Chapter-two

Business Planning

By: Yeshiwas Fentahun (MA), Lecturer

@ Department of Management ,College
of Business and Economics, Injibara
University
 Introduction
• To start any type of business or expand the
existing business needs to work on
opportunity identification and
evaluation, business idea development
and business plan preparation.
• Lack of proper opportunity identification
and evaluation, idea development
process and business planning reasons
for business failure.
• This chapter will summarize opportunity
identifying and evaluating processes, business
idea development process, and the feasibility
study, importance and preparation of a
business plan.
 Opportunity Identification and Evaluation

• The initial stage in the entrepreneurial

process is the identification and refinement
of a viable economic opportunity that
exists in the market.
• Without the recognition of an opportunity the
entrepreneurial process result in failure.
• The opportunity identification and evaluation
stage can be divided into five ;
• Getting the idea/scanning the environment,
• Identifying the opportunity,
• Developing the opportunity,
• Evaluating the opportunity
• Evaluating the team.
 CON,T…
• A .Scanning the Environment/ Getting the Idea
• Environmental scanning provides ideas and business
opportunities.
• Idea may be thought, intention, scheme,
suggestion, proposal, initiative, spur, impulse,
brainwave, insight, concept and connotation
about a possible course of action.
• B. Opportunity Identification
• Opportunity identification is ability to see, discover
and exploit opportunities that others miss, the
process of seeking out better ways of competing.
• It includes
• Scanning informational environment,
• Being able to capture,
• Recognize and make effective use of abstract,
• Implicit and changing information from the changing external
environments.
 CON’T…
• C. Opportunity Development
• Opportunity development is the process of
combining resources to pursue the
identified market opportunity.
• This involves systematic research to refine the
idea to the most promising, high potential
opportunity that can be transformed into
marketable items.
• D. Opportunity Evaluation
• Opportunity screening and evaluation is a
critical element of the entrepreneurial process.
• Evaluation can tell whether the specific product
or service has the returns needed to justify
the investment and the risk to be taken.
 CON’T…
• Evaluation process looking at,
•The creation and length of the opportunity,
• Its real and perceived value,
•Its risks and returns,
•Its fit with the personal skills and goals of the
entrepreneur,
• Its differential advantage in its competitive
environment.
• E. Assessment of the entrepreneurial
team
• Regardless of how right the opportunity may
seem to be, it will not make a successful
business unless it is developed by a team
with strong skills.
 Business Idea Development

• A business idea is a short and precise

description of the basic operation of an
intended business.
o Old Idea–anindividual copies an existing
business idea from someone.
o Old Idea with Modification–The entrepreneur
accepts an old idea from someone and
modifies it in some way to fit a potential
customer’s demand.
o A New Idea–The invention of something new for
the first time
 CON’T…
o Business Idea Identification
• Before you start a business, you need to have a clear
idea of the sort of business you want to run. Your
business idea will tell you:
 Which need will your business fulfill for the
customers
 What kind of customers will you attract?
 What good or service will your business sell?
 Who will your business sell to?
 How is your business going to sell its goods or
services?
 How much will your business depend upon and
impact the environment?
• A good business idea will be compatible with the
sustainable use of natural resources and will respect
the social and natural environment on which it
depends.
 CON’T…
o The Need will Your Business Fulfill for the Customers
• Your business idea should always have customers and their
needs in mind.
o Good or Service will your Business Sell
• Depending on your skills and the needs of the customers, you
should decide which good or service your business will sell.
• keep in mind there must be goods or services that people are
willing to pay for and at a price that will allow you to make a
profit.
o Identifies Potential Customer
• Any business cannot succeed without customers.
• Therefore, it is essential that you know who your customers will
be.
• Will you sell to a specific type of customer or to everyone in an
area?
• There must be enough people who are able and willing to
pay for your goods and services or the business will not
survive.
 CON’T…
o Strategy for Selling Goods or Services/
How is Your Business Going to Sell Good
or Services?
• How are you going to sell your goods or
services?
• If you plan to open a shop, you know how you
will sell your product, but manufacturers or
service operators can sell their products in
many different ways.
• For example a manufacturer, can sell
either directly to customers, to retailers
or to wholesalers.
 CON’T…
o Relation between Business and Environment
• Your business can only be sustainable in the long run if
it works in harmony with the social and natural
environment.
• How much does your business depend on the
environment?
• Does it rely on the weather, soil or other natural
resources?
• Does it need any specific type of labor from the local
community?
• Does it need the local community to support it?
• What should you do to make sure that your business
nurtures the natural environment and helps the local
community?
 Methods for Generating Business Ideas
• Every business idea should be based on
knowledge of the market(people who might
want to buy a good or service) and its
needs(customers).
• When generating business ideas, it is best to
try to keep your mind open to everything.
• There are many ways to come up with business
ideas, such as surveying local businesses or
asking existing business owners.
 CON’T…
o Learn from successful business owners
• You can learn a lot from people in your area who
have already gone through the process of
establishing a business.
• You should try to get the following information
from them:
• What kind of idea did their businesses start with?
• Where did the ideas come from?
• How did they develop their ideas into successful
businesses?
• Where did they get the money to start their
business?
• How does the business profit ?
• How does the business fit into the local
environment?
 CON’T…
• Draw From Experience
• Your own Experience
• Look at the list of your interests, your experiences
and your networks.
• Are there any possible business ideas that you
can derive from your own past experience?
• Think about each type of experience. Start with
yourself.
• What has your experience been as a customer in
the market place?
• Have you ever searched all day for some items
that you could not find in any store in your area?
• Think about the goods and services you have
wanted at different times and that you have had
difficulty finding.
 CON’T…

