Business Plan

Definition: A written document describing the nature of the business, the sales and marketing strategy,
and the financial background, and containing a projected profit and loss statement

Basic Concept of Business Plan

A business plan is also a road map that provides directions so a business can plan its future and
helps it avoid bumps in the road. The time you spend making your business plan thorough and
accurate, and keeping it up-to-date, is an investment that pays big dividends in the long term.

A business plan is considered to be an important device for any business. It is a document in

writing which illustrates in detail the nature, objectives and financial position of a business,
particularly a new one and the way it will achieve its objectives. A business plan can also be
prepared for an established business which is changing its area of operation or applying for a
business loan or funding request.
Types of Business Plan:
Business plans can be basically of two types:
Formal Business Plan: A detailed document mainly prepared for the purpose of ensuring
outside finance for the business.
Informal Business Plan: A rough plan which may contain hand-written notes helping the
owners in the daily functioning of a business and planning for expansions.

Your business plan should conform to generally accepted guidelines regarding form and content.
Each section should include specific elements and address relevant questions that the people who
read your plan will most likely ask. Generally, a business plan has the following components:

Title Page and Contents

A business plan should be presented in a binder with a cover listing the name of the business, the
name(s) of the principal(s), address, phone number, e-mail and website addresses, and the date.
You don't have to spend a lot of money on a fancy binder or cover. Your readers want a plan that
looks professional, is easy to read and is well-put-together.
Include the same information on the title page. If you have a logo, you can use it, too. A table of
contents follows the executive summary or statement of purpose, so that readers can quickly find
the information or financial data they need.

Executive Summary
The executive summary, or statement of purpose, succinctly encapsulates your reason for writing
the business plan. It tells the reader what you want and why, right up front. Are you looking for a
$10,000 loan to remodel and refurbish your factory? A loan of $25,000 to expand your product
line or buy new equipment? How will you repay your loan, and over what term? Would you like
to find a partner to whom you'd sell 25 percent of the business? What's in it for him or her? The
questions that pertain to your situation should be addressed here clearly and succinctly.

The summary or statement should be no more than half a page in length and should touch on the
following key elements:

 Business concept describes the business, its product, the market it serves and the business'
competitive advantage.
 Financial features include financial highlights, such as sales and profits.
 Financial requirements state how much capital is needed for startup or expansion, how it will be
used and what collateral is available.
 Current business position furnishes relevant information about the company, its legal form of
operation, when it was founded, the principal owners and key personnel.
 Major achievements points out anything noteworthy, such as patents, prototypes, important
contracts regarding product development, or results from test marketing that have been
conducted.

Description of the Business The business description usually begins with a short explanation of
the industry. When describing the industry, discuss what's going on now as well as the outlook
for the future. Do the necessary research so you can provide information on all the various
markets within the industry, including references to new products or developments that could
benefit or hinder your business. Base your observations on reliable data and be sure to footnote
and cite your sources of information when necessary. Remember that bankers and investors want
to know hard facts--they won't risk money on assumptions or conjecture.

When describing your business, say which sector it falls into (wholesale, retail, food service,
manufacturing, hospitality and so on), and whether the business is new or established. Then say
whether the business is a sole proprietorship, partnership, C or Sub chapter S corporation. Next,
list the business' principals and state what they bring to the business. Continue with information
on who the business' customers are, how big the market is, and how the product or service is
distributed and marketed.

Description of the Product or Service The business description can be a few paragraphs to a

few pages in length, depending on the complexity of your plan. If your plan isn't too
complicated, keep your business description short, describing the industry in one paragraph, the
product in another, and the business and its success factors in two or three more paragraphs.
When you describe your product or service, make sure your reader has a clear idea of what
you're talking about. Explain how people use your product or service and talk about what makes
your product or service different from others available in the market. Be specific about what sets
your business apart from those of your competitors.

Then explain how your business will gain a competitive edge and why your business will be
profitable. Describe the factors you think will make it successful. If your business plan will be
used as a financing proposal, explain why the additional equity or debt will make your business
more profitable. Give hard facts, such as "new equipment will create an income stream of
$10,000 per year" and briefly describe how.

