment.

 It emphasizes the strengths and recognizes the weaknesses of the proposed venture.

The plan can uncover weakness or alert the entrepreneur to sources of possible danger.

3.6.3 Who prepares a Business Plan?

The question of who prepares the business plan depends very much on the type of business and
the structure and size of the company. In very small companies, the drafting and planning of the
document may be done by managers and owners themselves or it will be outsourced to external
consultants. In a bit larger organisations contributions can come from different people both
within and outside the organisation. It must, however, be stressed that even though you choose to
include the support of an external consultant in your writing of the business plan, you must be
very much involved in the process as well. You should know and understand every little
detail of your business plan, because in the end it is not the external consultant who will
implement it but you together with your employees. You must work with the external consultant
all the way and you must believe in the strategies and figures.

3.6.4 Overview on the aspects of Business Planning

The business plan describes what the business will do, how and where it will be done, and how
the business will be financed and managed. In working out your own project, you should prepare
a sound business plan based on data which you collected and in which you have the utmost
confidence. Make your business plan tailor-made based on your specific strengths and
weaknesses. Decide on how much of your savings should be invested in the project, how much
income you should generate from the business, who your clients would be, and which technical
process is in line with your level of skills, resources and market size.

In order to prepare a complete business plan, try to encompass the information outlined in the
table below. More over, the business plan format, including all necessary explanations are
provided in the next section 3.6.5 and 3.6.6 to help you in developing successful business plan.

Business Plan Outline for Small Business

Executive Summary
 Personal Profile
Mission Statement
objectives
1. Business Profile
1.1. Company history
1.2. Product/Service description
1.3. Target market and customers
1.4. Business growth trend
1.5. Company Core Competencies
1.6. Business Collaborators
1.7. Business organization and license
1.8. Business location
1.9. Strength, weakness, opportunity and Threat
2. Market study
2.1. Introduction
2.2. Product/Service from customers point of view
2.3. Customer analysis
2.4. Competition
2.5. Target Market size and sales forecast
2.5.1. Geographic area of target market
2.5.2. Estimation of available market
2.5.3. Market share
2.5.4. Sales forecast
2.6. Marketing strategy
2,6.1. Pricing strategy
2.6.2. Promotion strategy
2.6.3. Business location and Distribution channel
3. Production
3.1. Production process
3.2. Machineries & equipment requirements
3.3. Raw material requirement
3.4. Labour requirement
3.5. Factory overhead expenses
3.6. Production cost
3.7. Production plan
4. Financials
4.1. Estimation of capital requirement
4.2. Profit & Loss statement
4.3. Cash flow statement
4.4. Balance sheet
4.5. Break-Even analysis
4.6. Return on investment
3.6.5 Business plan format
The start-up (new venture) business plan is not based on existing experiences of previous
production exercises but on estimations based on an initial market analysis and projected cost
calculation.

Business Plan
Personal Data
Full name of the entrepreneur/ partners................................................................
Address: ........................................................................................................
Educational qualification................................................................................
Special training..............................................................................................
Work experience............................................................................................
Naming your business
Determining the right name for your business is a critical step
The name should communicate:
What you do or make
What customers should value in your product or service
Include adjectives to bring your name to make the name more memorable
Cover page
The external appearance has its own contribution in communicating the content of the business
plan. The information included in the cover sheet must be simple highlighting the name of the
company with full address (telephone, fax, e-mail and name of person to be directly contacted
for further question with the date of business plan preparation), company logo if there is one
with limited size and at the centre the word business plan preceded by the company name
should appear. The second page will be for table of contents and it is highly preferable that it will
be limited to one page.
Executive Summary

The Executive Summary, although appearing first in the order of presentation in the Business
Plan, is actually the last to be prepared, that is, after the three sections of the business plan
(marketing, production/operation, and finance) have been completed.

If the executive summary does not succeed, your business plan will never sell investors. It is
recommended to place executive summary at the beginning of your business plan. Since one of
its primary functions is to capture the investors attention, the summary should be no longer than
two pages. The shorter the better.

Explain the fundamentals of the proposed business: What will your product be? Who will your
customers be? Who are the owners? What do you think the future holds for your business and
your industry?

Generally, try to address the following issues in your executive summary:

1. What is the nature of the project?

Briefly describe the project Product/service of the proposed business, benefits of the
product/service and the need identified and why the need exists, trends and risks of the market
and who are the customers and the expected market share, competitive advantage and key
suppliers and technological change in the industry, location of business and zoning laws, legal
form, plan of operation and main financial indicators such as projected and actual sales earnings
and profit after tax.

2. What are the entrepreneur's competencies and qualifications?

Give a brief introduction of yourself as an entrepreneur, your background, your past track record,
business experience and training, especially mention those skills, qualities, networks and
contacts with persons/enterprises needed by or related to the project, and how you plan to use
this knowledge and skills to successfully run the business.

3. What are the project's contributions to the local and national economy?

Describe the important socio-economic and developmental contributions of the proposed project
to the local and/or national economy. These contributions should be significant factors and
priority concerns of the government, banks and society in general. These contributions may
include employment generation, utilisation of local skills and materials, income generation,
import substitution, export earnings, etc.

Make your executive summary enthusiastic, professional, complete, and concise.

If applying for a loan, state clearly how much you want, precisely how you are going to use it,
and how the money will make your business more profitable, thereby ensuring repayment.

Mission Statement: Many companies have a brief mission statement, usually in 30 words or
fewer, explaining their reason for being and their guiding principles. Under mission statement,
describe your ultimate goal. Briefly explain Why does your organization exist? What do
differently? How create value?

A good mission statement is compelling, inspiring, concise, and clear and measurable goal.

Your mission statement will be followed by company objectives (you may also include company
goal).

Goal and Objectives: Goals are destinationswhere you want your business to be. Objectives
are progress markers along the way to goal achievement. For example, a goal might be to have a
healthy, successful company that is a leader in customer service and that has a loyal customer
following. Objectives might be annual sales targets and some specific measures of customer
satisfaction. It is recommended to specify your short-term (12 months) and long-term (after the
first 12 months) financial target in terms sales amount, profit and growth rate.

Mission statement template:

Our mission is to become [describe your ultimate goal, or insert your mission statement;
example; the leading manufacturer and marketer of branded in-line skate replacement wheels or
the first name in low fat cheese].

We aspire to carry a reputation in the marketplace for developing and delivering [time saving,
better-way products sold at a fair price for uses in the {x} market]. We can achieve this by
[cutting edge product development, close understanding of market trends and needs, innovative
and profitable merchandising and packaging].

Mission statement examples:

Example #1: Semiconductor Equipment company

[Semiconductor Equipment] will become a world leader in supplying lithography automation

and productivity enhancement products for the semi-conductor industry through innovative
design and unique customer insights.

Example #2: Website Management Co

The mission of [Website Management Technologies] is to help businesses engaging in e-

commerce achieve their sales and customer service objectives by enabling a better
understanding of Web site visitors behavior.

Example #3:

To make, distribute and sell the finest quality all-natural ice cream and related products in a
wide variety of innovative flavors made from Vermont dairy products.

Ben & Jerrys

To satisfy the world's appetite for good food, well served, at a price people can afford.

