CHAPTER 2: BUSINESS PLANNING

2.1. INTRODUCTION
In the previous chapter, we dealt with the concept of Entrepreneurship. This unit will help you to
understand the concept of opportunity identification and evaluation, business idea development
and how to prepare a business plan. Virtually to start any type of business or expand the existing
one needs to work on opportunity identification and evaluation, business idea development and
then prepare business plan. Lack of proper opportunity identification and evaluation, idea
development process and business planning are the most often cited reasons for business failure.
The various sections and sub-sections of this chapter will also summarize opportunity identifying
and evaluating processes, business idea development process, and the feasibility study, importance
and preparation of a business plan.

Chapter Objectives
After completing this chapter, students will be able to:
 Identify opportunity in the environment,
 Evaluate the opportunities in the environment,
 Generate business idea,
 Explain the concept of business planning,
 Identify components of business plan,
 Develop business plan,
2.2. Opportunity Identification and Evaluation

Most authors agree that the initial stage in the entrepreneurial process is the identification and
refinement of a viable economic opportunity that exists in the market. Without the recognition of
an opportunity the entrepreneurial process is likely to result in failure.
Opportunity recognition corresponds to the principal activities that take place before a business is
formed or structured. The opportunity identification and evaluation stage can be divided into five
main steps namely; getting the idea/scanning the environment, identifying the opportunity,
developing the opportunity, evaluating the opportunity and evaluating the team.

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 1) Scanning the Environment/ Getting the Idea
While scanning the environment it may be provide you with idea and business opportunities. Idea
is a thought or suggestion about a possible course of action. Synonymous with “idea” are the terms
thought, intention, scheme, suggestion, proposal, initiative, spur, impulse, brainwave, insight,
concept and connotation. Whereas, opportunity is a favorable time or set of circumstances for
doing something. Synonymous with opportunity are chance, opening and prospect. A business
opportunity is a gap left in a market by those who currently serve it, giving a chance to others to
add unrealized value by performing differently from and better than competitors in order to create
new possibilities.
Business opportunities are distinguished from ideas; an idea is not synonymous with opportunity.
The difference between an idea and an opportunity is that an opportunity is the possibility of
occupying the market with a specific innovative product that will satisfy a real need and for which
customers are willing to pay but idea is all about opinion about anything we can have. Successful
venturing may well rest upon the ability of an individual to recognize or distinguish an opportunity
from an idea.
2) Opportunity Identification
Opportunity identification is ability to see, to discover and exploit opportunities that others miss.
It is the process of seeking out better ways of competing. It includes scanning the informational
environment, being able to capture, recognize and make effective use of abstract, implicit and
changing information from the changing external environments.
It is important for the entrepreneur to understand the cause of the opportunity. Is it technological
change, market shift, government regulation, or competition? These factors and the resulting
opportunity have a different market size and time dimension. The market size and the length of
the window of opportunity form the primary basis for determining risks and rewards which serves
for opportunity evaluation.
Opportunity identification is a very difficult task, as most opportunities do not just appear but
rather result from an entrepreneur’s alertness to possibilities. In developing countries, problems
may be changed to business opportunities.
3) Opportunity Development
Having recognized the opportunity, timely adaptation of that opportunity to suit actual market need
is key to new venture success. Opportunity development is the process of combining

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 resources to pursue a market opportunity identified. This involves systematic research to refine the
idea to the most promising high potential opportunity that can be transformed into marketable
items.
4) Opportunity Evaluation
Opportunity screening and evaluation is a critical element of the entrepreneurial process. A
professional executed evaluation can tell whether the specific product or service has the returns
needed to justify the investment and the risk to be taken.
Opportunity screening and evaluation is perhaps the most critical element of the entrepreneurial
process, as it allows the entrepreneur to assess whether the specific product or service has the
returns needed for the resources required. This evaluation process involves looking at the creation
and length of the opportunity, its real and perceived value, its risks and returns, its fit with the
personal skills and goals of the entrepreneur, and its differential advantage in its competitive
environment.

5) Assessment of the Entrepreneurial Team

Regardless of how right the opportunity may seem to be, it will not make a successful business
unless it is developed by a team with strong skills.

