Methods of Teaching

Submitted by:
Enrique L. Radaza II
Submitted to:
Prof. Morales
How to make a business plan

What this module is all about?

Hi dear students! In this module, you will learn so much about business planning and
how to make a business plan. You will also learn some tips on how to make a business plan. The
text is designed to teach knowledge and skills that are needed in creating a business plan. The
activities in the text are task-oriented, requiring my students to apply knowledge and skills
learned to complete an assignment or solve a problem.

Learning Objectives

At the end of this lesson, the students are expected to:

Identify a business plan
Learn the different steps and tips in writing a business plan
Create a business plan

How to learn from this module

I’d like you to imagine that you are in an office. What do you think is the best thing to do
when you are in a situation wherein you have encountered problem regarding your business?
This module provides you with knowledge on how to deal with your business problems through
the use of a business plan. Answer the activity and pre test exercises on the next pages of this
module. Let us work and help each other.

Pretest
Direction: Read each item carefully and select the best answer by
writing its letter in your paper.

________ 1. Is a formal statement of a set of business goals, the

reasons why they are believed attainable, and the plan for reaching
those goals.
a. Plan
b. Business plan
c. Business statement

________ 2. A business plan is often confused with the term ________.

a. Business Managing plan
b. Management plan
c. Marketing plan

________ 3. When the existing business is to assume a major change or

when planning a new venture - a _____ year business plan is essential.
a. 3 to 5
b. 5 to 7
c. 2 to 3
________4. It's tempting to roll up your sleeves and plunge right
into the details of your business: evaluating products, studying
market segments, and sizing up your competition.
a. Create a vision
b. Don't ignore your customers.
c. Expect the unexpected.

_______ 5. Of course, the biggest mistake of all is failing to create

a business plan in the first place. Planning is hard work, and there's
no guarantee it will make your business
a. Be prepared to take risks.
b. Get a second (or third) opinion.
c. Don't skip the plan!

What is a business plan?

 A business plan is a formal statement of a set of business goals, the reasons why they are
believed attainable, and the plan for reaching those goals. It may also contain background
information about the organization or team attempting to reach those goals. Business plans may
also target changes in perception and branding by the customer, client, tax-payer, or larger
community. When managing a business, a business plan, or B-Plan, is often confused with the
term Marketing Plan. When the existing business is to assume a major change or when planning
a new venture - a 3 to 5 year business plan is essential.

Activity 1
Give the steps in creating a Business Plan for a small business. Try to think of the possible
contents of a business plan. Number one is done for you.

BUSINESS PLAN

1. Create a vision.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Lesson 25
How to make a business plan
 As you develop your business plan, it's easy to make mistakes or leave out important
elements. Here are a few of the most common business planning pitfalls and some tips on how to
avoid them:

1. Create a vision. It's tempting to roll up your sleeves and plunge right into the details of your
business: evaluating products, studying market segments, and sizing up your competition. Yet it's
possible to get so caught up in the process of planning a business that you lose sight of what
you're planning for. Before you get lost in the details, take a step back. Outline a clear vision and
a coherent set of values for your company. Develop a mission statement and use it to define
short-term goals and priorities. Once you have a clear road map for your business, you can plan
your journey with more confidence.

2. A budget isn't the same thing as a plan. You can't create a solid business plan without a
budget and a financial forecast. But a budget should be the product of all the other elements in
your plan. If you don't have a clear picture of your industry, customers, competitors, and market
conditions before you develop a budget, your numbers aren't likely to reflect reality.

3. Don't ignore your customers. This may sound obvious, but too many entrepreneurs assume
they know exactly what their customers need without bothering to ask. Take the time to learn
about your customers, and build your business plan around their needs and desires.

4. Don't shortchange the competition. If you assume your firm will be the only game in town
or if you fail to take existing competitors seriously, you're asking for trouble. Your competitors
can be a great source of information about what works and what doesn't.

5. Be prepared to take risks. Creating a business plan isn't about avoiding risk; it's about
understanding and managing risk. That's why a good business plan anticipates possible
challenges and includes a variety of scenarios for meeting those challenges. There's a difference
between a calculated risk and recklessness, and your plan can help you make that distinction.

6. Get a second (or third) opinion. The most experienced entrepreneur can still benefit from a
different point of view. Even if you're the only person involved in your business, find someone
who can study your plan objectively and point out possible weaknesses you might have missed.
7. Expect the unexpected. Every business plan needs some wiggle room to allow for
unexpected changes. Part of this involves creating budgets and marketing plans with some built-
in flexibility; but adapting to change also requires you to accept that you might have to modify or
even abandon business practices that worked well in the past.

