IPE-315

Entrepreneurship Development and

Micro Industries

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 Chapter 4:
The Business Plan

CHAPTER LEARNING OUTCOMES

After reading this chapter, you should be able to:

1. Explain the purpose and importance of the business plan.

2. Describe the components of a business plan.
3. Recognize the importance of reviewing your business plan.

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 Every Business Needs a Plan

Business plan

A document describing a business that is used to test the feasibility of a business idea,
to raise capital, and to serve as a road map for future operations.

❖ Although we all create mental plans, those thoughts need to be committed to

writing before starting a business.

❖ A written plan can help us find omissions and flaws in our ideas by allowing other
people to critically review and analyse them.

❖ A business plan tells the reader what your business objectives are; when, where,
why, and how your business will accomplish its objectives; and who will be involved
in running the business.

❖ When planning, you must define the goals of your business, determine the actions
that need to be taken to accomplish them, gather and commit the necessary
resources, and aim for well-defined targets.

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 The Purpose of Business Plan

The three primary reasons for writing business plans are

(1) to help you determine the feasibility of your business idea,

(2) to attract capital for starting up the business, and
(3) to provide direction for your business after it is in

❑ Proving Feasibility

Writing a business plan is one of the best ways to prevent costly oversights. Committing
your ideas to paper forces you to look critically at your means, goals, and expectations.
Writing your plan can help remove strong personal emotions from the decision-making
process. You need to be passionate about the business you are in, but emotion must be
balanced and tempered with logic and rationality.

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 The Purpose of Business Plan

❑ Attracting Capital

Almost all start-ups must secure capital from bankers or investors. One of the first
questions a banker or investor will ask when approached about participating in a
business is “Where is your plan?” You need to appreciate the bankers’ position. They
have to be accountable to depositors for the money entrusted to their care. Bankers in
general are financially conservative, so before they risk their capital, they will want
assurances that you are knowledgeable and realistic in your projections. Therefore, a
complete business plan is needed before you can raise any significant capital

❑ Providing Direction

Business plans should provide a road map for future operation. Don’t misunderstand—
providing direction does not mean that directions (and plans) don’t change. Craig Knouf
understands that point very well. He calculates that he has revised his original business
plan more than 120 times since he first wrote it in 1997 for Associated Business Systems,
an office equipment supplier in Portland, Oregon.

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 The Practice: Guidelines for Writing a
Business Plan
✓ Consider Your Audience

You need to show the benefit of your business to your reader. Investors want their
money to go into market-driven businesses, which satisfy the wants and needs of
customers, rather than technology-driven ones, which focus more on the product or
service being offered than on what people want.

✓ Keep It Brief

Your business plan should be long enough to cover all the major issues facing the
business, yet not look like a copy of War and Peace. Your final plan should be complete,
yet concise. Including financial projections and appendices, it should be less than 40
pages long. Your first draft will probably be longer, but you can sharpen your ideas by
editing the final document to 40 or fewer pages.

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 The Practice: Guidelines for Writing a
Business Plan
✓ Point of View

Try to write your business plan in the third person (do not use I or we). This approach
helps maintain objectivity by removing your personal emotions from the writing
process.

✓ Create a Professional Image

The overall appearance of your business plan should be professional and attractive, but
not extravagant. Having your document laser printed on white paper, with a colored-
stock cover, dividers, and spiral binding, is perfectly acceptable. Think of the message
your business plan will send to bankers and investors. For example, having it bound in
leather with gold leaf–trimmed pages is not a good sign. Does the plan’s appearance
suggest that you really need the money or will spend it wisely? As you write the first
draft of your plan, have several people who are not involved in your business read your
work to get their initial reactions. Do they quickly grasp the essence of your proposal?
Are they excited about your idea? Do they exclaim, “Wow!”? Getting feedback while you
are still writing the plan can help you refine your work and get the reader to say, “Wow!”
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 Business Plan Contents

❖ Cover Page

❖ Table of Contents

❖ Executive Summary

A condensed abstract of a business plan used to spark the reader’s interest in the
business and to highlight crucial information. The executive summary should
include the following components:

• Company information—what product or service you provide, your

competitive advantage, when the company was formed, your company
objectives, and the background of you and your management team.
• Market opportunity —the expected size and growth rate of your market,
your expected market share, and any relevant industry trends.
• Financial data —financial forecasts for the first three years of operations,
equity investment desired, and long-term loans that will be needed.

