Meaning of a business plan

A business plan is a planning tool that is the foundation of the opportunity assessment, feasibility analysis, and
business model. It is a written summary of an entrepreneur’s proposed business venture, its operational and
financial details, its marketing opportunities and strategy, and its managers’ skills and abilities. A business plan
describes the goals for a company and how it intends to get there. It captures a full picture of the business
model and all the planning and preparation an entrepreneur undertakes when starting a business. The plan is
written proof that an entrepreneur has performed the necessary research and studied the business
opportunity adequately. Most potential investors and lenders insist on a business plan as necessary when
considering funding a venture as it is their first impression of the company and its managers.
Tests of a business plan
A business plan needs to pass following three tests with potential lenders and investors:
1. Reality test.
Entrepreneur(s) need to prove through evidence (of feedback from real customers) in the
marketing portion of their business plans that there is strong demand for their business idea,
thereby establishing the viability of their idea. Moreover, the entrepreneur(s) need to validate
the cost estimates in the business plan, establish that the product is truly different from that of
competitors and offers some value to customers.
2. Competitive test.
The internal competitive test focuses on management’s ability to create a company that will gain an
edge over existing rivals.
a. Company through its business plan needs to prove the quality, skill, and experience of the
venture’s management team and other specialized resources they have.
b. the company needs to self-assess its strength and weaknesses relative to its key competitors.
Successful entrepreneurs carefully and honestly evaluate the strength of their product ideas.
They need to ask the following questions from themselves:
i. Who is our target market?
ii. What options currently exist for this target market?
iii. What do/will we offer the target market?
iv. What is the key problem it solves?
v. Why is it better than other options from which customers can choose?
vi. Can we successfully protect our intellectual property?
3. Value test.
To convince lenders and investors, a business plan must prove to them that it offers a high
probability of repayment of their money and an attractive rate of return on that money.
Benefits of making a business plan
A business plan serves following two essential purposes for the entrepreneur:
1. While making a business plan, entrepreneurs learn about their industry, target customers, financial
requirements, competition etc. which is essential for the success of their venture.
2. It provides a battery of tools—a mission statement, goals, objectives, budgets, financial forecasts,
marketing plans, and entry strategies—to help entrepreneurs subject their ideas to the test of reality
before launching a business. It may be possible that, after preparing the business plan, the
 entrepreneur realizes that the obstacles to goals cannot be overcome. The venture then may be
terminated while still on paper, saving time and money.
3. It provides guidance to the entrepreneur in organizing his or her planning activities. A good business
plan also helps an entrepreneur lead the company successfully through the challenging start-up phase.
It serves as benchmark to evaluate the progress of the business as it grows.
4. Building a sound business plan is one controllable factor that can reduce the risk and uncertainty of
launching a company.
5. It serves as an important tool in helping to obtain financing as a sound plan attracts lenders and
investors. A business plan must demonstrate to potential lenders and investors that the venture will be
able to repay loans and produce an attractive rate of return. Investors want proof that an entrepreneur
has realistically evaluated the risk involved in the new venture and has a strategy for addressing that
risk.
6. The business plan is highly valuable to the new personnel joining the company.
7. Customers wish to understand the value that the new product offers to them before making long term
commitments such as in high-tech telecommunications systems.
8. Suppliers may want to see a business plan before signing a contract to produce either components or
finished products or even to supply large quantities of materials on consignment.
Information requirements of business plan
Before making an elaborate business plan, an entrepreneur needs to do a feasibility analysis of the marketing,
finance, and production aspects of the business concept. This is needed to ensure that there are no barriers to
achieve the goals and objectives of the venture. It is important that the goals are well defined and feasible
(reasonable). The entrepreneur needs the following kind of information:
1. Market information
The entrepreneur first needs to first define the target market (customer group based on class,
gender, age, location etc.). Projection can be made once the target market is well defined. The
entrepreneur needs to know the size of the market and its growth potential. To build a
successful marketing plan with reasonable goals, the entrepreneur needs to research the
market. A recommended method is to use the inverted pyramid approach with general
economic environment (at the national level on the top (covering household average income
trends, demographic changes, employment levels, trends in product consumption habits) and
narrowing down to relevant industry at the national level (data on the aggregate sales of players
in the industry, regulatory environment etc.) and further narrowing to the specific local market
in which the entrepreneur sells (data on sales and strategies of competitors).
2. Operational information
The entrepreneur may need information on the following:
i. Location and accessibility to customers, suppliers, and distributors.
ii. Manufacturing operations. Basic machine and assembly operations, need for
subcontracting.
iii. Raw materials. suppliers’ details and costs.
iv. Equipment/machinery. list, cost and whether to purchase or lease.
v. Labor skills. how many personnel of each skill, payment rate and how to obtain.
vi. Space. total amount of space needed and whether to own or lease.
vii. Overhead cost. item needed to support manufacturing such as tools, supplies etc.
3. Financial information
 The entrepreneur needs to prepare a budget that includes revenues (from sales and any
external funds) and costs (including capital expenditures and direct operating costs). The
revenue from sales must be forecast from market data. The accepted method to arrive at
necessary cost projections are industry benchmarks and norms based on the industry history
and trends.