8. Don't forget what makes you unique. A cookie-cutter business plan might help you get
started, but it won't help you succeed. And while it helps to look at your competitors, don't model
your business after them. After all, you're in business to beat the competition. Learn from your
competitors' strengths, but also learn how to spot their weaknesses and use them to improve your
own business plan.

9. What's the point? Building a business involves hard work and struggle. But it should also
include a clear set of rewards, both for you and your employees. When you set goals in your
business plan, include some concrete motivation that goes beyond the satisfaction of a job well
done.

10. Don't skip the plan! Of course, the biggest mistake of all is failing to create a business plan
in the first place. Planning is hard work, and there's no guarantee it will make your business
succeed. But a good plan is still the best way to turn your vision into a realistic, coherent
business.

Contents of a Business Plan

Though business plans have many different presentation formats, business plans typically
cover five major content areas:
• Background information
• A marketing plan
• An operational plan
• A financial plan
• A discussion of the decision making criteria that should be used to approve the plan.

Some of these content areas may be more or less important depending on the kind of
business plan. There is no fixed content for a business plan. Rather the content and format of the
business plan is determined by the goals and audience. A business plan should contain whatever
information is needed to decide whether or not to pursue a goal. Once a business plan has been
developed, the key decision making points are usually summarized in an executive summary.

Organizational background
In a written plan, information may appear in a separate section, an appendix, or may be
omitted all together depending on the nature of the plan. If the plan is directed at people outside
of the company, a brief synopsis may appear in the executive summary. This will be
supplemented with a more detailed discussion elsewhere in the plan.

Current status

• Number of Employees
• Annual sales figures
• Key product lines
• Location of facilities
• Current stage of development (start-ups)
• Corporate structure (options are):
o Sole proprietors
o Partnership
o Joint Venture
o Publicly traded corporation
o Private corporation
o Limited liability company
o Public utility
o Non-profit organization
o Cooperative
• Names of the majority investor, if any

History

• Founding date
• Major successes
• Strategically valuable learning experiences
Management team

• Board members
• Owners
• Senior managers
• Managing partners
• Head scientists and researchers

Marketing plan
The marketing plan has five objectives: If the product is a new product with no existing
market, one must identify all substitute products. For each significant substitute product one
must explain:

• Name, features, why substitute, why proposed product better

• Switching costs and why new product justifies switching
• Expected adoption dynamics
• Expected role once market begins to develop (see above for existing products)

Pricing

• Chosen price points

• Proposed Pricing strategy

Demand management

In economics, demand management is the art or science of controlling economic demand

to avoid a recession. The term is also used to refer to management of the distribution of, and
access to goods and services on the basic of needs. An example is social security and welfare
services. Rather than increasing budgets for these things, governments may develop policies that
allocate existing resources according a hierarchy of need.

Distribution

• Distribution strategy
• List of major distributors
• Current status of negotiations

Promotion and brand development

• Promotion strategy

Operational plan
The plan outlines how one would service their clients cost effectively.

Manufacturing/deployment plan

• Supply chain requirements

• Production inputs
• Facility requirements - size, layout, capacity, location
• Equipment requirements
• Warehousing needs for raw materials, finished goods
o Space requirements

Information and communications technology plan

• Systems needed
o Operations: Billing, HR, SCM, CRM, Knowledge bases, etc
o Websites: internal, public
• Security and privacy requirements
• Hardware requirements
• Off-the-shelf software needed
• Custom development requirements

Staffing needs

• List of roles
• Management structure
• Head count approval
• For each role
o Job descriptions
o Number of employees
o Proposed compensation
o Availability
• Training plan

Training requirements should look to address two issues - a benefit to motivate staff and
developing the capability of the organization to deliver the business objectives. Ideally all
training requirements should be based on as an assessment of the business plan objectives, the
required competence and capability to deliver these objectives and understanding of the current
capacity and capability of the organization. Simple question to ask; to assess the appropriateness
of the training - as a result of the training, how much better will the organization be at delivering
its objectives. Remember that training covers a wide range of activities from project work and on
the job training to professional qualifications. Most learning takes place outside of formal
training activities.

Intellectual property plan

• Intellectual property inventory

• Portfolio development plan

Acquisition plan

Some business plans gain competitive advantage by buying companies up and down the
value chain. Some gain competitive advantage by buying up companies and consolidating them.
Sometimes a business plan will seek to earn a superior return by adding superior management
talent to an existing weak company.