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 Business Plan Contents

❖ Company Information
In this section, you should describe the background of your company, your choice of legal
business form, and the reasons for the company’s establishment. How did your company
get to the point where it is today? Give the company’s history by describing in some
detail what your business does and how it satisfies customers’ needs. How did you
choose and develop your products or services to be sold? Don’t be afraid to describe any
setbacks or missteps you have taken along the way to forming your business. They
represent reality, and leaving them out could make your plan and projections look “too
good to be true” to lenders or investors.
❖ Environmental and Industry Analysis
In the section on environmental and industry analysis, you have an opportunity to show
how your business fits into larger contexts. An environmental analysis shows identified
trends and changes that are happening at the national and international levels that may
influence the future of your small business. Introduce environmental categories such as
economic, competitive, legal, political, cultural, and technological arenas that affect and
are affected by your business. Discuss the future outlook and trends within these
categories.

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 Business Plan Contents

❖ Products or Services

In this section, you can go into detail describing your product or service. How is your
product or service different from those currently on the market? Are there any other
uses for it that could increase current sales? Include drawings or photos if appropriate.
Describe any patents or trademarks that you hold, as these give you a proprietary position
that can be defended. Describe your competitive advantage. What sets your product or
service apart as better than the competition’s? What is your product’s potential for
growth? How do you intend to manage your product or service through the product life
cycle? Can you expand the product line or develop related products? In this section of
your business plan, you can discuss potential product lines as well as current ones.

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 Business Plan Contents

❖ Marketing Research and Evaluation

You need to present evidence that a market exists for your business. A section on
marketing research and evaluation, presenting the facts you have gathered on the size
and nature of your markets, will tell investors if a large enough market exists and if you
can be competitive in that market. State the market size in dollars and units. Give your
sales forecast by estimating from your marketing research how many units and dollars
worth of your product you expect to sell in a given time period. That sales forecast
becomes the basis for projecting many of your financial statements. Indicate your primary
and secondary sources of data, and the methods you used to estimate total market size
and your market share.

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 Marketing Research and Evaluation

➢ Target Markets and Market Segmentation

You must identify your target markets and then concentrate your marketing efforts on
these key areas. These markets must share some identifiable need that you can satisfy.
What do the people who buy your product have in common with one another? To
segment your markets, you could use a demographic characteristic (for example, 18- to
25-year-old females), a psychographic variable (similar lifestyles, usage rate of product,
or degree of loyalty), a geographic variable (anyone who lives within a five-mile radius
of your business), or another variable. Describe actual customers who have expressed a
desire to buy your product. What trends do you expect will affect your markets?

➢ Market Trends
Markets and consumer tastes change, so you will need to explain how you will assess
your customers’ needs over time. A danger of segmentation and target marketing is that
it encourages the belief that those segments and markets will stay the same—they won’t.
Specify how you will continue to evaluate consumer needs so you can identify market
trends and, based on that information, improve your market lines and aid new product
development.

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 Marketing Research and Evaluation

➢ Competition
Among three or four primary competitors, identify the price leader, the quality leader,
and the service leader. Realistically discuss the strengths and weaknesses of each.
Compare your products or services with those of competitors on the basis of price,
product performance, and other attributes.
➢ Market Share
Because you have identified the size of your market and your competitors, you can
estimate the market share you intend to gain—that is, the percentage of total industry
sales. Market share can effectively be shown and explained using a pie chart.

➢ Marketing Plan
Your marketing plan shows how you intend to achieve your sales forecast. You should
start by explaining your overall marketing strategy, identifying your potential markets,
and explaining what you have decided is the best way to reach them. Include your
marketing objectives (what you want to achieve) and the strategies you will use to
accomplish these objectives.

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 Marketing Research and Evaluation

➢ Pricing as Part of Marketing Plan

Your pricing policy is one of the most important decisions you will have to make. The
price must be “right” to penetrate the market, to maintain your market position, and
especially to make profits. Compare your pricing policies with those of the competitors
you identified earlier. Explain how your gross margin will allow you to make a profit after
covering all expenses.

