CHAPTER - THREE

Business Planning
What is a business plan?
A business plan is a comprehensive set of guidelines for a new venture. It is also called a feasibility plan
that encompasses the full range of business planning activities. A business plan (feasibility plan) is an
outline of potential issues to address and a set of guidelines to help an entrepreneur make better decisions.
This plan would present basic business idea and all related operating, marketing, financial and managerial
considerations. It should layout the idea and describes where we are, where we want to go, and how we
propose to go there.

The purpose of business plan

1. It can help the owner/manager to crystallize and focus his ideas
2. It can help the owner/manager set objectives and give him a yardstick against which to monitor
performance
3. It can also act as a vehicle to attract any external finance needed by the business
4. It can convince investors that the owner/manager has identified high growth opportunities, and that he
has the entrepreneurial flair and managerial talent to exploit that opportunity effectively
5. It entails taking a long term view of the business and its environment
6. It emphasizes the strengths and recognizes the weakness of the proposed venture
7. It offers a sound basis for operation of a business plan that can be used at different times
I. When business plans are produced?
1. At the start up of a new business
After the initial stage of developing ideas and feasibility study are over, a new business may start
up through a detailed planning stage of which the main output is the business plan.

2. Business purchase
Buying an existing business does not neglect the need for an initial business plan. A detailed plan
tests the sensitivity changes to key business variables. This helps to understand the level of risk that are
accepted and the likelihood of rewards being available for the buyers.

3. Ongoing process
Ongoing review of progress, against the objectives of either a new business or a small business
purchase is important in a dynamic environment. A periodic review with the business plan is required in
the constantly changing environment. A business plan should be the live, strategic, and technical planning
focusing on how a small business responds to the inevitable changes around it.

4. Major decisions

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 Even if planning is not carried out on a regular basis, it is usually instigated at a time of major
change.

II. Who makes the business plans?

Three types of people are interested in a business plan:
1. the managers who run the business on a day to day basis
2. the owners, or prospective equity investors
3. the lenders, who are advancing loans for the enterprise
1. Managers
They are involved in small business planning both as producers and recipients of the plan. The
management of a small enterprise is the only people likely to be sufficiently knowledgeable to produce a
business plan. Business plans are also written to aid small business managers.

2. Owners
The managers of a small enterprise may also be the owners and take a keen interest in the planning
process. A plan may be intended for prospective equity partners, either a sleeping partner looking for an
investment, or an active partner looking to join an existing small business. Owners may also be lenders,
who take an equity stake in return for providing loans.

3. Lenders
Banks are the main recipients of business plan. They encourage the production of business plans to justify
overdrafts and loans offering literature and advice and putting together business plans. Other lenders of
money, from private individuals to venture capital companies, will also expect to make their investment
decision after the presentation of a formal business plan.

III. Why business plans are prepared?

The above three groups will have some shared, and some more separate motives for using a business plan.
Managers, owners and lenders will be seeking to investigate the following issues:

1. Assessing the feasibility and viability of the business or project

A project feasibility analysis includes market analysis, technical analysis, financial analysis and social
profitability analysis. A market analysis is a method of screening project ideas as well as means of
evaluating a project’s feasibility in terms of the market. The technical analysis of a project feasibility study
establishes whether the project is technically feasible or not, and whether it offers a basis for the
estimation of costs.
In the financial analysis, the emphasis is on the preparation of the financial statements, so that the project
may be evaluated in terms of the different measures of commercial profitability and the magnitude of
financing required may be determined.

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2. Setting objectives and budgets
An objective is an important element in the project planning. Objectives are concerned with
defining in a precise manner what the project is expected to achieve and to provide a measure of
performance for the project as a whole. Objectives are the foundations on which the entire edifice of the
project design is built. The objectives should be;
a) specific
b) not complex
c) measurable, tangible and verifiable
d) realistic and attainable
e) established within resource bounds
f) consistent with resources available or anticipated
g) consistent with organizational plans, policies or procedures.
Having a clear financial vision with believable budgets is a basic requirement of everyone involved in the
plan.

The format of a business plan

What should a business plan look like, and what should be included? Business plan should answer straight
forward questions;
 Where are we now?
 Where do we intend to go?
 How do we get there?
Where we are now?
An analysis of the current situation of the market place, the business concept and the people involved is a
necessary first step. An evaluation of what we are doing now helps to proceed to the future.

Where do we intend to go?

The direction that is intended for the business need to be clear and precise. Quantifiable targets and
objectives help to clarify and measure progress towards the intended goals. Identification of likely changes
to the business environment will build on the opportunities outlined, and assess possible threats.

How do we get there?

Implementation of accepted aims gives the final end result. Plans for marketing and managing the
business, with detailed financial support are the advisable preliminaries before putting it all into practice.

