CHAPTER - THREE
Business Planning
What is a business plan?
A business plan is a comprehensive set of guidelines for a new venture. It is also called a
feasibility plan that encompasses the full range of business planning activities. A business
plan (feasibility plan) is an outline of potential issues to address and a set of guidelines to
help an entrepreneur make better decisions. This plan would present basic business idea and
all related operating, marketing, financial and managerial considerations. It should layout the
idea and describes where we are, where we want to go, and how we propose to go there.
The purpose of business plan
1. It can help the owner/manager to crystallize and focus his ideas
2. It can help the owner/manager set objectives and give him a yardstick against which to
monitor performance
3. It can also act as a vehicle to attract any external finance needed by the business
4. It can convince investors that the owner/manager has identified high growth opportunities,
and that he has the entrepreneurial flair and managerial talent to exploit that opportunity
effectively
5. It entails taking a long term view of the business and its environment
6. It emphasizes the strengths and recognizes the weakness of the proposed venture
7. It offers a sound basis for operation of a business plan that can be used at different times
I. When business plans are produced?
1. At the start up of a new business
After the initial stage of developing ideas and feasibility study are over, a new business may
start up through a detailed planning stage of which the main output is the business plan.
2. Business purchase
Buying an existing business does not neglect the need for an initial business plan. A detailed
plan tests the sensitivity changes to key business variables. This helps to understand the level
of risk that are accepted and the likelihood of rewards being available for the buyers.
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3. Ongoing process
Ongoing review of progress, against the objectives of either a new business or a small
business purchase is important in a dynamic environment. A periodic review with the
business plan is required in the constantly changing environment. A business plan should be
the live, strategic, and technical planning focusing on how a small business responds to the
inevitable changes around it.
4. Major decisions
Even if planning is not carried out on a regular basis, it is usually instigated at a time of
major change.
II. Who needs the business plans?
Three types of people are interested in a business plan:
1. the managers who run the business on a day to day basis
2. the owners, or prospective equity investors
3. the lenders, who are advancing loans for the enterprise
1. Managers
They are involved in small business planning both as producers and recipients of the plan.
The management of a small enterprise is the only people likely to be sufficiently
knowledgeable to produce a business plan. Business plans are also written to aid small
business managers.
2. Owners
The managers of a small enterprise may also be the owners and take a keen interest in the
planning process. A plan may be intended for prospective equity partners, either a sleeping
partner looking for an investment, or an active partner looking to join an existing small
business. Owners may also be lenders, who take an equity stake in return for providing loans.
3. Lenders
Banks are the main recipients of business plan. They encourage the production of business
plans to justify overdrafts and loans offering literature and advice and putting together
business plans. Other lenders of money, from private individuals to venture capital
companies, will also expect to make their investment decision after the presentation of a
formal business plan.
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III. Why business plans are prepared?
The above three groups will have some shared, and some more separate motives for using a
business plan. Managers, owners and lenders will be seeking to investigate the following
issues:
1. Assessing the feasibility and viability of the business or project
A project feasibility analysis includes market analysis, technical analysis, financial analysis
and social profitability analysis. A market analysis is a method of screening project ideas as
well as means of evaluating a project’s feasibility in terms of the market. The technical
analysis of a project feasibility study establishes whether the project is technically feasible or
not, and whether it offers a basis for the estimation of costs. In the financial analysis, the
emphasis is on the preparation of the financial statements, so that the project may be
evaluated in terms of the different measures of commercial profitability and the magnitude of
financing required may be determined.
2. Setting objectives and budgets
An objective is an important element in the project planning. Objectives are concerned with
defining in a precise manner what the project is expected to achieve and to provide a measure
of performance for the project as a whole. Objectives are the foundations on which the entire
edifice of the project design is built. The objectives should be;
a) specific
b) not complex
c) measurable, tangible and verifiable
d) realistic and attainable
e) established within resource bounds
f) consistent with resources available or anticipated
g) consistent with organizational plans, policies or procedures.
Having a clear financial vision with believable budgets is a basic requirement of everyone
involved in the plan.
The format of a business plan : What should a business plan look like, and what should be
included? Business plan should answer straight forward questions;
Where are we now?
Where do we intend to go?
How do we get there?
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Where we are now?
An analysis of the current situation of the market place, the business concept and the people
involved is a necessary first step. An evaluation of what we are doing now helps to proceed
to the future.
Where do we intend to go?
The direction that is intended for the business need to be clear and precise. Quantifiable
targets and objectives help to clarify and measure progress towards the intended goals.
Identification of likely changes to the business environment will build on the opportunities
outlined, and assess possible threats.
How do we get there?
Implementation of accepted aims gives the final end result. Plans for marketing and
managing the business, with detailed financial support are the advisable preliminaries before
putting it all into practice.
