Chapter 4 – The Business Plan

WHAT IS A BUSINESS PLAN?

Prepared by the entrepreneur, a business plan is a document that describes the various external and internal
elements involved in starting a business or in expanding an existing venture, amidst a dynamic business environment. It
integrates the different functional plans such as marketing, manufacturing, finance, and human resource management, taking
into consideration the overall strategy of the business. During the first few years of business operations, the business plan
serves as a guide for short-term and medium- term decision-making and managerial action. Like a road map, it directs the
entrepreneur to his desired destination. It answers the following questions: Where am I now? Where am I going? How will I
get there?

WHY WRITE A BUSINESS PLAN? WHO READS IT?

Business plans are important because of the following reasons, among others: (a) it helps determine whether a
proposed or existing business venture is viable given its target market, (b) it guides the entrepreneur in mobilizing the
resources needed by the business, and (c) it serves as a tool in helping get financing for the business. The business plan may
be read by different people, including employees, suppliers, customers, bankers and potential investors. Table 4.1 shows why
the business plan is important to selected users.

Table 4.1 Value of the Business Plan to Selected Users

Users of Business Plan Why the Business Plan is Important to This User
Entrepreneur  Serve as a road map for managing the business
 Identifies the resources needed to operate and grow
the business
 Allows the entrepreneur to anticipate potential business
risk
Lender  Allows the lender to assess whether the entrepreneur
will be able to meet debt and interest payments
 Provides information about collateral or tangible assets
that can be secured for the loan
Investor  Allows the investor to gauge whether projected returns
are acceptable
 Provides information about the character of the
entrepreneur and about the capability of the venture’s
management team

Aside from providing the entrepreneur with a road map, the business plan allows him to anticipate potential risks so
that he can weigh the options when deciding to pour resources into the business.
For investors, a major consideration is whether they will be able to get back their investment with substantial returns
in five years, or even sooner. Thus, they would be interested to see the financial projections of the business plan, and to find
out whether these projections are based on reasonable assumptions about market conditions and operating costs, among
others.

WHAT INFORMATION IS NEEDED FOR THE MAJOR SECTIONS OF THE BUSINESS PLAN?
Preparing a business plan could take much time and effort. The process would be easier, though, if the entrepreneur knows
where to get the information needed for the business plan's major sections (see Table 4.2). Some information can be retrieved
from public sources, such as national government agencies, city or municipal offices, and industry associations. Many of these
information can be accessed through the Internet, including a wide array of statistical data made available to the public by the
Philippine Statistics Authority (https://psa.gov.ph).
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 Table 4.2. Information Needs for Major sections of the Business Plan
Market Information Needs Operations Information Needs
 General environmental trends  Location
 Specific industry trends  Manufacturing or service
 Local market conditions operations
 Market potential  Equipment and/or furniture
required
 Demographic and/or
psychographic profile of target  Space requirement
market  Labor requirement
 Raw materials needed and
potential suppliers
 Utilities (e.g. water and energy
requirements)
Financial Information Needs
 Rental rates
 Cost of equipment
 Cost of utilities (e.g. water,
electricity)
 Personnel cost
 Distribution Costs
 Cost of insurance
 Registration and license fees