2.3. Business Idea Development

A business idea is a short and precise description of the basic operation of an intended business.
There are three types of business ideas. They are:
1. Old Idea – Here an individual copies an existing business idea from someone.
2. Old Idea with Modification – In this case the person accepts an old idea from someone
and then modifies it in some way to fit a potential customer’s demand.
3. A New Idea – This one involves the invention of something new for the first time
2.4. Business Idea Identification

Before you start a business, you need to have a clear idea of the sort of business you want to run.
Your business idea will tell you:
 Which need will your business fulfill for the customers and what kind of customers will you
attract?
 What good or service will your business sell?
 Who will your business sell to?
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  How is your business going to sell its goods or services?
 How much will your business depend upon and impact the environment? A good business
idea will be compatible with the sustainable use of natural resources and will respect the
social and natural environment on which it depends.
All business ideas are not equally worth. Therefore, to identify promising business idea among
others, it is important to answer the above raised questions. Let we see the explanation for the
questions raised above.
2.5. Methods for Generating Business Ideas
There are many ways to come up with business ideas, such as surveying local businesses or asking
existing business owners. The information gained from one approach may supplement another and
help you to clearly describe your business ideas. Below, we will examine a few different
approaches to generating business ideas.
1. Learn from successful business owners
You can learn a lot from people in your area who have already gone through the process of
establishing a business. You should try to get the following information from them:
 What kind of idea did these businesses start with?
 Where did the ideas come from?
 How did they develop their ideas into successful businesses?
 How does the business profit and fit into the local environment?
 Where did they get the money to start their business?

2. Draw from Experience

Your own Experience: Look at the list of your interests, your experiences and your networks. Are there any
possible business ideas that you can derive from your own past experience? Think about each type of experience.
Other People’s Experience: The people around you are potential customers. It is important to understand their
experience trying to find goods and services that are unavailable or not exactly what they need. Listen carefully
to what these people say about their shopping experience. Ask your family and friends about the things they
would like to find that are not locally available. Expand your social knowledge by talking to people from
different age groups, social classes, etc. You can also visit community groups, colleges, etc. for a greater
understanding of the market.

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 3. Survey Your Local Business Area
Another way of discovering business ideas is to look around your local community. Find out what
type of businesses are already operating in your area and see if you can identify any gaps in the
market.
If you live in a village or small town, you may be able to identify all the fields of business in the
whole town. Otherwise, you may need to focus on the preferred business fields and business types
that you identified. This is an activity that will be much easier to do with a business partner or
friend. Visit the closest industrial area, markets and shopping centers in your area.
4. Scanning Your Environment
You can use your creativity to find more business ideas in your area. Look at the list of existing
local businesses. If the list has included most of the local markets, you may be able to learn about
the industries or service providers on which the local economy relies. It may be useful to think
about business ideas by considering all the resources and institutions in your area. For example
think about:
 Natural resources,
 Characteristics and skills of people in the local community,
 Import substitution,
 Waste products,
 Publications,
 Trade fairs and exhibitions,
5. Brainstorming
Brainstorming means opening up your mind and thinking about many different ideas. You start
with a word or a topic and then write down everything that comes to mind relating to that subject.
You continue writing for as long as possible, putting down things that you think of, even if they
seem irrelevant or odd. Good ideas can come from concepts that initially seem strange.
Brainstorming works best in a group. Get your family, friends or classmate together and ask them
to help by writing down ideas they have when they hear the word or subject matter.

6. Structured Brainstorming
Structured brainstorming is when you think of the different processes that are involved in the
operation of a particular business and the goods/services that can be offered with respect to those
processes. This is different from thinking about random items related to a particular business field

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 and type.

Try to think of all the businesses that are related to different aspects of a product:
 Those involved in production,
 Those involved in the selling process,
 Those involved in recycling or re-using materials,
 Those indirectly related (spin-offs),
 Those involved in servicing,

7. Focus Group
Focus group is a group of individuals providing information on a structured format which is led
by moderators. It is characterized by an open and in depth discussion: rather than simply asking
questions to solicit student response.

8. Problem Inventory Analysis

It is similar to focus group to generate new product ideas. The difference is rather than generating
new idea themselves, consumers are provided with a list of problems in general product category.
It is a method of obtaining “New Idea” and solutions by focusing on problems.
9. Free Association
One of the simplest methods that entrepreneurs can use to generate new ideas is free association.
This technique is particularly helpful in developing an entirely new slant to a problem. First, a
word or phrase related to the problem is written down, then another and another, with each new
word attempting to add something new to the ongoing thought processes, thereby creating a chain
of ideas ending with a new product/service idea emerging.
10. Forced Relationships
Forced relationships- as the name implies- is the process of forcing relationships among some
product combinations. It is a technique that asks questions about objects or ideas in an effort to
develop a new idea.
11. Attribute Listing
Attribute listing is an idea-finding technique that has the entrepreneur list the attributes of an item
or problem and then look at each from a variety of viewpoints. Through this process, originally
unrelated objects can be brought together to form a new combination and possibly a new
product/service that better satisfies a need.

