CHAPTER Ye) THE BUSINess PLAN The number of problems that may be felt when the small business is already in operation may just overwhelm the entrepreneur. If he is good enough, he may be able to handle them successfully if they happen one at a time. However, it will be very difficult for him if problems occur simultaneously. The entrepreneur is not entirely hopeless, however. The benefits afforded by business planning may help him achieve his objectives. When problems occur, some of them require immediate solution, leaving no sufficient time for the entrepreneur to think clearly. Effective business planning is used to eliminate this difficulty. This alone justifies engagement in business planning. . Planning may be viewed as a systematic approach to achieve certain objectives, It is an attempt to climinate mistakes inherent to “on-the-spot” decisions. Planning provides the decision-maker with ample time to consider relevant variables before a decision is reached. This is important because the resources required must be identified as carly as possible to preclude shortages arising from procurement difficulties. Planning is useful not only to big business. Small business may also reap the benefits of planning if it is undertaken even on a small scale basis. What is a Business Plan The business plan is a document that helps the small business owner determine what resources are needed to achieve the objectives of the firm, and provides a standard against which to evaluate results. The business plan is a sort of a business blueprint and it keeps the entrepreneur on the right track. It gives a sense of purpose to the business. It also provides guidance, influence, and leadership, as well as communicating ideas about goals and the means of achieving them to partners, associates, employees, and others. Purposes of a Business Plan ‘A business plan is written for two main purposes. They are the following: 1, to serve as management's guide during the lifetime of the business; and 2. to fulfill the requirement for securing lenders and investors. The Plan as a Guide In the course of writing the business plan, the small business operator (SBO) is afforded sufficient time to consider all factors relevant to operating the business. is afforded i iges of the environment and derivation of what can be expected to Tene ebions about various aspects of business operations can be considered in ‘appen, decis advance. ‘Scanned wth CamScanet= As periodic objectives are accomplished one at a time, the We Plan serves a, a useful tool for comparing what was planned against what was ac pete Discrepan. cies will provide the bases for implementing changes or making adjustments in th, business plan. The timetable indicated in performing the various aspects of operations is als, a very useful guide for the management of the firm. A Tool for Securing Funds | ; When the SBO needs initial or additional funding for his business venture, the business plan is a handy means for convincing lenders and investors | In many cases, the business plan indicates that the proponent SBO is fully aware of what he is gettin, into. Lenders will be more comfortable to see various documents that indicate the borrower can repay the loan. Such documentation takes the form of financial project. ions which are usually included in the business plan.» The business plan will serve as a means of providing some assurance that the investor will place his funds ina worthwhile investment. Revising the Plan A business plan is prepared in consideration of the current and expected situa- tions. In the process of implementing the plan, however, the expected development or changes in the environment may not happen fully or even partially. _In that case, the business plan or portions of it may no longer be relevant. When that happens, a revision of the business plan is in order. The implication is that even with a business plan, the SBO must strive to be well informed about what is happening to his business and to the industry where his busi- ness belongs. Necessary steps must be undertaken to adjust to changes. For instance, if the usual source of labor has become unreliable, the corresponding portion of the business plan must be revised. Parts of the Business Plan The contents of the business plan will depend upon the purpose. Usually, how- ever, they contain the following: a 1. _ title page and contents; executive summary; description of the business; description of the product or service; market strategies; analysis of the competition; operations and management; financial data; and supporting documents. SPN ADR aD Scanned ith ComseamnerTitle Page and Contents The business pla ee ean a of the following: plan must be easily identifiable through a cover page with a listing 1. the name of the business; the name/s of the proponents (in this case, the SBO); address; telephone number; e-mail and website address; the date; and NOUEON the name of the person who prepared the business plan. _ The next page should provide a table of contents 50 the readers can easily find the information they need. Executive Summary The executive summary is a portion of the business plan that summarizes the plan and states the objectives of the business. If the SBO is intending to borrow money or is seeking capital from investors, the following must be indicated: 1. _ the capital needs of the business; how the money will be used; 2. 