Topic  Business Plan

5
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain what a business plan is;
2. Describe seven importance of business plans;
3. Identify the parties who need business plans;
4. Explain eight essential elements of a good business plan;
5. Discuss six guidelines for preparing a business plan; and
6. Describe five factors that contribute to the failure of business plans.

 INTRODUCTION
Business environments today are dynamic, complex and subject to continual
change. In order to gain and retain sustainable competitive advantage, achieve
stated objectives and a range of efficiencies, an entrepreneur must have a good
business plan. Business planning is one of the management tools used to achieve
business objectives.

Therefore, a company should prepare a convincing business plan to attract

investors. Investors are more prepared to invest in a business when they believe
that the business planning is realistic and profitable based on their forecast of the
business viability. When a business plan is prepared based on correct
information, investors will have confidence in the market, product or service of
the company. The accuracy of a business plan will reflect the managementÊs
ability, experience and history in running the business.
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5.1 WHAT IS A BUSINESS PLAN?

A business plan is a written document, which describes in detail the overall plans
of a business in which an entrepreneur aims to get involved. Even if the
entrepreneur has been in business for a number of years, committing plan to
paper allows the entrepreneur to re-examine his business as well as to consider
new business opportunities. Therefore, a business plan is the blueprint of a
company, presented in a standard business format that is logical and realistic. A
business plan must communicate ideas and goals clearly. To accomplish this, a
plan should include three things as shown in Figure 5.1:

Figure 5.1: Three main things that an entrepreneur should include in a business plan

According to Patricia Utton (2001), a business plan is a detailed programme or

roadmap outlining every conceivable aspect of an entrepreneurÊs proposed
business venture. It is a comprehensive, self-explanatory plan of what the
entrepreneur intends to do; how the entrepreneur intends to do it, when the
entrepreneur intends to do it; where the entrepreneur intends to do it and why
he believes his idea is viable and profitable. It is, in essence, a structured
guideline to achieve the entrepreneurÊs goals, in operating the business.

Besides that, a business plan is an ideal tool to check facts and to

comprehensively examine the practicality of an idea before putting it into action.
It gives the entrepreneur opportunities for realistic expectations and action when
taking the business into operation. On the other hand, it also helps the
entrepreneur to identify areas of strength and weakness, and the details for the
entrepreneur to look over, the opportunity to be gained and the threat to be
faced. All these aspects will determine how they can best achieve their business
goals.
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Generally, an entrepreneur needs to prepare a workable business plan for the

following purposes:
(a) It forces entrepreneurs to arrange their thought in a logical and
structured order.
(b) It helps them to create business frameworks by defining the activities,
responsibilities and objectives to be achieved.
(c) It encourages entrepreneurs to stimulate reality and anticipate pitfalls
before they actually occur.
(d) It helps entrepreneurs to develop strategies to meet those objectives.
(e) It serves as a working action plan or guideline in operating their business.
(f) It enables them to identify constraints that they may face when running the
business.

5.2 IMPORTANCE OF BUSINESS PLANNING

A business plan is very important to an entrepreneur for various reasons
(refer Figure 5.2).

Figure 5.2: The importance of a business plan

(a) Increase Opportunity for Success

Comprehensive business planning can identify the level of performance
that is supposed to be achieved in business. A business plan will determine
the changes that need to be taken to ensure its success. Such changes that
need to be taken into consideration are organisational structure,
introduction of new technology, new manufacturing techniques and new
programmes for subordinates to increase their commitment and
productivity. Entrepreneurs need to update their knowledge and skills, to
increase their opportunity for success.
 TOPIC 5 BUSINESS PLAN  63

(b) Develop Mission and Vision

A business plan can set a clear mission and vision for a business. It enables
the entrepreneur to make the right decisions and take appropriate actions
in the future. The mission and vision will act as a lighthouse to enable the
entrepreneurs to know exactly where they are moving towards. The
entrepreneurs should communicate mission and vision to the entire
stakeholder to gain confidence from them.

(c) Identify the Main Competitor/s

Business planning will enable entrepreneurs to determine who their main
competitors are, their strengths and weaknesses and determine the right
strategy to face them. All these can be done by competitive analysis to
identify the competitorsÊ product line or service as well as their market
segment. The entrepreneur should be sure to identify all key competitors
for each of the products or services and try to estimate how long it will take
before new competitors enter the market place.

(d) Identify the Right Way of Managing the Business

A business plan gives room for the entrepreneurs and their employees to
develop effective strategy to run the business. They can define who, when
and how to tender their knowledge, skills and abilities in implementing the
business. The entrepreneurs should also ensure that their products and
services are in line with the customersÊ taste, government policies and other
changes in the business environment.

