Chapter Three

Developing Business Plan

 CHAPTER THREE
DEVELOPING BUSINESS PLAN
2.1 WHAT IS A BUSINESS PLAN?
A business plan is a written document that sets out the basic idea underlying a
business and related start-up considerations.
It is a written document that the entrepreneur prepares before going to the
implementation stage.
Purpose of business plan
 Helps to crystallize the dreams and hopes that motivates the entrepreneur to
start the business.
 Helps to avoid a random jump in to a business
 Helps to quantify rough ideas on a paper
 Helps to set objectives and gives a yardstick against which to monitor
performance
 Helps to attract external fund
 Helps to take a long term view of your business and its environment
 Helps to identify the SWOT of a business venture
Value and scope of the business plan
The entrepreneur should determine and know how valuable and detail their
business plan is. The depth and detail of the business plan depends on the size
and scope of the proposed type of new venture.
Differences in the scope of the business plan may be dependent on whether the
new venture is a service; involves a manufacturing or is a consumer good or
industrial product.
The size of the market, competition, and potential growth may also affect the scope
of a business plan.
Generally, large and rapid growth firms need to have elaborative and
comprehensive business plan than the small and slow growth ones though
success for business of all sizes is improbable without business plan.
Business plan is more valuable to the entrepreneur, potential investors, or even
for the review of new personnel. The business plan is important to these people
because:
 It helps to determine the viability of the venture in the designated market.
 It provides guidance to the entrepreneur in organizing his/her planning
activities.
The planning process forces the entrepreneur to bring objectively to the idea
and reject on such questions as:
 Does the idea make sense?
 Will it work?
 Who is my customer?
 Does it satisfy customer needs and wants?
 What kind of protection can I get against imitation by competitors?
 Can I manage such a business?
 Whom will I compete with? And so on.

USERS OF A BUSINESS PLAN

 Internal users
 External users
 USERS OF A BUSINESS PLAN

Fig: Showing stakeholders of a business plan

INFORMATION NEEDS OF AN ENTREPRENEUR
1. Market Information Needs
It should include information on competition, margins for distribution, market
trends and growth potentials as well as the important marketing mixes.
2. Operation Information Needs.
Manufacturing operations: basic machines, assembly operations &whether
any of these operations would be subcontracted and how and by whom.
Raw material: The kind and quantity of raw materials needed and supplier’s
names, addresses, and costs should be determined.
Equipments – the equipments needed should be listed and whether it will be
purchased, rented or leased also should be clearly indicated.
Labor Skills: - Each labor’s unique skill needed, the number of personnel in
each skill, pay rate and an assessment of where and how these skills will be
obtained should be identified.
Space and Area: - The total amount of space and area needed should be
determined, including whether the space and the area will be owned, leased,
rented and so on.
Over heads: - Each items needed to support production or manufacturing, such
as tools, supplies, utilities, salaries and so on, should be clearly determined.
3. Financial Information Needs
This assessment will primarily tell potential investors if the business will be
profitable, how much money will be needed to launch the business and meet
short-term financial needs, and how this money be obtained.
There are traditionally three areas of financial information that will be needed
to ascertain the feasibility of the new venture. These are:
 Expected sales and expense for at least the first three years.
 Cash flow figures for the first three years; and
 Current balance sheet figures and pro forma (forecasted) balance sheets for the
first three years.

Technology and Internet as Sources of Information

The changing world of technology offers new opportunities for entrepreneurs to
access information for any business activities efficiently, expediently and
cheaply.
Internet (Website, e-mails or on-line services) is an important source of
information in the preparation of the business plan for industry analysis,
competitor’s analysis, and measurement of market potential, to later stage
planning and decision making.
 2.2 PREPARATION OF BUSINESS PLAN &
ITS MAJOR PARTS

A business plan generally answers three key questions;

1. Where are we now?

2. Where do we want to go?
3. How do we get there?
 OUTLINE OF THE BUSINESS PLAN

1. Introductory Page
This is the title or cover page that provides a brief summary of the business
plan’s contents. The introductory page should contain the following:
The name and address of the company
The name of the entrepreneur(s) and address.
A paragraph describing the company and the nature of the business.
The amount of financing needed. The entrepreneurs may offer a package
that shows stock, debt, asset and so on. However, many venture capitalists
prefer to structure this package in their own way.
A statement of the confidentiality of the report. This is for security purpose
and is important for the entrepreneur.

