The Business Plan

Unit 5

What Is a Business Plan?

 A business plan is a document describing a venture’s opportunity, its product or service,

context, strategy, team, required resources, and potential financial returns. It is guided by
three basic questions:
1. Where are we now?
2. Where do we want to be?
3. How are we going to get there?
 A business plan is a written document prepared by the entrepreneur that describes all the
relevant external and internal elements involved in starting a new venture. It addresses
both short- and long-term decision making.
 The business plan is like a road map for the business’ development. In developing the
business plan the entrepreneur can determine how much money will be needed from new
and existing sources.

Why Write a Business Plan?

 Business plans serve many functions. Mostly, they serve to do some or all of the
following
 Sell yourself on the business: A carefully elaborated plan can help convince you
that starting this business is the right thing for you to do.
 Obtain financing: A business plan is an essential prerequisite for convincing
potential investors to finance the new venture.
 Motivate and focus the management team: Developing a business plan gets
everyone thinking about the business goals and can ensure a joint understanding
of the company’s roadmap.
 Obtain large contracts: The fact of having thought about the future and put some
strategy down on paper provides credibility, and presenting a sound business plan
may facilitate larger contracts.
 Attract key employees: The business plan might help prospective employees to
decide whether to join the venture.
 Arrange strategic alliances: it can help to develop strategic and equity alliance
between small and large companies and the bigger partner generally likes to see a
business plan to guide the selection process.
 Complete mergers and acquisitions: In these cases, the business plan serves as a
company résumé, helping to demonstrate that the value of the business is the
highest possible.

Who Should Write the Business Plan?

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 The business plan should be prepared by the entrepreneur; however, he or she may
consult many sources.
 Lawyers, accountants, marketing consultants, and engineers are useful supplemental
sources. Other resources are the Small Business Administration, Service Core of Retired
Executives, Small Business Development Centers, universities, friends, and relatives.

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Who Will Read the Business Plan?

 It might be surprising to hear, but most entrepreneurs will say that they have written
hundreds of different business plans – all for the same business! The issue here is that a
business plan needs to be adapted to the audience to which it will be presented.
 A business plan can, for example, be directed at internal people such as the management
team or employees. In this case it is more an operational document to help align
individuals within the company.
 The audience and their interest in the plan is highly diverse, ranging from bankers, angel
investors, venture capital providers, institutional investors and investment advisers to
business partners, managers of other companies, and government agencies.
 Each presentation of the company and its business plan needs to be tailored to the
interests of these different stakeholders.

What Should Be in the Business Plan?

 Even though each business plan might be a little different, the overall structure will
include some core elements that stay the same. Only their length and focus might vary
with the audience. To be on the safe side, the plan should include the following points:
1. Cover page and table of contents.
2. Executive summary.
3. Description of the current situation: Basic company information,
products/services, management team, business organization, future goals, vision,
and mission
4. Description of opportunity and market: Who are the buyers, who are the
competitors, what are the competitive advantages of the company?
5. Description of the business model, the marketing and sales strategy.
6. Basic facts on the financials: Cash flow projection (life line), income statement
(bottom line/profit and loss), balance sheet (business health/assets, liabilities,
etc.), funding requirements.
7. Risk analysis and possible exit strategies.
8. Conclusion and appendixes: Résumés, literature, technical descriptions.
Cover Page, Introductory Page and Table of Content
 The title page provides a brief summary of the business plan’s contents, and should
include:
1. The name and address of the company
2. The name of the entrepreneur and a telephone number
3. A paragraph describing the company and the nature of the business
4. A statement of the confidentiality of the report
5. It also sets out the basic concept that the entrepreneur is attempting to develop.
Executive Summary
 This is prepared after the total plan is written. It should be three to four pages in length
and should highlight the key points in the business plan.
 The summary should highlight in a concise manner the key points in the business plan.
 Issues that should be addressed include:
1. Brief description of the business concept
2. Any data that support the opportunity for the venture.

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3. Statement of you this opportunity will be pursued.

4. Highlight some key financial results that can be achieved
 Because of the limited scope of the summary, the entrepreneur should ascertain what is
important to the audience to whom the plan is directed.