Market Information
A critical piece of information for any aspiring entrepreneur is the potential market for his product or service. To
determine the size of the market, however, the entrepreneur must be clear on who his primary secondary markets are. What
are their demographic characteristics? For example, is the product meant to address the needs of highly-educated women
with high-income levels living in suburban areas? Or is it likely to be bought by less-educated women belonging to a lower-
income class and living in dense urban areas?
Information About Operations
Going back to the entrepreneur who plans to open a hostel, he will need information on the following:
 Location: Where will the hostel be built? How far is it from the airport or seaport? How far is it from restaurants,
hospitals, churches, and major tourist destinations in the area? Is it accessible to public transportation?
 Service operations: Will the entrepreneur provide rooms only or will it be on a bed-and-breakfast operation? Will it
provide other services (e.g., laundry, airport transfer, local tours)?
 Equipment and/or furniture required: Given the number of rooms, how many beds, furniture, furnishings, air
conditioning units or electric fans, toilet bowls, bathroom fixtures, etc. must be purchased? How much will each of
these costs?
 Space requirements: What will be the total amount of space needed for the rooms, the lobby, the kitchen, and the
dining area? Will there be space set aside for a small garden or a parking area?
 Labor requirements: What particular skills are needed for the operations? How many employees are needed to
adequately support the operations? Will the employees handle multiple jobs, or will there be dedicated staff for
receiving guests, housekeeping, and doing kitchen chores? Where and how will these employees be sourced? For
each of the required skills, what are the wage rates in the area?
 Raw materials needed and potential suppliers: What raw materials or supplies are needed (e.g. soap, tissue paper) for
the rooms, and what ingredients are needed by the kitchen staff for the guests' meals? The suppliers' names,
addresses and contact information, as well cost of the supplies must be indicated.
 Utilities: Assuming an average occupancy rate, what is the estimated electricity and water consumption of the hostel?
What are the current and projected rates for these utilities?

Financial Information
The financial section of the business plan will require the entrepreneur to include a list of all sources of revenue and a
list of all possible expenditures for the first year of operations. The budget must include a forecast of sales revenue, which can
be prepared using assumptions about the potential market capital expenditures, direct operating expenses, and cash required
for non- expense items. For personnel costs, the entrepreneur can use the regional minimum wage as a basis or check salary
rates offered by companies advertising in local newspapers. For utilities, the entrepreneur can simply check the published

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rates of utility companies in the area. For insurance costs he/she can ask an insurance agent. For business permits and
licenses, the city or municipal office should be able to provide the required fees.
MAJOR SECTIONS OF A BUSINESS PLAN
The major sections of the business plan and their typical content are summarized in Table 4.3. After the executive
summary, the sections are presented following a certain logic.
Major Sections
Introductory page
Executive summary
Environmental and industry
analysis
Description of the business
Production Plan
Operations Plan
Marketing Plan
Organizational Plan
Financial Plan
Assessment of risk
Timetable/milestones
Typical Content
 Business name and address
 Names and addresses of business owners
 Nature of business
 Statement of financing needed
 Statement of confidentiality of the report (optional)
 Highlights of the business plan summarized in two or three pages
 Conditions of the general environment (i.e., sociocultural, technological,
economic and politico-legal conditions)
 Conditions of the specific environment (i.e., supply and demand conditions,
competition
 Products and/or service
 Size of the business
 Mission statement and core values
 Location of the business and its major physical assets
 Background of the business owners/entrepreneurs
 Manufacturing process
 Physical plant
 Machinery and equipment
 Suppliers of raw materials
 Future capital equipment needs
 Description of the company’s operations
 Flow of orders for goods and services
 Pricing
 Distribution
 Promotion
 Sales forecast
 Form of ownership
 Principal shareholders or partners
 Organizational chart/lines of authority
 Background of the management team
 Roles and responsibilities of management team
 Assumptions
 Pro forma balance sheet
 Pro forma income statement
 Cashflow projections
 Sources and users of funds
 Break-even analysis
 Potential risks – internal and external
 Strategies for preventing or minimizing risks
 Response to risks should they occur
 Formal registration of the business
 Completion of product or service design
 Completion of prototypes
 Hiring of initial personnel
 Reaching agreements with suppliers and distributors
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  Actual production
 Initial orders, sales and deliveries
Appendices  Market research data
 Detailed financial projections
 Curriculum vitae of the management team
 Price lists from suppliers
 Profile of competitors

Introductory Page
This cover page provides a brief summary of the business plan's content. It must contain the following: (a) the name and
address of the company; (b) the name of the entrepreneur and his contact information (telephone number, fax number, email
address, and personal website, if available); (c) a brief description of the company and the nature of the business; and (d) the
amount of financing needed. The entrepreneur might also want to include a statement of confidentiality, especially if his/her
business idea involves a novel or cutting-edge technology.