The Business plan
All business plans include eight common elements that are contained in the feasibility model
summarized below. This model is generally adaptable to most types of new ventures.
Eight common elements in a feasibility plan
Executive summary Venture defined, products or services identified, market
characteristics summarized, founders introduced, and financial
structure profiled
Business concept Purpose of the venture and the major objectives of its founders;
description of the distinct competency of the firm
Product or service Function and nature of products and services, proprietary interests,
attributes and technical profile
Market research and analysis Customer scenario, markets, venture’s niche, industry structure,
expected competition, and sales forecast
Market plan Market strategy to compete, pricing, promotion, distribution,
service and warranties, and sales leadership
Manufacturing or operations Facilities, location, inventory and materials needed, human
resources, operational processes, technology, security, insurance,
and safety
Entrepreneurial team Profile of founders, key personnel, investors and management roles
Financial documentation Financial statements for income and expenses, cash flow; assets
I. Executive summary and liabilities, break-even projections, and start-up underwriting
The opening section, called needed
the executive summary, is a synopsis of the proposed enterprise.
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It addresses five subjects as noted in the figure below.
Venture defined Describe the purpose and nature of the business
Product or service Describe the product or service to be sold
Market Describe market size and location, and customers
characteristics
Entrepreneurial team Describe the founders, key people and their roles
Financial summary Describe estimates of revenue and expenses,
founder’s equity, debt and capital needed
Venture defined
The company must be identified to include when it was formed, by whom and for what
purpose. The entrepreneur should briefly extend the definition to explain how the enterprise
is unique.
Product or service
The entrepreneur must describe clearly what will be sold. If there is a proprietary interest
(patent, trademark, or copyright), this fact should be stated. The executive summary should
briefly describe how far the entrepreneur has gone to develop the product or service.
Products and services should also be described in terms of quality image, pricing and
distinguishing characteristics that might demonstrate a distinctive competency.
Market characteristics
Existing and potential markets must be briefly described in terms of size and geographic
characteristics. The plan must provide a summary of data to validate projections. Market
potential should be estimated over a reasonable period of time (i.e. number of sales for the
first three to five years). Summaries on data on growth projections, such as regional trends in
specialty merchandising, may be required.
Entrepreneurial team
An entrepreneurial team may include only the founding entrepreneur, but there are other key
personnel essential for the firm’s success. These individuals must be identified, and their
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skills and talents must be adequately described. The executive summary emphasizes
strengths of team members and their qualifications.
Financial summary
Critical financial considerations must be summarized to include start-up estimates of
revenue, costs, cash flow requirements, and profits or losses. These should be extended in
annual increments for at least three years. A good plan will identify the break even point in
sales volume.
II. Business description
Following the executive summary, the plan will provide detailed sections on each major
topic. The first section is a thorough description of the business. Essentially, the same points
covered in the executive summary are covered here, but they are covered in far greater detail.
An important area to address is the nature of market demand. Is the firm responding to an
established demand, or is it trying to establish a new product or service in untested markets?
The entrepreneur also needs to explain the nature of the business by clearly defining how the
firm will operate and what the founders intend to accomplish.
III. Products or services
The plan must provide an accurate description of a product or service before attempting to
explain how it will be marketed. Essential information required to describe a product
includes distinctive characteristics of the product itself, how it works (or is used), materials,
costs, methods of manufacturing, proprietary protection (patents, trademarks, or copyrights),
and potential competing (substitute) products. Most new products also will require validated
testing, and many will require approval by regulatory agencies. A business is staged during
the start up and early growth periods. Staging refers to the manner in which products or
services will be introduced. It also explains the diversification plans and prospects for
incremental growth.
IV. Market Research and Analysis
The objective of market research and analysis is to establish that a market exists for the
proposed venture. Entrepreneurs may provide a credible summary of potential customers,
markets, competitors, and assumptions about pricing, promotion and distribution.
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Market research and analysis activities
Identify potential Evaluate markets Analyze competitors Describe
customers assumptions
Demographic profile Future markets and Existing competitors Market niche for
of customers trends or changes with similar positioning firm
Characteristics of Window of products Pricing approach
customers, age, sex, opportunity Future competitors used in plan
income etc. Niche position and ease of entry Distribution or
Buying habits and information Industry structure method of making a
relevant information market
for new venture
Potential customers
A customer profile includes demographic information such as age, sex, family income,
occupation and location of potential customers. Customer profiles can include many
characteristics but entrepreneurs should be guided by reason to provide relevant information
that could affect sales.
Markets
A market exists only when there are qualified buyers, but the entrepreneur must remember
that the feasibility plan is a forecast of future markets. Therefore, market trends are important
to identify, including a window of opportunity for introducing the new business.
Competitors
It is essential to identify competitors and to analyze how competition is likely to change
when the new venture becomes established. The minimum requirement is to identify existing
competition and to explain their strengths and weaknesses.