➢ Promotion as Part of Marketing Plan

How will you attract the attention of and communicate with your potential customers?
For industrial products, you might use trade shows and advertise in trade magazines, via
direct mail, or through promotional brochures. For consumer products, you should
describe your plans for advertising and promotional campaigns. You should also give the
advertising schedule and costs involved. Examples of advertising or brochures may be
included in the appendix of the business plan.

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 Marketing Research and Evaluation

➢ Place as Part of Marketing Plan

Describe how you intend to sell and distribute your products. Will you use your own sales
force or independent sales representatives or distributors? If you will hire your own sales
force, describe how it will be structured, the sales expected per salesperson per year, and
the pay structure. Your own sales force will concentrate more on your products because
it will sell them exclusively. If you will use sales representatives, describe how those
individuals will be selected, the territories they will cover, and the rates they will charge.

➢ Service Policies as Part of Marketing Plan

If you sell a product that may require service, such as cameras, copy machines, or
bicycles, describe your service and warranty policies. These policies can be important in
the customer’s decision-making process. How will you handle customer service problems?
Describe the terms and types of warranties offered. Explain whether you will provide
service via your own service department, subcontract out the service work, or return
products to the factory. Also state whether service is intended to be a profit center or a
break-even operation.

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 Business Plan Contents

❖ Manufacturing and Operations Plan

➢ Geographic Location
Describe your planned geographic location and its advantages and disadvantages in
terms of wage rates, unionization, labour pool, proximity to customers and suppliers,
types of transportation available, tax rates, utility costs, and zoning. Again, you
should stress the features most relevant to your business. Proximity to customers is
especially important to a service business, whereas access to transportation will be of
greater concern to a manufacturing business.

➢ Facilities
What kind of facilities does your business need? Discuss your requirements for floor
space (including offices, sales room, manufacturing plant space, and storage areas),
parking, loading areas, and special equipment. Will you rent, lease, or purchase these
facilities? How long will they remain adequate: One year? Three years? Is expansion
possible?

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 Manufacturing and Operations Plan

➢ Make-or-Buy Policy: In a manufacturing business, you must decide what you will
produce and what you will purchase as components to be assembled into the finished
product. This is called the make-or-buy decision. In your business plan, you should justify
the advantages of your policy. Describe potential subcontractors and suppliers.

➢ Control Systems: What is your approach to controlling quality, inventory, and

production? How will you measure your progress toward the goals you have set for your
business?

➢ Labor Force: At the location you have selected, is there a sufficient quantity of
adequately skilled people in the local labor force to meet your needs? What kinds of
training will you need to provide? Can you afford to offer this training and still remain
competitive? Training can be a hidden cost that can turn a profit into a loss.

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 Business Plan Contents

❖ Management Team
❑ A good management team is the key to transforming your vision into a successful
business. Show how your team is balanced in terms of technical skills (possessing the
knowledge specific to your type of business), business skills (the ability to successfully
run a business), and experience .
❑ Include a job description for each management position, and specify the key people who
will fill these slots. Can you show how their skills complement one another? Have these
individuals worked together before? An organization chart can be included in the
appendix of your plan to graphically show how these positions fit together. Résumés for
each key manager should be included in the appendix.
❑ Discuss the management training your key people have had and may still need. Be as
specific as possible on the cost, type, and availability of this management or technical
training .
❑ Like your managers, you may need professional assistance at times. Identify other people
with whom you will work, including a lawyer, a certified public accountant, an insurance
agent, and a banker. Identify contacts you have supporting you in these areas.

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 Business Plan Contents

❖ Timeline
Create a timeline outlining the interrelationships and timing of the major events
planned for your venture. In addition to helping you calculate your business needs
and minimize risk, the timeline is an indicator to investors that you have thoroughly
researched potential problems and are aware of deadlines. Keep in mind that
people tend to underestimate the time needed to complete projects. Your schedule
should be realistic and attainable.