For more information see Mergers and Acquisitions.

When acquisitions form a major part of the business strategy, the acquisition plan needs to be
included in the business plan.

• Acquisition strategy
• Proposed acquisition targets
• Effect on market structure (if consolidation plan is being proposed)

Organizational learning plan

The organizational learning plan discusses what lessons will be learned from the marketing,
operational, and finance plans and how those lessons will be consolidated to gain strategic
advantage.

• Market sensing - organization's method for collecting information about customers

(George Day)
• Strategic Staircase - the accumulation of future competencies by building on existing
competencies. (Michael Hays, Costas Markides)

Cost allocation model

If variable costs play an important role in the business plan, it may be helpful to include a cost
allocation model. This is particularly true if one has a unique business model that creates
competitive advantage by transforming traditionally fixed costs into variable costs.

• Fixed cost
• Variable costs
Financial plan
For more information, see financial plan.

Current financing

• Key investors or owners

• Angels, friends, and family
• Existing loans and liabilities
o Terms, obligations

Funding plan

• IMF
• World Bank

Financial forecasts

• Sometimes called pro formas

o Balance sheet
o Income statement
o Cash flow statement
• 1-3-5-7 year projections (depends on length of project)
o For loans, repayment period determines length of projections, i.e. a six month
loan doesn't need seven year forecasts
o For investments point at which returns stabilize (terminal value) determines
length of forecast
• Annual, quarterly, and monthly versions should be provided
• Graphs of key values often helpful: gross revenue, EBITDA, NPV, etc.
• Financial portions of the marketing, asset development, and operations are often placed in
this section rather than in the section discussing the plan. They are viewed as elaboration
on the various line items in the pro-formas.

Risk analysis
For more information, see risk analysis.

Risk evaluation

• Market risks - lack of surgeons; large geographical area so that we don't compete against
our own clients;
 o New entrants to market
 Easy of entry
 Potential threat to market share- advertising companies
o Slower than expected adoption
• Operational risks
• Staffing risks- imbedding the right candidate for the right surgeon
o Availability of skilled workforce- x-pharma reps, x-equipment reps
o Union issues
• Financing risks
o Liabilities
o Poorly worded investor contracts at risk for litigation
o Investor pull-out
o Lack of follow-on funding to complete project
• Managerial risks
o Poor board or investor dynamics
o Agency risk particular to the venture

Risk management plan

Detailed plans are more often found as part of internal plans. Plans written for funders may need
to include a high level of description if there are significant controllable risks.

• Methods and procedures to limit liabilities

• Reserve funds
• Continuity of operations plan

Decision making criteria

• Break even analysis
• NPV
• IRR
• Balanced Scorecard

Break-even (economics)

In economics & business, specifically cost accounting, the break-even

point (BEP) is the point at which cost or expenses and revenue are equal:
there is no net loss or gain, and one has "broken even". A profit or a loss has
not been made, although opportunity costs have been paid, and capital has
received the risk-adjusted, expected return.
 For example, if a business sells less than 200 tables each month, it will make a loss, if it
sells more, it will be a profit. With this information, the business managers will then need to see
if they expect to be able to make and sell 200 tables per month.

If they think they cannot sell that much, to ensure viability they could:

1. Try to reduce the fixed costs (by renegotiating rent for example, or keeping better control
of telephone bills or other costs)
2. Try to reduce variable costs (the price it pays for the tables by finding a new supplier)
3. Increase the selling price of their tables.

Any of these would reduce the breakeven point. In other words, the business would not need to
make so many tables to make sure it could pay its fixed costs.

Limitations:

• Break-even analysis is only a supply side (i.e. costs only) analysis, as it tells you nothing
about what sales are actually likely to be for the product at these various prices.
• It assumes that fixed costs (FC) are constant. Although, this is true in the short run, an
increase in the scale of production is likely to cause fixed costs to rise.
• It assumes average variable costs are constant per unit of output, at least in the range of
likely quantities of sales. (i.e. linearity)
• It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e.,
there is no change in the quantity of goods held in inventory at the beginning of the
period and the quantity of goods held in inventory at the end of the period).
• In multi-product companies, it assumes that the relative proportions of each product sold
and produced are constant (i.e., the sales mix is constant).

NPV
Net present value, an economic standard method for evaluating competing
long-term projects in capital budgeting.