Environmental and Industry Analysis

 The entrepreneur should first conduct an environmental analysis to identify trends and
changes occurring on a national and international level that may impact the new venture.
Examples of environmental factors are:
1. Economy
2. Culture
3. Technology
4. Legal concerns
 All of the above external factors are generally uncontrollable. Next the entrepreneur
should conduct an industry analysis that focuses on specific industry trends. Some
examples of industry factors include:
1. Industry demand
2. Competition
3. The last part of this section should focus on the specific market. This would include
such information as who the customer is and what the business environment is like.
The market should be segmented and the target market identified.

Description of the Venture

 The description of the venture should be detailed in this section. This should begin with
the mission statement or company mission, which describes the nature of the business
and what the entrepreneur hopes to accomplish.
 The new venture should be described in detail, including the product, location,
personnel, background of entrepreneur, and history of the venture. The emphasis placed
on location is a function of the type of business.
 Maps that locate customers, competitors, and alternative locations can be helpful. If the
building or site decision involves legal issues, the entrepreneur should hire a lawyer.

Production Plan or Operations Plan

 If a new venture is a manufacturing operation, a production plan is necessary. This plan
should describe the complete manufacturing process, including whether or not the
process is to be subcontracted.
 If the manufacturing is carried out by the entrepreneur, the plan should describe the
physical plant layout and machinery and equipment needed.
 If the venture is not manufacturing, this section would be titled operational plan. The
entrepreneur would need to describe the chronological steps in completing a business
transaction.

Marketing Plan
 The marketing plan describes how the products will be distributed, priced, and promoted.
Potential investors regard the marketing plan as critical to the venture’s success.

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Organizational Plan
 The organizational plan section should describe the venture’s form of ownership. If the
venture is a corporation, this should include the number of shares authorized, share
options, and names and addresses of the directors and officers.
 It is helpful to provide an organization chart indicating the line of authority. This chart
shows the investor who controls the organization and how members interact.

MARKETING PLAN
 The marketing plan establishes how the entrepreneur will effectively compete and
operate in the marketplace. Marketing planning should be an annual activity focusing on
decisions related to the marketing mix variables.
 The marketing plan section should focus on strategies for the first three years of the
venture. For the first year, goals and strategies should be projected monthly. For years
two and three, market results should be projected based on longer-term goals.
 The marketing plan should answer three basic questions:
 Where have we been? -The history of the marketplace, marketing strengths and
weaknesses, and market opportunities.
 Where do we want to go (short term)? - Marketing objectives and goals in the
next twelve months.
 How do we get there? -Specific marketing strategy that will be implemented.
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 Information for developing the marketing plan may require some marketing research.
Marketing research involves the gathering of data in order to determine such information
as who will buy the product, what price should be charged, and what is the most effective
promotion strategy.
 Marketing research may be conducted by the entrepreneur or by an external supplier or
consultant. Market research begins with definition of objectives. Many entrepreneurs
don’t know what they want to accomplish from a research study.
 An obvious source is data that already exists, or secondary data, found in trade
magazines, libraries, government agencies, and the Internet. The Internet can provide
information on competitors and the industry, plus can be used for primary research.
 Information that is new is primary data. Observation is the simplest approach.
Networking is an informal method to gather primary data from experts in the field, can be
a valuable low-cost research method.
 A recent study found that the most successful ventures were focused on information
about competitors, the customer, and the industry. Less successful ventures were more
focused on gathering information on general economic and demographic trends.

CHARACTERISTICS OF A MARKETING PLAN

An effective marketing plan should:
1. Provide a strategy to accomplish the company mission.
2. Be based on facts and valid assumptions.
3. Provide for the use of existing resources.
4. Describe an organization to implement the plan.
5. Provide for continuity.

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6. Be simple and short.

7. Be flexible.
8. Specify performance criteria that can be monitored and controlled.

THE MARKETING MIX

 The actual short-term marketing decisions in the marketing plan will consist of four
important marketing variables, called the marketing mix:
1. Product or service.
2. Pricing.
3. Distribution.
4. Promotion.
 Each variable should be described in detail in the strategy section of the marketing plan.