McDonalds

1. Business Project Profile

1.1. Company History

Company history: Briefly describe the following issues:

 What is the status of your business? (Start-up or Existing)
Who started the business?

When was your business founded? [Date]

When will your business open? [Date]

Why was it founded?

When was your products introduced /will be introduced? [Date]

1.2. Products/Services Description

Describe in depth your products or services (technical specifications, drawings, photos, sales brochures,
and other bulky items belong in Appendices). What burning marketplace needs are addressed by your
product? What value do you add to the product?

What factors will give you competitive advantages or disadvantages? Examples include level of quality or
unique or proprietary features.

This is a crucial section to show your uniquenesses to your sources of capital. Investors must see
something unique, proprietary, or protected about your product or service. Explain the unique value-added
characteristics your product line or process provides to customers and how these characteristics translate
into a competitive advantage for your company.

Generally, try to address the following issues:

What are you selling?

What are you selling and what are the characteristics of your product or service? If Product,
describe size, colour, shape, quality etc.
Is your product or service a new or a existing product?(A new product/service or an existing one)
What problems do you solve with your product or service?
Which customer needs will be fulfilled and what benefits will the customers obtain?
How will your product or service be used?

Uniqueness
o How is your product unique?
o Why will your product or service be successful in the market?

Competitive Comparison
o How is your product different from the product of your competitors?

How does it compare in quality and price with its competitors?

What is the current state of your product or service? Is it ready for the market?
If No, When will it be ready? What is missing?
How will your product be further developed?

What have been the development costs?

1.3. Target Market and Customers

Describe your customer profile and why customers want or need your product/service
(State it briefly hereyou will do a more thorough explanation in the Marketing Plan section).
1.4. Business Growth Trend
Is the market for your proposed product (business) growing or shrinking.
1.5. Company Core Competencies
Describe your most important company strengths and core competencies. What factors will make
the company succeed? What do you think your major competitive strengths will be?
Describe convincingly that you are passionately committed to your new business and have the
realism to make inevitable hard choices.
Describe your background, experience, skills, which will be required in your proposed business.
1.6. Business Collaborators
The leverage from relationships can be appealing to investors. Explain the possible
collaborator/strategic alliance and how you work with others to improve your performance.
1.7. Business Organization and Licenses
Name of the Business: List the legal and trade names of your proposed business
Office Location: Indicate your intended principal office location (if appropriate)
Licenses: List the appropriate licenses or business registration you will need at local,
regional (state), and federal level
Business Legal Form: Explain the form of business organization you intend to use and
why it is best for your business (include the strengths and weaknesses of the legal
structure)
1.8. Business Location and Infrastructure
The strategic location of the business can play a decisive role in its success or failure. Explain the
work premises and other utilities at your disposal and describe the specific working premise
problems, the space needed for the business, the desirable features of the location and its
accessibility to the market. If there is anything in the location that is of special interest for your
business, you can stress it, too.
1.9. Strength, Weakness, Opportunity and Threats
Explain the strength, weakness, opportunity and threats of your proposed business.

2. Market Study
2.1. Introduction
Briefly describe your marketing activities. Use the following seven sentence introduction and
example as a guideline to write your introduction.
Seven sentence introduction
1. The first sentence tells the purpose of the marketing strategy.
2. The second tells how youll achieve this purpose, focusing upon your benefits.
3. The third tells your target market or markets.
4. The fourth, the longest sentence, tells the marketing weapons youll employ.
5. The fifth tells your niche.
6. The sixth tells your identity.
7. The seventh tells your budget, expressed as a percentage of your projected gross
revenues.

Example: Introduction to market study

The purpose of Prosper Press is to sell the maximum number of books at the lowest possible
selling cost per book. This will be accomplished by positioning the books as being so valuable
to free-lancers that they are guaranteed to be worth more to the reader than their selling price.
The target market will be people who can or do engage in free-lance earning activities.
Marketing tools to be utilized will be a combination of classified advertising in magazines and
newspapers, direct mail, sales at seminars, publicity in newspapers and on radio and television,
direct sales calls to bookstores, and mail-order display ads in magazines. The niche to be
occupied is one that stands valuable information that helps free-lancers succeed, the ultimate
authority for free-lancers. Our identity will be one of expertise, readability, and quick response
to customer requests. Thirty percent of sales will be allocated to marketing.

2.2. Product/Service-from Customers Point of View

In the Products and Services section, you described your products and services as you see them.
Now describe them from your customers point of view.
Explain the Features and Benefits of your products or services
List all of your major products or services.

For each product or service:

Describe the most important features. What is special about it?

Describe the benefits. That is, what will the product do for the customer?
Note the difference between features and benefits, and think about them. For example, a house
that gives shelter and lasts a long time is made with certain materials and to a certain design;
those are its features. Its benefits include pride of ownership, financial security, providing for the
family, and inclusion in a neighborhood. You build features into your product so that you can sell
the benefits.
What after-sale services will you give? Some examples are delivery, warranty, service contracts,
support, follow-up, and refund policy.
2.3 Customer Analysis
Identify your targeted customers, their characteristics, and their geographic locations.
The description will be completely different depending on whether you plan to sell to other
businesses or directly to consumers. If you sell a consumer product, but sell it through a channel
of distributors, wholesalers, and retailers, you must carefully analyze both the end consumer and
the middleman businesses to which you sell.
The following is a series of checklists, which can guide you in your interview with wholesalers,
retailers, and consumers (people who use the product) or customers (people who buy your
product). The questions are intended to be illustrative and you should learn how to begin your
interview (by being friendly with your interviewees so that they will open up and not feel
suspicious or threatened) and pose your questions diplomatically, politely and clearly to attain
the desired information and accurate answers.
If the questions are adequately answered, you can make a preliminary estimate of the total
demand in your market area and the share of the market which you can realistically capture,
given an effective marketing strategy. If similar products are distributed mainly by wholesalers
and retailers, conducting such a survey is really the first step in establishing a relationship with
your customers and finding out their needs.
There are two main reasons for carrying out the survey:
a) Accurate collection of information, so that a reliable level of sales and production can be
forecasted;
b) Establishment of good relations with your own potential customers.

