Business Planning and Start-up

Nicanor P. Hayag
INTRODUCTION
The question that is often asked by people who are starting a business is: “Why do I need
to bother with a business plan?” Apart from the obvious response – “If you don’t have one,
nobody will lend you money” – there are a number of very strong reasons and justifications
for developing proper business plans, including:
• to focus the mind on the purpose of the business and what the business will offer
• to clarify for the business proposers just what they want and expect from the business
• to research and identify the target markets and customers
• to identify the resources (staff, skills, physical, and financial) that will be needed
• to quantify financially the costs and funding of those resources
• to plan the implementation of the business and the budget implications of this
• above all, to test the viability of the business, in terms of markets, break-even levels,
investment costs and returns, to ensure that it can survive and grow.
INTRODUCTION
It must also be remembered that business plans are not just used by start-
ups. They are a valuable management tool for planning and monitoring the
successful operation of the business. They can also be used for long-term
planning to investigate strategic development options – growth,
diversification, acquisition and exit strategies or sale of the business. They
can be used to raise external funding or investment to finance those
strategies, or to develop new products or innovations, and of course they
can measure the profitability and success of the business to determine what
dividends the owners can take to repay their investment and effort.
A. BARRIERS TO STARTING AND GROWING A NEW BUSINESS

Barriers to Starting a New Business

The typical barriers to entry for start-up businesses fall into five main
categories.
• The high cost of capital investment for some sectors, industries or
technologies.
• Accessing finance for start-up.
• The strength and attitudes of competitors within the market.
• The staff skills/expertise and networks and contacts required.
• Compliance with regulatory requirements.
A. UNDERSTANDING INNOVATION – THEORIES AND EXPLANATIONS
Barriers to Growing an Early Stage or Small Business
Issues for the entrepreneur (or, more typically, the non-entrepreneurial owner-manager).
• Too much operational focus and a lack of strategic thinking or planning.
• No desire for growth:
- perhaps due to a deliberate choice of lifestyle business, or
- because the entrepreneur/owner-manager is satisfied with the current size and
profits of the firm.
• No desire for further risk or personal financial exposure once the firm is stabilised and
profitable.
• Lack of necessary strategic/managerial/sales and marketing skills.
• Wariness of employing other managers because of the:
- fear of loss of direct control/own investment in the hands of others, or
- dislike of delegation or inability to delegate.
• The implicit role change from entrepreneur to manager as a business grows.
B. THE IMPORTANCE OF PROPER BUSINESS PLANNING

Why Are Business Plans so Important?