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2.6. Business Idea Screening

Idea screening is the process to spot good ideas and eliminate poor one. To screen the business
idea generated, three approaches are discussed as follow:
1) Macro screening: is aimed screening down ideas to 10. And the common criteria are:
 Are my own competencies (see strength detector) sufficient?
 Can I finance it to a large extent with my own equity?
 Will people buy my product/service (i.e. is it needed and can people afford it)?
2) Micro Screening: is aimed screening down ideas into 3. The common criteria used for
screening are:

 Solvent demand
 Availability of raw materials
 Availability of personal skills
 Availability of financial resources
3) Scoring the Suitability of Business Idea:
This approach is most appropriate when deciding on starting a business. When there are more than
one possible business ideas and one needs to decide which one to follow, we use score business
ideas (e.g., BI1, BI2, BI3) by assigning a rating from 1 to 3 for each question, with 3 being the
strongest. After we score the ideas we sum the total and select the idea with the highest score.

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 S. No Questions BI1 BI2 BI3
1. Are you familiar with the operations of this type of business?
2. Does the business meet your investment goals?
3. Does the business meet your income goals?
4. Does the business generate sufficient profits?
5. Do you feel comfortable with the business?
6. Does your family feel comfortable with the business?
7. Does the business satisfy your sense of status?
8. Is the business compatible with your people skills?
9. Is there good growth projected for the overall industry of the business?
10. Is the risk factor acceptable?
11. Does the business require long hours?
12. Is the business location-sensitive?
13. Does the business fit your personal goals and objectives?
14. Does this business fit your professional skills?
Totals

Potential customers: Their views are essential to your understanding of whether or not your
proposed product is important to them and if you need to modify your idea to meet their needs.
 Competitors, suppliers and entities with financial resources: Their views will reveal the
challenges of competition that you would face, as well as other issues related to your
potential business.
 Financial institutions: Find out the lending requirements to determine whether borrowing
for a new business is possible.
 Key informants and opinion leaders: These are people who would know a lot about the
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 type and field of business you want to go into and/or a lot about your potential customers.
Their views would give you a lot to think about and could also give you a better insight
into the feasibility of your business idea.
When you have completed the summary of your business idea, you can go on to the next step to
start your own business: Prepare a business plan for the proposed business.

2.7. Concept of Business Plan

Planning is the first and the most crucial step for starting a business. A carefully charted and
meticulously designed business plan can convert a simple idea/innovation into a successful
business venture.
A business plan is a road map for starting and running a business. A well-crafted business plan
identifies opportunities, scans the external and internal environment to assess the feasibility of
business and allocates resources in the best possible way, which finally leads to the success of the
plan. It provides information to all concerned people like the venture capitalist and other financial
institutions, the investors, the employees. It provides information about the various functional
requirements (marketing, finance, operations and human resources) for running a business.
A business plan is the blueprint of the step-by-step procedure that would be followed to convert a
business idea into a successful business venture. A business plan first of all identifies an innovative
idea, researches the external environment to list the opportunities and threats, identifies internal
strengths and weakness, assesses the feasibility of the idea and then allocates resources
(production/operation, finance, human resources ) in the best possible manner to make the plan
successful:.
The objectives of a business plan are to:
 Give directions to the vision formulated by entrepreneur.
 Objectively evaluate the prospects of business.
 Monitor the progress after implementing the plan.
 Persuade others to join the business.
 Seek loans from financial institutions.
 Visualize the concept in terms of market availability, organizational, operational and
financial feasibility.
 Guide the entrepreneur in the actual implementation of the plan.

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  Identify the strengths and weakness of the plan.
 Identify challenges in terms of opportunities and threats
 Clarify ideas and identify gaps in management information about their business, competitors
and the market.
 Identify the resources that would be required to implement the plan.
 Document ownership arrangements, future prospects and projected growths of the business
venture.