Wholesalers'/Importers' checklist
Most consumer products such as biscuits, sugar, toothpaste, matches, etc. find their way to the
consumers by means of wholesalers who purchase the goods in bulk from a factory or
distributors and then sell them in smaller quantities to grocery stores and retail shops
(customers). Since there are usually few wholesalers and many retailers, it is often best to start
your market survey by visiting the wholesalers. Once you have defined your market area, try and
locate all the wholesalers who supply your area and ask the following questions:
1) How many wholesalers are there in your market area? What are their names and where are
their locations?
2) What market areas does each wholesaler cover?
3) How often does each of your products sell per year? Are your sales of the product increasing
every year? If yes, by how much?
4) Are seasonal fluctuations present?
For example: 1 2 3 4 5 6 7 8 10 11 12 months
High
Medium
Low
5) What about the extent of competition? Are they large in size, are their product features the
same, what are their quality standards? What are their marketing practices?
6) What about product improvements, i.e. do they think the market needs some new designs,
more varieties, better features, new product specifications?
7) What are their selling prices of your products?
8) At what price do they buy them?
9) What is the length of credit extended to them by their suppliers (one week, one month?), if
any?
10) Assuming your product is of suitable quality and priced competitively, how much of your
product would they take as a sample order?
Retailers' checklist
Retail shops are the last link between producers and consumers. Ultimately, they make the final
sale to the public. Their proximity to the buyers makes them valuable sources of information on
what people actually want and buy.
For example, if a person buys ink that turns out to be of poor quality, then the customer will
complain to the shop where he purchased it, rather than going to the factory. For this reason,
retailers are in a strategic position to identify gaps within the market, particularly between what
the customers demand is and what his wholesalers can supply. A few creative retailers may be
able to give you new product ideas that could also be realised in your factory.
The objectives of interviewing retailers are:
a) To cross-check data provided by wholesalers;
b) To learn about the needs, wants, tastes, buying habits, etc. of the consumers;
c) To look for potential new products;
d) To learn how to position your product as against your competitors products;
e) To learn how to market your product more effectively;
f) To help identify promotional measures that will be useful in selling the product (e.g. display
boards, give-aways, samples, etc.);
g) To help formulate the marketing strategy of the business.
A few questions which may be asked from the retailer:
1) How much of the product does he sell in a year?
2) How many competitors does he have in his neighbourhood?
3) Does he experience any seasonal fluctuation in sales?
4) From what wholesaler or manufacturer does he buy the product?
5) Is he given any credit by his suppliers?
6) If he is given credit for the product, for how long is the credit given?
7) Does he sell on wholesale anywhere, if so, where?
8) What is his purchase price of the product?
9) What is his selling price of the product?
10) Does he have any ideas whether his customers would like some changes or improvements of
the product?
11) Does he buy the product by means of cash or on credit?
12) Does he sell on commission?

Customers' or consumers' checklist

Even if you have interviewed wholesalers and retailers, it is important to discuss market
acceptance with customers (who buy the product) and consumers (who use the product). Their
feedback is very useful, either to cross-check previously collected opinions or to capture new
ideas that neither of the other two groups of interviewees have touched on or reflected.
In particular, if your product is a capital good (e.g., machinery), it is necessary to talk to
consumers as they normally purchase directly from the factory. A few questions which can be
asked from customers and consumers are:
1) Why did you buy this product?
2) When (What month) did you buy it?
3) How often do you buy this product?
 4) Will you need more of this product in future? How many units?
5) How much did you pay for it?
6) Are you satisfied with it?
7) Would you like to see any changes or improvements?
8) From where did you buy it (locality), from whom?
9) Why did you buy it from this particular supplier?
You must have a profile record of your interviewees (wholesalers, retailers, consumers),
including information such as age, occupation, income, buying habits, sex, consumption patterns
etc., as this information will be helpful in analysing and describing your market.

3.4. Competition
What products and companies will compete with you?
List your major competitors: (Names and addresses)
Will they compete with you across the board, or just for certain products, certain customers, or in
certain locations?
Will you have important indirect competitors? (For example, video rental stores compete with
theaters, although they are different types of businesses.)
How will your products or services compare with the competition?
Use the Competitive Analysis table below to compare your company with your two most
important competitors. In the first column are key competitive factors. Since these vary from one
industry to another, you may want to customize the list of factors.
In the column labeled Me, state how you honestly think you will stack up in customers' minds.
Then check whether you think this factor will be a strength or a weakness for you. Sometimes it
is hard to analyze our own weaknesses. Try to be very honest here. Better yet, get some
disinterested strangers to assess you. This can be a real eye-opener. And remember that you
cannot be all things to all people. In fact, trying to be causes many business failures because
efforts become scattered and diluted. You want an honest assessment of your firm's strong and
weak points. Now analyze each major competitor. In a few words, state how you think they
compare. In the final column, estimate the importance of each competitive factor to the customer.
1 = critical; 5 = not very important.
Competitive Analysis

Factor Me Strength Weakness Competitor A Competitor Importance

Products
Price
Quality
Factor Me Strength Weakness Competitor A Competitor Importance
Selection
Service
Reliability
Stability
Expertise

Company
Reputation

Location
Appearance

Sales Method

Credit Policies

Advertising

Image
Now, write a short paragraph stating your competitive advantages and disadvantages.
2.5. Target Market size and Sales Forecast
2.5.1. Geographic Area of Target Market
Determining the geographical coverage (that is, where to market the product) depends very much
on the nature of the product; how well it lend itself to transport and distribution; the size of the
market in different localities; the presence of strong competitors in the areas under consideration;
your willingness to travel and, of course, on existing contacts or channels of distribution you are
familiar with. In general, it is easier to deal with a limited market area, since travel time and
distribution costs can be kept to a minimum.
2.5.2. Estimation of Currently Available Market Size
This estimate should be possible to carry out in a number of ways. Basically, the approach is to
move from the general to the particular. For example, you can start by estimating consumption,
usage or sales of the product per head of the population in your market area.
Then, one by one eliminate certain segments (specific groups categorised by age, income,
location, sex, habits, etc.) of the population who may not be your consumers, so that at the end a
reasonable figure can be assumed to be correct. If possible and available, it is also good to check
certain statistics. If you cannot make use of any reliable statistics (secondary data), it may be
better to carry out a simple and low-cost sample survey, i.e., gather firsthand or primary data. For
example, if you know how many shops there are which sell your or similar products, and if you
question a few of them regarding their sales, you can estimate the total sales of the product.
2.5.3. Market Share
Here, you are expected to answer the question-What share or percent of the above estimated
market size can be captured by your proposed business?
This is always a difficult question to answer precisely, since much depends on your ability as an
entrepreneur to sell your product, your network, the effectiveness of your marketing strategy and
your aggressiveness in pushing the product combined with business common sense. It also
depends on the extent and strength of competition. However, certain guidelines can be given. If
you have done your market survey properly, you will know the following information on your
competitors:
a) whether there are few or many competitors;
b) whether they are large or small in size;
c) whether their product features are similar or different to one another;
d) whether their product features are similar or different to yours.
The following decision guide may help in processing this information to make an estimate of
your market share.

Decision Guide
Number of Their Size * Their Product Market Share (in %)
Competitors Features
Many Large Similar 0 - 2,5
Few Large Similar 0 - 2,5
One Large Similar 0 - 5
Many Large Dissimilar 0 - 5
Few Large Dissimilar 5 - 10
Many Small Similar 5 - 10
Few Small Similar 10 - 15
One Large Dissimilar 10 - 15
Few Small Dissimilar 20 - 30
One Small Similar 20 - 50
One Small Dissimilar 40 - 80
Total 100
* Assumed that your business is in the "small" category when entering the market.
2.5.4. Sales Forecast
Now that you have estimated the market share you can realistically capture, make an estimate of
your targeted sales (sales forecast), that is, every month for the first year and yearly for the next
five years. The first annual sales forecast is generally a fraction of the estimated market share and
could be anywhere from 60 to 80% of the market share at the beginning. This is to take certain
errors in estimating the market into consideration.

