CHAPTER 21

BUSINESS PLANNING

Introduction

Profit planning is a big part of most management control systems. When administered wisely it,

(a) compels strategic planning and implementation of plans

(b) provides a framework for judging performance

(c) motivates managers and employees

(a) promotes coordination and communicates among subunits within the company.

It is most useful when it becomes an integral part of a company's strategy analysis.

Strategy specifies how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its objectives It includes consideration of such questions as:

(1) What are the objectives of the company?

(2) Are the markets for a company's products - local, regional, national or global? What trends affect its
markets? How is the company affected by the economy, its industry, and its competitors?

(3) What form of organization and financial structure serves the company best?

(4) What are the risks of alternative strategies and what are the company's contingency plans if its
preferred plan fails?

Business planning is forecasting developments for a specific period of time in order to formulate a
course of action. The course of action is spelled out in a document called the business plan. Effective
planning enables the organization to control its direction and stabilize it. Planning is an effective way of
guiding the organization through a changing environment. Planning enables the company to achieve
results on a broader scale rather than constantly reacting to events on a day-to-day basis.

Planning is an entrepreneurial business means two or three people sitting together and discussing
where the business is going. Formal long-range planning systems are unnecessary in a small firm. The
entrepreneur usually does not have training or experience in planning. Plans for the smaller firm have
to be flexible because of the potential impact of external events.

The Planning Process

Planning process should be viewed as two stages. Initially. During strategic planning phase, the long-
term goals of the organization are established. During this phase , the organization should address major
issues, such as the markets in which it will compete or long-term facilities requirements. The second
stage, tactical planning, is the allocation of production, financial, and manpower resources to achieve
established goals. In general, tactical planning is the process by which management will direct the
company's growth toward its objectives; the budgeting process is the link between today' s operational
capabilities and the objectives derived from tactical planning.

On a broad basis, planning can be viewed as the process by which management focuses on influences
that can impact a company. Those influences can be classified into three categories: external, internal,
and management.

1. External largely beyond the company's control

a. Development of new or improved competitive products with an advantage in cost, quality, or

b. Changes in the volume or type of business of present or potential customers, which in turn
affect the supplier's volume of sales or alter the specifications required from the supplier

. c. Additional competitors furnishing the same goods or services

d. Changes in industry credit policies

e. Improvements in materials or parts available from competitive suppliers

f. Improvements in machinery and equipment

g. Development of new packaging and transportation methods

h. Changes in economic and market conditions for the industry or business as a whole

2. Internal - established by the characteristics of the company

a.Financial resources

b. Capabilities of managerial, technical, and other staff and employees

c. Capabilities of present machinery and equipment

d. Size and location of plant

e. Costs of producing goods and services

3. Management - reflecting the desires of the owner and management

a. Desire to diversify or to shift dependence from a product with uncertain demand

b. Desire to grow in order to produce greater profits, more opportunities for employees, etc.

c. Desire to raise the quality of products and services

e. Desire to increase profitability of money invested

Importance of Planning to an Entrepreneurial Firm

While planning is necessary for all firms, it can be particularly important for entrepreneurial business
since:

1. Planning helps smaller businesses to identify and allocate scare resources to move the company in the
desired direction. Without an explicit plan, resources may be used to meet immediate needs that may
conflict with long-term objectives.

2. Smaller businesses cannot absorb mistakes as well as larger firms; therefore, risks must be continually
identified. Planning helps small businesses to identify these potential hazards earlier and to prepare a
contingency plan.

3. The flexibility common to many small firms enables easier implementation of plans. Small firms can
make major changes in direction. Therefore, a smaller firm can often quickly capitalize on economic or
market shifts if it has developed the appropriate plans.

