CHAPTER 7:

BUSINESS PLAN
WHAT IS A BUSINESS PLAN?

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.

Purposes:
1. To serve as management’s guide during the lifetime of the business
2. To fulfill the requirement for securing lenders and investors
PARTS OF THE BUSINESS PLAN
1. Title page and contents
2. Executive summary
3. Description of the business
4. Description of the product or service
5. Market strategies
6. Analysis of the competition
7. Operations and management
8. Financial data
9. Supporting documents
TITLE PAGE AND CONTENTS
1. Name of the business
2. Name/s of the proponents ( in this case, the SBO)
3. Address
4. Telephone number
5. E-mail and website address
6. Date
7. Name of the person who prepared the business plan
EXECUTIVE SUMMARY
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. Capital needs of the business

2. How the money will be used
3. What benefits will be derived by the business from the loan or investment
4. In case of loan, how it will be repaid with interest, and in the case of
outside investment, how profits will be generated.
DESCRIPTION OF THE BUSINESS
1. short explanation of the industry
2. description of the business

In describing the industry, it is important to present the current situation

and the outlook for the future. Information must be provided regarding
the various markets within the industry, as well as new products or
developments that could affect the business. The sources of information
must be indicated.
STATEMENTS ABOUT THE FOLLOWING
WILL BE USEFUL IN DESCRIBING THE
BUSINESS;
1. To serve as management’s guide during the lifetime of the
business
2.To fulfill the requirement for securing lenders and investors
3.The industry sector where the business falls into (retail,
manufacturing, education, entertainment, and others)
4.Whether the business is new or established
5.The ownership status of the business ( sole proprietorship,
partnership, or corporation)
6. Information on who the customers are
7.Information on the size of the market
8.Information on how the product or service is distributed
DESCRIPTION OF THE PRODUCT
OR SERVICE
1. the important features of the product or service
Ex: maintenance free feature of the product and home delivery service

2. detail description of how the product is used

3. what makes it different from others available in the market

Ex: service 24 hours a day
THE OBJECTIVE OF PRODUCT OR SERVICE
DESCRIPTION IS TO SHOW THAT THE FIRM
HAS A COMPETITIVE EDGE OVER OTHERS
Factors that will make the business successful must be
described:
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
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.

1. Definition of the market

2. Determination of the market share
3. Positioning strategy
4. Pricing strategy
5. Distribution strategy
6. Promotion strategy
DEFINITION OF THE MARKET
The objective of market definition is to determine which
part of the total potential market will be served by the
firm. Hence, the market must be defined in terms of the
size, demographics, structure, growth prospects, trends,
and sales potential. To determine the total potential, the
total aggregate sales of the competitors must be
presented.
 SALES

Company
A 50,000
UNITS

Company
B 65,000 UNITS

Company
C 80,0000 UNITS

Other
companies 10,000 UNITS

THE MARKET FOR

205,000
PRODUCT X
UNITS
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
4. Determine the percentage of the potential annual purchase that the firm can attain
Number of prospects in the target market 1,000 families
Frequency of purchase per year 48 times
Total number of purchases per year 48,000
Average payment per purchase P1,000
Projected total industry sales per year P48,000,000
Percentage the firm can attain 15%
THE FIRM’S MARKET SHARE P7,200,000
ANALYSIS OF THE COMPETITION
The small business operator 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, the following must be determined:

1.Strengths and weaknesses of the firm’s competitors;
2.Strategies that will give the firm a competitive edge;
3.Barriers that can be developed to prevent competitors or
would-be competitors from exploiting the firm’s market; and
4.Any opportunity that can be exploited
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 Weakness Strength Weakness

location
Strong sales team Weakness Strength Strength

Strong financial Strength Weakness Weakness

capacity
OPERATIONS AND MANAGEMENT
How the firm will be operated on a continuing basis is an
important component of the business plan.

1.Organizational structure
2.Operating expenses
3.Capital requirements
4.Cost of goods sold
ORGANIZATIONAL STRUCTURE
A 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:

1.Marketing (including sales, customer relations and

service)
2.Production (including quality assurance)
3.Research and development
4.Management
5.Human resources
OPERATING EXPENSES
Projections of operating expenses are important aspects in the preparation of a
business plan. This is 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.
OPERATING EXPENSES
Overhead, which may be fixed or variable, includes the following:
1. rent;
2. advertisings 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.
OPERATING EXPENSES
These expenses include the following:
1. material
2. labor
3. overhead.

In both type of business, all merchandise sold are indicated as cost of goods, and those
that are not sold are categorized as inventory.