3. whatbenefits will be derived by the business from the loan or investment; and 4, in case of loan, how it will be repaid with interest, and in the case of outside investment, how pro! mary is prepared after the business plan is written. fits will be generated. The executive sum} Description of the Business This particular portion of the business pl prospective jnvestors and lenders. This is divided into two parts: 1. ashort explanation of the industry; and 2, _adescription of the busin it is important to present the current situation and the tion must be provided regarding the various markets products or developments that could affect the tbe indicated. in describing the business: lan is very useful to the SBO, as well as ess. In describing the industry, outlook for the future. Informat within the industry, 2 well as new business. The sources of information mus! the following will be useful i or where the business fall and others); Statements about 1, the industry education, en = Is into (retail, manufacturing, tertainment, ‘Scanned wth CamScanet5. 6. whether the business is new or established; the ownership status of the business (sole proprietorship, partnership, o, corporation); information on who the customers are; information on the size of the market; and information on how the product or service is distributed. Description of the Product or Service The product or service must be described clearly in the plan. To achieve this, the following must be presented: L The important features of the product or service, such as the maintenance- free feature of the product, or the home delivery service for products ordered through the phone. A detailed description of how the:product is used. What makes the product or service different from others available in the market, Examples are the availability of the product or service 24 hours a day, or the water-based feature of the product insect repellant. The objective of product or service description is to show that that firm has a competitive edge over the others. If the business plan is able to show that edge, lend- ers and investors may just respond favorably. It is very important to explain that the business will be profitable. Factors that will make the business successful must be described. Some of these positive factors that are worth describing are: 1. _ superior organization of the business; 2, latest equipment that are currently used by the company; 3. superior location of the company; 4. fair price of the product or service; and 5, _ superior customer service offered by the company. Market Strategies Market strategies refer to what the SBO plans to do to achieve the market objective of the firm. These strategies are formulated after undertaking market research. Market strategies consist of the following: SAR wD wm definition of the market; determination of the market share; positioning strategy; pricing strategy; distribution strategy; and promotion strategy. ‘Scanned wth CamScanetDefiniti vihich part Beene Market, The objective of market definition is to determine must be defined in epotential market will be served by the firm. Hence, the market erms of size, demographics, structure, growth prospects, trends, and sales potential. To deter, . . mine the total potential “ke of the competitors must be presented (Figuei6). ial market, the total aggregate sales SALES Company A ————> 50,000 units Com; 3s ) ————> _ 65,000 units ———_> _ 80,000units Other Companies ) —————* _ 10,000 units THE MARKET FOR ———— 205,000 units PRODUCT X Figure 16. The Market for Product X Determination of the Market Share. The business plan will be more useful to the reader, especially lenders and investors, if the projected market share of the firm is presented. To determine the firm’s market share, the following steps may be used: 1. determine the number of prospects in the target market; 2. determine the number of times the product or service is purchased by the target market; : 3. figure out the potential annual purchase; and 4, determine the percentage of the potential annual purchase that the firm can attain (Table 11). ‘Seanne wth CamScanetTable 11. Determining the Firm's Market Share (an example) Number of prospects in the target market 1,000 families Frequency of purchase per year (average) 48 time Total number of purchases per year 48,000. Average payment per purchase 1,000 Projected total industry sales per year 48,000,000 Percentage the firm can attain 15% THE FIRM’S MARKET SHARE 7,200,000 Positioning