MODULE 5

THE BUSINESS PLAN

The business speaks the mind of the entrepreneur. It introduces the business to lenders, investors and others. More important, it demonstrates the capability of the entrepreneur, not only as a venture founder but also as a competent business manager.

Lenders and investors often require a business plan as a road map for financing. It is also useful as a guide to the entrepreneur in founding and operating the business and allocating limited resources for goal attainment. It forces the entrepreneur to study himself or herself rigorously and above all to think of the business in its totality, rather than in isolated components.

OBJECTIVES:

After studying this module, the student should be able to:

1.      Discuss why there is a need for a business plan;

2.      Discuss what planning is like in the real world of entrepreneurs;

3.      Identify and formulate a formal business plan;

4.      Identify and discuss the five musts of a business plan.

WHY A PLAN?

The logical extension of a firm’s strategic planning is a business plan, which details how the enterprise is going to meet its objectives. In its complete form, the business plan documents all aspects of planned business activities.

People sometimes think of business plans as being primarily guides for the startup of new ventures. But that is not the only time a plan is useful. In fact, properly done, a business plan becomes a part of a firm’s life: it stays with the business, updated as necessary, tagging along throughout the business cycle, proving particularly useful for mapping out a specific program for an existing business, turning around the financing of a troubled firm, and seeking investment in business expansion. In brief, a business plan speaks the mind of a businessperson and can be used in almost any situation as a guide to action.

PLANNING IN THE REAL WORLD OF ENTREPRENEURS

Given the enormous importance of business plans, it is not surprising that a great deal has been said and written about them. Recent years have seen the publication of dozens of books on the subject. There are even computer software to help generate the plans. Business students are taught how to prepare a business plan in courses such as management, marketing, entrepreneurship, and even accounting. And practically everyone who has anything to do with entrepreneurship and small business reiterates that no one should go into a business or try to manage one without a business plan. A few years ago, people blamed the failure of young firms on lack of adequate bookkeeping. Today, the same people say it’s because entrepreneurs lack a business plan.

It is true that many entrepreneurs do not have a business plan. This lack of what has become a high priority in most business has two reasons (1) entrepreneurs are typically not people who find written planning a pleasant thing to do; and (2) the kind of plans that are taught in business schools often have little to do with what is needed and practical in real life.

Business Plans and the Entrepreneurial Mindset

Entrepreneurs are primarily action-oriented, focused on products and marketing.  Many of them do not want to spend time drawing up a written plan.  They feel their place in the world is the marketplace, not sitting in front of a desk puzzled over words and figures.  Other excuses for not planning include:  overconfidence and over-reliance on common sense; a conviction that planning is not necessary; preoccupation with other matters that seem more urgent; and just plain laziness.

The best way for an entrepreneur to overcome any of these negative feelings is to realize that a business plan is important because it stimulates organized consideration of the strengths and weaknesses of a venture or a proposed venture. As a management tool, it provides a focal point for organizing the whole management effort, a summary of business activities, a definition of the company’s goals, financial objectives, and strategies, and an assessment of the required resources and their allocations.  Prepared properly, it will serve as a blueprint to guide the entrepreneur in operating the business and in allocating available resources efficiently.  In addition, if money must be obtained from outside sources, a plan will serve as a package for presenting the proposition to potential lenders and to investors.  Without a precise, thorough, written analysis of the business, the financial analyst will likely judge the entrepreneur to be deficient in other management qualities as well.  In other words, not having a business plan means that the priority of a business has not been recognized.  Above all, it shows a lack of discipline.

It may also help the reluctant planner to remember that writing a business plan can be a learning experience, sharpening both the entrepreneur’s analytical ability and revealing potential problems (or strong points) of the venture. 

Planning the Plan: Who Will Use It?

Students taking credit courses must prepare business plans in the way prescribed in their texts.  But for practical purposes, a business plan can and should vary with the need of the user.

Thus, a business plan prepared solely for the use of an owner/manager may not be a formal document but rough notes and fragments stored in his or her personal computer.  They are sufficient guide to action.  One could argue that it would be even better to have an organized plan.  However, not everyone is equipped to do a “real” plan, and doing some sort of plan is better than having none at all.  In contrast, business plans prepared in the hope of obtaining investment from a venture capitalist, a loan from a bank, or aid from a government agency need to be more formal.  Plans prepared for each of these will also differ from each other since each kind of user has somewhat different objectives.  The key point to remember is that any business plan must be prepared to address the needs of the user, not what the entrepreneur perceives as his or her own needs.

A FORMAL BUSINESS PLAN

Since business plans are written to achieve a purpose and since all purposes are not identical, there is a great deal of variation from one business plan to another.  This section describes the parts of a complete, formal plan for either a proposed or an existing venture; a plan suitable for outside users (such as potential investors). 

The assumption in preparing a formal general plan is that the reader knows little or nothing about the industry but may wish to know a great deal about the enterprise.  Since you are undoubtedly hoping to attract money to the firm by writing this document, the effect must be one of enthusiasm, competence, and honesty.

The Full Form

A properly prepared formal plan contains:

1.      Table of Contents

2.      Executive Summary.  A brief statement, preferably no more than one page long.

3.      About the Business.  A statement of the basic non-financial background of the business: when and where it was started, product details, its major suppliers and customers, and its competitive advantage.  Details go in later sections.