❖ Critical Risks and Assumptions

➢ Unreliable sales forecasts
What will you do if your market does not develop as quickly as you predicted or,
conversely, if your market develops too quickly? Each of these situations creates its
own problems. Sales that are too low may cause serious financial problems. Sales
that are too high may cause bottlenecks in production, difficulties in purchasing
enough products from vendors or suppliers, trouble hiring and scheduling
employees, or dissatisfied customers who must wait longer than they expected for
your product or service.
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 Critical Risks and Assumptions

➢ Competitors’ ability to underprice or to make your product obsolete.

➢ Unfavorable industry-wide trends

Not long ago, businesses that produced asbestos made up a thriving industry
supplying products for automotive and building construction firms. Then
reports linking asbestos with cancer drastically affected the demand for that
product and virtually eliminated the industry.

➢ Appropriately trained workers not as available as predicted.

➢ Erratic supply of products or raw materials.

➢ Any one of the 10,000 other things you didn’t expect

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 Business Plan Contents

❖ Benefits to the Community

➢ Economic development
number of jobs created (total and skilled), purchase of
supplies from local businesses, and the multiplier effect (which shows the number of
hands that new dollars brought into the community pass through before exiting).

➢ Community development
providing needed goods or services, improving physical
assets or the appearance of the community, and contributing to a community’s
standard of living.

➢ Human development
providing new technical skills or other training, creating
opportunities for career advancement, developing management or leadership skills,
offering attractive wages, and providing other types of individual growth.

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 Business Plan Contents

❖ Exit Strategy
Every business will benefit by devoting some attention to a succession plan. Before you
begin your business is a good time to consider how you intend to get yourself (and your
money) out of it. Do you intend to sell it in 20 years? Will your children take it over? How
will you prepare them for ownership? Do you intend to grow the business to the point of an
initial public offering? How will investors get their money back?
❖ Financial Plan
➢ Sources and Uses of Funds The simple sources and uses of funds form shows where
your money is coming from and how you are spending it (see Figure 4.2 from book).
➢ Cash Flow Statement The most important financial statement for a small business is the
cash flow statement, because if you run out of cash, you’re out of business. In a cash flow
statement, working from your opening cash balance, you add all the money that comes
into your business for a given time period (week, month, quarter), and then you subtract
all the money you spend for the same time period. The result is your closing cash
balance, which becomes your opening balance for the next time period. You should
project a cash flow statement by month for the first year of operation and by quarter for
the second and third years. Cash flow shows you what the highest amount of working
capital will be. It can be especially critical if your sales are seasonal in nature or cyclical.
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 Financial Plan

➢ Balance Sheet The balance sheet shows all the assets owned by your business and the
liabilities, or what is owed against those assets. The difference between the two is what
the company has earned, or the net worth of the business, which is also called capital.
From the balance sheet, bankers and investors will calculate some key ratios, such as
debt-to-equity and current ratio, to help determine the financial health of your business.
You need to prepare balance sheets ending at each of the first three years of operation.
➢ Profit-and-Loss Statement
With a profit-and-loss statement, your objective is to come up with as close an
approximation as possible of what your sales revenues and expenses will be. In making
your projections, it is helpful to break sales down by product line (or types of services)
and then determine a best-case scenario, a worst-case scenario, and a most-likely
scenario somewhere between the two extremes for each category. This practice helps
create realistic projections. Remember that lenders and investors (especially venture
capitalists) are professionals at picking apart business plans.
➢ Break-even Analysis How many units (or dollars’ worth) of your products or service
will have to be sold to cover your costs? A break-even analysis will give you a sales
projection of how many units or dollars need to be sold to reach your break-even point—
that is, the point at which you are neither making nor losing money.
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 Business Plan Contents

❖ Appendix
Supplemental information and documents not crucial to the business plan, but of
potential interest to the reader, are gathered in the appendix. Résumés of owners and
principal managers, advertising samples, brochures, and any related information can
be included. Different types of information, such as résumés, advertising samples, an
organization chart, and a floor plan, should each be placed in a separate appendix and
labelled with successive letters of the alphabet (Appendix A, Appendix B, and so on). Be
sure to identify each appendix in your table of contents (for example, “Appendix A:
Advertising Samples”)

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Thank You

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