Other information to address here is a description of the experience of the other key people in the
business. Whoever reads your business plan will want to know what suppliers or experts you've
spoken to about your business and their response to your idea. They may even ask you to clarify
your choice of location or reasons for selling this particular product.

Market Analysis
A thorough market analysis will help you define your prospects as well as help you establish
pricing, distribution, and promotional strategies that will allow your company to be successful
vis-à-vis your competition, both in the short and long term.

Begin your market analysis by defining the market in terms of size, demographics, structure,
growth prospects, trends, and sales potential. Next, determine how often your product or service
will be purchased by your target market. Then figure out the potential annual purchase. Then
figure out what percentage of this annual sum you either have or can attain. Keep in mind that no
one gets 100 percent market share, and that a something as small as 25 percent is considered a
dominant share. Your market share will be a benchmark that tells you how well you're doing in
light of your market-planning projections.

You'll also have to describe your positioning strategy. How you differentiate your product or
service from that of your competitors and then determine which market niche to fill is called
"positioning." Positioning helps establish your product or service's identity within the eyes of the
purchaser. A positioning statement for a business plan doesn't have to be long or elaborate, but it
does need to point out who your target market is, how you'll reach them, what they're really
buying from you, who your competitors are, and what your USP (unique selling proposition) is.

How you price your product or service is perhaps your most important marketing decision. It's
also one of the most difficult to make for most small business owners, because there are no
instant formulas. Many methods of establishing prices are available to you, but these are among
the most common.

 Cost-plus pricing is used mainly by manufacturers to assure that all costs, both fixed and variable,
are covered and the desired profit percentage is attained.

 Demand pricing is used by companies that sell their products through a variety of sources at
differing prices based on demand.

  Competitive pricing is used by companies that are entering a market where there's already an
established price and it's difficult to differentiate one product from another.

 Markup pricing is used mainly by retailers and is calculated by adding your desired profit to the
cost of the product.

You'll also have to determine distribution, which includes the entire process of moving the
product from the factory to the end user. Make sure to analyze your competitors' distribution
channels before deciding whether to use the same type of channel or an alternative that may
provide you with a strategic advantage.

Finally, your promotion strategy should include all the ways you communicate with your
markets to make them aware of your products or services. To be successful, your promotion
strategy should address advertising, packaging, public relations, sales promotions and personal
sales.

Competitive Analysis
The purpose of the competitive analysis is to determine:

 the strengths and weaknesses of the competitors within your market.

 strategies that will provide you with a distinct advantage.

 barriers that can be developed to prevent competition from entering your market.

 any weaknesses that can be exploited in the product development cycle.

The first step in a competitor analysis is to identify both direct and indirect competition for your
business, both now and in the future. Once you've grouped your competitors, start analyzing their
marketing strategies and identifying their vulnerable areas by examining their strengths and
weaknesses. This will help you determine your distinct competitive advantage.

Whoever reads your business plan should be very clear on who your target market is, what your
market niche is, exactly how you'll stand apart from your competitors, and why you'll be
successful doing so.

Operations and Management
The operations and management component of your plan is designed to describe how the
business functions on a continuing basis. The operations plan highlights the logistics of the
organization, such as the responsibilities of the management team, the tasks assigned to each
division within the company, and capital and expense requirements related to the operations of
the business.

Financial Components of Your Business Plan

After defining the product, market and operations, the next area to turn your attention to are the
three financial statements that form the backbone of your business plan: the income
statement, cash flow statement, and balance sheet.
The income statement is a simple and straightforward report on the business' cash-generating
ability. It is a scorecard on the financial performance of your business that reflects when sales are
made and when expenses are incurred. It draws information from the various financial models
developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of
goods. By combining these elements, the income statement illustrates just how much your
company makes or loses during the year by subtracting cost of goods and expenses from revenue
to arrive at a net result, which is either a profit or loss. In addition to the income statements,
include a note analyzing the results. The analysis should be very short, emphasizing the key
points of the income statement. Your CPA can help you craft this.