(e) Increase the StakeholdersÊ Confidence

Every stakeholder who has an interest in a business will be eager to know
the companyÊs strengths like finances, resources and company viability.
This information is necessary for the stakeholder to determine his return on
investment. For example, before a financial institution agrees to provide the
loan needed by the entrepreneur either to start or to expand his business,
they would want to know the prospects of the business, and the ability to
repay the loan. On the other hand, suppliers also want to know the strength
of the entrepreneursÊ financial position before they prepare to give credit
for their materials. Also, government agencies would want to know the
background and the nature of the business before they allow the company
to operate.
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(f) Identify Barriers to Business

When implementing a business, an entrepreneur will definitely face many
barriers. These barriers will cause failure or slow down the entrepreneurÊs
progress if it is not properly managed. Therefore, the entrepreneur should
identify the barriers he may face before implementing the business and take
the necessary action to face it. The entrepreneur knows how far those
barriers will affect him and his business.

(g) As a Performance Tool

A business plan is an operating tool which, if properly prepared, will help
the entrepreneur to work effectively towards its success. The business plan
will allow the entrepreneur to set a realistic target to be achieved as a
performance yardstick. Therefore, the business plan will provide the basics
for evaluating and controlling the companyÊs performance in the future, in
terms of profit, cost and quality. It is also used to achieve performance
targets, to analyse customersÊ behaviour trends, competitorsÊ strengths, and
internal and external economic performances.

EXERCISE 5.1
Why are business plans important to entrepreneurs?

5.3 WHO NEEDS THE BUSINESS PLAN?

A business plan is very important to various parties. Among those who need
business plans are:

(a) The Management Team

A business plan will enable the management team to consider the time,
effort and support needed to achieve the companyÊs goal. It will provide
them with opportunities to analyse critical situations that will hinder
business progress. Besides, it will enable them to forecast changes that
might happen in the future. The management team must also analyse the
reason for the success and the failure of the company as well as threats and
opportunities that would be faced in the future. Therefore, the team must
build and examine the strategies and priorities that should be clearly
described and communicated to ensure company growth. The management
team is responsible for setting a reasonable benchmark as a comparison for
the companyÊs success. Besides that, a business plan will enable the
management team to identify difficulties and constraints faced by the
employees in achieving the target.
 TOPIC 5 BUSINESS PLAN  65

(b) The Shareholders

Business planning is also important to shareholders. They must know how
the business is to be conducted since their approval is necessary if changes
in target and strategy are to be made. So, they need to know about any new
decisions made before executing them. A business plan is an essential
document for shareholders because they play a vital role in critically
reviewing the draft plan. The entrepreneur should inform them about the
future market of the products or services, business operations, financial
projections and future plans, such as expanding the business to
international markets. The business plan is also important for new ventures
or new businesses in order to secure potential new shareholders.

(c) Bankers or Creditors

Before approving a loan application, bankers will need to study the
entrepreneurÊs business plan. This plan will give them an indication of the
returns they may expect from their loan and also enable them to gauge the
viability of the venture and its profitability within a reasonable time frame.
The business plan will also give bankers an idea of the companyÊs strategies
and priorities. These must be clearly described in the plan and consistent
with the overall departmental strategy policy, functional objectives and
reporting requirement. From the business plan, bankers will also be able to
ascertain government grants and tax incentives available to the
entrepreneur.

(d) Customers
Customers will also be interested in the business plan for information
regarding the company which will influence their decision to use its
products or services. Issues of interest include the quality and safety of the
companyÊs product. To gain customersÊ confidence, the business plan
should also include the price of the product, durability, features and
additional support or after sales services. Customers will have more
confidence if the product uses new technologies, is authorised by parties
such as SIRIM and JAKIM, and is in line with their culture.

(e) Suppliers
Suppliers need a business plan when considering approval for business
procurement on credit terms. Suppliers want to see the ability of a business
to pay back the credit on time. Thus, a good business plan is able to give a
clear picture on the capability of the business.
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(f) The employees

Most potential employees want information about business developments
and performance before they decide to join an organisation. They can get
this information from the business plan.

5.4 ESSENTIAL ELEMENTS OF A GOOD

BUSINESS PLAN
Every successful business plan should include something about each of the
following areas since these are what make up the essential elements of a good
business plan (refer to Figure 5.3).

Figure 5.3: The eight essential elements of a good business plan

(a) Executive Summary

The executive summary is the most important section of a business plan.
This is the first section that needs to be looked at and it should tell readers
where the company is and where it wants to go. Among the elements
included in the executive summary are the mission statement, the date
when the business started, the name of the founders and the roles they
play, the number of employees, location of the business and their branches
or subsidiaries (if any), description of plans or facilities, products
manufactured, bankersÊ names, the progress of the company and its
growth, financial status and a summary of the managementÊs future plans.
 TOPIC 5 BUSINESS PLAN  67

(b) Market Analysis

The market analysis section illustrates the entrepreneurÊs knowledge about
a particular industry which the business is in. It should also present a
general overview and conclusion of any marketing research data that has
been collected. However, specific details of marketing research studies
should be moved to the appendix section of the business plan. This section
should include an industry description and outlook, target market
information, market test result, lead times and an evaluation of
competition.

(c) Marketing and Sales Strategies

Marketing is the process of creating and attracting customers to the
business. The entrepreneur should realise that customers are the lifeblood
of a business. A business plan should include a sales forecast based on
market analysis. In this section, the most important thing to do is to define
the marketing strategy. Marketing strategy should be a part of an ongoing
self-evaluation process and unique to the company. An overall marketing
strategy would include strategies for market penetration, business growth,
channels of distribution and communication. Overall sales strategy should
include sales force strategies and sales activities. It is also important to
include the marketing budget in this section.