Strategy. Positioning refers to how the firm differentiates its product or service from those of the competitors and serving a niche. Positioning strategy is one where the firm identifies a target market segment and develops a strategy mix to address the desires of that segment. The objective of posi- tioning is to establish the firm’s product or service identity in the mind of the buyer, Before adapting a positioning strategy, the following questions must first be considered: 1 What does the customer really want to buy from the firm? Apart from product quality, the answer could vary from fast and efficient service to clean and friendly environment, to good reputation, and the like. How is the product or service different from the competitors’? A product or service may be different from competition in terms of quality, maintenance require- ments, number of uses, ease of operation, among others. What makes the product or service unique? The firm’s product or service may be unique in many ways. It may only be the one that is delivered free to the customer's house, or it may be the only product that provides a trade-in op- tion to the customer. Pricing Strategy. How the firm prices its product or service is a very important component of the business plan. If the firm wants to achieve its objectives, the right price for its product or service must be maintained. In determining the right price, the following factors must be considered: 1. 2. customer’s/perception of value in the firm’s kind of business; costs involved such as, overhead, storage, financing, production, and distri- bution; and : profit objectives of the firm. ‘Seanne wih CamScanetThe firm’s price may be established through any of the following methods: 1. Cost plus pricing — covers all costs, variable and fixed, plus an extra incre- ment to deliver profit. Demand pricing - is a method of pricing where the firm sets prices based on buyer desires. The range acceptable to the target market is determined. Competitive pricing — calls for price-setting on the basis of prices charged by competitors. Markup pricing — is a form of cost-oriented pricing in which the firm sets prices by adding per-unit merchandise costs, operating expenses and de- sired profit. Each of the various methods of pricing has corresponding strengths and weak- nesses. In a given situation, one pricing method could be the most effective. Distribution Strategy. Distribution refers to the process of moving goods and ser- vices from the firm to the buyers. The distribution channel that will be adapted must provide a strategic advantage to the firm. Common distribution channels are the following: 1. Direct sales — is the most effective channel if the plant is to move goods di- rectly to the ultimate users. Original equipment manufacturer sales - involves selling a manufactured pro- duct to another manufacturer who, in turn, incorporates the same to his product and which is later sold as a finished product to the end user. An example is the sound system incorporated into cars. Manufacturer's representatives — are wholesalers employed by one or several producers and paid on commission according to quantity sold. Wholesalers - are channel members that sell to retailers or other agents for further distribution through the channel until they reach the final users. Brokers — are distributors who buy directly from distributors or wholesalers and sell to retailers or end users. Retailers — sell directly to consumers. Direct mails—are printed materials used ina targeted campaign to consumers. These are sent directly to consumers. These include catalogs, letters, e-mail, and other direct appeals (Figure 17). : ‘Seanne wth CamScanetDirect Sales Channel PRODUCER Channel Manufacturer Wholesaler | = 5 2 c — g 2. Original 3. Manufacturer's Equipment Representative Manufacturer Channel Sales Channel anc | Manufacturer Original Equipment v Manufacturer Representative v Wholesaler! Retailer/ End User 6. Retailer Channel 5. Broker Channel Retailer Consumer ir 7. Direct Mail Channel Company Retailer/ End Use Consumer Ir Figure 17. Common Distribution Channels ‘Scanned wth CamScanetPromotion Strategy How = company’s products or services will be promoted is an important com~ ponent of the marketing strategy. The promotion strategy must include the following: 1. Advertising aspects: a. advertising budget; b. positioning message; and c. first year’s media schedule. Packaging ~ describes how the company’s products will be packaged. Public relations — will be a detailed presentation of the publicity strategy of the firm. This will include a list of media that will be tapped to convey the firm’s message to the target market. The schedule of special events like product launching will also be included. Sales promotions ~ are means used to support the sales message like special sales, coupons; contests, premium awards, trade-in, among others. Personal sales — present the sales strategy including: pricing procedures; rules on returns and adjustments; methods of sales presentations; generation of leads; policies on customer services; rpeaoge compensation of salesmen; and g. responsibilities of the salesmen. Analysis of the Competition The small business operator (or the entrepreneur) will find it difficult to compete if his competitors are unknown to him. This makes it necessary to make an analysis of the competitors. In competitive analysis, 1. 