How do lenders/investors evaluate a business plan?

Lenders like banks are primarily interested in the ability of the new venture to pay back the debt including
interest within a designated period. Banks want facts with an objective analysis of the business opportunity
and of all the potential risks involved. Typically, lenders focus on the four Cs of credit in the business plan:
1. Character (entrepreneur’s credit history).
2. Cash flow (ability of the entrepreneur to meet debt and interest payments).
3. Collateral (tangible assets being secured for the loan).
4. Contribution in equity (the amount of personal equity that the entrepreneur has invested).
Investors, particularly venture capitalists, have different needs since they are giving large sums of capital for
ownership (equity) with the expectation of cashing out within five to seven years. Investors focus on the
following in a business plan:
1. entrepreneur’s background information and character. This is important not only from a financial
aspect but also because the venture capitalist play an important role in the actual management of the
business. Hence, investors want to make sure that the entrepreneur is compliant and willing to accept
this involvement.
2. the market and financial projections during this critical five to seven-year period. This is because these
investors demand a high rate of return.
Elements of a business plan
The outline for a (typical/good/solid as per question) business plan is illustrated in the table below.
Introductory Page
This is the cover page that provides a brief summary of the business plan. It contains the name and address of
the company; name of the entrepreneur(s) and their all types of contact details including website addresses; a
paragraph describing the company and the nature of the business; the amount of financing needed; and a
statement of the confidentiality of the report. Investors consider it important because they can see the
amount of investment needed without having to read the entire plan.
Executive Summary
This section of the business plan is prepared after writing the total plan. About two to three pages in length,
the executive summary stimulates the interest of the investors. This is a very important section of the business
plan since the investor uses the summary to determine if the entire business plan is worth reading. Thus, it
should highlight concisely and convincingly, the key points in the business plan.
The executive summary should provide information on the following:
1. The entrepreneur(s) starting the business. For example, if one of the entrepreneurs has been very
successful in other start-ups, then this person and his or her background needs to be emphasized.
2. The business concept or model of the venture.
3. Way in which this business concept or model is unique.
4. How and how much money the venture will make.
5. The exit strategy if the venture has a strong growth plan and in five years expects to float an IPO.
6. Any supportive evidence, such as data from marketing research.
7. Contracts in hand (for example with a large customer) should be highlighted.
Environmental and Industry Analysis
It is an assessment to identify uncontrollable external factors that may impact the venture.
The important environmental factors are the following:
1. Economy. Trends in the GNP, unemployment by geography, disposable income etc.
2. Culture. cultural changes due to demographic changes; shifts in attitudes (such as “Buy local”); trends
in safety, health, and nutrition, as well as concern for the environment.
3. Technology. potential technological developments determined from actions of major industries or
central governments.
4. Legal concerns. legal issues in starting a new venture; any future legislation for example safety or
advertising regulation, affecting the packaging, product or service, channel of distribution, price, or
marketing.
The industry analysis focuses on specific industry trends. Most important factors are:
1. Industry demand. sales growth forecast (whether the market is growing or declining), the number of
new competitors, and possible changes in consumer needs.
2. Industry level Competition. who are the competitors, how is their performance, what are their
strengths and weaknesses, so that an effective marketing plan can be made.
3. Specific market. who is the target customer and what is the business environment in the specific
market and geographic area where the venture will compete.
Description of Venture
The description of the venture should be detailed overview of the product(s), service(s), and operations of a
new venture. This section should contain the following:
1. the mission statement of the company mentioning the nature of the business, reasons for starting the
venture, reasons for claims of success.
2. Key elements are the product(s) or service(s), intellectual property status, the location and size of the
business (including building requirement, cost of owning or leasing, parking availability, connectivity,
access to customers, suppliers, distributors, delivery rates, town regulations), the personnel and office
equipment needed including costs, experience of the entrepreneur(s), and the history of the venture.
Production Plan
A production plan is necessary only if the new venture involves manufacturing. It is important to any potential
investor for assessing financial needs. The plan should describe the complete manufacturing process as
follows:
1. the physical plant layout; the machinery and equipment needed; raw materials and suppliers’ names,
addresses, and terms; costs of manufacturing; and any future capital equipment needs.
2. If manufacturing is partly or fully subcontracted, then the plan should describe the subcontractor(s),
including location, reasons for selection, costs, and completed contracts.
Operations Plan
All businesses, manufacturing or not, should include an operations plan as part of the business plan. It
describes the flow of goods and services from production to the customer. It might include the following
details:
1. inventory or storage of manufactured or purchased products.
2. operation of inventory control systems.
3. distribution and shipping.
4. steps involved in a business transaction with customer.
5. customer support services and its technological requirements.
Marketing Plan
The marketing plan is an important part of the business plan since it describes strategy to distribute, price, and
promote product(s) or service(s). It needs to share with the investors:
1. market research evidence to support marketing strategies and sales forecasts made to project the
profitability of the venture.
2. budget and appropriate controls needed for that marketing strategy.
Organizational Plan
The organizational plan is the part of the business plan that details the form of ownership (proprietorship,
partnership, or corporation); terms of partnership; names and shares of stocks of board of directors; an
organization chart indicating the lines of authority and responsibility of members of new venture. This part of
the business plan provides the potential investor with a clear understanding of who controls the organization
and how the management will function.
Assessment of Risk
Risk assessment identifies potential hazards and alternative strategies to meet business plan goals. Following
details should be included:
1. the potential risks (from a competitor’s reaction; weaknesses in the marketing, production, or
management team; and new advances in technology that might render the new product obsolete) to
the new venture.
2. a discussion of what might happen if these risks become reality.
3. the strategy that will be employed to prevent, minimize, or respond to the risks should they occur.
Financial Plan
The financial plan is an important part of the business plan. It includes key financial data projections that
determine economic viability and necessary financial investment commitment. Generally, three financial
projections are discussed in this section:
1. the forecasted sales and the expenses (cost of goods sold, the general and administrative expenses) for
at least the first three years, with the first year’s projections provided monthly. Net profit after taxes
can then be projected by estimating income taxes. This is needed for break-even analysis.
2. cash flow figures for at least three years. The first-year projections, however, should be on a monthly
basis. Since sales may be irregular, short-term capital borrowing may be needed to meet fixed expenses
such as salaries and utilities.
3. Pro forma or projected balance sheet. This shows the financial condition of the business at a specific
time. It summarizes the assets of a business, its liabilities (what is owed), the investment of the
entrepreneur and any partners, and retained earnings (or cumulative losses).
Appendix
The appendix of the business plan generally contains any backing up material not necessary in the main text of
the document.