Net present value:

In finance, the net present value (NPV) or net present worth (NPW). Of a time series
of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of
the individual cash flows. In the case when all future cash flows are incoming (such as coupons
and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply
the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central
tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of
money to appraise long-term projects. Used for capital budgeting, and widely throughout
economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present
value terms, once financing charges are met.
 The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or
discount curve and outputting a price; the converse process in DCF analysis, taking as input a
sequence of cash flows and a price and inferring as output a discount rate (the discount rate
which would yield the given price as NPV) is called the yield, and is more widely used in bond
trading.

A firm's weighted average cost of capital (after tax) is often used, but many people
believe that it is appropriate to use higher discount rates to adjust for risk or other factors. A
variable discount rate with higher rates applied to cash flows occurring further along the time
span might be used to reflect the yield curve premium for long-term debt.

Another approach to choosing the discount rate factor is to decide the rate which the
capital needed for the project could return if invested in an alternative venture. If, for example,
the capital required for Project A can earn five percent elsewhere, use this discount rate in the
NPV calculation to allow a direct comparison to be made between Project A and the alternative.
Related to this concept is to use the firm's Reinvestment Rate. Reinvestment rate can be defined
as the rate of return for the firm's investments on average. When analyzing projects in a capital
constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's
weighted average cost of capital as the discount factor. It reflects opportunity cost of investment,
rather than the possibly lower cost of capital.

An NPV calculated using variable discount rates (if they are known for the duration of
the investment) better reflects the real situation than one calculated from a constant discount rate
for the entire investment duration. Refer to the tutorial article written by Samuel Baker. For more
detailed relationship between the NPV value and the discount rate.

For some professional investors, their investment funds are committed to target a
specified rate of return. In such cases, that rate of return should be selected as the discount rate
for the NPV calculation. In this way, a direct comparison can be made between the profitability
of the project and the desired rate of return.

To some extent, the selection of the discount rate is dependent on the use to which it will
be put. If the intent is simply to determine whether a project will add value to the company, using
the firm's weighted average cost of capital may be appropriate. If trying to decide between
alternative investments in order to maximize the value of the firm, the corporate reinvestment
rate would probably be a better choice.

Using variable rates over time or discounting "guaranteed" cash flows differently from
"at risk" cash flows may be a superior methodology, but is seldom used in practice. Using the
discount rate to adjust for risk is often difficult to do in practice (especially internationally), and
is difficult to do well. An alternative to using discount factor to adjust for risk is to explicitly
correct the cash flows for the risk elements using rNPV or a similar method, then discount at the
firm's rate.
IRR (Internal Rate of Return)

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure
and compare the profitability of investments. It is also called the discounted cash flow rate of
return (DCFROR) or simply the rate of return (ROR).

In the context of savings and loans the IRR is also called the effective interest rate. The term
internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the
interest rate or inflation).

The internal rate of return on an investment or project is the annualized effective compounded
return rate or discount rate that makes the net present value of all cash flows (both positive and
negative) from a particular investment equal to zero.

In more specific terms, the IRR of an investment is the interest rate at which the net present
value of costs (negative cash flows) of the investment equal the net present value of the benefits
(positive cash flows) of the investment.

Internal rates of return are commonly used to evaluate the desirability of investments or projects.
The higher a project's internal rate of return, the more desirable it is to undertake the project.
Assuming all other factors are equal among the various projects, the project with the highest IRR
would probably be considered the best and undertaken first.

A firm (or individual) should, in theory, undertake all projects or investments available with
positive IRRs. Investment may be limited by availability of funds to the firm and/or by the firm's
capacity or ability to manage numerous projects.

Important:

Because the internal rate of return is a rate quantity, it is an indicator of the efficiency,
quality, or yield of an investment. This is in contrast with the net present value, which is an
indicator of the value or magnitude of an investment.

An investment is considered acceptable if its internal rate of return is greater than an

established minimum acceptable rate of return or cost of capital. In a scenario where an
investment is considered by a firm that has equity holders, this minimum rate is the cost of
capital of the investment (which may be determined by the risk-adjusted cost of capital of
alternative investments). This ensures that the investment is supported by equity holders since, in
general, an investment whose IRR exceeds its cost of capital adds value for the company (i.e., it
is economically profitable).
Balanced scorecard
The balanced scorecard (BSC) is a strategic performance management tool - a semi-
standard structured report supported by proven design methods and automation tools that can be
used by managers to keep track of the execution of activities by staff within their control and
monitor the consequences arising from these actions.