• Other People’s Experience

• It is important to understand experience of the
people around you are potential customers,
• trying to find goods and services that are
unavailable or not exactly what they need, their
shopping experience.
• Ask your family and friends about the things they
would like to find that are not locally available.
• Expand your social knowledge by talking to
people from different age groups, social classes,
etc.
• You can also visit community groups, colleges,
etc. for a greater understanding of the mark.
• “There is no enough entertainment in this town
and the weekends are so boring.”
 CON,T..
• Survey Your Local Business Area
• Another way of discovering business ideas is
to look around your local community.
• Find out what type of businesses are already
operating in your area and see if you can
identify any gaps in the market.
• If you live in a village or small town, you may
be able to identify all the fields of business in
the whole town.
• You may need to focus on the preferred
business fields and business types that you
identified.
• Visit the closest industrial area, markets
and shopping centers in your area.
 CON’T…
o Scanning Your Environment
• You can use your creativity to find more business ideas in
your area.
* Natural Resources: Think of what is abundantly
available natural resources in your area? that could be
made into useful products without harming the environment.
• Natural resources include materials from soil,
agriculture, forest, mineral, water, etc.
* Characteristics and Skills of People in the Local
Community: Consider whether the people in your area have
some special characteristics / skills that could be useful for a
business:
• Are there people in your community who are good
artisans, tailors or carpenters or who have specific skills
creating items unique to your area?
• Are there recent graduates looking for jobs who you could
employ?
• Are there caregivers, nurses or people who could offer
services to children, the elderly or the sick?
 CON,T…
* Waste Products: Business opportunities can also
be generated by using materials that have been
previously used by both homeowners and
businesses.
• Think about the possible use of waste materials for
the production of other useful and marketable items.
• Recyclable waste products can be identified by
analyzing certain items to see how they are
discarded.
* Import Substitution: Can you think of anything
that is imported that might be made locally?
• Some imported goods have high import duties,
making them very expensive.
• You could investigate the possibility of operating a
business that can easily make the imported goods
locally.
 CON,T…
• Publications: Publications from the internet
and other printed material may help you find
ideas.
• There are many sites on the internet that you
can visit to find out about business ideas as
well as franchise businesses for sale.
• Trade Fairs and Exhibitions: Organizations
hold trade fairs for different goods or services.
• Attending these fairs may give you exposure
to a number of new business ideas that you
had not previously considered.
 CON,T…
• Brainstorming
• Brainstorming means opening up your mind and
thinking about many different ideas.
• You start with a word or a topic and then write
down everything that comes to mind relating to
that subject.
• Brainstorming works best in a group.
• Get your family, friends or classmate together and
ask them to help by writing down ideas they have
when they hear the word or subject matter.
• Structured brainstorming: when you think of the
different processes that are involved in the operation of
a particular business and the goods/services that can be
offered. related with production, selling process, in
recycling or re-using materials, indirectly related
(spin-offs)and in servicing.
 CON’T…
* Focus Group
• Focus group is a group of individuals providing
information on a structured format which is
characterized by an open and in depth discussion.
• It is useful for both getting new idea on existing
product or screening idea/concepts.
* Problem Inventory Analysis
• It is similar to focus group to generate new
product ideas.
• The difference is rather than generating new idea
themselves, consumers are provided with a list of
problems in general product category.
• It is a method of obtaining “New Idea” and
solutions by focusing on problems.
 CON’T…
* Free Association
• One of the simplest methods that
entrepreneurs can use to generate new ideas
is free association.
• This technique is particularly helpful in
developing an entirely new slant to a problem.
• A word or phrase related to the problem is
written down,
• With each new word attempting to add
something new to the ongoing thought
processes,
• Thereby creating a chain of ideas ending
with a new product/service idea emerging.
 CON’T…
* Forced Relationships
• Forced relationships- as the name implies- is the
process of forcing relationships among some
product combinations.
• It is a technique that asks questions about objects
or ideas in an effort to develop a new idea.
* Attribute Listing
• Attribute listing is an idea-finding technique that
has the entrepreneur list the attributes of an item
or problem and then look at each from a variety of
viewpoints.
• Through this process, originally unrelated objects
can be brought together to form a new
combination and possibly a new product/service
that better satisfies a need.
 Business Idea Screening