4.      About the Entrepreneur and the Team.  Brief backgrounds of the owner/manager and the management team (administrative and technical), emphasizing why each person is important to the business.

5.      Product or Services Profile.  A description of product characteristics, product development, the estimated product life cycle, and long-term product strategy.

6.      Feasibility Survey.  A market survey showing the feasibility of the product or service.

7.      Market Description and Analysis.  A report covering the size of the market, consumers’ motives and behavior, market segment, target market, market trends, and the enterprise’s estimated market share and sales.  Be sure to state the basis for formulating the estimates.

8.      Competition.  A description of the main competitors and their competitive strategies, plus any other information demonstrating the entrepreneur’s awareness of the total market environment that the venture must confront.

9.      Anticipated Sales.  A forecast that includes the assumption and/or basis on which it is made.

10.  Marketing Strategy.  A statement setting out the market niche, a clearly defined marketing objective, and the strategy and tactics—pricing, advertising, promotion, distribution, service, and warranty policies—the entrepreneur will use to achieve the marketing objective.  Retailers and restaurateurs include here an explanation of why a particular location or type of location is desired.

11.  Feasibility of Operation.  A brief description of the production process, technology employed, quality assurance enforcement, physical plant, status of the building, machinery, and equipment, and any other element of operational strategy that could substantiate the claim that the undertaking is viable.

12.  Human Resources.  An explanation of the expected sources of personnel, the enterprise’s general human resources policy including, if possible, objectives other than the profit for example, pride in the product, the quality of life, and shared residuals from the employee’s point of view.  If the undertaking will create jobs in a high-unemployment region or for some special group, this is the place to say so.  And most importantly, if skilled personnel are required, it must be specified how they are to be recruited and/or trained and what policies will be used to retain them.  If an established company is unionized, a brief description of union relationship is desirable and often necessary.

13.  Financial Information.  A complete set of financial statement for three years, including:

·    The projected financial state of the venture (Balance Sheet).

·    A pro forma operating statement (Profit and Loss Statement)

·    A cash-flow forecast by month (Established firms are expected to submit professionally prepared statements.)

Some situations and some users require the entrepreneur to amplify or add schedules to support the financial statements.  If the plan is to be used to solicit a loan, the cash-flow forecast must show plans for the loan repayment.  If the business is one with marked seasonal fluctuations, perhaps with heavy emphasis on accounts receivable, accounts  payable, and inventory, a cash-flow chart will likely be required.  A manufacturer may find a factory overhead schedule useful.  Other information to be placed here may include a breakeven analysis and a description of any financial commitments the entrepreneur has made on behalf of the enterprise.  For short-term borrowing from a bank, a list of the securities offered should also be provided.  Long-term leaders may require an ageing of accounts receivable and payables to determine if the working capital is adequate for the business needs.

14.  Risks.  A list of the anticipated risks to be overcome, including those in the areas of manufacturing, marketing, finance, and human resources.  Measures to deal with risks under all foreseen circumstances must be described.

15.  Research and Development.  A statement of what is planned.  This is applicable to all businesses.  It is an essential commitment if the enterprise is to survive, grow, and prosper in today’s worldwide competitive environment.

 THE FIVE MUSTS OF A BUSINESS PLAN

Every business plan must observe the following fundamentals:

1.      A business plan must be accompanied by a set of cash-flow projections. Three years of month-to-month forecasts are desirable, but one year is better than nothing at all.

2.      A business plan must have the users’ needs in mind. What the readers want to know may be what the entrepreneur wants them to know, but it is often very different.

3.      A business plan must be prepared to demonstrate coordination of all functions of the enterprise. For example, if the projected revenue is PhP 1 million, marketing, production, finance, human resources, etc. must function as a team to earn that revenue.

4.      A business plan must show the owner/managers’ determination, commitment, and competence.

5.      A business plan must be followed with action. A seemingly excellent plan that does evoke any action is only words and figures. Even the worst written plan, if acted upon, is better.

A BUSINESS PLAN AS AN ENTREPRENEUR’S GUIDE FOR ACTION

A business plan that is intended to serve the entrepreneur as a working document requires no particular formality. Some form of organized approach will, however, bring his or her thoughts together, present a vision of what the next one year or five years of the enterprise will bring, and outline the strategies and tactics needed to get there.

As an action guide, a business plan for the entrepreneur’s own use should at least:

·         Define personal and business objectives, so that the entrepreneur can make sure they are attainable and in congruence with each other.

·         Provide a self-assessment of mental, physical, and financial capability to undertake the challenge.

·         Outline the resources required to achieve the objectives.

·         Map out a strategy to acquire these resources.

·         Rank all actions required to achieve the objectives.

·         Offer an action plan that includes

·         All the things that must be accomplished and the actions needed to get them done.

·         Assignments for specific individuals to undertake the tasks.

·         The deadlines for accomplishment.

·         A brief guide for measuring the result which can be a simple checklist.

Entrepreneurs often use this sort of informal action plan in the incubation and startup stages of an enterprise, but it can be useful at any stage.

Questions To Answer:

1.      Why is there a need for a business plan? Discuss your answer thoroughly and cite examples.

2.      Identify the different plans of a full form business plan.

3.      Enumerate the “5 musts” of a business plan.

4.      How can a business plan guide the activities of an entrepreneur?

5.      How do you plan a business plan?