Elements of Good Business Planning

The Business Plan

1. A brief description of the company's present practices in all important areas including products,
purchasing, quality control, labor relations, channels of distribution, and production

2 A list of the principal external factors-government regulation, the economy, competition, the
community environment, technology, and the labor markets

3. A list of changes expected in present practices and next few years present practices and external
factors over the

4. An assessment of the strengths and weaknesses of the firm and its products

5. A forecast of expected financial results for the next 2 years

6. A financial analysis identifying anticipated problem (cash shortage, low profits, etc.) or potential
actions (investment of cash, expanded advertising etc.)
7. Performance projections under alternate assumptions such as decline in sales, shortage of material,
and increase in labor costs

8. Contingency plans for action under various scenarios

9. the business plan is for starting a new venture or raising additional financing, it includes the following:

a. Financing requirements

b. Detailed marketing information

c. Relevant technical factors

d. Sensitivity analysis indicating the critical factors

e. Resumes for key personnel

f. Bank and investor relationships

g. Past and potential problem areas

Common Characteristics

A significant aspect of planning for small business involves evaluating and deciding upon such changes to
the business as capital investment, new products, or the acquisition of a computer. Plans include not
only a solid economic evaluation but also an assessment of the risks involved. While the methods of
individual organizations may vary, common characteristics would include the following:

I. Plans are kept as simple as possible.

2. Plans are flexible enough to change with unexpected events.

3. Plans are supported by information that is complete, accurate, and

usefully organized.

4. Planning is approached in an organized manner.

5. The plan includes the actions to be taken and not just the desired results.

6. The managers who will be responsible for these actions participate in their planning

7. The planning horizon is clearly defined.

8. Plans are effectively communicated and monitored.

9. Motivation and controls exist within the organization so that it will operate according to plans.

10. The plan relates to the financial statements.

The assistance rendered by the consultant is not necessarily any different from the results that could be
produced by the internal planning process of the company itself. Consequently, a consultant could be
effective in a situation in which there is no current planning process. In addition, the consultant might
provide input to the existing planning efforts if an outside and independent opinion might be useful.
Finally, a consultant can work closely with the individuals having. planning responsibilities and, through
this interaction, enhance the organization's planning capability.

In a planning engagement, a consultant can render assistance in a number of different areas.

I. Develop the methods of planning: Where a company does not have a formal planning approach and
does not have the staff or the capability of developing an approach, the consultant can develop the
features of a good planning System.

2.. Evaluate the methods for long-range planning: If the company is capable of developing plans with its
own planning function, then the consultant can evaluate the various aspects of the planning methods.

3. Instruct members of management about planning: While a company may have a planning capability,
the chances are the resources will be limited. One of the tenets of planning is to have the individuals
who ill be responsible for the fulfillment of the plans actually prepare the plans themselves. Planning
staffs should be small and should not be charged with preparing the plans. Outside assistance can
instruct the members of top and middle management in proper planning techniques.

4. Suggest techniques to be used in the planning process: Consultants should be familiar with techniques
that could be utilized to implement the goals and objectives of the planning process. Financial reporting
systems, financial projection systems, and other subsystems of the planning process can be suggested.
The purpose of these subsystems is to mechanize the process of capturing data and to provide feedback
to management. Effective reporting systems can improve the quality of the planning process.

5. Play the "devil's advocate": Perhaps the most effective role for the consultant would be playing
devil's advocate with regard factors to objectives of the company. The consultant can suggest additional
factors to be considered in the development of goals and objectives.

6. Conduct sessions to determine the cause of variances: As a follow-on to the development of and
instruction in a planning methodology, the consultant can conduct a series of sessions aimed at
exploring the causes of the variances from the plans. This activity takes place after the fact rather than
before. as result of this interaction, the company should be able to reset its goals and objectives and
explore additional alternatives.

Segments of a Business Plan

 Description of the company

 Marketing plan
 Production or operations plan

 Personnel plan

 Financial plan

1. Description of the company

 Mission statement

 Background / history of the company

 Capital and ownership structure

2. Marketing plan

 Markets

 Competition

 Products/ services

 Pricing

 Advertising and sales promotion programs

 Distribution

 Exporting, offshore sourcing and other aspects of international trade

 Warranties and returned goods policies

 Customer service programs

 Credit and collection policies

3. Operations plans

 The physical facility

 Equipment, machinery and vehicles

 Operating systems and procedures

 New product development

4. Personnel plan

 Management organization
 Departmental organization

 Hourly worker/ union contract

 Benefit programs

5. Financial plan

 Economic and business assumption

 Working capital requirement

 Equipment and facility financing

 Acquisition financing

Business plan covers a shorter time period and oriented toward short-term business tactics that can be
implemented by personnel at middle management levels. It includes more detailed financial projections
than strategic plans and focuses on internal operations with heavy emphasis on marketing, production,
and organization changes aimed at reaching specific goals for the next year or two.