• Idea screening is the process to spot good

ideas and eliminate poor one.To screen the
business idea generated,three approaches :
* Macro screening: is aimed to down ideas to 10. the
common criteria are:
• Are my own competencies (see strength detector)
sufficient?
• Can I finance it to a large extent with my own equity?
• Will people buy my product/service (i.e. is it needed and
can people afford it)?
* Micro Screening: is aimed to down ideas into 3. The
common criteria used for micro screening are:
• Solvent demand/profitable demand (market share)
• Availability of raw materials
• Availability of personal skills
• Availability of financial resources
 CON’T…
* Scoring the Suitability of Business Idea:
• This approach is most appropriate when
deciding on starting a business.
• When there are more than one possible
business ideas and one needs to decide
which one to follow.
• we use score business ideas (e.g., BI1, BI2,
BI3) by assigning a rating from 1 to 3 for each
question, with 3 being the strongest.
 CON’T…
S.N BI1 BI2 BI3
Questions
o
1 2 3
1 Are you familiar with the operations of this type of
business?
2 1 3
2 Does the business meet your investment goals?
2 3 3
3 Does the business meet your income goals?
1 1 3
4 Does the business generate sufficient profits?
1 1 2
5 Do you feel comfortable with the business?
6 Does your family feel comfortable with the
business?
1 1 3
7 Does the business satisfy your sense of status?
2 3
8 Is the business compatible with your people skills?
Is there good growth projected for the overall industry of 1 2 2
9
the business?
1 2 2
10 Is the risk factor acceptable?
1 2 3
11 Does the business require long hours?
1 2 2
12 Is the business location-sensitive?
1 2 3
13 Does the business fit your personal goals and
 CON’T…
While to answer the above questions,
there are four important groups that you
should talk to:
o Potential customers: Their views are
essential to your understanding of whether or
not your proposed product is important to
them and if you need to modify your idea to
meet their needs.
o Competitors, suppliers and entities with
financial resources: Their views will reveal
the challenges of competition that you would
face, as well as other issues related to your
potential business.
 CON’T…
o Financial institutions: Find out the lending
requirements to determine whether borrowing
for a new business is possible.
o Key informants and opinion leaders:
These are people who would know a lot about
the type and field of business you want to go
into and/or a lot about your potential
customers.
• Their views would give you a lot to think
about and could also give you a better insight
into the feasibility of your business idea.
 Concept of Business Plan

• A business plan is a road map for starting and

running a business.
•A well-crafted business plan identifies
opportunities, scans the external and internal
environment to assess the feasibility of business
and allocates resources in the best possible way,
which finally leads to the success of the plan.
• It provides information about the
various functional requirements
(marketing, finance, operations and
human resources) for running a
business.
 CON,T…
• A business plan is the blueprint of the step-by-
step procedure that would be followed to
convert a business idea into a successful
business venture.
• A business plan first of all identifies an
innovative idea, researches the external
environment to list the opportunities and
threats, identifies internal strengths and
weakness, assesses the feasibility of the
idea and then allocates resources
(production/operation, finance, human
resources ) in the best possible manner to
make the plan successful:.
 CON’T…
• The objectives of a business plan are to:
• Give directions to the vision formulated by entrepreneur.
• Objectively evaluate the prospects of business.
• Monitor the progress after implementing the plan.
• Persuade others to join the business.
• Seek loans from financial institutions.
• Visualize the concept in terms of market availability,
organizational, operational and financial feasibility.
• Guide the entrepreneur in the actual implementation of the plan.
• Identify the strengths and weakness of the plan.
• Identify challenges in terms of opportunities and threats
• Clarify ideas and identify gaps in management information about
their business, competitors and the market.
• Identify the resources that would be required to implement the
plan.
• Document ownership arrangements, future prospects and
projected growths of the business venture.
 Developing a Business Plan