Plans are important, first of all, because the process of producing a business
plan is a very efficient way to focus the ideas of potential entrepreneurs, in
terms of defining their objectives and assessing their own abilities to
organise and run the business. It is needed before any substantial financial
commitments or investments are made.
Second, the planning process establishes parameters and specific targets
which provide a yardstick against which the progress and profitability of the
business can be measured. In other words, this is the process of converting
the proposers’ objectives into quantifiable financial forecasts and targets
against which progress and achievement can be measured.
Third, there are relatively few aspiring entrepreneurs who have the
resources to be totally self-financing, so most are faced at some time with
the need to raise external finance, if not at the start-up stage, then later
when they wish to expand and grow the established business. For these
persons, possession of a good business plan is crucial to their future.
B. THE IMPORTANCE OF PROPER BUSINESS PLANNING
The Business Plan as a Means of Focusing Ideas
The production of a comprehensive business plan is really centred on a process of
questions and answers; and the deeper you move into the plan, the more questions arise
becoming self-employed, have a fairly general idea of what they would like to achieve from
it in terms of their personal ambitions, wealth and lifestyle. However, the question: “What
are your specific objectives?” needs to be asked, to prompt them to define the precise
parameters within which their proposed business will operate. Typically, this question is only
asked for the first time when they start to fill in the bank’s business plan form. The primary
objectives (often called the mission statement) of the business need to state clearly and
specifically the purpose for which the business exists, and the market in which it will
operate, as in these examples.
• I intend to operate a high-quality and profitable mobile catering service, specialising in
wedding receptions and private parties, in the Kent and Sussex areas.
• We will be providing a service which designs, constructs and maintains heated swimming
pools for large private homes in London and south-east England.
B. THE IMPORTANCE OF PROPER BUSINESS PLANNING
Measuring Progress and Achievement
It is imperative that every new business has clearly defined objectives and parameters within which it
will operate. However, these only have purpose and value if they can be used as a basis for
measuring the performance on an ongoing basis.
The financial context, this might include:
• annual budgetary plans, forecasting income and expenditure on a month by month basis, against
which actual income and expenditure can be monitored
• forecasts of gross profit margins and net profit margins, derived from the budgetary plans, which
can be monitored to pick up any problems due to rising costs, falling sales or seasonal fluctuations
in sales
• the effects of specific sales or promotional activities on sales revenues or profit margins
• cash flow forecasts, and the effects of giving or taking credit
• the need for additional working capital to sustain business, e.g. by means of short term overdrafts or
longer-term loans to facilitate expansion of the business
• the affordability of capital investment: Do we replace or repair? Do we produce components
ourselves, or buy them in? Do we use loans or hire purchase to buy equipment, or do we lease?
B. THE IMPORTANCE OF PROPER BUSINESS PLANNING
In the sales and marketing context, examples might include:
• forecasts of market share that will be achieved by each range of products
or services
• sales forecasts and projected revenues for each individual product or
service
• expected profit margins or contributions to overheads achieved by those
revenues
• costs of sales activities
• costs of special promotions and expectations of increased sales and
revenues generated by them
• costs of customer service and retention.
B. THE IMPORTANCE OF PROPER BUSINESS PLANNING
Raising Finance for Start-up or Expansion
Very few start-up businesses are in the position of not requiring funding to start trading, and
virtually all of those that have ambitions of growth for the future will need some form of
finance to expand and grow.
The various options for raising business finance are share capital among shadiscussed in
Chapter 8, but for the majority of small firms the starting point is their local bank manager.
Inevitably, the first question asked of a budding entrepreneur is: “Can I see your business
plan?” – a question which is usually closely followed by: “What forms of security or
collateral can you offer?”
How Often Should the Business Plan Be Updated?
Most business plans are updated on an annual basis. For most small firms, it is unrealistic
to prepare very detailed budgets and cash flow forecasts for more than a year ahead, but
preparing them for less than a full year will not generate useful information. It is important to
remember that the business plan is a live document, for use as part of an ongoing process
– it is not just something prepared for the bank manager at the start of the year, and then
put in the filing cabinet and forgotten until next year.
C. EXPECTATIONS OF LENDERS AND INVESTORS
Expectations
When experienced lenders or investors take a first look at a new business plan proposal, they rarely
read it through from front to back.
Essentially, when reviewing a proposal, investors and lenders are looking for answers to a number of
specific questions.
• How financially viable does the business proposal look and, in consequence, what is the likelihood
of a loan being repaid, or making a good return on capital investment
• How reasonable are the sales and profit forecasts and projections – do the figures look realistic?
• Do the proposals demonstrate a good degree of understanding and analysis of markets and
customers?
• How detailed and realistic is the marketing plan?
• Has a detailed risk analysis been carried out, and have contingency plans been identified to address
or mitigate risks?
• What opportunities have been identified for investors to exit at the end of the investment period (exit
strategies)?
C. EXPECTATIONS OF LENDERS AND INVESTORS
Due Diligence
This is the process used to evaluate business proposals for lending or
investment. In its simplest form, for a start-up business it may comprise a
detailed risk analysis of the proposed borrowing against the business plan,
coupled with checks on the financial position of the proposers. This involves
things like taking up bank references and personal references, and carrying
out credit checks, insolvency list searches, and property searches where
property is offered as security
D. BUSINESS PLAN FORMAT AND STRUCTURE
The following generic business plan format is a 2011 update of a model developed
by Butler (2006) that has been designed to cover the content required to meet
three specific objectives.
1. It has been synthesised from a number of business plan formats used by major
UK clearing banks (HSBC/Barclays/Lloyds TSB/RBS etc) and modified to provide
the content and coverage required by most lenders and investors to enable them to
make a balanced decision about providing funding for the business proposal.
2. It follows the Small Firms Enterprise Development Initiative (SFEDI) National
Occupational Standards for Business Enterprise which define best practice for the
process. SFEDI (www.sfedi.co.uk) is the Sector Skills Body for Enterprise in the
UK.
3. Most importantly, the plan’s content and structure should require the potential
entrepreneur to understand and address a range of key questions and issues that
are essential to survival during the start-up and early stages of a new business.