The Business plan

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 All business plans include eight common elements that are contained in the feasibility model summarized
below. This model is generally adaptable to most types of new ventures.

Eight common elements in a feasibility plan

Executive summary Venture defined, products or services identified, market characteristics

summarized, founders introduced, and financial structure profiled
Business concept Purpose of the venture and the major objectives of its founders; description
of the distinct competency of the firm
Product or service Function and nature of products and services, proprietary interests,
attributes and technical profile
Market research and analysis Customer scenario, markets, venture’s niche, industry structure, expected
competition, and sales forecast
Market plan Market strategy to compete, pricing, promotion, distribution, service and
warranties, and sales leadership
Manufacturing or operations Facilities, location, inventory and materials needed, human resources,
operational processes, technology, security, insurance, and safety
Entrepreneurial team Profile of founders, key personnel, investors and management roles
Financial documentation Financial statements for income and expenses, cash flow; assets and
liabilities, break-even projections, and start-up underwriting needed
I. Executive summary
The opening section, called the executive summary, is a synopsis of the proposed enterprise. It addresses
five subjects as noted in the figure below.

Venture defined Describe the purpose and nature of the business

Product or service Describe the product or service to be sold

Market Describe market size and location, and customers

characteristics

Entrepreneurial team Describe the founders, key people and their roles

Financial summary Describe estimates of revenue and expenses,

founder’s equity, debt and capital needed

Venture defined
The company must be identified to include when it was formed, by whom and for what purpose. The
entrepreneur should briefly extend the definition to explain how the enterprise is unique.

Product or service
The entrepreneur must describe clearly what will be sold. If there is a proprietary interest (patent,
trademark, or copyright), this fact should be stated. The executive summary should briefly describe how

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far the entrepreneur has gone to develop the product or service. Products and services should also be
described in terms of quality image, pricing and distinguishing characteristics that might demonstrate a
distinctive competency.

Market characteristics
Existing and potential markets must be briefly described in terms of size and geographic characteristics.
The plan must provide a summary of data to validate projections. Market potential should be estimated
over a reasonable period of time (i.e. number of sales for the first three to five years). Summaries on data
on growth projections, such as regional trends in specialty merchandising, may be required.

Entrepreneurial team
An entrepreneurial team may include only the founding entrepreneur, but there are other key personnel
essential for the firm’s success. These individuals must be identified, and their skills and talents must be
adequately described. The executive summary emphasizes strengths of team members and their
qualifications.

Financial summary
Critical financial considerations must be summarized to include start-up estimates of revenue, costs, cash
flow requirements, and profits or losses. These should be extended in annual increments for at least three
years. A good plan will identify the break even point in sales volume.

II. Business description

Following the executive summary, the plan will provide detailed sections on each major topic. The first
section is a thorough description of the business. Essentially, the same points covered in the executive
summary are covered here, but they are covered in far greater detail. An important area to address is the
nature of market demand. Is the firm responding to an established demand, or is it trying to establish a new
product or service in untested markets? The entrepreneur also needs to explain the nature of the business
by clearly defining how the firm will operate and what the founders intend to accomplish.

III. Products or services

The plan must provide an accurate description of a product or service before attempting to explain how it
will be marketed. Essential information required to describe a product includes distinctive characteristics
of the product itself, how it works (or is used), materials, costs, methods of manufacturing, proprietary
protection (patents, trademarks, or copyrights), and potential competing (substitute) products. Most new
products also will require validated testing, and many will require approval by regulatory agencies. A
business is staged during the start up and early growth periods. Staging refers to the manner in which

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products or services will be introduced. It also explains the diversification plans and prospects for
incremental growth.
IV. Market Research and Analysis
The objective of market research and analysis is to establish that a market exists for the proposed venture.
Entrepreneurs may provide a credible summary of potential customers, markets, competitors, and
assumptions about pricing, promotion and distribution.

Market research and analysis activities

Identify potential Evaluate markets Analyze competitors Describe

customers assumptions

Demographic profile Future markets and Existing competitors Market niche for
of customers trends or changes with similar positioning firm
Characteristics of Window of products Pricing approach
customers, age, sex, opportunity Future competitors used in plan
income etc. Niche position and ease of entry Distribution or
Buying habits and information Industry structure method of making a
relevant information market
for new venture

Potential customers
A customer profile includes demographic information such as age, sex, family income, occupation and
location of potential customers. Customer profiles can include many characteristics but entrepreneurs
should be guided by reason to provide relevant information that could affect sales.

Markets
A market exists only when there are qualified buyers, but the entrepreneur must remember that the
feasibility plan is a forecast of future markets. Therefore, market trends are important to identify, including
a window of opportunity for introducing the new business.