The cash flow statement is one of the most critical information tools for your business, since it
shows how much cash you'll need to meet obligations, when you'll require it and where it will
come from. The result is the profit or loss at the end of each month and year. The cash flow
statement carries both profits and losses over to the next month to also show the cumulative
amount. Running a loss on your cash flow statement is a major red flag that indicates not having
enough cash to meet expenses-something that demands immediate attention and action.

The cash flow statement should be prepared on a monthly basis during the first year, on a
quarterly basis for the second year, and annually for the third year. The following 17 items are
listed in the order they need to appear on your cash flow statement. As with the income
statement, you'll need to analyze the cash flow statement in a short summary in the business plan.
Once again, the analysis doesn't have to be long and should cover highlights only. Ask your CPA
for help.

The last financial statement you'll need is a balance sheet. Unlike the previous financial
statements, the balance sheet is generated annually for the business plan and is, more or less, a
summary of all the preceding financial information broken down into three areas: assets,
liabilities and equity.

Balance sheets are used to calculate the net worth of a business or individual by measuring assets
against liabilities. If your business plan is for an existing business, the balance sheet from your
last reporting period should be included. If the business plan is for a new business, try to project
what your assets and liabilities will be over the course of the business plan to determine what
equity you may accumulate in the business. To obtain financing for a new business, you'll need
to include a personal financial statement or balance sheet.

In the business plan, you'll need to create an analysis for the balance sheet just as you need to do
for the income and cash flow statements. The analysis of the balance sheet should be kept short
and cover key points.

Supporting Documents
In this section, include any other documents that are of interest to your reader, such as your
resume; contracts with suppliers, customers, or clients, letters of reference, letters of intent, copy
of your lease and any other legal documents, tax returns for the previous three years, and
anything else relevant to your business plan.
Some people think you don't need a business plan unless you're trying to borrow money. Of
course, it's true that you do need a good plan if you intend to approach a lender--whether a
banker, a venture capitalist or any number of other sources--for startup capital. But a business
plan is more than a pitch for financing; it's a guide to help you define and meet your business
goals.

Just as you wouldn't start off on a cross-country drive without a road map, you should not
embark on your new business without a business plan to guide you. A business plan won't
automatically make you a success, but it will help you avoid some common causes of business
failure, such as under-capitalization or lack of an adequate market.

As you research and prepare your business plan, you'll find weak spots in your business idea that
you'll be able to repair. You'll also discover areas with potential you may not have thought about
before--and ways to profit from them. Only by putting together a business plan can you decide
whether your great idea is really worth your time and investment.

https://www.entrepreneur.com/encyclopedia/business-plan

2. BASIC PRINCIPLES OF BUSINESS PLANNING 

1. Planning must be realistic. It must be based on available human, financial and physical
resources. Planning without enough resources may result to the failure of an enterprise.

2. Planning must be based on the needs of the community. It should fit the needs of the
people in a community which can be known through observations, personal interviews
and questionnaires.

3. Planning must be flexible. You, as the entrepreneur, should be able to adjust and to plan
if development changes occur or changes in government laws or policies happen.
Planning should respond to the trends in consumer’s tastes and preferences.

4. Planning must start with simple projects. This requires simple management and
technology, thus, the micro business is advised.

3. STAGES OF BUSINESS PLANNING

 Professor Philip Kotler, author of Marketing Management, said that there are four stages
of business planning. Businesses which have passed these stages are on their way to
sophisticated planning. Many enterprises are classified in each of these stages:

 Unplanned Stage At the start of the business , the owner-manager is busy looking for
funds, customers, materials and equipment. He has no time for planning. His entire
attention is devoted to the daily operations of his business in his intense desire to survive.

 Budgeting-System stage Eventually, the owner-manager realizes the need to develop

and use a budgeting system. Estimated incomes from sales and expected expenditures are
made. This is done to facilitate the orderly functions of the growing enterprise.

 Annual planning stage The owner-manager drafts an annual plan. He can use either
the top-down planning or bottom-up planning. In top-down approach, the owner-manager
provides the goals and let the employees comply with them. In the case of the bottom-up
approach, he encourages his employees to participate in planning the goals and strategies
of the enterprise. The first approach in planning is autocratic while the other one is
democratic.