2.8. Developing a Business Plan

2.8.1. Business Planning Process

A plan, which looks very feasible at the first instance, might actually not be when the details are
drawn. Hence documenting the business plan is one of the early steps that an entrepreneur should
take. As discussed above, the successful entrepreneur lays down a step-by-step plan that she/he
follows in starting a new business. This business plan acts as a guiding tool to the entrepreneur
and is dynamic in nature – it needs continuous review and updating so that the plan remains viable
even in changing business situations. The various steps involved in business planning process are
discussed here below:
1) Preliminary Investigation
Before preparing the plan entrepreneur should:
 Review available business plans (if any).
 Draw key business assumptions on which the plans will be based (e.g. inflation, exchange
rates, market growth, competitive pressures, etc.).
 Scan the external environment and internal environment to assess the strengths, weakness,
opportunities and threats.
 Seek professional advice from a friend/relative or a person who is already into similar
business (if any).
2) Opportunity Identification and Idea Generation
Entrepreneurship is not just limited to innovation (generation of an entirely new concept, product
or service, but it also encompasses incremental value addition to the concept/product/ services
offered to the consumer, shareholder and employee).
Opportunity identification and business idea generation is the first stage of business planning
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 process. It involves generation of new concepts, ideas, products or services to satisfy demand.
3) Environmental Scanning
Once a promising idea emerges through idea generation phase the next step is environmental
scanning, which is carried out to analyze the prospective strengths, weakness, opportunities and
threats of the business enterprise. Hence before getting into the finer details of setting up business
it is advisable to scan the environment both external and internal and collect the information about
the possible opportunities, threats from the external environment and strengths and weaknesses
from the internal environment (the detail has been addressed in chapter one).
4) Feasibility Analysis
Feasibility study is done to find whether the proposed project (considering the above
environmental scanning) would be feasible or not. It is important to demarcate environmental
scanning and feasibility study at this point. Environmental scanning is carried out to assess the
external and internal environment of the geographical area/areas where, entrepreneur intends to
set up his business enterprise, whereas feasibility study is carried out to assess the feasibility of the
project itself in a particular environment in greater detail.
5) Report Preparation
After environmental scanning and feasibility analysis, a business plan report is prepared. It is a
written document that describes step-by- step, the strategies involved in starting and running a
business.

2.8.2.Essential Components of Business Plan

2.8.2.1. Cover Sheet: Cover sheet is like the cover page of the book. It mentions the name of the
project, address of the headquarters (if any) and name and address of the promoters.
2.8.2.2. Executive Summary: Executive summary is the first impression about the business proposal.
As the saying goes, the first impression is the last impression. A careful presentation of
information should be done to attract the attention of the evaluators. It should be in brief (not
more than two or three pages) yet it should have all the factual details about the project that
can improve its marketability. It should briefly describe the company; mention some financial
figures and some salient features of the project. Generating interest in the minds of the readers
is the prime motive of the executive summary.
2.8.2.3. The Business: This will give details about the business concept. It will discuss the
objective of the business, a brief history about the past performance of the company (if it
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 is an old company), what would be the form of ownership (whether it would be a single
proprietor, partnership, cooperative society or a company under company law). It would
also label the address of the proposed headquarters.
2.8.2.4. Funding Requirement: Since the investors and financial institutions are one of
the key bodies examining the business plan report and it is one of the primary objectives
of preparing the business plan report, a careful, well-planned funding requirement should
be documented. It is also necessary to project how these requirements would be fulfilled.
Debt equity ratio should be prepared, which can give an indication about how much finance
would the company require and how it would like to fund the project.
2.8.2.5. The Product or Services: A brief description of product/services is given in this subsection.
It includes the key features of the product, the product range that would be provided to the
customers and the advantages that the product holds over and above the similar products/
substitute products available in the market. It also gives details about the patents, trademarks,
copyrights, franchises, and licensing agreements.
2.8.2.6. The Plan: Now the functional plans for marketing, finance, human resources and operations
are to be drawn.
1) Marketing Plan: Marketing mix strategies are to be drawn, based on the market research.

2) Operational Plan: The operational plan would give information about (i) Plant location:
why was a particular location chosen? Is it in the vicinity of the market, suppliers, labor or
does it have an advantage of government subsidies for that particular location or are there
any other specific reasons for choosing the particular location?, (ii) Plan for material
requirements, inventory management and quality control are also drawn for identifying
further costs and intricacies of the business. Finally, the budget for operational plan is also
drawn.
3) Organizational Plan: The organizational plan indicates the pattern of flow of
responsibilities and duties amongst people in the organization, it provides details about the
manpower plan that would be required to put life into the business and it would also enlist
the details about the laws that would be governed in managing the employees of the
organization. In the end the organizational plan is also budgeted.
4) Financial Plan: The financial plan is usually drawn for two to five years for an existing
company. For a new organization the following projections are drawn:
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 a) Projected Sales
b) Projected Income and Expenditure Statement
c) Projected Break Even Point
d) Projected Profit and Loss Statement
e) Projected Balance Sheet
f) Projected Cash Flows
g) Projected Funds Flow
h) Projected Ratios
2.8.2.7.Critical Risks: The investors are interested in knowing the tentative risks to evaluate the
viability of the business and to measure the risks involved in the business. This can further
give confidence to the investors as they can calculate the risks involved in the business
from their perspectives as well.
2.8.2.8.Exit Strategy: The exit strategies would provide details about how the organization would
be dissolved, what would be the share of each stakeholder in case of winding-up of the
organization. It further helps in measuring the risks involved in investing.
2.8.2.9.Appendix: The appendix can provide information about the Curriculum Vitae of the
owners, Ownership Agreement and the like.