STEPS IN PREPARING THE MARKETING PLAN

Step 1: Defining the Business Situation
 The situation analysis is a review of where the company has been and considers many of
the environmental factors. The entrepreneur should provide a review of past performance
of the product and the company.
 Industry analysis should include information on market size, growth rate, suppliers, new
entries, and economic conditions.
Step 2: Defining Target Market/Opportunities and Threats
 The entrepreneur should have a good idea of who the customer or target market will be.
The defined target market will usually represent one or more segments of the entire
market.
 Market segmentation is the process of dividing the market into smaller homogeneous
groups. The process of segmenting is:
a. Decide what general market or industry you wish to pursue.
b. Divide the market into smaller groups based on characteristics of the customer.
c. Select segment or segments to target.
d. Develop marketing plan integrating the parts of the marketing mix.

Step 3: Considering Strengths and Weaknesses

 It is important for the entrepreneur to consider its strengths and weaknesses.

Step 4: Establishing Goals and Objectives

 Before strategy decisions can be outlined, the entrepreneur must establish realistic
marketing goals and objectives. These answer the question "Where do we want to go?”
 These goals should specify such things as market share, profit, sales, market penetration,
pricing policy, and advertising support. Not all goals and objectives must be quantified. It
is a good idea to limit the number of goals to between six and eight.

Step 5: Defining Marketing Strategy and Action Programs

 Strategy and action decisions respond to the question "How do we get there?" It
incorporates:
1. Product or Service

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 This includes a description of the product and may include more than the physical
characteristics.
 It involves packaging, brand name, price, warranty, image, service, features, and
style.
2.Customer Service
 Meeting customer needs and creating loyalty involves a number of low-cost steps:
 In writing develop a statement of customer service principles. Train those
employees who have direct contact with customers.
 Establish a process for evaluating customer service.
 Reward employees who are most effective in providing quality customer service.
 Make regular contact with customers.
 Invest in quality telephone equipment.
 Meet customer expectations.
 Customer service is especially important for e-businesses.
3.Pricing.
 One of the difficult decisions is determining the appropriate price for the product.
Factors such as costs, discounts, freight, and markups must be considered.
 Marketing research can help determine a reasonable price that consumers are
willing to pay.
4.Distribution.
 This factor provides utility or makes the product convenient to purchase when it is
needed. This variable must be consistent with other marketing mix variables.
Type of channel, number of intermediaries and location of members should be
described.
 Regardless of the type of business, itis usually necessary for the new venture to
have a website.
 The Internet will become an increasingly important medium for information and
distribution. Direct mail or telemarketing may be considered. Direct mail
marketing is one of the simplest and lowest in entry costs.
5.Promotion.
 The entrepreneur needs to inform customers as to the product’s availability using
advertising media such as print, radio, or television.
 Usually television is too expensive unless cable television is a viable option.
 Larger markets can be reached using direct mail, trade magazines, or newspapers.
 A website may also create awareness and promote the product and services of the
venture. It is possible to make use of publicity as a means of introduction.
 It is important that the marketing strategy and action programs be specific and
detailed enough to guide the entrepreneur through the first year.

Step 6: Coordination of the Planning Process

 The management team must coordinate the planning process. The entrepreneur may
be the only person involved but may lack experience in preparing the plan.

.Step 7: Designing Responsibility for Implementation

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 The plan must be implemented effectively to meet all of the desired goals and
objectives. Someone must take the responsibility for implementing each decision
made in the marketing plan.
Step 8: Budgeting the Marketing Strategy
 Planning decisions must also consider the costs involved in the implementation of
these decisions. This budgeting will be useful in preparing the financial plan.

Step 9: Implementation of the Marketing Plan

 The marketing plan is meant to be a commitment to a specific strategy. A
commitment to make adjustments as needed by market conditions is also valuable.
Step 10: Monitoring Progress of Marketing Actions
 Monitoring of the plan involves tracking specific results of the marketing effort. What
is monitored is dependent on the specific goals and objectives outlined.

THE ORGANIZATIONAL PLAN

DEVELOPING THE MANAGEMENT TEAM

 Potential investors are interested in the management team and its ability and commitment
to the new venture.
 Investors usually demand that the management team not operate the business part-time
while employed full time elsewhere.
 It is also unacceptable for the entrepreneurs to draw a large salary.
 The entrepreneur should consider the role of the board of directors and/or a board of
advisors in supporting the management of the new venture.