Financial Data
Finances are most interested in the functional aspects of the business plan. To satisfy
the requirement, the following statements must be presented in the business 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.
 MDM Food Shop Projected
Income Statement For the Year Ending
Dec. 31, 2012

Gross Annual Sales P12,000,000

less:
Food cost 4,800,000
Gross Profit P7,200,000
less:
Operating Cost
Rent 864,000
Salaries 1,920,000
Utilities insurance
overhead 600,000
Owner Salary 2,400,000
Net Profit 5,784,000
P1,416,000
 BALANCE SHEET
The balance sheet is a type of financial statement that
shows the financial condition of the business as of a given
date. The information provided by this statement is useful
not only to the entrepreneur but also to the prospective
creditors. A scrutiny of the balance sheet will give the owner
some clues if modifications are needed in some of the items
listed.
 BALANCE SHEET
A summary 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
 THE ASSETS
The assets portion of the balance sheet lists the assets of the firm in order of liquidity; i.e., 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 investments accounts;
b. Accounts receivable- refer to income derived from credit accounts (charged accounts, customer's
accounts or trade debtors); 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 depreciation; and
b. Investments- are investments accounts owned by the company that cannot be converted to cash in
less than a year.
 THE LIABILITIES
The liabilities portion of the balance sheet is classified as current or long-term.

• Current liabilities are due in one year or less and they include the following:
1. Accounts payable- refer to all expenses incurred by the business that are purchased on an open
account from supplies and are due for payment;
2. Accrued liabilities- refer to operational expenses that are not yet paid. Examples 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 bonds due and payable over one year;
2. Mortgage payable- refers to loans used for the purchase of real estate and is repaid for a period of
over one year; and
3. Notes payable- are loans represented by a written documents which is payable for a period of over
one year.
THE OWNER'S EQUITY
- This section refers to how much the owner has in the business. It
provides a useful means in evaluating the company.

For Example:

If a real estate project is valued at $500,000 and the loan amount

due is $400,000 the amount of owner's equity in this case, is $100,000.
 Manufacturing Enterprises Projected
Balance Sheet Statement
As of December 31, 2012
Assets
Cash P70,450
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 P496,643
Accounts Payable 47,665
Accrued liabilities 112,164
Long -term debt 2,638,373
Total Liabilities 3,296,209
Owner’s Equity 2,087,602
Total Liabilities and Owner’s Equity 5,383,811
 CASH FLOW
STATEMENT
The cash flow statement is also very useful tool for business
planners. It projects what the business plan means in terms of pesos.
It is used for operational planning and estimates the amount of cash
inflows and outflows of the business during a specified period of time.
A proper balance between the cash inflows and outflows will result to
profits.
The following items are listed in a cash flow statement:

1. Cash- is the cash on the hand in the firm.

2. Cash sales- are income from sales paid for by cash.
3. Receivables- are income collected from credit sales.
4. Other incomes- are income derived from investments, interest on money loaned to
borrowers, and on cash derived from sale of assets.
5. Total income- is the some of each cash, cash sales, receivable, and other income.
6. 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 service.
7. Direct labor- refers to labor required to manufacture a product or perform a service.
8. Overhead- refers to all fixed and variable expenses required in the day-to-day operations of
the business.
9. Marketing expenses- refer to all salaries, commissions, and other direct costs associated
with the marketing and sales department.
 Mikaela Enterprises Cash Flow Statement
2012 to 2014

2012 2013 2014

Cash sales P5,000 P7,000 P10,000
Receivables 900 1,100 1,500
Other income 100 150 300
Total income P6,000 P8,250 P11,800
Material 500 700 900
Direct labor 600 700 850
Overhead 900 400 450
Marketing and sales 250 300 400
Research and Development 100 150 200
General and Administrative 400 400 400
Taxes 55 80 110
Capital 120 130 150
Loans 50 50 50
Total Expenses P2,475 P2,901 P3,500
Cash flow 3,525 5,340 8,300
Cumulative cash flow 8,865 17,165
10. R and D Expenses- are labor expenses required to support the research and development
efforts of the firm.
11. G and A Expenses- refer to those required to support the general and administrative,
national and local.
12. Taxes- refer to those required to support the general and administrative, national and local.
13. Capital- represents the fund requirements to obtain any equipment needed to generate
income.
14. Loan payments- represents the fund requirements to obtain any equipment needed to
generate income.
15. Total expenses- refers to the sum of materials ,direct labor, overhead, marketing expenses,
R and D, G and A, taxes capital, and loan payments
16. Cash flow- refers to the difference between total income and total expenses.
17. Cumulative cash flow- refers to the difference between current cash flow and cash flow
from the previous period.
Supporting Documents
The business plan would be more meaningful if supporting documents are
included:

1. the owner’s resume

2. contracts with suppliers
3. contracts with customers or clients
4. letters of reference
5. letters of intent
6. a copy of firm’s lease
7. a copy of copyright or patent acquired, if applicable
8. tax returns for the past three years
SUMMARY
The business plan is a very useful document in managing an
entrepreneurship or small business. It provides information on how the owner will
undertake the various activities necessary in operating the business.

The plan enumerates the various decisions made after careful analysis. As
such, it relieves the owner of spur-of-the-moment decisions when the business is
already in operation.

The business plan also provides important information for prospective

investors and lenders.

The plan should be a useful piece of reading material as it contains

information about the business, its product or service, market strategies,
competitors, operations and management, financial data, and supporting
documents.
THANK YOU! :)