2. 3. 4. The competitors of any b direct competitor o! of Kopiko Coffee. Bi will take away sales fro) an indirect competitor the following must be determined: gths and weaknesses ofthe firm’s competitors; ve the firm a competitive advantage; stren; strategies that will gi veloped to prevent competitors or would-be compe- barriers that can be d a the firm’s market; and titors from exploiting fat can be exploited. any opportunity th usiness may either be or both direct and/or indirect. A ffers a similar product. For example, Nescafe is a direct competitor sth will cater to the same target market. An indirect competitor va company in an indirect manner. For instance, RC Cola is £ Great Taste Coffee. ‘Seanne wth CamScaneta os . oe The marketing, strategies of the firm’s competitors must also be analyzed. g, action wil provide clues a8 60 which part ofthe target market the frm meet se For example, if the competitor’s strategy is to reach its target market by forging ca re, ments with big malls, the firm may attempt to reach such market by using altemat, channels. For instance, the firm may tap the services of retail stores located within the area where ils target market is situated. Of course, the firm will have to adapt sure strategy if it has the strength and capacity to implement such. The aim of competitor analysis is to determine how the firm stands against com. tition, After determining its position, the firm must take stock of its strengths ang weaknesses and craft an appropriate strategy to achieve its business objectives, In designing an effective business strategy, the entrepreneur will benefit from using a prepared table of comparative strengths and weaknesses of competing firms, An example is shown in Table 12. Table 12. A Comparison of the Strengths and Weaknesses of Competing Firms Key Assets and Skills Our Company Competitor A Competitor B Superior product strength ‘weakness strength Good business location weakness strength weakness Strong sales team. weakness strength strength Strong financial capacity _| strength weakness weakness Operations and Management How the firm will be operated on a continuing basis is an important component of the business plan. As such, the plan must contain the following: 1. organizational structure; 2. operating expenses; 3. capital requirements; and 4. cost of goods sold. Organizational Structure if 4 well-defined and realistic organizational structure is an important element of the business plan. Investors and lending institutions will be interested to look at this Particular aspect, Generally, they will be concerned how the firm is organized along the following concerns: J. marketing (including sales, customer relations and service); 2. production (including quality assurance); 3. research and development; 4. management; and 5. human resources, ‘Scanned wth CamScanetOperating Expenses Projections of operating expenses are important aspects in the preparation of a business plan. This is a prerequisite in projecting financial statements. Lenders and investors are especially interested in scrutinizing such statements. In determining operating expenses, labor and overhead must be considered. The organizational structure is useful in providing information in the determination of labor expenses. Overhead, which may be fixed or variable, includes the following: 1. rent; N advertising and sales promotion; 3. supplies; 4. utilities; 5. packaging and shipping: 6. maintenance and repair; 7. equipment leases; 8. payroll; 9. payroll taxes and benefits; 10. bad debts; 11. _ professional services; 12. insurance; 13. loan payments; 14, depreciation; and 15. travel. Capital Requirements Capital equipment are necessary items in operating businesses, The business plan will not be complete unless a listing of capital equipment needed to be purchased is drawn up. Equipment needs vary from business to business. Manufacturing firms will need more elaborate types of equipment. Service businesses usually require less equipment. A firm engaged in transporting elementary and high school students, for example, will need buses or jeepneys only. Cost of Goods Sold Businesses which carry inventories like those engaged in manufacturing and trading must provide a list showing cost of goods. The cost of goods of trading firms Consist of products purchased for resale, while the cost of goods of manufacturing firms refer to total expenses incurred in manufacturing the products that are intended tobe sold. ‘Scanned wth CamScanet‘These expenses include