2.6. Marketing Strategy

2.6.1 Pricing Strategy
Explain your method or methods of setting prices. For most small businesses, having the lowest
price is not a good policy. It robs you of needed profit margin; customers may not care as much
about price as you think; and large competitors can under price you anyway. Usually you will do
better to have average prices and compete on quality and service.
In selecting your pricing strategy, consider the following factors (refer the market analysis you
carried out in previous sections)
Does your pricing strategy fit with what was revealed in your competitive analysis?
Compare your prices with those of the competition. Are they higher, lower, the same?
Why?
How important is price as a competitive factor? Do your intended customers really make
their purchase decisions mostly on price?
What will be your customer service and credit policies?
There are three common ways of determining the selling price of your product. These are:
a) The "cost-plus method"
This is done by adding a reasonable profit margin (say 20% to the final total product costs (i.e.,
marketing costs plus production costs plus administration costs, plus finance costs). The final
product costs per unit are determined by dividing the total product costs by the number of units
produced. To this figure you may add a profit margin.
b) The "comparative method"
This method compares your product with others in the market and then, based on your product's
quality and other features, you may fix your price lower, higher or at the same level as your
competitors price.
c) "What the market will bear method"
This method is based on supply and demand of the product. For instance, if there is a scarcity of
the product in the market (sellers' market), you can set your selling price at a high level; hence
your profit margin could be higher. Similarly, if there is a surplus of the product in the market
(buyers' market), you may be forced to lower your price, and consequently your profit margin.
(Two alternatives to avoid reducing profit margins are: (1) to reduce the product costs by
identifying which areas under marketing, production, administration and finance can be
reduced), and (2) to identify other market segments that can afford to buy at the original price).
In practice, all three methods should be used from time to time in any business, but in general
and especially when starting a business, it is safer to use the "Cost-Plus Method". It is also a
good business strategy to anticipate your competitors reaction to your pricing strategy.
2.6.2. Promotion Strategy
Promotion is one of the most neglected aspects of marketing a product. Promotion is necessary to
entice and convince buyers into purchasing your product and not those of your competitor.
Consider the following factors before deciding the promotional measure:
Advertising: What media, why, and how often? Why this mix and not some other?
Have you identified low-cost methods to get the most out of your promotional budget?
Will you use methods other than paid advertising, such as trade shows, catalogs, dealer
incentives, word of mouth (how will you stimulate it?), and network of friends or
professionals?
What image do you want to project? How do you want customers to see you?
In addition to advertising, what plans do you have for graphic image support? This
includes things like logo design, cards and letterhead, brochures, signage, and interior
design (if customers come to your place of business).
Should you have a system to identify repeat customers and then systematically contact
them?
Promotion is generally divided into advertising, sales promotion, publicity and personal selling.
A few of these measures are:
radio advertisements, newspapers, magazines, trade journals or, if appropriate also via
television,
volume discount (reduced prices when selling in bulk);
handbills distribution;
prompt, regular, courteous and efficient service;
 good merchandising ensuring the proper display of your product on the shelves of your
market outlets;
special credit facilities to regular customers;
posters; billboards; signboards;
free samples; free trials;
press releases;
buy one - take two;
raffles; coupons;
sponsorship of local shows, festivals;
participation in trade fairs and exhibitions;
personal selling.
One word of caution on promotional measures: These activities cost money to your business, so
be sure that for every promotional measure adopted, there is a foreseeable increase in sales.
Without a justifiable increase in sales, costs will escalate, hence increasing the unit costs of the
product. Make sure to include these costs in your marketing budget.
2.6.3. Business Location and Distribution Channel
Probably you do not have a precise location picked out yet. This is the time to think about what
you want and need in a location. Many startups run successfully from home for a while.
You will describe your physical factory building needs later, in the Production/Operational Plan
section. Here, analyze your location criteria, as they will affect your customers.
Try to see the following points in deciding business location and channel of distribution:
Is your location important to your customers? If yes, how?
If customers come to your place of business:
Is it convenient? Parking? Interior spaces? Not out of the way?
Is it consistent with your image?
Is it what customers want and expect?
Where is the competition located? Is it better for you to be near them (like car dealers or
fast food restaurants) or distant (like convenience food stores)?
Distribution Channels
Based on the analysis of customers in different categories; such as wholesalers, retailers,
consumers, and your business location, decide your channel of distribution and justify your
selection
How do you sell your products or services?
Retail
 Direct (mail order, Web, catalog)
Wholesale
Your own sales force
Agents
Independent representatives
Bid on contracts

Checklist Marketing

Customers
Who are or will be your customers? Individual Consumers (answer questions related to individual
consumers)
Businesses (answer questions related to businesses)
Wholesalers
Retailers
Service providers
Government
Other

Characteristics of the Customers

Within the specific market you have chosen, to
whom will you aim to sell (are you selling) your
products?

Individual consumers
Where do your customers live (geography)?
What is the age range of your customers?
What is the annual estimated income of your
customers?
What is the educational background of your
customers?
What is the sex of your customers?
What is the family size of your customers?
What is the occupation of your customers?

Businesses
What kind of business is it? Manufacturer
Retailer
Wholesaler
Service provider
What is the company size? (micro, small,
medium?)
Where are they located?
What are their sales volumes?
How many employees do they have?

Important factors
What factors are important for your customers Appearance (colour, texture, shape, material etc)
when buying your product or similar ones? Durability
Fragility (ease of handling, transportability)
Innovation
Operating characteristics (efficiency, adaptability etc)
Packaging
Quality
Service
Warranties
Why, when and where?
Why would the customers buy your product
(Good quality, low price, good service etc)?
What benefits do you (can you) provide your
customers?
Why will they buy your products or services and
not the ones of your competitors?
When would the customers buy your product or
service?
Where do the customers currently buy products or
services similar to yours?

Where would the customers buy your product?

Customer Groups
Could you divide your customers into different
groups? (age, gender, income bracket,
rural/urban)
What are the most important customer groups?

Market Area/Geographical Coverage

What will your geographical coverage of your Local
product be? National
Where will you market your product? Regional
International
Market Size
What is the size of the market?
How much of the product/service is currently
being sold?
How many potential customers do you estimate
exist in the market?
How many customers do you need?

Market Share and estimated sales

What share or percent of this market can be
captured by your business?
How often will the customers buy your
product/service?
How much of your products/services do you
expect that each customer will buy a year?
Competitors
Who are your 5 most important competitors? Competitor 1:
Address:
Competitor 2:
Address:
Competitor 3:
Address:
Competitor 4:
Address:
Competitor 5:
Address:
How many years have they been in business?
What are they selling?
What is the price of their products?
What are their annual sales?
How do their products differ from yours?
Why do you think that you can capture a part of
their market/business?

Strengths and Weaknesses

What are the perceived strengths of your Convenience Price Service
competitors? (for each competitor) (location) Production Timeliness
Why do customers buy their products? Distribution capabilities Value
Experience and Quality Other
knowledge Reputation
Image Sales
Longer opening
hours

What are the weaknesses of your

Convenience Price Service
competitors? (for each competitor) (location) Production Timeliness
Distribution capabilities Value
Experience and Quality Other
knowledge Reputation
Image Sales
Longer opening
hours
What are your strengths compared to your
competitors?
What are your weaknesses compared to
your competitors?