2. Executive Summary
 This section of the business plan is prepared after the total plan is written.
 It would highlight concisely and convincing the key points in the business
plan, that is, the nature of the venture, financing needed, market potential,
and support as to why it will succeed.
3. Industry Analysis
Is made to know which industry the entrepreneur will be competing
in.
 Future trends and historical achievements should be included.
 Insight on new product developments in this industry.
 Competitive analysis; Each major competitor should be
identified, with appropriate strengths and weaknesses described
particularly as to how they might affect the new venture’s
potential success in the market.
 The market should be segmented and the target market for the
entrepreneur identified.
 Any forecasts made by the industry or by the government should
be noted. A high growth market may be viewed more favorably
by the potential investor.
4. Description of the Venture
This will enable the investor to ascertain the size and scope of the
business. Key elements are:
 Product(s) or service(s),
 Location and size of the business,
 Personnel and office equipment that will be needed,
 Background of the entrepreneur(s),
 History of the venture.
5. Production Plan
 If the new venture is a manufacturing operation, a production plan is
necessary. This plan should describe the complete manufacturing process.
 If some or all of the manufacturing process is to be subcontracted, the
plan should describe the subcontractor(s), including location, reasons for
selection, costs, and any contracts that have been completed.
 If the manufacturing is to be carried out in whole or in part by the
entrepreneur, she will need to describe the physical plant lay out; the
machinery and equipment needed to perform the manufacturing
operations; raw materials and suppliers’ names, addresses, and terms;
costs of manufacturing; and any further capital equipment needs.
 If the venture is not a manufacturing operation but a retail store or
service, this section would be titled “merchandising plan” and purchase
of merchandise, inventory control system, and storage needs should be
described
6. Marketing Plan
The marketing plan is an important part of the business plan
since it describes how the product(s) or service(s) will be priced,
promoted and distributed.
Classification of customers, buying decisions and benefits to
customers have to be addressed.
Specific forecasts for product(s) or service(s) are indicated in
order to project profitability of the venture.
The budget and appropriate controls needed for marketing
strategy decision should be discussed.
7. Organizational Plan
The organizational plan describes the venture’s form of ownership-
that is, proprietorship, partnership, or corporation.
For instance, if the venture is a partnership, the terms of the
partnership should be included. If the venture is a corporation, it is
important to detail the shares of stock authorized, share options,
names and addresses and resumes of the directors and officers of the
corporation.
It is also helpful to provide an organization chart indicating the line
of authority and the responsibilities of the members of the
organization.
8. Assessment of Risk
Every new venture will be faced with some potential hazards, given the
particular industry and competitive environment.
It is important that the entrepreneur makes an assessment of risk and
prepares can effective strategy to deal with them.
Major risks for a new venture could result from;
o Competitor’s reaction;
o Weaknesses in the marketing or production, and
o New advances in technology that may make the new product
obsolete.
It is also useful for the entrepreneur to provide alternative strategies
should any of the above risk factors occur. These contingency plans and
strategies illustrate to the potential investor that the entrepreneur is
sensitive to important risks and is prepared should any occur.
9. Financial Plan
It determines the potential investment commitment needed for the new venture
and indicates whether the business plan is economically feasible.
Generally, three financial areas are discussed in this section of the business
plan.
1.The entrepreneur should summarize the forecasted sales and the
appropriate expenses for at least the first three years, with the first year’s
projections provided monthly. It includes the forecasted sales, cost of goods
sold, and the general and administrative expenses. Net profit after taxes can
then be projected by estimating income taxes.
2.Cash flow figures must be presented for at least the first three years, with the
first year’s projections provided monthly. Since bills have to be paid at different
times of the year, it is important to determine the demands on cash on a monthly
basis, especially in the first year. Remember that sales may be irregular, and
receipts from customers may also be spread out, thus necessitating the
borrowing of short-term capital to met fixed expenses such as salaries.
3. The last financial item needed in this section of the business plan is the
projected balance sheet. This shows the financial condition of the business at
a specific time. It summarizes the assets of a business, its liabilities, the
investment of the entrepreneur and any partners, and retained earnings or
cumulative losses. Any assumptions considered for the balance sheet or any
other item in the financial plan should be listed for the benefit of the potential
investor.

10. Appendix
• The appendix of the business plan generally contains any backup material that
is not necessary in the text of the document. Reference to any of the documents
in the appendix should be made in the plan itself.
• Letters from customers, distributors, or subcontractors are examples of
information that should be included in the appendix.
• Any documentation of information, that is, secondary data or primary research
data used to support plan decisions, should also be included.
• Leases, contacts, or any other types of agreements that have been initiated
may also be included in the appendix.
• Lastly, price lists from suppliers and competitors may be added.
 USING AND IMPLEMENTING THE BUSINESS PLAN
The business plan is designed to guide the entrepreneur through the first
year of operations. It is important that the implementation of the strategy
contain control points to ascertain progress and to initiate contingency
plans, if necessary.
It is also important to realize that without good planning the employees will
not understand the company’s goals and how they are expected to
perform in their jobs.
Many businesses fail because of the entrepreneurs’ inability to plan
effectively.
In addition, the entrepreneur can enhance effective implementation of the
business plan by developing a schedule to measure progress and to
institute contingency plans.
Measuring Plan Progress
During the introductory phases of the start-up, the entrepreneur should determine
the following control elements ;
Inventory control: by controlling inventory, the firm can ensure maximum
service to the customer.
Production control: compare the cost figures estimated in the business plan
against day-to-day operation costs. This will help to control machine time,
worker hours, process time, delay time, and other cost.
Quality control: this will depend on the type of production system but is
designed to make sure that the product performs well.
Sales control: information on units, Birr, specific products sold, prices,
meeting of delivery dates, and credit terms are all useful to get a good
perspective of the sales of the new venture.
Disbursements: the new venture should also control the amount of money
paid out. All bills should be reviewed to determine how much is being
disbursed and for what purpose.
 UPDATING THE PLAN

The best business plan can become out-of-date if conditions change.

Environmental factors such as the economy, customers, technology, or
competition and internal factors such as the loss or addition of key
employees can all change the direction of the business plan.
Thus, it is important to be sensitive to changes in the company, industry,
and market. If these changes are likely to affect the business plan, the
entrepreneur should determine what revisions are needed.
In this manner, the entrepreneur can maintain reasonable targets and goals
and keep the new venture on a course that will increase its chances of
success.