LEGAL FORMS OF BUSINESS

There are three basic legal forms and one new form of businesses.
The three basic forms are:
a. Proprietorship.
b. Partnership.
c. Corporation
A new form is the limited liability company, which is now possible in most states.
 The entrepreneur should evaluate the pros and cons of each of the legal forms prior to
submitting a business plan.
 In the proprietorship, the owner has full responsibility for operations. In a partnership,
there may be owners with general or with limited ownership. In the corporation,
ownership is reflected by ownership of shares of stock.
 The proprietor and general partners are liable for all aspects of the business. Since the
corporation is a legal entity that is taxable and absorbs liability, the owners are liable only
for the amount of their investment.
 To satisfy any outstanding debts of the business, creditors may seize personal assets of
the owners in proprietorships or regular partnerships.
 In a partnership the general partners share the amount of personal liability equally,
regardless of their capital contribution. In a limited partnership, the limited partners are
liable only for their capital contributions.

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DESIGNING THE ORGANIZATION
 The design of the initial organization will be simple. The entrepreneur may perform all of
the functions alone. He or she sometimes is unwilling to give up responsibility to others.
 The entrepreneur may have difficulty making the transition from a start-up to a growing
well-managed business that maintains its success over a long period of time.
 As the workload increases the organizational structure will need to expand to include
additional employees with defined roles. Interviewing and hiring procedures will need to
be implemented.
 For many new ventures, part-time employees may be hired, raising commitment and
loyalty issues.
 The organization must identify the major activities required to operate effectively. The
design of the organization will indicate to employees what is expected of them in
following areas:
 Organizational structure, which defines members’ jobs and the relationship these jobs
have to one another.
 Rewards are in the form of bonuses, promotion, and praise.
 A selection criterion is the set of guidelines for selecting individuals foreach position.

BUILDING THE SUCCESSFUL ORGANIZATION

 Before writing the organization plan, it is helpful to prepare a job analysis. The job
analysis serves as a guide in determining hiring procedures and job descriptions and
specifications.
 As the size of the venture changes, the process becomes more complex. The place to start
is with the tasks that need to be performed to make the venture viable. After this list is
made, then determine how many positions and what types of persons will be needed.
 Other decisions to be made early in planning process:
a. Where to advertise for employees.
b. How they will be trained.
c. How they will be compensated.

Operational PLAN
 An Operational Plan is a detailed plan used to provide a clear picture of how a team,
section or department will contribute to the achievement of the organization’s strategic
goals.
 The strategic goals of an organization are outlined in the Strategic or Business Plan,
which highlights the organization’s intended direction.
 The Operational Plan should align with the organization’s overall objectives as detailed
in the Strategic Plan. This alignment can be achieved by ensuring that the team, section
or department purpose aligns with the objectives of the Strategic Plan. In turn, the
Operating Plan of the team, section or department should align with the purpose.
 Operational plans are used to identify:

 The goals of the team, section or department

 How the goals will be achieved
 What resources are required to meet the goals

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 Although there are no strict rules as to the format of an Operational Plan they normally
contain the following information:

I. Goods and service design. According to Henzer (2004), design of goods and design
defines much of the transformation process. The factors of cost, quality and human
resources must be made during the stage. Operation management of product and services
is also different because due to different characteristic and tangible / intangible feature.

II. Quality. Customer has a very high quality standard nowadays and operation
management decision in quality must be clear and strict for its members to understand
and comply. It must set a quality, standard and operating procedure to meet customers’
high expectation.

III. Process and capacity design. Manufacturing of physical products may have higher
importance on process and capacity design than services operation. Operation
management (product) should decide what process it, what type of technology and to
what extent, human resources, quality and maintenance that determines its basic cost
structure. Services operation decision on this area is much simpler and it can determine
by customers who directly involved in the process. For example, customer will ask tailor
to design specific fashion clothes. Capacity design issue is critical for services because it
will try to reduce waiting time and avoid lost of sales due to insufficient capacity. For
manufacturing capacity design is based on firms financial capability, forecast for future
and market demand.