the following: 1. material; 2. labor; and 3. overhead. In both types of business, all merchandise sold are indicated as cost o " f goods, ang those that are not sold are categorized as inventory. Financial Data Financiers are most interested in the financial aspects of the business plan, Tp satisfy this requirement, the following statements must be presented in the busines: plan: : 1. income statement; 2. _ balance sheet; and 3. cash flow statement. Income Statement The income statement shows the income, expenses, and profits of a firm over a period of time. It is also alternatively called “statement of earnings.” It may cover a certain year, quarter, or month. It provides basic data to help the prospective financier analyze the reasons for the projected profits. Figure 18 is an example of a firm’s income statement. MDM Food Shop Projected Income Statement For the Year Ending Dec. 31, 2012 - Gross Annual Sales 12,000,000 less: Food Cost 4,800,000 Gross Profit 7,200,000 less: Operating Costs Rent 864,000 Salaries 1,920,000 Utilities, insurance overhead 600,000 Owner salary 2,400,000 Net Profit 5,784,000 Piai6o0r Figure 18. Sample Income Statement ‘Scanned wih CamScanetBalance Sheet The bala i ; / fon ofthe nee sheet is a type of financial statement that shows the financial condi- sefull not only to the Of a given date. The information provided by this statement is i ¥ to the entrepreneur but also to the prospective creditors. A scrutiny. of the balance sheet will give the ree mee + . owner some ch it of the items listed, clues if modifications are needed in some Asummary of financial information about the business is contained in the balance sheet and are broken down into three areas, namely: 1. assets; 2. liabilities; and 3. owner's equity. or Assets. The assets portion of the balance sheet lists the assets of the firm in order of liquidity, ie., from the most liquid to the least liquid. As such, this portion is subdivided into the following: 1. Current assets a. Cash — which includes cash in checking, savings, and short-term invest- ment accounts; b. Accounts receivable — refer to income derived from credit accounts; and c. Inventory - refers to the inventory of materials used to manufacture a product not yet sold. 2. Fixed assets — these are durable assets and will last more than one year. These consist of the following: a. Capital and plant - refers to the book value of all capital equipment and others such as land and building, if owned by the firm, less deprecia- tion; and b. Investments — are investment accounts owned by the company that can- not be converted to cash in less than a year. D he liabilities portion of the balance sheet is classified as current iabilities. T The'laabis due in one year or less and they include the follow- or long-term. Current liabilities are ing: . r to all expenses incurred by the business that are pur- ts payable — refe : ; chased a a open account from suppliers and are due for payment; 2. Accrued liabilities - refer to operational expenses that are not yet paid. Ex- amples are overhead and salaries; and 3, Taxes that are due and payable. Long term liabilities are due in more than one year. They include the following: 1. Bonds payable - are 2. Mortgage payable - refers to loans used for the purchase of real estate and is , vepaid for a period of over one year and bonds due and payable over one year; Scanned ith Comseamner3. The Owner's Equity. This sectio neés. It provides a useful means in eval Notes payable — are loans represented by a written document which is pay, able for a'period of over one year. n refers to how much the owner has in the busi, Juating the company. Figure 19 is an illustration of the projected balance sheet. Mikaela Manufacturing Enterprises d Balance Sheet Statement Projecte As of December 31, 2012 Assets Cash P 70,450 Accounts Receivable 2,406,130 Inventories 2,608,791 Prepaid Expenses 9,437 Net Fixed Assets 289,003 Total Assets P5, 383,811 Liabilities and Owner's Equity Notes Payable P 497,643 Accounts Payable 47,665 Accrued liabilities 112,164 Long-term debt 2, 638,737 Total Liabilities 3,296,209 Owner's Equity 2,087,602 Total Liabilities and Owner's Equity —_ 5,383,811. Figure 19. Sample Balance Sheet Cash Flow Statement The cash flow statement is also a very useful tool for business planners. It pro- jects what the business plan means in terms of pesos. It is used for operational plar- ning and estimates the amount of cash inflows and outflows of the business during @ specified period of time. A proper balance between the cash inflows and outflows will result to profits. Figure 20 illustrates a sample of cash flow statement. The following items are listed in a cash flow statement: 1, 2. 3. 