3. Production
3.1. Production Process
In order to find out what costs (labour, raw material and overheads) are involved in production, it
is useful to follow the whole production process and to identify how the raw material are
received and gradually, step-by-step, transformed through various processes (e.g., cutting,
mixing, assembling, finishing, packaging, etc.) into a finished product. Description of the process
need not be a lengthy explanation, but should cover all the major operations. A process flow
chart is a useful tool to depict the production process. This will also clarify how many workers
are required at each stage and what skills are needed.
In this section, make sure that your business plan contains the following issues:
Production Process (Manufacturer)
Production methods
- What is involved in the production process? (show the flow process chart)
Materials
- What buildings and machinery (fixed assets) are needed and what will be their cost?
- When and where can the machinery be obtained?
- When and how will the machinery be paid for?
- How will maintenance be done and are spare parts available locally?
- What materials do you need for the production of the products and how much?
Source of supply
- Which parts of your product will be bought and which parts will you do yourself?
- Who delivers these products?
- What are the sources of raw materials? Are they available throughout the year?
Production Capacity
- What is your production capacity?
- How much capacity will be used?
- What are the plans for using spare capacity?
Labour
- How many workers are needed and what skills should they have?
- How is the availability of labour?
Costs
- What are the design and development costs?
- How much will the raw materials cost?
- What will be the cost of labour?
 - What factory overhead expenses are involved?
- What is the production cost per unit?
Service providers
- What is the process of delivering the service?
- What is your service delivery capacity?
- What are the design and development costs (e.g. consulting fee, preparation of
materials, training)
-You should also include any issues that are applicable in your business from
manufacturers section (listed above)
3.2. Building and Machineries (Fixed Asset) Requirement

I. What building and machinery (fixed assets) are needed and what will be their costs?

Identify these items carefully and estimate their costs accurately. If the requirements are over-
estimated, the results can either be:

a) Too much production occurs and stocks are built up - this costs money and ties up capital
uselessly and unnecessarily;

b) Excess capacity means that you are investing in certain assets or paying interest on building
and equipment that are not providing you with any return. This will also increase costs in the
long-run by having a higher depreciation than necessary;

c) There is also the possibility that the project may not be financed at all because it appears too
expensive.

In general, it is better to start on a very modest scale with a small building, or even rented space,
and with the minimum essential machinery. Remember, if the demand for your product exceeds
the 8-hour capacity (one shift) of the equipment, an extra shift can be added at a later stage, or
you can operate on overtime after the regular shift has ended. Especially when starting a
business, proceed with capital purchases with extreme caution and only when the market is
secured.

Regarding machine capacity the supplier should give the correct information to the entrepreneur.
In many cases, suppliers tend to over-rate the capacity and efficiency of their machinery; so do
not count on the machines working at 100% rated capacity.

By determining the realistic capacity of each machine, it is then possible to estimate accurately
the proper balancing of the machines and men, i.e. how many of each tools or machines are
required, and correspondingly the workers and skills required operating the machines to ensure a
smooth and efficient production operation.

Determining the costs of building and machinery should be relatively easy, since every
entrepreneur can find out this information from machinery suppliers. Again, you should be
cautious not to build fancy buildings or obtain equipment, which is too modern or too
sophisticated to operate and maintain. Machinery salespersons usually try to sell the most
expensive or most modern equipment first, so be aware of what you need and can afford, and do
not be led into purchasing equipment, which may not be essential or even suitable to your scale
of production, especially in the initial stages of your operation.

Be aware that there may be a wide range of technology options ranging from labour-intensive
(more labour is required relative to the number of machines or investment in machines) to
capital-intensive (more machines are used or higher investment in machines relative to the labour
required).

If quality labour supply can be assured, it is often wise to use labour-intensive technology, since
your factory will be less dependent on its machines, which can break down at any time, suffer
from power failure, and be idle for lengthy periods. If, on the other hand, labour is troublesome
and unreliable due to seasonal availability, a more capital-intensive approach on a modest scale
may be more practical. However, if workers are properly motivated, they can be encouraged to
become more reliable.

Finally, list all the land and improvements, building, furniture and fixture, machinery and factory
equipment including installation costs, stating their size, capacities and costs, to eventually arrive
at the total costs of fixed assets.

Table 3.2 Machinery/Equipment requirement

3.2 Machinery/Equipment Requirement

No Item Unit Total Life time Maintenance Source
Price Value Costs
1
2
3
4
Total:

II. What is the useful life of the building and machinery?

The answer will depend on the make of the building (i.e., whether made of wood, concrete
structure, etc.) and machinery and on how much you use your fixed assets. To arrive at an annual
depreciation charge, deduct the scrap value at the end of its expected life, and then divide the
value of the asset by the number of years of its productive life. If it has no scrap value, simply
divide the value by the number of years.

Tax Office of different countries publish different general rates of depreciation. In many
countries, general practice is as follows, although certain variations may exist:

Fixed Assets Life Annual Depreciation

Machinery 10 years 10%

Building 20 years 5%
 Furniture 5 years 20%

Vehicle 7 years 15%

III. How will maintenance be done and are spare parts available locally?

It makes little sense to import equipment which, although it may be more dependable, may result
in long work stoppages while you wait for the arrival of spare parts from abroad. Maintenance
service and spare parts should be available locally to ensure continuous production. Do not forget
to estimate the costs of maintenance and spares, as this will form part of the production costs.
Maintenance costs are part of factory overhead expenses.

IV. When and where can the machinery be obtained?

It is necessary to check with machinery suppliers. Estimate accurately the delivery time of the
machinery, as this is vital in preparing your pre-operating schedule. Also, do not forget to include
in the costs of the machinery, the transport costs to the factory, import duties (if imported),
insurance up to the point of installation and installation charges, if any.

V. How much capacity will be utilised?

100% capacity utilisation normally means that the equipment is working eight hours a day, six
days a week. Most factories work on an 8-hour, one shift basis and many of them use their
equipment for only a portion of this time. Seasonal fluctuations in capacity utilisation should be
accounted for. A good example is a brick factory where operations may run continuously for 24
hours a day during the construction season and may be shut down for six months due to rainy
season.

VI. What are the plans for using spare capacity?

Machines and equipment should be used as much as possible. This keeps the workers in a steady
rhythm and the equipment in good running order. During periods where low capacity utilisation
is foreseen, attempts should be made to ensure that other works (e.g., product improvement and
development) are undertaken, which may not at first be directly related to the main production,
but which at a later stage may be developed into a new product.

VII. When and how will the machinery be paid for?

Certain machinery suppliers are prepared to sell their equipment on hire-purchase scheme. This
spreads the costs of the machinery over a longer period of time, resulting in higher total costs,
but it enables the business to have greater cash liquidity or lower investment requirements during
the start up period. Before purchasing the equipment, find out the terms of sale, i.e. whether cash,
credit, or leasing, the length of payment and other conditions, such as guarantees, after-sales
services, training of operators.
VIII. Where will the factory be located and how will the factory be arranged?

Almost always in small and medium industries the factories have the same location as their
business addresses.

Equally important is to determine the floor space required by the business (for production, office,
store room, toilet, etc.) and more importantly how the factory space is going to be laid out in
terms of the spatial arrangement of the machines and equipment. To answer this question, it is
essential that you must know the production process and the machines/equipment needed for
each process, so that you can arrange the machines according to the production flow as much as
possible.