• Business Planning Process

o The various steps involved in business planning
process are discussed here below:
* Preliminary Investigation
oBefore preparing the plan entrepreneur should:
o Review available business plans.
o Draw key business assumptions on which the plans
will be based (e.g. inflation, exchange rates, market
growth, competitive pressures, etc.).
o Scan the external environment and internal
environment to assess the strengths, weakness,
opportunities and threats.
o Seek professional advice from a friend/relative or a
person who is already into similar business (if any).
 CON,T…
* Opportunity Identification and Idea
Generation
• Entrepreneurship is not just limited to
innovation (generation of an entirely new
concept, product or service,
• But it also encompasses incremental value
addition to the concept/product/ services
offered to the consumer, shareholder and
employee).
• Opportunity identification and business idea
generation is the first stage of business
planning process.
• It involves generation of new concepts, ideas,
products or services to satisfy demand.
 CON’T…
* Environmental Scanning
• Environmental scanning is carried out to
analyze the prospective strengths,
weakness, opportunities and threats of
the business enterprise.
• Hence before getting into the finer details of
setting up business it is advisable to scan
both external and internal the
environment and
• Collect the information about the possible
opportunities, threats from the external
environment and strengths and
weaknesses from the internal
environment
 CON,T…
* Feasibility Analysis
• Feasibility study is done to find whether the
proposed project (considering the above
environmental scanning) would be feasible or
not.
• It is important to demarcate environmental
scanning and feasibility study at this point.
* Report Preparation
• After environmental scanning and feasibility
analysis, a business plan report is prepared.
• Report is a written document that describes
step-by- step, the strategies involved in
starting and running a business.
 Essential Components of Business Plan
• Cover Sheet: Cover sheet is like the cover page of the
book. It mentions the name of the project, address of the
headquarters (if any) and name and address of the
promoters.
• Executive Summary: Executive summary is the first
impression about the business proposal. As the saying
goes, the first impression is the last impression.
• A careful presentation of information should be done to
attract the attention of the evaluators.
• It should be in brief (not more than two or three pages)
yet it should have all the factual details about the
project that can improve its marketability.
• It should briefly describe the company; mention
some financial figures and some salient features
of the project.
• Generating interest in the minds of the readers is the
prime motive of the executive summary
 CON’T…
• The Business: This will give details about the
business concept.
o It will discuss the objective of the business,
o Brief history about the past performance of the
company (if it is an old company),
o What would be the form of ownership (a single
proprietor, partnership, cooperative society or
a company under company law).
o It would also label the address of the proposed
headquarters.
 CON,T…

• Funding Requirement:
• one of the primary objectives of preparing the
business plan report, a careful, well-planned
funding requirement should be documented.
• It is also necessary to project how these
requirements would be fulfilled.
• Debt equity ratio should be prepared, which
can give an indication about how much
finance would the company require and how it
would like to fund the project.
 CON’T…
• The Product or Services: A brief description of
product/services is given in this subsection. Includes:
o The key features of the product,
o The product range that would be provided to the
customers
o the advantages that the product holds over and
o Substitute products/the similar products/ available in the
market.
o It also gives details about
• The patents, trademarks,
• Copyrights, franchises, and
• Licensing agreements.
• The Plan: Now the functional plans for marketing,
finance, human resources and operations are to be
drawn.
• Marketing Plan: Marketing mix strategies are to be
drawn, based on the market research.
 CON,T…
• Operational Plan: The operational plan would
give information about
• ( i) Plant location:
o why was a particular location chosen?
o Is it in the vicinity of the market, suppliers, labor?
or
o Does it have an advantage of government subsidies
for that particular location or are there any other
specific reasons for choosing the particular
location?,
• (ii) Plan for material requirements, inventory
management and quality control:
o Drawn for identifying further costs and intricacies of
the business.
o Finally, the budget for operational plan is also
drawn.
 CON’T…
• Organizational Plan: The organizational plan
indicates
• The pattern of flow of responsibilities and
duties amongst people in the organization.
• Provides details about the manpower plan that
would be required to put life into the business
• It would also enlist the details about the laws
that would be governed in managing the
employees of the organization.
• In the end the organizational plan is also
budgeted.
 CON’T…
• Financial Plan: The financial plan is usually
drawn for two to five years for an existing
company.
• For a new organization the following projections
are drawn:
• Projected Sales
• Projected Income and Expenditure Statement
• Projected Break Even Point
• Projected Profit and Loss Statement
• Projected Balance Sheet
• Projected Cash Flows
• Projected Funds Flow
• Projected Ratios
 CON,T…
• Critical Risks: The investors are interested in
knowing the tentative risks to evaluate the viability
of the business and to measure the risks involved in
the business.
• This can further give confidence to the
investors as they can calculate the risks
involved in the business from their
perspectives as well.
• Exit Strategy: provides details about
• How the organization would be dissolved,
• What would be the share of each stakeholder in case of
winding-up of the organization.
• It further helps in measuring the risks involved in
investing.
• Appendix: provides information about the
Curriculum Vitae of the owners, Ownership
Agreement and the like.
The end