4. Cash — is the cash on hand in the firm. Cash sales - are income from sales paid for by cash. Receivables — are income collected from credit sales. Other incomes - are income derived from investments, interest on money loaned to borrowers, and on cash derived from sale of assets. ‘Scanned wth CamScanetSample Cash Flow Statement Mikaela Enterprises Projected Cash Flow Statement 2012 to 2014 (000) 2012 2013 2014 Cash sales 5,000 7,000 10,000 Receivables 900 1,100 1,500 Other income 100 300 Total Income 6,000 11,800 Material 500 900 © Direct labor 600 850 Overhead 900 450 Marketing and Sales 250 400 Research and Development 100 200 General and Administrative 400 Taxes 55 80 Capital 120 130 Loans — 50. — 50. Total expenses P2475 P2,901_ Cash flow 3,525 5,340 8,300 Cumulative cash flow 8,865 17,165 Figure 20. Sample Cash Flow Statement 5. Total income — income. is the sum of each cash, cash sales, receivable, and other Material or merchandise refers to: a. raw material used in the manufacture of the product; or b. the cash outlay for merchandise inventory of trading firms; or c. the supplies used in the performance of a service. Direct labor — refers to labor required to manufacture a product or perform a service. to all Overhead — refers to afi 1x! day operations of the business. enses — refer to all salaries, commissions, and other direct costs Marketing ovr h the marketing and sales departments. ‘ 1 fixed and variable expenses required in the day-to- Scanned ith Comseamner10. ni. 12. 13. 14. 15. 16. 17. — R and D expenses ~ are labor expenses required to support the research ang development efforts of the firm. Gand A expenses - refer to those required to support the general and admin. istrative functions of the firm. Taxes — refer to all taxes, except payroll withholding taxes, paid to the Gover. ment, national and local. Capital - represents the fund requirements to obtain any equipment needeq to generate income. Loan payments — refer to total payments made to reduce or eliminate any long-term debts. a Total expenses — refer to the sum of materials, direct labor, overhead, market. ing expenses, R and D, G and A, taxes capital, and loan payments. Cash flow — refers to the difference between total income and total expenses, Cumulative cash flow — refers to the difference between current cash flow and cash flow from the previous period. The cash flow must be carefully analyzed and a short summary must be presented in the business plan. Supporting Documents The business plan would be more meaningful if supporting documents are included. The documents usually consist of the following: 1. S NAA YD the owner’s resume; contracts with suppliers; contracts with customers or clients; letters of reference; letters of intent; a copy of the firm’s lease; a copy of copyright or patent acquired, if applicable; and tax returns for the past three years. Scanned ith CamseamnerCase 7. Sammy’s Motor Repair Shop: In the Beginning At age 26, Samuel Bugarin established his motor repair shop along the highway one kilometer away from the commercial district of his town. He holds a degree in Mechanical Engineering and just after graduation, he started working as an apprentice in his uncle’s motor repair shop. He prodded his uncle to expand his business but his advice was not heeded. He thinks that the motor repair business is growing steadily. He noticed that the new car models are operated with electronic systems installed in them. Sammy believes that repair and maintenance of the new car models cannot be served adequately by repair shops existing in the area. Sammy immersed himself into learning the care and maintenance of electronic installations in cars. He also acquired the skills necessary for maintaining efficient performance of cars. When he thought he already possessed the required training, he decided to become a motor repair shop entrepreneur. Sammy gathered relevant information he thought would be necessary in the preparation of a business plan. He considered hiring at least five experienced me- chanics. He started constructing the building where his office and service facilities will be housed. He made sure that customers can contact him through the telephone he installed in his office. In addition, he maintains a handyphone so he can serve those whose cars get stalled somewhere. Sammy stuck to his business plan and business was very encouraging during the first three years. On the fourth year of his operation, a new motor repair shop opened just across the highway from his shop. It was inevitable that some of his customers would move over to his new competitor. Sammy did not anticipate the threat now confronting his business. He was already entertaining the idea of putting up another shop at the other end of the commercial district. But now, it seems that his dream of opening another shop is slowly drifting away. With the entry of the competitor, he is beginning to lose faith in the usefulness of a business plan. He is apprehensive and he wants quick advice. i Guide Questions 1. Ifyou were a friend of Sammy, what would you tell him? 2. IsSammy’s situation hopeless? : 3. What did Sammy miss regarding his business plan? ‘Scanned wth CamScanet