IV. Location can be an area for operation management to decide and with globalization
of business, operation managers too must think global. For physical goods, location
selection can be determined by pools of qualified human resources, technology, raw
material, access to market and government policy. For services as it is direct to
customers, the location is determined by market accessibility or near to customer as
possible.

V. Layout design. Material flow, process selection technology used, capacity needs,
workers needs, inventory requirement, and capital will influence the decision for layout
design. For services such as hotels, beside capacity needs layout also will enhance its
attributes and features to the customers.

VI. Human Resources and Job Design – Employees is the integral part in the total system
design. Operation management must set a policy to set labor standards to ease transition
of skills, improvement of knowledge, skills and abilities (KSA), build a balance work and
life quality in an effective cost target. For services one extra area operation management
should touch, which is customers relationship that they are dealing directly.

VII. Supply Chain Management – Decisions that have to take place of what to produce,
what material to buy, from where, how is the cost and how is the delivery from supplier
to the final end customers in on-time delivery and minimum cost possible. It is more
critical in production of goods than services.

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VIII. Inventory – Decisions on how and where the inventory level to keep long term
customers satisfaction, suppliers, material availability for not to disrupt the production,
human resources needed for this purpose and important the holding cost from financial
perspective. Goods production are more concern because manufacturer may kept raw
material, in progress work order and final goods while services is not critical as it is
directly produce and consume simultaneously.

IX. Scheduling – Efficient way of allocation, control and management of materials,

capital goods and human resources to efficiently produce the final goods from the input
available. Schedules are more formal in goods production with short, medium and long
term planning to accommodate customers demand. For services the demand is more
direct and volatile and often concern on human resources and KSA availability to meet
current customer’s needs.

X. Maintenance – Decision must be made regarding the desired level of reliability,

stability and systems must be established by management to maintain that reliability and
stability.

Contingency Planning:
 Contingency planning involves creating an alternative plan in the event of circumstances
changing. Setting an Operational Plan involves making a best estimate as to what will
happen.
 However, circumstances may change resulting in the original plan becoming unsuitable.
Therefore, it is important that you have an alternative strategy to deal with changes.
 The level and degree of contingency planning you carry out will depend on the impact of
your plan on the business and the degree to which the environment might change.

THE FINANCIAL PLAN

 The financial plan provides a complete picture of:
1. How much and when the funds are coming into the organization?
2. Where the funds are going?
3. How much cash is available?
4. The projected financial position of the firm

 The financial plan provides the short-term basis for budgeting and helps prevent a
common problem-lack of cash.
 The financial plan must explain how the entrepreneur will meet all financial obligations
and maintain its liquidity.
 In general, the financial plan will need three years of projected financial data for outside
investors.

OPERATING AND CAPITAL BUDGETS

 Before developing the pro forma income statement, the entrepreneur should prepare
operating and capital budgets.

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1. If the entrepreneur is a sole proprietor, he or she will be responsible for the budgeting
decisions.
2 In a partnership, or where employees exist, the initial budgeting process may begin with
one of these individuals.
3. Final determination of budgets will ultimately rest with the owners or entrepreneurs.

 In the preparation of the pro forma income statement, the entrepreneur must first develop
a sales budget, an estimate of the expected volume of sales by month.
1. From sales forecasts, the entrepreneur will determine the cost of these sales.
2. Estimated ending inventory will also be included.

 Production or Manufacturing Budget.

1. This budget provides a basis for projecting cash flows for the cost of goods produced.
2. The important information in this budget is the actual production required each month
and the needed inventory to allow for changes in demand.
3. This budget reflects seasonal demand or marketing programs, which can increase
demand and inventory.
4. The operating budget is an important document, as the pro forma income statement
will only reflect the actual costs of goods.
 Operating Budget.
1. Next the entrepreneur can focus on operating costs.
2. Fixed expenses (incurred regardless of sales volume) include rent, utilities, salaries,
interest, depreciation, and insurance.
3. The entrepreneur will need to calculate variable expenses, which may change from
month to month depending on sales volume, such as advertising and selling expenses.
 Capital budgets are intended to provide a basis for evaluating expenditures that will
impact the business for more than one year.
1. A capital budget may project expenditures for new equipment, vehicles, or new
facilities.
2. These decisions can include the computation of the cost of capital and the anticipated
return on investment using present value methods.
3. The entrepreneur should enlist the assistance of an accountant.