It is perhaps the best known of several such frameworks (for example, it is the most
widely adopted performance management framework reported in the annual survey of
management tools undertaken by Bain & Company, and has been widely adopted in English
speaking western countries and Scandinavia in the early 1990s. Since 2000, use of Balanced
Scorecard, its derivatives (e.g. performance prism), and other similar tools (e.g. Results Based
Management) have become common in the Middle East, Asia and Spanish-speaking countries
also.

The core characteristic of the Balanced Scorecard and its derivatives is the presentation
of a mixture of financial and non-financial measures each compared to a 'target' value within a
single concise report. The report is not meant to be a replacement for traditional financial or
operational reports but a succinct summary that captures the information most relevant to those
reading it. It is the method by which this 'most relevant' information is determined (i.e. the design
processes used to select the content) that most differentiates the various versions of the tool in
circulation.

The first versions of Balanced Scorecard asserted that relevance should derive from the
corporate strategy, and proposed design methods that focused on choosing measures and targets
associated with the main activities required to implement the strategy. As the initial audiences
for this were the readers of the Harvard Business Review, the proposal was translated into a form
that made sense to a typical reader of that journal - one relevant to a mid-sized US business.
Accordingly, initial designs were encouraged to measure three categories of non-financial
measure in addition to financial outputs - those of "Customer," "Internal Business Processes" and
"Learning and Growth." Clearly these categories were not so relevant to non-profits or units
within complex organizations (which might have high degrees of internal specialization), and
much of the early literature on Balanced Scorecard focused on suggestions of alternative
'perspectives' that might have more relevance to these groups.

Modern Balanced Scorecard thinking has evolved considerably since the initial ideas
proposed in the late 1980s and early 1990s, and the modern performance management tools
including Balanced Scorecard are significantly improved - being more flexible (to suit a wider
range of organizational types) and more effective (as design methods have evolved to make them
easier to design, and use).

Design of a Balanced Scorecard ultimately is about the identification of a small number of

financial and non-financial measures and attaching targets to them, so that when they are
reviewed it is possible to determine whether current performance 'meets expectations'. The idea
behind this is that by alerting managers to areas where performance deviates from expectations,
they can be encouraged to focus their attention on these areas, and hopefully as a result trigger
improved performance within the part of the organization they lead.

The original thinking behind Balanced Scorecard was for it to be focused on information
relating to the implementation of a strategy, and perhaps unsurprisingly over time there has been
a blurring of the boundaries between conventional strategic planning and control activities and
those required to design a Balanced Scorecard. This is illustrated well by the four steps required
to design a Balanced Scorecard included in Kaplan & Norton's writing on the subject in the late
1990s, where they assert four steps as being part of the Balanced Scorecard design process:

1. Translating the vision into operational goals;

2. Communicating the vision and link it to individual performance;
3. Business planning; index setting
4. Feedback and learning, and adjusting the strategy accordingly.

These steps go far beyond the simple task of identifying a small number of financial and non-
financial measures, but illustrate the requirement for whatever design process is used to fit within
broader thinking about how the resulting Balanced Scorecard will integrate with the wider
business management process. This is also illustrated by books and articles referring to balanced
scorecards confusing the design process elements and the balanced scorecard itself. In particular,
it is common for people to refer to a “strategic linkage model” or “strategy map” as being a
balanced scorecard.

Although it helps focus managers' attention on strategic issues and the management of the
implementation of strategy, it is important to remember that the balanced scorecard itself has no
role in the formation of strategy. In fact, balanced scorecards can comfortably co-exist with
strategic planning systems and other tools.

Post test

Direction: Read each item carefully and select the best answer by
writing its letter in your paper.

________ 1. Is a formal statement of a set of business goals, the

reasons why they are believed attainable, and the plan for reaching
those goals.
a. Plan
b. Business plan
c. Business statement

________ 2. A business plan is often confused with the term ________.

a. Business Managing plan
b. Management plan
c. Marketing plan

________ 3. When the existing business is to assume a major change or

when planning a new venture - a _____ year business plan is essential.
a. 3 to 5
b. 5 to 7
c. 2 to 3
________4. It's tempting to roll up your sleeves and plunge right
into the details of your business: evaluating products, studying
market segments, and sizing up your competition.
a. Create a vision
b. Don't ignore your customers.
c. Expect the unexpected.

_______ 5. Of course, the biggest mistake of all is failing to create

a business plan in the first place. Planning is hard work, and there's
no guarantee it will make your business
a. Be prepared to take risks.
b. Get a second (or third) opinion.
c. Don't skip the plan!

Answer key
Pretest:
1. B
2. C
3. A
4. A
5. C

Posttest:
6. B
7. C
8. A
9. A
10. C