ECON 444 Notes

TOPIC 6: BUSINESS PLANNING

Introduction

A business plan is a description of a business. It is a roadmap that will help an entrepreneur to

get to his/her desired destination. It gives you an idea of the obstacles that lie ahead and can
point out possible alternative routes. One major benefit an entrepreneur will receive from
developing a business plan is getting to thoroughly know the industry and market. A well-
prepared business plan will not only assist in plotting a course for the company but also serve as
a vital sales tool.

Components/Elements of a Business Plan

1. Executive summary

It is the most important part a business plan. It might include a table of contents, company
background, market opportunity, management overviews, competitive advantages, and financial
highlights. It should be written after you have completed the other sections of your business plan.
It should be clear concise and compelling.

2. Business description and structure

This is where you explain why you are in business and what you are selling. If you sell products,
describe your manufacturing process, availability of materials, how you handle inventory and
fulfillment, and other operational details. If you provide services, describe them and their value
proposition to customers. Include other details such as strategic relationships, administrative
issues, intellectual property you may own, expenses, and the legal structure of your company.

3. Market research and strategies

This is where you spell out your market analysis and describe your marketing strategy, including
sales forecasts, deadlines and milestones, advertising, public relations and how you stack up
against your competition. You should also outline the industry structure and your primary
customers. Effective market research will enable you to identify trends that are influencing and
affecting your market. If you cannot produce a lot of data analysis, you can provide testimonials
from existing customers.
 4. Management and Staff

This is where you provide details such as qualifications and responsibilities of your company
executives and managers and explain how their expertise will help you meet business goals. This
is also where you outline how you will overcome any labor shortages. Investors pay particular
attention to this particular section. Investors need to evaluate risk, and often, a management team
with lots of experience may lower perceived risk.

5. Financial documents

This is where you provide the numbers that back up everything you described in your
organizational and marketing sections. Include conservative projections of your profit and loss
statements, balance sheet, and your cash flow statements for the next three years. These are
forward-looking projections, not your current accounting outputs.

6. Products and services description

It is in this section that you further expand on the details of the products and services your
company offers that you covered in the executive summary. Include all relevant information
concerning your products and services. This includes how you plan to manufacture them, how
long they can last, what needs they might meet and how much you project it might cost to
produce them.

7. Competitive analysis

Add a detailed competitive analysis that clearly outlines a comparison of your organization to
your competitors. Outline your competitors’ weaknesses and strengths and how you expect your
company might compare to these. Include any advantages or distinctions your competition has in
the marketplace. Additionally, explore what makes your business different from other existing
businesses in the industry, along with any potential issues you might face when entering the
(industry) marketplace.

8. Operating plan

This part of your business plan describes how you plan to carry out operations in your company.
It includes information regarding how and where your company plans to operate, such as
shipping logistics or patents for intellectual property. The operating plan also details operations
related to personnel, like how many employees you hope to hire in various departments.

Reasons for Failure of Business Plans

1. A dead document

A business plan that is created for a purpose and then discarded will always become obsolete
quickly. Making your business plan a living document is essential if you don’t want the whole
process to be a failure. Only a regularly reviewed and updated plan can be the spur to look
critically at your business on a recurring basis.

2. Over-optimism

Most business plans are over-optimistic, especially as regards predicted sales, often massively
overestimating the size of the market. Research your market thoroughly. Too many business
plans include a SWOT analysis, but concentrate on the strengths and opportunities and ignore the
threats and weaknesses.

3. Ignoring the competition

Business plans commonly assume that the competition will make no competitive response or
indeed, will have no new initiatives of their own. Study your competitors and try to second-guess
their plans. A living document will take into account their actions.

4. New or old?

Too many business plans depend on doing something new, when what is needed is to find a
better way of doing what is being done now.

5. Ignoring risk

What are the risks attached to the plan? Think through these and the costs of failure as well as
the rewards of success.

6. Profit or turnover?

If expansion is planned, it should result in increased profits, not just sales. Expansion requires
finance, people and other resources. As an entrepreneur, can you get them?
7. Not having the expertise

When creating a business plan, you need to know what you are talking about. So, it’s crucial that
you have the relevant expertise and experience to be able to write a workable business plan, and
then put your idea into practice.

8. Not being realistic

When you’re writing a business plan for your new business venture, it is easy to get carried away
and be over-optimistic about how much money you will make. However, this could be a fatal
mistake and could cause your business plan to fail.

Business plans should be realistic about future growth and profits. Over-estimating your income
is likely to cause problems further down the line, as you could reach a point where your
expenditure is more than the money coming in. Being realistic from the beginning will help you
to plan your budget accordingly and give your business plan a greater chance of success.

9. Neglecting the finances

Every successful business plan needs to include detailed financial projections. Entrepreneurs will
need to look at costs, trends, and their competitors to come up with realistic and achievable
figures for their income and expenditure, which will give direction and structure to their business
operations.

It is very likely that these figures will change, but it is important to have some benchmarks to
aim for. The figures will also highlight any major flaws with your business model (i.e., if you are
spending more money than you make), so you can make any necessary changes to your budget.
If you want to use your plan to try to get funding, you will need to show how much money you
require and what the funds would be used for.

10. Lack of market research

Market research is a vital part of starting a new business or project. If you don’t fully understand
the competition and the current situation of your marketplace, you don’t have enough
information to go forward. Thorough market research needs to take place and the results need to
be viewed realistically. If your niche is saturated, then you need to come up with a plan that will
set your business or project apart and help it succeed.