Contents of a Business Plan

Note: The format of a business plan or the amount of detail it contains, how extensive and image
oriented it is, etc., may vary according to the intended use and readership. The following summary of the
ingredients of the business plan is intended to show the elements needed to compose a winning plan
that will attract potential financial resources to the venture.

Listed below are the items that one should consider including in a business plan:

L. Cover Sheet. If one is appealing to prospective investors, money brokers, bankers, venture capitalists,
etc., include a cover sheet, preferably on company stationery, displaying company emblems, logos, etc.
This will help place the application in a framework of legitimacy.

Keep the cover sheet as simple as possible. Identify the business and the institution or party to whom
the business plan is addressed. Include the date the plan is submitted. Here is a checklist of items to
include:

A. Business information Business Planning 885

1. Name of business

2. Location, address

3. Telephone numbers
4. Contract person(s), including titles

B. Business paragraph: promotional description of business goals, potential, and outlook.

C .Amount of capital required: current and anticipated future needs.

D. whenever possible state the name or names of persons referring the proponent to the investor.

II. Table of Contents. This index will not only help the prospective lender understand the road map the
proponent is placing before him, it will also make a statement about the proponent (i.e., being
organized, thorough, sensitive to the needs of those being approached, and able to manage the "big
picture"). Type up the Table of Contents last.

III. Executive Summary. This portion of the business plan must be designed to capture and hold the
interest of the party to whom the plan is being presented. It is also the only portion of the business plan
that everyone who sees the business plan is sure to read with care. Make sure it can be read in a few
minutes. Make it good! Keep it somewhere between two and five pages of typed copy.

This critical executive summary encapsulates the entire business plan in a few paragraphs by giving the
most succinct statement possible of the nature and objectives of the business:

A. Its mission.

B. Its unique "selling advantage."

C. The projections for the future (sales and profits).

D. The needs (capital and other resources).

E. Procedures and timetable for repaying investors.

F. The amount of capital being requested.

This summary is a crystallization of the entire business plan in a quick, overview format. Don't neglect
this section; it will demonstrate that one can focus with clarity on his/her goals, and state in no-
nonsense fashion who the proponent is, what he/she wants, and where he/she is going.

IV. The Context of the Business. This statement provides a "big picture" perspective of the industry to
which the business belongs and prepares the reader to understand better how the business fits into the
total picture. It should include:

A. Growth potential: in view of the trends described above, provide a statement (in pesos) of the future
growth potential of the industry in which the company is competing.

B. New products and developments: what new developments have arisen in the recent past that will
make the company's product or service more attractive to the public?

C. Economic trends: evidence that spending trends are favorable to the industry.
D. Industry outlook and trends: the future of the industry according to industry leaders, experts,
economists, government forecasters, and other authoritative spokespersons.

V. Profile of the Business.

A. What is the precise nature of the company's business?

B. Provide a brief history of the business or how the products and services were developed.

C. What are the economic trends? Is there evidence that spending trends are favorable to the industry?

D. What is the organizational detail (legal structure, personnel resources.

operational patterns, organization chart) of the business?

E. What are the factors that influence the business (i.e., local economic factors, seasonality, dependence
on special vendors or suppliers)

F. What are the patterns of research and development

1. The nature of the test-marketing procedures

2. Results achieved?

3 Product development?

4. Legal control of process and/or product?

G . Are there relevant contracts and agreements? (Identify here and include

copies in the Appendix; Examples: resale agreements, service contracts, leases, etc.)