EXECUTIVE SUMMARY
The executive summary, which is prepared after the total plan has been written, must stimulate the interest of its reader,
especially if he or she is a potential investor. If it is written in a concise and compelling manner, the business plan might just
convince the potential investor that the entire business plan is worth reading. Key questions that the business plan must
answer include the following:
 What is the basic idea for the new product or service? What makes it unique?
 How will the idea for this proposed venture be realized?
 Is the potential market big enough to make the business viable?
 How much revenue and income are the business expected to generate?
 Who are the people behind the business? Do they have the knowledge skills, and experience required to develop
the product or service idea and to run the proposed venture?

Environmental and Industry Analysis

As explained earlier, it is important to describe the general conditions within which the entrepreneurial venture will
operate. These environmental factors include the following:
o Sociocultural Conditions. This includes, among others, a description of shifts in the characteristics of the
population (demographics), including the rise of the Filipino middle class and the growing elderly population;
lifestyle trends, including the increasing emphasis on health and sustainable living: and shifting consumer
preferences, including the demand for green products and services.
o Technological Conditions. For example, advances in information and communication technology has given rise to
e-commerce, which has greatly influenced a variety of industries such as wholesale and retail, tourism, banking,
and telecommunications
o Economic Conditions. This must include a description of the growth of both the national and local economies, as
measured by the Gross Domestic Product or GDP and the regional GDP respectively; price movements of key
business inputs, inflation rates, interest rates, foreign exchange rates, employment trends, and disposable
income, among others.
o Politico-legal Conditions. This must take into account existing laws and regulations, as well as future legislation
that could directly affect the business. A legislated increase in minimum wage, for instance, would have a
substantial impact on a labor-intensive business employing low-wage workers. On the bright side, there might be
tax exemptions, incentives, or subsidies that businesses can avail of if they fall under the government's list of
priority industries.

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 o Supply and Demand. For the entrepreneur, it is important to know whether his proposed business venture
belongs to an industry that is rapidly growing (sunrise industry), steadily growing, plateauing, or rapidly declining
(sunset industry).
o Competition. Some entrepreneurs might be led to believe that a good product or service is enough to sustain a
profitable business. However, there is always the threat of a large competitor who has the resources to come up
with a similar, or even better product at a much lower price. It is, therefore, essential for the entrepreneur to
"know the enemy" (i.e., the products and services that they offer, their major customers, their strengths and
weaknesses) so that he can execute an appropriate competitive strategy.

Description of the Business

Worth including in this section is the venture's mission statement, which could serve as a guide in decision-making.
The entrepreneur must also include information about the product or service offered by the company, the location of the
business, its major physical assets, and some background information about the business owner and its management team.
Other questions the entrepreneur must be able to provide answers for include the following: Will the building be bought or
leased? What are the terms of purchase or lease? Is the building old or new? Will the building require some renovation? What
equipment will be needed these be purchased or leased?

Production Plan
If the new venture is a manufacturing concern, the entrepreneur must prepare a production plan that describes the
complete manufacturing process. If the manufacturing will be carried out by the business, the entrepreneur must include the
following in the production plan: a description of the layout of the physical plant; the machinery and equipment needed to
perform the manufacturing operations; names, addresses, and terms of payment of the suppliers of raw materials; production
costs; and future capital equipment needs.

