Chapter 5
Preparing a Business Plan
An early, important step in the launching of any business is preparation of a business plan.
Obviously, a plan of some type exists in the mind of any person who is thinking about a new
business venture. How ever, this is a weak substitute for a written business plan. The concern of this
chapter is to discuss how to transform those vague ideas that exist in the entrepreneur’s mind into a
written document that lays the ground work for the proposed venture.
1. Definition: A business plan can be defined as a written document prepared by the
entrepreneur that describes all relevant external and internal elements involved in starting a
new venture. It is often an integration of functional plans such as marketing, finance,
manufacturing/operations, and human resources. It addresses both short term and long term
decision making for the first three years of operation. Thus the business plan – or as it is
some times referred to, the game plan, the venture plan, a loan proposal, an investment
prospectus, or the deal- answers the questions: Where am I now? Where am I going? How
will I get there?
2. Why a Business Plan? Although not mandatory, preparing a formal written business plan is
very important for a number of reasons:
The entire business planning process forces the entrepreneur to analyze all aspects of
the venture and to prepare an effective strategy to deal with the uncertainties that
arise. Thus, a business plan may help an entrepreneur avoid a project doomed to
failure.
The time, effort, and research needed to put together a formal business plan force the
entrepreneur to view the venture critically and objectively.
The competitive, economic, and financial analyses included in the business plan
subject the entrepreneur to close scrutiny of his assumptions about the venture’s
success.
Since all aspect of the business venture must be addressed in the business plan, the
entrepreneur develops and examines operating strategies and expected results for out
side evaluators.
The business plan quantifies objectives, providing measurable benchmarks for
comparing forecasts with actual results.
The completed business plan provides the entrepreneur with a communication tool
for outside financial sources as well as an operational tool for guiding the venture
towards success.
3. Who Should Prepare the Business Plan? The business plan should be prepared by the
entrepreneur; however, he/she may consult with many other sources in its preparation.
Lawyers, accountants, marketing consultants, and engineers are useful in the preparation of
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the plan. If and when external help is sought in preparing the business plan, the entrepreneur
must remain the driving force behind the plan. Seeking the advice and assistance of outside
professionals is always wise, but entrepreneurs need to understand every aspect of the
business plan, since it is they who come under the scrutiny of financial sources. Thus, the
business plan stands as the entrepreneur’s description and prediction for his or her venture,
and it must be defended by the entrepreneur- simply put, it is the entrepreneur’s
responsibility.
4. Who reads the business plan? The business plan may be read by employees, bankers,
venture capitalists, suppliers, customers, advisors, and consultants. Whoever is expected to
read the business plan, can often affect its actual content and focus. Since each of these
groups reads the business plan for different purposes, the entrepreneur must be prepared to
address all their issues and concerns. However, there are probably three perspectives that
should be considered when preparing the plan:
The perspective of the entrepreneur: the entrepreneur understands better than any
one else the creativity and technology involved in the new venture. The entrepreneur
must be able to clearly articulate what the venture is all about.
The marketing perspective: too often the entrepreneur would consider only the
product or the technology and not whether or not some one would buy it. But more
important than high technology or creative flair is the marketability of a new venture.
Referred to as ‘market-driven,’ this type of enterprise convincingly demonstrates the
benefits to users-the particular group of customers it is aiming for- and the existence
of a substantial market.
The investor’s perspective: this is concentrated on the financial forecast. Sound
financial projections are necessary if investors are to evaluate the worth of their
investment. This is not to say that the entrepreneur should fill the business plan with
spreadsheets of figures. In fact, many venture-capital firms employ a ‘projection
discount factor,’ which merely represents the belief of venture capitalists that
successful new ventures usually reach approximately 50% of their projected
financial goals. However, a three to five-year financial projection is essential for
investors to use in making their judgment of the venture’s future success.
5. Guide Lines in Preparing a Business Plan: Below is a list of recommendations about how
to prepare a successful business plan given by experts in venture capital and new venture
development. Entrepreneurs need to adhere to these guide lines in order to make there
business plan successful in satisfying the needs of various people who read the business
plan:
Keep the plan respectably short: readers of business plans are important people
who refuse to waste their time. Therefore, entrepreneurs must be able to explain the
venture not only carefully and clearly but also concisely.
Organize and package the plan appropriately: a table of contents, an executive
summary, an appendix, exhibits, graphs, proper grammar, a logical arrangement of
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segments, and overall neatness are critical elements to the effective presentation of
the business plan.
Orient the plan towards the future: entrepreneurs should create an air of
excitement in the plan by developing trends and forecasts that describe what the
venture intends to do and what the opportunities are for the product or service.
Avoid exaggeration: sales potentials, revenue estimates, and the venture’s potential
growth should not be inflated. Many times, a best-case, worst-case, and probable-
case scenario should be developed for the plan. Documentation and research are vital
for the credibility of the plan.
Highlight critical risks: the critical risks segment of the business plan is important
in that it demonstrates the entrepreneur’s ability to identify potential problems and
develop alternative course of action.
Give an evidence of an effective entrepreneurial team: the management segment
of the business plan should clearly identify the skills of each key person as well as
demonstrate how all such persons can effectively work together as a team in
managing the venture.
Do not over diversify: focus the attention of the plan on one main opportunity for
the venture. A new business should not attempt to create multiple markets nor pursue
multiple ventures until it has successfully developed one main strength.
Identify the target market: substantiate the marketability of the venture’s product
or service by identifying the particular customer niche being sought. This segment of
the business plan is pivotal to the success of the other parts. Market research has to
be included to demonstrate how this market segment has been identified.
Keep the plan written in the third person: rather than continually stating “I,”
“we,” or “us,” the entrepreneur should phrase every thing as “he,” “they,” or “them.”