You can also determine the size of the machines and the space they will occupy (including
allowance for movement). A plant layout will be very useful for this purpose. You can arrange
your machines in a straight line or a U-shape.

3.3 Raw Material Requirement

I. How much raw material is required?

Now that you have a good idea of the production level you want to achieve, find out the type,
quality and quantity of raw material needed. Find out the input-output ratio or conversion ratio,
e.g. how many kilos of oil would be required to produce 120 kg of soap per day. These should be
specified according to square meter, kilo, ton, pieces, etc., which will be used per month.

II. How much will the raw material cost?

After determining the quality and quantity of the needed raw material, find out their unit costs
(i.e.,2,000 Birr per ton, 15 Birr per square meter, etc.), list these costs next to the material and
prepare a list of average monthly raw material requirements and their costs. Include duties and
relevant taxes, if raw material is imported.

III. What are the sources of raw material? Are they available throughout the year?
In sourcing raw material, at least three factors are critical. Firstly, the price should be as low as
possible. Secondly, their source should be as close as possible to the production site to reduce
transport costs. Thirdly, the source should be reliable.

If raw material is not available throughout the year, at least two alternatives are possible - either
the factory will have to reduce production or it must build up a stock of raw material when they
are available and plentiful, so that production can be continuous. If the latter is chosen, additional
working capital is required and should be included in the calculation of your cash needs and
determination of your project's investment requirements, so that the business can cope with this
situation. For example, think of the problem involved in obtaining fruit for a fruit processing
plants during off-season!

Table 3.3 Raw material requirement

3.3 Raw Material Requirement

No. Item Quantity Total Annual Requirement
Value Source
1
2
3
Total:

3.4 Labour Requirement

I. How many direct and indirect workers are needed and what skills should they have?
Labour in a factory is divided into direct and indirect labour. Direct labourers are those who are
directly or intimately involved in the production process. Indirect labourers are all further
workers who facilitate production such as utility men, foremen, maintenance workers, among
others, who are not directly involved in production.
To determine the number and type of direct labourers needed, break down their skills into three
categories: skilled, semi-skilled and unskilled. Their salary scales should be calculated
accordingly.
II. What will be the costs of labour?
Estimate how much each worker (for example, from the production supervisor/foreman down to
the production worker, maintenance man, utility man) should receive on a monthly basis. Labour
costs should include effective total labour costs to cover basic salaries, wages, fringe benefits,
paid leaves, free meals, social and medical insurance, etc.
In certain cases, direct labour will be paid according to piece work. If this is the case, estimate
the production output of the worker and multiply this number by the respective piece rate.
III. Are workers available throughout the year? If not, what effect will this have on
production?
Many factory workers in small and medium businesses receive low wages and, therefore,
supplement their income with agricultural or other extra external jobs. If this is the case, the
business must be ready to cope with such a situation and, either pays its workers competitive or a
higher wages/salaries/piece rates, or recruit new or temporary workers during this period, or even
be prepared to reduce production. Whatever course of action is decided upon, it must be
accounted for in determining the production schedule.
IV. How will the workers be motivated?
Workers can be motivated in a number of various ways: humane treatment, good working
environment, increased responsibility, other incentives (e.g., profit sharing, awards for deserving
workers, bonuses and providing facilities, such as meal and snack allowances, transport
allowances, medical allowances, lodging, etc.) If these are given, their costs should be calculated
and included in computing actual labour costs or as overheads.
Table 3.4 Labour requirement
3.4 Labour Requirements
No. Labour Categories No. of Staff Annual wages/ Further Training
Salaries required
1 Skilled
2 Semi-skilled
3 Unskilled
4 Owners salary
Total:
3.5. Factory Overhead Expenses

Factory overhead expenses include such costs as rent of factory space, maintenance and repair
costs, depreciation of factory machines and equipment, costs of utilities (water, electricity, and
salary of supervisors, cleaners and maintenance men). In the case of electricity, if it is used in a
large quantity and the amount used depends directly on the level of production, it should be
treated as a raw material rather than as an overhead expense. But if electricity is only used for
lighting and general purposes, treat it as an overhead expense.

Only the costs, such as those listed-above that do not change or vary much according to the level
of production are treated under overheads.

Table 3.5 Factory overheads

3.5.1 Factory overheads- Utilities / Infrastructure

No. Item Annual Total Annual Maintenance
Requirement Costs Costs
1 Electricity
2 Gas
3 Water
4 Rent
5 Other
Total:

3.5.2 Administrative and Selling Costs

No. Item Quantity Amount
 Total:

*
NOTE:- Total factory overhed expenses = Utilities/Infrastructure (3.5.1) + Administrative and
Selling Costs(3.5.2)

3.6. Production Cost

Production costs include the costs of direct raw material, direct labour and factory overheads.
Two methods are mentioned here to calculate production costs per unit, as follows:

The complication of unit cost estimation arises from the fact that few small industries produce
only one item for sale. Whereas it may be easy to identify the raw material costs in any one item,
estimating the labour content or allocating a portion of the overheads to a particular item presents
another problem.

To arrive at the production costs per unit, First, determine the costs of direct raw materials
required (step 3.3) and allocate direct labour cost (step 3.4), and overhead expenses (step 3.5)
for each product of your business.

Allocating direct labour costs:

To assign direct labour costs to any product, follow this simple rule: Multiply the hourly direct
labour charge by the number of hours of direct labour that goes into manufacturing the product.
The hourly direct labour charge is derived by dividing the total direct labour costs by the number
of hours of direct labour available. For example, if 8 direct labourers work 8 hours a day, 6 days
a week for 4 weeks, then the total hours of direct labour available per month is:

8 workers x 8 hrs/day x 6 days/week x 4 weeks = 1,536 hrs

Assume the total costs of these direct labourers amount to 4,000 Birr,

Then the cost of a labour per hour (hourly rate in birr) is:

= Total direct labour costs of 4,000 Birr / 1,536 hours available

 = 2.60 per direct labour hour (hourly rate)

Example-1:

If a chair requires 6 hours of direct labour to manufacture, then the direct labour costs of that
chair lies at:

Hourly rate of LC 2.60 x 6 hours = LC 15.60

Allocating Overhead Expenses:

There are two ways of allocating overheads. These are:

a) By relating overheads to labour hours,

b) By allocating them in relation to sales.

The first and preferred way is to relate overhead expenses to the hours of direct labour involved
in manufacturing the product. This can be done by dividing the total overhead expenses by direct
labour hours available and then multiplying this amount by the number of hours it takes to
manufacture the product.

Example-2 (consider data from example-1):

If total overhead expenses amount to 3,000 Birr and total direct labour hours are 1536 then the
hourly overhead rate is:

Total overheads of 3,000Birr / 1536 total hours = 1.95 Birr per direct labour hour (Hourly
overhead rate). Then, multiply the hourly overhead rate by the number of direct labour hours
used to make the product:

Hourly Overhead Rate of 1.95 Birr x 6 hours to manufacture one chair = 11.70 Birr

This figure can then be added to the raw material and direct labour charge to arrive at the unit
production costs of the product.