Assumptions about the new venture
A formal marketing plan comprises the next major section of the feasibility plan.
Entrepreneurs must identify the market niche, price system, promotional effort, and
distribution method to justify a basis for market research.
Market niche
A market niche is a carefully defined segment of a broader market. It defines the positioning
of a product or service to create a distinct marketing focus.
Pricing systems
Describing the price system is essential for developing a customer profile. Luxury prices for
name-brand products sold through specialty stores indicate customers that quality
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merchandise and individualized service are offered. Low prices with frequent sales and
discounts suggest the opposite. Prices will also be defined by credit policies, location,
methods of distribution, and market strategies devised by the founders.
Methods of distribution
It is the manner in which products or services are brought to market. The choice of a
distribution system often defines the market niche, influences prices, and delineates
promotional activities. A creative method of distribution gives a business its distinct
competency.
The sales forecast
Marketing research must conclude with solid data on projected sales. A sales forecast is the
culmination of research to indicate the quantity of sales and expected gross sales revenue
during the planning period. A sales forecast includes quantity of sales in numerical terms
where the products or services can be individually identified. A good plan will describe
projected sales in the executive summary, but present well-documented information here on
specific market data and how sales are expected to occur during the first three to five years of
business.
V. The market plan
The market plan describes an entrepreneur’s intended strategy. It builds on market research
and distinct characteristics of the business to explain how the venture will succeed. It focuses
on specific marketing activities. It describes pricing policies, quality image, warranty
policies, promotional programs, distribution channels, and other issues such as after sales
service and marketing responsibility. These are outlined in the figure below.
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Elements of the Marketing Plan
Quality and reliability, use, and how the product or
Product or service service will be positioned in growth markets
Pricing system Pricing methods, discounts, quantity and bulk prices,
methods to set prices.
Promotional mix Strategy of combining appropriate uses of public relations,
advertising, displays, events, demonstrations, personal sales etc.
Distribution Description of service- after-sales policies, repair services,
channels guarantees, and product warranties
Services and Use of market channels including retail, wholesale, catalog,
warranties telemarketing, personal sales representatives, or other approaches
Marketing leadership Define leadership roles, persons responsible for marketing
and sales
VI. Manufacturing or operations plan
Facilities Inventory Human Operations Other issues
resources
Opening inventory Operating Research and Insurance
Purchase or lease Purchasing system personnel development Legal
Renovations Sub contracting Skill requirements Manufacturing protection
Equipment and Inventory Supervision process Patents,
technology management Service and Service structure Copyrights
Packing and Supplies and support Quality control and trade
transport support Unusual Safety and marks
Legal and zoning
requirements maintenance Security
issues
systems
Manufacturing and operating elements
Facilities
Every business requires physical facilities. Retailers are usually involved in choosing a
location and either securing a lease or purchasing a store. Facilities include fixtures,
furniture, equipment, parking facilities, and renovations necessary to open for business.
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Inventory management
Retailers will describe beginning inventory required to open for business and explain how
merchandise will be replenished. Manufacturers will describe raw materials and supplies needed in
inventory prior to production, and they will also describe projected finished goods inventory at
opening
Human resource requirements
From a manufacturing view point, human resource requirements should be summarized with
information on the number of personnel and type of skills needed. If the business depends on
unusually talented personnel, then they should be identified.
Operational rationale
If the firm will engage in R&D, the plan should spell out the extent of this effort. If operations include
manufacturing, the plan should describe vendor relations, supply requirements, maintenance
expectations and transport requirements. Manufacturers will also be expected to describe their quality
control policies, safety requirements, and other specific operations related to the enterprise.
Legal issues
Most businesses must consider insurance and legal protection to avoid disasters. Specifically,
entrepreneurs will need business liability insurance, and when the business relies on a few talented
people, the founders may want to purchase personnel life and disability insurance on key people.
VII. Leadership- the entrepreneurial team
Entrepreneurs must take care to profile the entrepreneurial team honesty but effectively. They should
emphasize team member’s strengths, past successes, and positive characteristics, and they should
include brief resumes of the principals. Each person’s role in the new venture should be described
briefly, including board members or investors who may not be involved directly in operations yet be
able to influence decision
VIII. Financial documentation
Since money is the objective measure used to gauge a firm’s progress, it follows that financial
statements come under close scrutiny. Financial statements for a new venture are projections based on
previously defined operating and marketing assumptions.
An income statement or profit and loss statement is required to show revenue, cost of goods sold,
operating expenses, and net income. Cash flow budgets reflect information from the profit and loss
statement adjusted properly for credit sales, non cash expenses and cash obtained and used outside of
operational income. A projected balances sheet will summarize assets and liabilities, and a break even
analysis will reveal when the enterprise begins to turn a profit.
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