H. What are the company's operational procedures? For ventures involving manufacturing a product,
include:

a. Physical space requirements

b. Machinery and equipment

c. Raw materials

D. Inventory and supplies

e. Personnel requirements

f. Capital estimates

2. For ventures involving selling or retailing, include:

a. Physical space requirements

c. Inventory system

d. Staff and equipment

e. Training

f. Credentials

Note: This information, and similar details included constitutes the profile of the business. This section
should provide the reader with the concept of how the business works and why it has a unique chance to
shine in the marketplace

VI. Profile of the Specific Market.

A. Precisely state who the consumers of the products or services are.

B. The geographical scope of the market, including size and population.

C. Growth potential of your target market.

D. The company's ability to satisfy the market's demands.

E. How a business plan will enable the proponent to attract new customers while keeping the customers
it has.

When developing a profile of the target market, it is important to remember that the research will
determine the strength of your analysis. The time spent on this section should be spent wisely. The
Internet, local library and the telephone will be your strongest allies. Use them to their fullest!

Take advantage of the information and statistics already available in books, directories, and case studies.
Thorough research will impress potential investors more than one can believe.

Note: Be thorough in structuring this market profile. The proponent should show that he/she, has done
his/her homework with great care and due diligence.

VII. Anticipated Challenges and Planned Responses. This section of the business plan sets forth the
contingency strategies for dealing with anticipated barriers and challenges. Some of the main types are
these:

A. Dealing with the competition:

1. The major competitors (similarities and differences when compared with the company's
business),

2. Their strong points and weaknesses;

4. How the competition will try to block the company and how it will respond.

B. Weak areas where the proponent believes the company may be Vulnerable and how can these be
compensated, for example

1. Obsolescence factors

2. Cheaper products on the horizon

3. Cyclical trends in the marketplace

4. Possible economic downturn in the future

5. Turnover of key employees

6. Seasonality of your products and services

7. Offering a benefits package to employees (whether or not to)

C. Legal factors:

1. License requirements that one must satisfy or maintain.

2. Restrictions and regulations under which one must operate, given the nature of the business.

3. Future changes in legal or governmental policies that may affect the business, and how these will be
responded to.

4. Any governmental agencies that one needs to apply to.

D. Protection issues:

1. Patents, copyrights, trademarks, and other protection procedures the company has in place.

2. How to assure that business secrets are preserved.

E. Key man contingencies:

1. The depth of the management team.

2. Management procedures in place to assure continuity of leadership.

3. Plans for responding to the loss of any important personnel.

F. Staffing:
1. Personnel needs one anticipates having over time (requirements. training, benefits, expansion) and
how these needs will be met.

2. Policies on minority issues.

3. Policies on temporary versus permanent staff.

4. Policies on racism, or prejudices.

Note: This section must demonstrate that the proponent has covered the problem bases and has
carefully crafted contingency plans in place. The information in this section will provide the business plan
with more credibility than one thinks. Be practical and reasonable.

VIII. Marketing Plan. We have all seen great businesses, with a super location and a unique product, go
broke and close their doors. In most cases this tragic problem can be traced to poor marketing and
promotion. This could be because the owner of the business did not know how to market his or her
products and services.

Many business owners make the mistake of thinking they don't have to advertise or promote their
"superior products or services." WRONG! Nothing could be farther from reality. Small business owners
tend to ignore or (given the benefit-of-the-doubt) forget four key Marketing areas, and end up going out
of business. These four critical areas are:

1. Publicity

2. Promotion

3. Merchandising

4. Market Research

Here's a secret. Read this carefully. Each of these four marketing areas does

not have to cost you one centavo. That's right. You don't have to spend any

hard money for these free things.

Go ahead, ask the question. "HOW...?"

How does one reach his/her customers to let them know who he/she is and what services he/she can
provide without spending any money?

The first rule in the area of marketing is a very simple one: know one’s market. It's simple to determine
who the customers are. Entrepreneur Magazine gives us a super idea in this area: "All you have to do is
forget that you are selling your product or service, and put yourself in your customers place." It's almost
like the Golden Rule: "Do unto others as you would have them do unto you." Entrepreneur goes on to
say, "Ask yourself questions such as these:
 Where do I go to buy it?

 What makes me buy it?

 What media do I watch, read, listen to, that makes me decide to buy it”*

*Source: Entrepreneur Magazine

Simply put, one must know what media the market draws to.

One must develop a rock-solid marketing plan. The profits will literally rise or fall on the basis of how
well one develops and implements the marketing plan. Here is the chance to show one's entrepreneurial
expertise in its best light. Carefully consider the following ideas and strategies, and implement each one
of them in the plan:

A. Marketing strategies that one will be focusing on.

B. Reasons for these strategies: information, feasibility testing, competitor track record, and/or creative
insight into the market.