The second method of allocating overheads is according to the percentage of sales (% of sales)
of that particular product in relation to total sales. If, for example, a furniture maker produces the
following products:

Products Unit Selling Sales per % of Sales

Month(Birr)
Price (Birr)

20 chairs 200 4,000 20%

10 beds 400 4,000 20%

12 tables 1,000 12,000 60%

Total Sales 20,000 100%

Total sales are 20,000 Birr of which 20% are chairs, 20% beds, and 60% tables.

Therefore, 20% of overheads could be allocated to chairs. The overhead charge per chair can
then be calculated as follows:

Total overheads for 20 chairs lies at:

Total overheads per month of 3,000 Birr x 20% = 600 Birr

Therefore, the overhead charge for each chair is 30 Birr (600 Birr/20 chairs = 30 Birr)

Similarly, for beds, it is:

600 Birr/10 beds = 60 Birr

And for tables:

600 Birr/12 tables = 150 Birr

After having determined the raw material costs per unit, the direct labour costs per unit and the
overhead rate per unit, the unit production costs can be calculated by adding all of these three
cost components:

+ Unit Raw Material Costs

+ Unit Direct Labour Costs

+ Unit Factory Overhead Costs

= Unit Production Costs

Table 3.6 Projected unit production cost

3.6 Projected Unit Production cost (production cost per unit)
No. Item Raw Marterial Labour cost per Overhed cost Unit production
cost per unit unit per unit cost
1
2
3

3.7 Production Plan

Prepare your production plan based on your sales forecast (from market study) and estimated
production capacity.

Table 3.7 Projected production plan

3.7 Projected Production and Sales
 No. Item Total Quantity per year Sales Revenue per year Capacity
Utilisation (%)
1
2
3

4. Financials
Financing will be calculated on the basis of the preceding cost calculation and the availability of
own funds. Own funds are important to convince the financial institution to grant loan because
own funds show the capability of the business owner of organized savings and business
management.
4.1 Total Capital Requirement

Total capital requirement, also known as total project costs or total investment requirement is
composed of three items: Pre-operating expenses, Fixed assets and Working capital.

Pre-Operating Expenses

Pre-operating expenses are those necessary expenses that are incurred before the business starts
operating. These include registration fees and licenses, training costs, costs of preparing the
business plan, trips to raw material and equipment suppliers, etc.

Fixed Assets

Fixed assets is the sum total of all costs of land and improvements, building, machinery, furniture
and fixtures, vehicles, etc. (step 3.2)

Working capital is the amount of money permanently needed in cash or in kind to keep the
business operating while it is awaiting full payment for goods sold to customers.

Working capital can be calculated by adding five factors:

1) The costs of maximum raw material stocks that will have to be stored to ensure continuous
production. In a few cases this may be three to six months worth, if the raw material is difficult
to obtain or has to be imported, whereas in other cases (where raw materials are readily
available) only one or two weeks worth may be needed;

To determine the costs of raw material stocks, simply multiply the quantity needed by its
purchase price;
2) The costs of finished goods kept in stock and awaiting distribution to the customers

To determine the costs of finished goods stock, multiply the number of units to be kept by
the unit production costs (step 3.6)
3) The costs of a work-in-process that is on factory floor, but have not yet been converted into a
final product or finished goods

To determine the costs of the work-in-process, first estimate the percentage of operation
remained to finish each semi-finished item, then multiply this by their respective unit
production cost, finally add the costs to finish each product together to obtain the total
work-in-progress inventory cost.
4) The costs of goods already distributed to customers, but have not yet been paid (accounts
receivable)

To determine the costs of goods already distributed, but not yet paid for, estimate the
quantity that will be given on credit and multiply this number by the unit production costs

5) The amount of ready cash needed to pay workers and overheads.

To determine the amount of cash needed in the business, add the monthly labour costs in
step 3.4 and overheads (Utilities in 3.5.1 & administrative and selling expenses in 3.5.2)

Add these five cost elements together to arrive at the total working capital requirement.

Finally, calculate the total capital requirement,

Total Capital Requirement = Pre-Operating Expenses + Fixed Assets + Working capital

4.2. Projected Profit and Loss Statement

The Profit and Loss Statement (PLS) is one of the financial analysis tools employed by business
enterprises to track the performance of their enterprises. The PLS is the difference between sales
and expenses of an enterprise over a given period of time, often one year. If this difference is
positive, it is termed profit, while if it is negative, it is then termed loss.

The PLS is important for entrepreneurs/managers in checking the efficiency of their business
strategies and taking proper actions. The statement is also important for bankers to check
business profitability before extending credit. The statement can only be drawn up based on
certain source documents such as the cashbook; otherwise it would be very difficult to apply,
especially for micro enterprises.
For the statement to be applied in a given enterprise a certain level of accounting system is
needed to be in place. The PLS statement has the following components:
Gross sales: the total value of sales which is obtained by multiplying the price of each
product with the total units of output sold.
Returns and allowances: stands for the value of damaged goods that are returned by
customers to the business enterprise for which the business replaces the damaged goods
with new. It also considers payments made as sales commissions, discounts, etc., which
again are deducted from Gross Sales to result in Net Sales.
Costs of goods sold: stands for the costs involved with regard to direct labour, direct
material and factory overhead costs which are deducted from Net Sales to arrive at Gross
Profit: Direct material: stands for those material costs directly accrued in the production
process, such as raw material. Direct labour: refers to costs of all labour inputs directly
 used in the production of goods/services of a given enterprise. Often direct labour costs
are measured on unit rates and costs of daily labour. Overhead costs: stands for those
costs incurred, but which are not directly related to the production process. E.g.
depreciation of machinery or equipment, shade rent, etc.
Administrative and selling expenses: This includes costs incurred for certain
administrative purposes and for the distribution of products. These are deducted from
Gross Profit to arrive at Operating Profit. These expenses are for example, salaries of
management and support staff, expenses related to telephone, water and electricity bills
as well as office rents and other similar expenses.
Interest expense: this is the amount of interest to be paid on the amount of loan obtained,
based on the current interest rate. Try to figure out if the interest is charged at a flat or
declining rate.
Estimated income tax: the amount of tax that has to be paid as per the income tax
proclamation.
Table 4.2.Projected Profit and Loss Statement
Projected Profit and Loss Statement

Period: from............... to....................