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 2.9. Sample Business plan Format

The business plan outlined below presents all necessary chapters in detail, including all necessary
explanations in the context of Ethiopia.

Business plan outline

for micro-enterprises - Ethiopian application

Business Plan
1. Full name of the business operator...................................
2. Address: Woreda.......................... Town...................
Kebele........................... House no..............
3. Type of the plan/work/business in which the operator is to be engaged.
........................................................................................
4. Year of the plan: From............................... to....................
5. Work premises at the disposal of the operator..................
..........................................................................................
..........................................................................................
Specify, if there is any problem:
..............................................................................................

6. Yearly sales plan:

Product/service to
Ser. no. be sold, marketed / Unit Qua. Unit price Total price Remark
year

Total sales
Months during which sales are expected to be high
........................................................................................................................................................
........................................................................................................................................................
........................................................................................................................................................
1. Equipment currently owned by the operator:

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 Type of Unit of Unit Total
Ser. no. Qua. Remark
equipment measure cost cost

Total cost of
equipment

8. Equipment to be purchased by the operator

Type of Unit of Unit Total
Ser. no. Qua. Remark
equipment measure cost cost

Total cost of
equipment
9. Yearly raw material requirement:
Type of raw Total
Ser. no. Unit Unit price Remark
material Qua. price

Total yearly raw

material cost

Source of raw material..................................................................................................................

......................................................................................................................................................
10. Other yearly operating expenses (e.g. labor expense, sales expense, depreciation
expense, tax expense etc..)
Amount of expense
Ser. no. Types of expense Remark
in Birr

Total expense

11. Yearly production/service plan:

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 Types of
Unit Total
Ser. no. production/service to be Qua. Remark
Unit cost cost
produced or rendered

Total cost

12. Financial plan:

Capital requirements Equity Loan Total
Investment capital:
Machinery + equipment
Furniture + fixture
Business premises
Any other initial and significant outlay
Working capital:
· Salary/wage
· Raw material and/or supplies
· Rent
· Maintenance
· Business promotion
· Other cash outlay to meet
short-term and recurrent expenditure
Total
13. Yearly profit and loss plan

Profit + Loss Statement Format: Accounting

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 Business plan outline 2 for micro and small enterprises and startups
Business plan outline
For micro and small enterprises and start ups

Executive summary
1. Brief Description of the Project
2. Brief Profile of the Entrepreneur
3. Project's Contributions to the Economy
1. Sales and Marketing
1.1 Product description
1.2 Competitors'
1.3 Location
1.4 Market Area
1.5 Main Customers
1.6 Total Demand
1.7 Market Share
1.8 Selling Price
1.9 Sales Forecast
1.10 Promotional Measures
1.11 Marketing Strategy
1.12 Marketing Budget
2. Production
2.1 Production Process
2.2 Fixed Capital
2.3 Life of Fixed Capital
2.4 Maintenance and Repairs
2.5 Sources of Equipment
2.6 Planned Capacity
2.7 Future Capacity
2.8 Terms and Conditions of Purchase of Equipment
2.9 Factory Location and Layout

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 2.10 Raw Materials Needed
2.11 Cost of Raw Materials
2.12 Raw Materials Availability
2.13 Labor
2.14 Cost of Labor
2.15 Labor Availability
2.16 Labor Productivity
2.17 Factory Overhead Expenses
2.18 Production Cost
3. Organization and Management
3.1 Form of Business
3.2 Organizational Structure
3.3 Business Experience and Qualifications of the Entrepreneur
3.4 Pre-Operating Activities
3.5 Pre-Operating Expenses
3.6 Office Equipment
3.7 Administrative Expenses
4. Financial plan
4.1 Project Cost
4.2 Financing Plan and Loan Requirement
4.3 Security for Loan
4.4 Profit and Loss Statement
4.5 Cash Flow Statement
4.6 Balance Sheet
4.7 Loan Repayment Schedule
4.8 Break-even Point (BEP)
4.9 Return on Investment (ROI)
4.10 Financial Analysis

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