INCOME STATEMENTS
 Sales is the major source of revenue; since other activities relate to sales, it is usually the
first item defined.
 In preparing the pro forma income statement, sales by month must be calculated first.
1. Market research, industry sales, and trial experience might provide the basis forthese
figures.
2. Forecasting techniques, such as a survey of buyers’ intentions or expert opinions, can
be used to project sales.
3. The costs for achieving increases in sales can be higher in early months.
 Sales revenues for an Internet start-up are often more difficult to project.
1. A giftware Internet start-up could project the number of average hits expected per day
or month based on industry data.

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2. From the number of "hits" it is possible to project the number of consumers who will
buy products and the average dollar amount per transaction.
 The pro forma income statements also provide projections of all operating expenses
foreach month of the first year.
1. Selling expenses as a percentage of sales may also be higher initially.
2. Salaries and wages should reflect the number of personnel employed, as well as their
roles in the organization.
3. Any unusually expenses, such as those for a key trade show, should be flagged and
explained at the bottom.
 In addition to the first year’s statement, projections should be made for years 2 and 3.
1. Investors generally prefer to see three years of income projections.
2. Some expenses will remain stable over time, like depreciation, utilities, rent,
insurance, and interest.
3. When calculating the projected operating expense, it is important to be conservative

CASH FLOW
 Cash flow is not the same as profit.
1. Profit is the result of subtracting expenses from sales.
2. Cash flow results from the difference between actual cash receipts and cash payments.
3. Cash flows only when actual payments are made or received.

 For an Internet start-up, the same transaction would involve the use of a credit card in
which a percentage of the sale would be paid as a fee to the credit card company.

 On many occasions, profitable firms fail because of lack of cash; therefore, using profit
as a means of success may be deceiving.
 There are two standard methods used to project cash flow.
1. In the indirect method some adjustments are made to the net income based on the fact
that actual cash may not have actual been receive or disbursed.
2. The direct method, a simple determination of cash in less cash out, gives a fast
indication of the cash position of the new venture at a point in time.
 It is important for the entrepreneur to make monthly projections of cash, pro forma
cashflow.
1. If disbursements are greater than receipts in any time period, funds will have to be
borrowed or cash reserve tapped.
2. Large positive cash flows may need to be invested in short term sources.
3. Usually the first few months of start-up will require external cash in order to cover
cash outlays.
 The most difficult problem with projecting cash flows is determining the exact monthly
receipts and disbursements.
1. Some assumptions will need to be made and should be conservative so enough funds
can be maintained to cover the negative cash months.
2. These cash flows will also assist in determining how much money will need to be
borrowed.

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 The pro forma cash flow is based on best estimates and may need to be revised to ensure
accuracy.
 It is useful to provide several scenarios, each based on different levels of success.

BALANCE SHEET
 The entrepreneur should also prepare a projected balance sheet depicting the condition of
the business at the end of the first year.
1. The pro forma balance sheet summarizes the assets, liabilities, and net worth of the
entrepreneurs.
2. Every business transaction affects the balance sheet.
3. The balance sheet is a picture of the business at one moment in time and does not
cover a period of time.
 Assets.
1. Assets represent everything of value that is owned by the business.
2. The assets are categorized as current or fixed.
a. Value is not necessary replacement cost-it is the actual cost expended for the
asset.
b. Current assets include cash and anything that will be converted into cash within
a year.
c. Fixed assets are those that will be used over a long period of time.
d. Management of receivables, or money owed by customers, is important to the
business’ cash flow of the business.
 Liabilities.
1. Liabilities accounts represent everything owed to creditors.
2. Current liabilities are due within a year.
3. Others are long-term debts.
4. It is often necessary to delay payments of bills in order to more effectively manage
cash flow.

 Owners Equity.
1. This amount represents the excess of all assets over all liabilities.
2. Owners’ equity represents the net worth of the business.
3. Any profit from the business will also be included in the net worth as retained
earnings.

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