Gross Sales
Less: Returns and allowances -
= Net Sales =
Less: - Costs of goods sold -
- Direct material -
- Direct labour -
- Overhead -
= Gross Profit =
Less: - Administrative and selling expenses -
- Salaries -
- Telephone -
- Water -
- Electricity -
- Rentals -
- Others -
= Operating Profit =
Less: - Interest expense -
= Net Profit before Tax =
Less: - estimated Income Tax -
= Net Profit after Tax =
Date
Signature

Example - Projected Profit and Loss Statement

Profit and Loss Statement (one year) Amt.(Birr) Amt.(Birr)

Sales: 120 kg per day x 20 days per month x 12 months x 14 Birr 403,200

Less:
Raw Material: 26,070 Birr x 12 months - 312,840
Labour: 1,600 Birr x 12 months -19,200
Overheads: 2,333 Birr x 12 months - 27,996 - 360,036

Gross Profit 43,164

Less:
Marketing & Administrative Costs (500 x 12 months) - 6,600

Operating Profit 36,564

Less:
Interest Expense (step 4.6) -7,002

Net Profit before Tax 29,562

Less: Estimated Income Tax -5912.4

Net Profit after Tax 23,649.6

Date
Signature

4.3. Cash Flow Statement

In this part of the business plan, the Cash Flow Statement is calculated and included. While the
profit and loss statement gives the results of financial transactions of a business during a certain
period (e.g. month or year), the cash flow statement shows the sources (inflows) and applications
(outflows) of the cash in the business throughout the year.
 Table 4.3 Projected Cash Flow
0 1
Item Actual Forecast Actual
1. Initial Cash
2. Inflows:
2.1Sales
2.2 Others
2. Total Inflows
3. Outflows:
3.1Dividends
3.2 Labour costs
3.3 Promotion material
3.4 Rent
3.5 Energy
3.6 Telephone
3.7 Publicity/Promotion
3.8 Registration fee
3.9 Others (Insurance...)
3. Total Outflows

4. Net Flow Return (2-3)

5. Final Cash Flow (1+4)

Example - Cash Flow Statement

0 1
Item Real Forecast Real
1. Initial Cash 90,000 35,000

2. Inflows:
2.1 Sales 0 22,000
2.2 Others 0 0
2. Total Inflows 0 22,000

3. Outflows:
3.1 Dividends 0 8,000
3.2 Labour costs 0 12,000
3.3 Promotion material 1,500 1,500
3.4 Rent 19,000 6,500
3.5 Energy 0 1,000
3.6 Telephone 6,000 1,000
3.7 Publicity/Promotion 10,000 0
3.8 Registration fee 3,000 0
3.9 Others (Insurance...) 0 0
3. Total Outflows 55,000 30,000
4. Net Flow Return (2-3) -55,000 -8,000
5. Final Cash Flow (1+4) 35,000 27,000

4.4. Projected Balance Sheet

The balance sheet is the statement of assets and liabilities and provides the financial picture of
the business on a certain date, for example, at the end of the year.

Table 4.4 Projected Balance Sheet Statement

Balance Sheet ( at the end of the first year)
Assets Local currency (Birr)
Current Assets:
- Cash
 - Raw materials (RM) Inventory
- Work-in-Process (WP) Inventory
- Finished Goods (FG) Inventory
- Accounts receivable
Total Current Assets
Fixed Assets:
- Land
- Building
- Machinery + Equipment
- Office Equipment
- Less: Accumulated Depreciation
Net Fixed Assets
Other Assets:
Pre-operating Expenses
Total Assets
Liabilities
Current Liabilities:
Accounts payable -
Loans payable
Total current Liabilities
Long-term Liabilities:
Loans payable
Total Liabilities
Owner's Equity:
Beginning Capital
Add: Net Profit after Tax
Less: Withdrawal/Dividends
Total Owners Equity
Total Liabilities and Equity

Example - Projected balance sheet

Balance Sheet as at the end of the first year
Assets LC (local currency)
Current Assets:
- Cash 23,354
- Raw materials (RM) Inventory 26,070
- Work-in-Process (WP) Inventory 750
- Finished Goods (FG) Inventory 15,000
- Accounts receivable 16,800
Total Current Assets 81,974
Fixed Assets:
- Land 4,000
- Building 20,000
- Machinery + Equipment 9,000
- Office Equipment 1,000
- Less: Accumulated Depreciation - 3,400
Net Fixed Assets 30,600
 Other Assets:
Pre-operating Expenses -
Total Assets 112,574
Liabilities
Current Liabilities:
Accounts payable -
Loans payable 4,004
Total current Liabilities 4,004
Long-term Liabilities:
Loans payable 52,008
Total Liabilities 56,012
Owner's Equity:
Beginning Capital 27,000
Add: Net Profit after Tax 29,562
Less: Withdrawal/Dividends -
Total Owners Equity 56,562
Total Liabilities and Equity 112,574

4.5. Break-Even Analysis

Three kinds of break-even points (BEP) are commonly referred to, namely:
1) BEP Sales (in Birr)
2) BEP Production (volume)
3) BEP Percentage (%)
a) Break-even Point (BEP) Sales
Break-even point (BEP) Sales - is that amount of sales value at which no profit or loss is incurred
by the business.
b) Break-even Point (BEP) Production
The Break-even point (BEP) Production - is that level (volume or quantity) of production at
which no profit or no loss is incurred on the part of the business. Production above this level will
result in a profit and production below this point will result in a loss.
c) Break-even Point (BEP) Percentage
Break-even point (BEP) Percentage - is that percentage level of sales or production at which the
business neither makes a profit nor loss. Production above this level will result in a profit and
production below this point will result in a loss.
To determine the BEP, three figures need to be calculated.
These are:
Sales: annual sales as documented in the profit and loss statement
Variable Costs - these are the costs that change significantly according to levels of production,
and usually consist of raw material costs plus direct labour (step 3.3), provided it is hired and
terminated according to the high level of production a factory is making.
Fixed Costs - these are costs such as indirect labour and overhead expenses, interest and
depreciation. These costs do not change significantly, if the factory produces more or less.

Break-even Point (BEP) Calculation

a. BEP Sales
To determine BEP Annual Sales, multiply annual sales found in the income statement by the
annual fixed costs and divide by annual sales less annual variable costs:

Annual Sales x Annual Fixed Costs

BEP (Sales) =
Annual Sales - Annual Variable Costs

b. BEP Production
To determine BEP Production Volume, divide BEP Sales by the Unit Selling Price (USP):

Break-even Point Sales

BEP Production =
Unit Selling Price

A further method is to: Divide Annual Fixed Costs by the Unit Selling Price less Unit Variable
Costs, also known as Contribution Margin, that is, the remainder of what is left to cover fixed
costs and profit. At BEP, the contribution margin can only cover fixed costs, not profit:

Annual Fixed Costs

BEP Production =
Unit Selling Price - Unit Variable Costs

c. BEP Percentage
To determine the BEP Percentage on yearly sales, multiply the yearly fixed costs by 100, divided
by annual sales minus the variable costs.

Annual Fixed Costs x 100%

BEP Percentage =
Annual Sales - Annual Variable Costs

4.6 Return on Investment (ROI)

One important issue that should be looked into when deciding on whether or not to go ahead
with your business is to answer this crucial question: "Will my money be better off in this
business or safe at the bank, where it can earn a fixed interest in long-term bonds, savings or
time-based deposits?" To answer this question, calculate the projects return on investment
(ROI), presenting one of the means of measuring profitability.
This is done by dividing Net Profit by the total capital requirement times 100: It is more
advisable to use Net Profit after Tax, if this is applicable.

Net Profit
 Return on Investment = x 100
Total Equity

A variation in the profitability measure is the Return on Owner's Investments (ROI). This is
derived by dividing Net Profit before Taxes by the Owners Equity (Capital or Investment) times
100, as shown below:

Net Profit
Return on Owners Investment = x 100
Owners capital

If the percentage is greater than the banks rate on long-term deposits, including allowances for
the countrys inflation rate during the same period, then the project appears to be financially
viable. If it is below the bank rate, then you may consider several alternatives which could
include measures, such as increasing the level of production (provided the market is sufficient),
looking for ways to reduce costs, or even abandoning the project altogether.