Managing Cash Flow

Managing and improving cash flow, a critical component of any financial plan, especially for small businesses.
Below is a summary of its key points:
1. Understanding Cash Flow
Cash flow is the movement of money in and out of a business.
Profitability does not equate to cash flow; even profitable businesses can fail due to cash flow problems.
Key cash flow components: accounts receivable, accounts payable, inventory, and operating expenses.
2. The Cash Flow Cycle
Describes the process of cash flowing through a business, including:
Purchasing inventory or services.
Selling goods or services.
Collecting payments from customers.
The goal is to minimize the cash conversion cycle by reducing the time between cash outflows and inflows.
3. Strategies to Improve Cash Flow
Accelerate Cash Inflows:
Use efficient invoicing systems.
Offer early payment discounts.
Implement effective collection procedures.
Control Cash Outflows:
Negotiate better payment terms with suppliers.
Delay non-critical expenses.
Avoid overstocking inventory.
Other Techniques:
Lease instead of purchasing equipment.
Use credit lines strategically.
Regularly monitor cash flow through forecasts and budgets.
4. Building a Cash Reserve
Maintain a safety cushion to handle unexpected expenses or seasonal fluctuations.
Determine the appropriate reserve amount based on business needs and risks.
5. Using Technology
Leverage accounting and financial management software to monitor cash flow in real time.
Automate billing and collections for efficiency.
By focusing on cash flow management, Scarborough argues businesses can achieve greater financial stability
and prepare for growth opportunities. This chapter serves as a practical guide for entrepreneurs to proactively
address potential liquidity challenges.