C. Pricing Note: Pricing a product or service is sometimes as much a decision - based on customer
acceptance as cost. Therefore, consumer research and competitor track record and pricing, customer
acceptance, etc., should be demonstrated as one's basis. In other words, "Charge what the market will
bear."

D. The timetable.

E. The marketing budget.

F. Guarantee policies.

G. Presentation and packaging.

H. Professional resources one will need to implement your plan.

I. How will the response of the market to the campaign be monitored.

J. How will one approach against another be tested.

K. Advertising and promotional intentions.

L. Media that will be used to promote the enterprise, and related costs.

IX. Financial Projections. Here is the heart of any business plan, the point in time where one's vision is
quantified in terms of pesos and centavos, and units of time: days, weeks, months, and years. All
persons reading the plan will go through the financial projections with great care. The financials should
be broken down into monthly projections for years one and two, and annually thereafter up to and
including year ten. Based on this scenario one should include the following projections. These
projections (sometimes called the "computation trio") should be prepared according to three scenarios:
Profit & Loss Statement, Statement of Financial Position, and Cash Flow Statement.

A. Profit & Loss Statement: Based on the marketing plan one has determine projected revenues over
time. Typically, projections become outdated given the impact of all the variables at work in a given
enterprise and its market environment. Adjustments will need to be made constantly as one implements
mid-course corrections over time.

Next, calculate the cost of goods and/or services sold (COGS) as well as all the anticipated fixed
overhead costs. Keep in mind that the COGS will generally fluctuate with revenue volume while fixed
overhead costs will exist on a continued monthly basis.

The net difference of total revenues less total costs will determine the profit or loss of the enterprise.

B. Statement of Financial Position: The statement of financial position gives a profit of the worth of your
company at a given moment in time. This statement lists all of the company's assets (cash, accounts
receivable, inventory, machinery and equipment, real estate, etc.) and all of the company's liabilities
(accounts payable, notes payable, taxes and interest payable, salaries and wages currently owed, etc.).

The difference between the assets and the liabilities constitutes the net worth of the company (also
called the equity) at any particular moment in time. If one has a track record when the business plan in
an expansion of an existing operation) then the Statement of financial position may show considerable
equity. If one is stating out with a new venture, the statement of financial position may be very simple
and show the little equity. Work with the local accounting team develop of the statement of financial
position (in quarters or years).

C. Cash Flow Statement: When one plots expected revenue against anticipated expenses, and tally the
running net balances by unit time, one is projecting the cash flow. Cash flow totals are a critical index of
how successful the business will be. Be sure to identify all changes in detail. Leave nothing to the
imagination. Be conservative and realistic.

Note: As in all number exercises, work with the accountant on the details:

X. Implementation Schedule. This portion of the business plan accomplishes the following:

A. Identifies when one expects needed financing to kick in.

B. Lists the main steps of the marketing campaign charted by date.

C. Gives the scheduled dates of the production and delivery programs that will fulfill the obligations of
sales

The implementation schedule will enable one to coordinate and manage the enterprise in a systematic
and controlled way. This section of the business plan is of critical importance both internally (as a
management tool) and externally (as a means of persuading others that the business venture is worth
undertaking).
XI. Statement of Resource Needs. If one is using your business plan for the purpose of generating
needed resources from lenders or investors, this item will summarize the precise needs (amount, terms,
date needed) and identify how the resources will be used. n the case of financing, the cash-flow
projections will, of course, reflect how these funds will be repaid.

In the case of capitalization involving equity partners, the projections will give an indication of the
growth of equity and the anticipated timetable for the sharing of profits.

XIL. Appendix. This section of the business plan might include some or all of the following:

A. Footnotes from the text (i.e., assumptions used in projections, further sources of information).

B. Supporting documents.

C. Articles, clippings, special reports.

D. Biographies.

E. Bibliographies.

F. Graphs and charts.

G. Copies of contracts and agreements.

H. Glossary of items.

I. References: lenders, investors, or other bankers, suppliers, trade creditors, etc., who can give positive
feedback on your past performance.