 Strategic planning stage As the business enterprise becomes bigger, a long-rage

planning is needed. This is a three-or five-year plan. Such plan has flexibility to able to
adjust to changing conditions. An executive of the Xerox Corporation claims that some of
their plan are being revised every day of the year. At this stage, planning develops into a
more strategic character.

4. CRITERIA OF EFFECTIVE PLANNING

1. The plan should state clearly its objectives. Such clear statement is necessary so that hose who
will be involved in the execution of the plan will understand, believe, accept and support it.
2. The plan should provide measures for a satisfactory accomplishment of the objectives in terms
of quantity, quality, time and cost. These help in delegating responsibility and measuring results.
3. The plan should state the policies which should guide people in attaining the objectives.
4. The plan should indicate what department or unit will be involved in accomplishing the
objectives. It may or may not spell out the procedures for performing the required work.
5. The plan should indicate the time which should be allowed for each activity. It may be
necessary to establish a target data for completing the activity.
6. The plan should specify the required resources and their corresponding costs.
7. The plan should designate the officers who will be held accountable for the accomplishment of
the objectives. Sufficient authority should be delegated to such officers/executives.

COMPONENTS OF BUSINESS PLANNING

1. SWOT. The chances of a product or service can be evaluated through the SWOT analyses.
(This is explained in Chapter 6.) Every product or service has its own strength, weakness,
opportunity and threat. Planning should include the improvement of the product/service in order
to survive competition.
2. Objectives. These should be specific and realistic. Such objectives can be daily, weekly,
monthly and yearly. For example, 10% increase in sales after 6 months of operations.
Environmental factors should be considered I n formulating business objectives. Peace and order,
power supply and government polices affect business activities.
3. Strategies . These are ways of accomplishing the objectives. Such ways are stated in the
financial, production, marketing and organizational plans of the enterprise. For instance in the
objective of increasing sales by 10% after 6 months of operations, there are several ways of
attaining it. One way is to advertise the product. Another is to improve customer relations. It can
be also done by reducing the selling price, or a combination of the three ways.
4. Time frame. In business, time is gold. For this reason, an entrepreneur must be efficient in
time management. Every activity has its own time schedule. Activities which are completed on
time save money.

CHARACTERISTICS OF A GOOD BUSINESS

Plan Although most business plans are not identical, they all must be:
 Neat
 Organized
 Professional
 Well-written and well-designed
 Highlight important parts of the business
 10-100 pages in length

OR

 Objective 
 Clear 
 Logical and simple
 Flexible 
 Stable Complete and integrated

5. OUTLINE OF A BUSINESS PLAN

1. Cover sheet: Name of business, names of principals, address and phone number
2. Business goals
3. Strategies
4. Table of Contents 

SECTION ONE: The Business

 Description of Business
 Product/ Service
 Market
 Location of Business
 Competition
 Management
 Personnel
 Application and Expected effect of Loan ( if needed)
 Summary

SECTION TWO: Financial Data

 Sources and Application of Funding
 Capital Equipment List
 Balance Sheet
 Break- Even Analysis
 Projections ( Profit and Loss Statements)
 Five year summary (Detail by month for first year > Detail by quarter for second, third, fourth,
and fifth year)
 Cash flow Projection (Detail by month for first year , Detail by quarter for second, third, fourth,
and fifth years , Notes of Explanation)
 Deviation Analysis
 H. Historical Financial Reports for Existing Business
 Balance sheets for past five years
 Income statements for past five years
 Tax returns

SECTION THREE: Supporting Documents

 Personal resumes, personal balance sheets, cost of living budget, credit reports, letter of reference,
job descriptions, letters of intent, copies of leases, contracts, legal documents, and anything else
relevant to the plan.
 6. STEPS IN BUSINESS PLANNING
1. Evaluate your personal resources and interests, and the resources of the community.
2. Analyze your market
3. Choose a proper business location
4. Prepare a financial plan
5. Prepare a production plan
6. Prepare an organizational plan
7. Prepare a management plan

7.THE IMPORTANCE OF BUSINESS PLANNING

> Planning can eliminate business risks
> Planning can minimize costs of production
>Planning can detect the weaknesses of the business operations