Successful Financial Plan

In Essentials of Entrepreneurship and Small Business Management by Norman M. Scarborough, the topic of a
Successful Financial Plan emphasizes the importance of detailed financial planning to ensure the long-term
sustainability and growth of a business. Below is a summary of its key components:
1. Purpose of a Financial Plan
The financial plan provides a roadmap for managing the business’s resources, measuring performance, and
ensuring profitability.
It is essential for securing funding from lenders or investors by demonstrating financial viability and potential.
2. Key Components of a Financial Plan
Income Statement (Profit and Loss Statement):
Shows the business’s revenues, expenses, and profits over a specific period.
Helps track financial performance and identify areas for improvement.
Cash Flow Statement:
Tracks cash inflows and outflows, ensuring the business has enough liquidity to cover operating expenses.
Critical for managing working capital and avoiding cash shortages.
Balance Sheet:
Provides a snapshot of the business’s financial health by detailing assets, liabilities, and equity.
Helps assess the business's ability to meet financial obligations.
3. Break-Even Analysis
Determines the sales volume needed to cover costs, highlighting when the business will start generating profit.
Helps entrepreneurs set realistic financial goals and pricing strategies.
4. Budgeting and Forecasting
Budgets provide a framework for managing expenses, allocating resources, and setting financial priorities.
Financial forecasting involves predicting future revenues, costs, and profits based on market trends and
historical data.
5. Financing the Business
Entrepreneurs need a clear strategy for funding operations and growth, which may involve:
Debt Financing: Loans or credit lines from banks or alternative lenders.
Equity Financing: Selling ownership stakes to investors or venture capitalists.
Bootstrapping: Using personal savings or reinvesting profits into the business.
The choice of financing affects ownership control, risk, and repayment obligations.
6. Managing Financial Risks
Financial planning involves anticipating and mitigating risks such as economic downturns, fluctuating market
demand, or unexpected expenses.
Maintaining a cash reserve and diversifying revenue streams can provide a buffer against uncertainties.
7. Monitoring Financial Performance
Regularly reviewing financial statements and key metrics (e.g., profitability, liquidity, and leverage ratios)
ensures the business stays on track.
Variance analysis helps compare actual performance against financial goals and budgets, allowing for timely
adjustments.
8. Importance of Financial Discipline
Effective financial management requires discipline in spending, investing, and maintaining accountability.
Entrepreneurs should prioritize long-term sustainability over short-term gains.
Conclusion
A successful financial plan is a cornerstone of entrepreneurial success. It not only guides daily financial
decisions but also provides the foundation for achieving long-term business goals. By carefully planning,
monitoring, and adjusting their financial strategies, entrepreneurs can ensure their ventures remain profitable
and resilient in a competitive market.

Sources of Financing
Following are the various funding options available to entrepreneurs:
1. Personal Financing
Entrepreneurs often start by investing their own resources, which can include:
Savings: Using personal savings to fund initial operations.
Home Equity Loans: Leveraging property value to secure funding.
Bootstrapping: Minimizing expenses and reinvesting profits into the business.
Personal financing demonstrates commitment to investors or lenders.
2. Friends and Family
Borrowing from personal networks is a common initial funding source.
Agreements should be formalized to avoid misunderstandings or conflicts.
3. Debt Financing
Involves borrowing money that must be repaid with interest.
Common sources include:
Commercial Banks: Offer loans, lines of credit, and equipment financing. However, they often require strong
credit and collateral.
Credit Unions: Provide loans with potentially lower interest rates.
Government Programs: Agencies like the Small Business Administration (SBA) offer loans with favorable terms
for small businesses.
Alternative Lenders: Online platforms offering faster but often higher-interest loans.
Debt financing allows entrepreneurs to retain ownership but creates repayment obligations.
4. Equity Financing
Involves selling ownership stakes in exchange for capital.
Common sources include:
Angel Investors: High-net-worth individuals who invest in early-stage businesses.
Venture Capitalists: Firms investing in businesses with high growth potential, often seeking significant returns
and a say in management.
Crowdfunding: Raising small amounts of money from many people via platforms like Kickstarter or Indiegogo.
Equity financing provides funds without repayment but dilutes ownership and control.
5. Grants and Subsidies
Certain industries or demographics may qualify for government or private grants, which do not need to be
repaid.
These are often competitive and require a detailed application process.
6. Trade Credit
Suppliers may offer credit terms, allowing businesses to purchase goods and pay later.
Helps manage cash flow without upfront payment obligations.
7. Leasing
Instead of purchasing equipment, businesses can lease assets, which reduces initial costs.
Leasing can conserve cash but may be more expensive over the long term.
8. Factoring and Invoice Financing
Businesses can sell accounts receivable (invoices) to a factoring company at a discount to receive immediate
cash.
Useful for managing cash flow but reduces overall revenue.
9. Retained Earnings
Profitable businesses can reinvest their earnings into operations or expansion rather than distributing them to
owners or shareholders.
10. Specialized Sources
Incubators and Accelerators: Offer funding, mentorship, and resources in exchange for equity or participation.
Partnerships: Bringing in business partners who contribute capital in exchange for equity and shared
responsibilities.
Conclusion

Entrepreneurs have access to a variety of financing options, each with its own advantages and trade-offs. The
best choice depends on the business’s stage, financial needs, growth potential, and the entrepreneur’s
willingness to share ownership or assume debt. A well-thought-out funding strategy can significantly impact a
business's success and sustainability.