(d) Services or Product Line

This section describes the uniqueness of the companyÊs services or products
and the benefits to potential and current customers. The entrepreneur
should focus on the areas where a distinct advantage exists by identifying
the problem for which the service or product provides a solution.

(e) Organisation and Management

This section includes companyÊs organisational structure, details about the
ownership of the company, a profile of management teams and the
qualifications of members of the board of directors, the remuneration plan
and the administrative budget.

(f) Funding Request

This section focuses on the amount of funding needed to start or expand the
business. If necessary, it can include different funding scenarios such as
with and without funding and its implication to the business. Therefore,
this section consists of project implementation cost, which includes capital
expenditure, operational expenditure, sources of finance or funding. It also
includes funding requirements, future funding requirements over the next
five years, how they will utilise the funds received and any long term
financial strategies that would have an impact on the companyÊs financial
progress.
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(g) Financials
Financials should be developed after analysing the market and setting clear
objectives. In this section, the entrepreneur shows clearly the financial
projections such as cash flow pro forma, profit and loss pro forma, balance
sheets projections, etc.

(h) The Appendix

The appendix section should be provided to readers on an as-needed basis.
In other words, it should not be included with the main body of business
plan. The business plan is a communication tool. As such, it will be seen by
many people. The appendix includes a credit history, resume of key
managers, product pictures, letters of reference, details of market studies,
relevant magazine articles, licenses, permits, legal documents, copies of
leases, building permits, contracts and list of business consultants,
including attorneys and accountants.

ACTIVITY 5.1
You are an entrepreneur who is running a bakery selling
traditional cakes in Ampang Plaza. What are the details you will
include under the Marketing and Sales Strategy in your business
plan? Discuss in group and write the details.

EXERCISE 5.2
What are the important elements in a good business plan?
 TOPIC 5 BUSINESS PLAN  69

5.5 GUIDELINES IN PREPARING BUSINESS

PLANS
Figure 5.4 shows the six guidelines to be followed in order to produce an
effective business plan.

Figure 5.4: The guidelines in preparing a business plan

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5.6 PITFALLS TO AVOID IN PLANNING

According to Kuratko (2004), there are a number of pitfalls that should be avoided
by entrepreneurs in the formulation of a business plan. Some of these are common
errors that are usually committed by entrepreneurs and are easily noticed. Table 5.1
shows five pitfalls and strategic steps to be taken to avoid them.
Table 5.1: Pitfalls in Planning

No Pitfalls Facts How to Avoid

1. No realistic  Some of the business plans do not contain Good business plan
goals attainable and clear goals that entrepreneurs should include a clear
are trying to achieve. schedule with specific
 Lack of time frame. steps of action to be
 No priorities. accomplished within
specific time frame.
 No action steps in the business plan.
2. Failure to Sometimes, entrepreneurs are so immersed in To avoid this pitfall, list
anticipate their ideas that they are unable to see the down possible obstacles
obstacles possible problems that may arise. There are no that may arise and steps
indicators to recognise the problems, no or contingency plans if
admission of possible mistakes or weaknesses the problems occur.
in the plan and contingency plans do not exist.
3. No Many entrepreneurs appear to lack of Entrepreneurs should
commitment commitment in their business. Entrepreneurs follow up important
or should not give the impression that they donÊt appointments and
dedication take matters seriously in doing business. The willing to demonstrate
obvious indicators for lack commitments are: financial commitment to
 Excessive procrastinations. their business.
 Missed appointments.
 No desire to invest personal money.
 Desire to make quick profit.
4. Lack of Many investors look for the entrepreneurs with They should give evidence
business or actual experience and not merely with ideas, of personal experience and
technical and who have true knowledge in the proposed background for this
experience business. Thus, entrepreneurs should venture.
demonstrate their knowledge and background If they lack specific
experience in their business areas. knowledge or skills, they
should get assistance from
those with qualifications.
5. No market Many entrepreneurs do not identify potential The best way to avoid this
niche customers for their products. Many new pitfall is to establish a
potential products never reach the hand of the specifically targeted market
customer because of the lack of a market niche segment and demonstrate
or no market was ever established for that why and how specific
product. product or service will
meet that target group.
 TOPIC 5 BUSINESS PLAN  71

Entrepreneurs should avoid the pitfalls discussed above in order to better the
chances of their business plan to succeed. These critical areas must be handled
carefully before developing their business plan. This will help the entrepreneur
to establish a solid foundation on which to develop an effective business plan.

EXERCISE 5.3
Describe the factors that contribute to the failure of business plans.

 Business planning is a management system. It integrates the management

functions of planning, organising, implementing and controlling.
 The business planning process provides management with basic tools and
information that describe the management and resource environment, and
contribute to establishing the accountability framework needed to manage in
a dynamic environment. So, the execution of business planning is very
important to ensure the survival and expansion of the business.

Business plan Product line

Executive summary Pitfalls
Management function Shareholders
Market analysis Stakeholders