Operations Plan
The operations plan must be included whether the business is concerned with manufacturing or service. For
manufacturing businesses, this section must describe the flow of goods and services from production to the customer,
including purchasing, inventory of raw materials and of finished goods, inventory control procedures, and distribution. For
service businesses, must describe the procedures in completing a business transaction. A retail business, for example, must
explain how it will purchase the various products it will offer, how it will manage the inventory and how it will keep track of
sales.
Marketing Plan
This section describes the target market for the new product or service. Who will want to buy and use the product or
avail of the service? Why would they want to do so? Once the target market is defined, then the entrepreneur must describe
how the product or service will be priced, promoted, and distributed to its target customers. In addition, forecasted sales
must be included in this section to provide an indication of the viability of the business. These forecasts, however, will only be
believable if the assumptions about the potential market are reasonable.
Organizational Plan
In the section it is not enough for this section to provide a documentation of the venture's form of ownership that is
proprietorship, partnership, or corporation, nor is it sufficient to have a nice organizational chart that indicates the positions
and job descriptions of the venture's management team. After reading this section, the potential investors must be convinced
that the individuals who will run this venture collectively have the competence, character, experience, and expertise needed to
ensure a successful business outcome. Do the members of the management team have complementary skills and abilities?
Have they clearly delineated their roles and responsibilities according to their individual strengths? Have they developed a
good working relationship?

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Financial Plan
While every section of the business plan is important, one section that is likely to receive close scrutiny is the financial
plan. This section determines the investment that must be poured into the business and indicates whether the business is an
economically viable undertaking.
First, the financial plan must provide a summary of the assets the business will own, its projected liabilities, the
expected investment of the entrepreneur, and potential retained earnings. Such information is summarized in a pro forma
balance sheet, which shows projections of the company's financial condition at various times in the future.
Second, the financial plan must summarize the projected sales, the costs of goods sold, and the general and
administrative expenses for the first three years. Such information, including the computed net income after taxes, is shown in
a pro forma income statement.
Finally, the financial plan must include a cash flow statement, which shows the amount and timing of expected
inflows and outflows of cash over a period of several years. Cash flow projections for the first year are usually provided
monthly to ensure that the business will have sufficient working capital to sustain operations.

Assessment of Risk
Effective business plans must contain a section that discusses the risks that might prevent the business from achieving
its objectives. Among these risks are the following: (a) price cutting by competitors, (b) operating cost that exceed initial
estimates, (c) failure to achieve sales forecasts, (d) sudden unavailability or a steep increase in the price of raw materials, (e)
difficulties in raising additional capital, (f) advances in technology that might render the new product obsolete; and (g)
unforeseen environmental conditions, such as a natural disaster, a major recession, or an unfavorable legislation. Once these
risks are identified, there must be a discussion on what strategies will be employed to prevent or minimize risk, or to respond
to risks should they occur.

Timetable/Milestones
For both the entrepreneur and the potential investor, knowing when major activities will happen and when
milestones will be reached serves a useful purpose. Among the key milestones are the following: (a) formal registration of the
business, (b) completion of product or service design, (c) completion of prototypes, (d) hiring of initial personnel, (e)
agreements with suppliers and distributors, (f) actual production, (g) receipt of initial orders, and (h) initial sales and
deliveries.
Appendices
To ensure that the main body of the business plan is concise enough to include only the most essential information,
several items could instead be appended to the document. These items typically include market research data, detailed
financial projections, the full résumés of the business founders and members of the top management team, and even the
profile of key competitors. By placing these items as appendices, the entrepreneur provides information that some readers
might want to examine more closely but at the same time keeps the length of the business plan itself manageable.

WHY DO SOME BUSINESS PLANS FAIL?

Conceivably, not all business plans will result into successful business undertaking. The chances of failure, though, are
higher if the business plan is poorly prepared. Potential investors are likely to reject a business plan that has the following
problems:
o Document is sloppy and looks unprofessional
o Executive summary is not coherent and is too long
o Unclear why people would want to buy the product or service
o Unclear whether the product can be readily produced
o Sales and financial projections are unreasonably optimistic
o Inadequate description of the qualifications and experience of the management team
o Inadequate assessment of the potential threats to the business
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