Competitors
It is essential to identify competitors and to analyze how competition is likely to change when the new
venture becomes established. The minimum requirement is to identify existing competition and to explain
their strengths and weaknesses.
Assumptions about the new venture
A formal marketing plan comprises the next major section of the feasibility plan. Entrepreneurs must
identify the market niche, price system, promotional effort, and distribution method to justify a basis for
market research.
Market niche

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A market niche is a carefully defined segment of a broader market. It defines the positioning of a product
or service to create a distinct marketing focus.
Pricing systems
Describing the price system is essential for developing a customer profile. Luxury prices for name-brand
products sold through specialty stores indicate customers that quality merchandise and individualized
service are offered. Low prices with frequent sales and discounts suggest the opposite. Prices will also be
defined by credit policies, location, methods of distribution, and market strategies devised by the founders.
Methods of distribution
It is the manner in which products or services are brought to market. The choice of a distribution system
often defines the market niche, influences prices, and delineates promotional activities. A creative method
of distribution gives a business its distinct competency.
The sales forecast
Marketing research must conclude with solid data on projected sales. A sales forecast is the culmination of
research to indicate the quantity of sales and expected gross sales revenue during the planning period. A
sales forecast includes quantity of sales in numerical terms where the products or services can be
individually identified. A good plan will describe projected sales in the executive summary, but present
well-documented information here on specific market data and how sales are expected to occur during the
first three to five years of business.

V. The market plan

The market plan describes an entrepreneur’s intended strategy. It builds on market research and distinct
characteristics of the business to explain how the venture will succeed. It focuses on specific marketing
activities. It describes pricing policies, quality image, warranty policies, promotional programs,
distribution channels, and other issues such as after sales service and marketing responsibility. These are
outlined in the figure below.

Elements of the Marketing Plan

Quality and reliability, use, and how the product or
Product or service service will be positioned in growth markets

Pricing system Pricing methods, discounts, quantity and bulk prices, methods
to set prices.

Promotional mix Strategy of combining appropriate uses of public relations,

advertising, displays, events, demonstrations, personal sales etc.

Distribution Description of service- after-sales policies, repair services,

channels guarantees, and product warranties

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 Services and Use of market channels including retail, wholesale, catalog,
warranties telemarketing, personal sales representatives, or other approaches

Marketing leadership Define leadership roles, persons responsible for marketing

and sales
VI. Manufacturing or operations plan

Facilities Inventory Human Operations Other issues

resources

Opening inventory Operating Research and Insurance

Purchase or lease Purchasing system personnel development Legal
Renovations Sub contracting Skill requirements Manufacturing protection
Equipment and Inventory Supervision process Patents,
technology management Service and Service structure Copyrights
Packing and Supplies and support Quality control and trade
transport support Unusual Safety and marks
Legal and zoning
requirements maintenance Security
issues
systems
Manufacturing and operating elements
Facilities
Every business requires physical facilities. Retailers are usually involved in choosing a location and either
securing a lease or purchasing a store. Facilities include fixtures, furniture, equipment, parking facilities,
and renovations necessary to open for business.
Inventory management
Retailers will describe beginning inventory required to open for business and explain how merchandise
will be replenished. Manufacturers will describe raw materials and supplies needed in inventory prior to
production, and they will also describe projected finished goods inventory at opening

Human resource requirements

From a manufacturing view point, human resource requirements should be summarized with information
on the number of personnel and type of skills needed. If the business depends on unusually talented
personnel, then they should be identified.
Operational rationale
If the firm will engage in R&D, the plan should spell out the extent of this effort. If operations include
manufacturing, the plan should describe vendor relations, supply requirements, maintenance expectations
and transport requirements. Manufacturers will also be expected to describe their quality control policies,
safety requirements, and other specific operations related to the enterprise.

Legal issues

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Most businesses must consider insurance and legal protection to avoid disasters. Specifically,
entrepreneurs will need business liability insurance, and when the business relies on a few talented people,
the founders may want to purchase personnel life and disability insurance on key people.

VII. Leadership- the entrepreneurial team

Entrepreneurs must take care to profile the entrepreneurial team honesty but effectively. They should
emphasize team member’s strengths, past successes, and positive characteristics, and they should include
brief resumes of the principals. Each person’s role in the new venture should be described briefly,
including board members or investors who may not be involved directly in operations yet be able to
influence decision
VIII. Financial documentation
Since money is the objective measure used to gauge a firm’s progress, it follows that financial statements
come under close scrutiny. Financial statements for a new venture are projections based on previously
defined operating and marketing assumptions.
An income statement or profit and loss statement is required to show revenue, cost of goods sold,
operating expenses, and net income. Cash flow budgets reflect information from the profit and loss
statement adjusted properly for credit sales, non cash expenses and cash obtained and used outside of
operational income. A projected balances sheet will summarize assets and liabilities, and a break even
analysis will reveal when the enterprise begins to turn a profit.

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