In other words, avoid personalizing the plan, and keep the plan objective.
Capture the reader’s interest: because of the numerous business plan submitted to
investors and the small percentage of plans funded, entrepreneurs need to capture the
reader’s interest right away by starting with the uniqueness of the venture. Use the
title page and the executive summary as key tools for capturing the reader’s attention
and creating a desire to read more.
6. Contents of a Business Plan: a detailed business plan usually has ten sections. The ideal
length of a plan is 50 pages, although depending on the need for detail, the overall plan can
range from 40 to more than 100 pages (including the appendix). Below is the detail
discussion of the ten elements of a business plan.
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), telephone number, fax number, e-mail
address and website address if available
A paragraph describing the company and the nature of the business
The amount of financing needed. The entrepreneur may offer a package,
that is, stock, debt, 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
purposes and is important for entrepreneur.
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Executive summary: This section of the business plan is prepared after the total
plan is written. About 2-3 pages in length, the executive summary should stimulate
the interest of the potential investor. This is a very important section of the business
plan and should not be taken lightly by the entrepreneur since the investor uses the
summary to determine if the entire business plan is worth reading. Thus, it would
highlight in a concise and convincing manner the key points in the business plan.
Although determining what is important in any executive summary would be
difficult since every business plan is different, there are a number of significant
issues that should be addressed:
The entrepreneur should briefly describe the business concept.
Any data that support the opportunity for this venture should be briefly
stated.
After establishing the reality of the opportunity the executive summary
should then state how this opportunity will be pursued.
Next the executive summary should highlight some of the key financial
results that can be achieved from the implemented marketing strategy.
Important experience of entrepreneur(s), any important contracts or other
legal documents that are in place, and any other information that is felt can
assist in selling the business venture to a potential investor should also be
mentioned
Environmental and industry analysis: It is important to put the new venture in
proper context by first conducting environmental analysis to identify trends and
changes occurring on a national and international level that may impact the new
venture. Examples of these environmental factors include:
Economy: the entrepreneur should consider trends in the GNP,
unemployment, disposable income, and so on.
Culture: an evaluation of cultural changes may consider shifts in the
population by demographics, shifts in attitudes, or trends in safety, health,
and nutrition as well as concern for the environment.
Technology: advances in technology are difficult to predict. However, the
entrepreneur should consider potential technological developments
determined from resources committed by major industries or the
government. Being in a market that is rapidly changing due to technological
developments will require the entrepreneur to make careful short-term
marketing decisions as well as to be prepared contingency plans given any
new technologic developments that may affect his/her product or service.
Legal concerns: there are many important legal issues in starting a new
business. The entrepreneur must pay attention to any future legislation that
might affect the product or service, channel of distribution, price or
promotion strategy. The deregulation of prices, restriction on advertising,
and safety regulations affecting the product or packaging are examples of
legal restriction that can affect any marketing program.
All the above external factors are generally uncontrollable. However, an awareness
and assessment of these factors using various sources can provide strong support for
the opportunity and can be invaluable in developing the appropriate marketing
strategy.
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Once an assessment of the environment is compete, the entrepreneur should conduct
an industry analysis that will focus on specific industry trends. And this includes:
Industry demand: knowledge of whether the market is growing or
declining, the number of new competitors and possible changes in
consumer needs are important issues in trying to ascertain the potential
business that might be achieved by the new venture.
Competition: the entrepreneur should be aware of who the major
competitors are and what their strengths and weaknesses are so that an
effective marketing strategy can be implemented.
Description of the venture: In this section, the entrepreneur must ascertain the size and
scope of the business. It should begin with the mission statement. This statement basically
describes the nature of the business and what the entrepreneur hopes to accomplish with the
business. Other issues that must be discussed in this section include:
The product or service
The location and size of the business
The personnel and office equipment that will be needed
The back ground of the entrepreneur(s) and the history of the venture
Marketing Plan: this section of the business plan describes how the product(s) or service(s)
will be distributed, priced, and promoted. Marketing research evidence to support any of the
critical marketing decision strategies as well as for forecasting sales should be described in
this section. The specific forecasts for product(s) or service(s) are indicated in order to project
profitability of the venture.
Production Plan or Operational 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, reason 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, he or she will need to describe the physical plant layout; the machinery and
equipment needed to perform the manufacturing operations; raw materials and suppliers’
names, addresses, and terms; costs of manufacturing; and any future capital equipment
needs. If the venture is not a manufacturing operation but retail store, service, or some other
type of non-manufacturing business, this section would be titled operational plan and the
entrepreneur would then need to describe the chronological steps in completing a business
transaction.
Organizational plan: The organization plan is part of the plan that describes the venture’s
form of ownership-that is, proprietorship, partnership, or corporation. 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, as well as the names,
addresses, and resumes of the directors and officers of the organization. It is also to provide an
organization chart indicating the line of authority and the responsibilities of the members of
the organization.
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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 in the following manner:
The entrepreneur should indicate the potential risks to the new venture.
Then, the entrepreneur should discuss what might happen if these risks
become reality- meaning, the impact of each risk on the new venture if it
materializes.
Finally, the entrepreneur should talk about the strategy that will be
employed to prevent, minimize, or respond to the risks should they occur.
Major risks for a new venture could result from a competitor’s reaction; weaknesses in the
marketing, production, or management team; and new advances in technology that might
render the new product obsolete. Even if these factors present no risks to the new venture the
entrepreneur should discuss why that is the case.
Financial Plan: the financial plan determines the potential investment commitment
needed for the new venture and indicates whether or not the business is economically
feasible. Generally, three financial areas are discussed in this section of the plan:
The entrepreneur should summarize the forecasted sales and the appropriate
expenses at least for the first three years, with the first year’s projections
provided monthly.
The second major area of information needed is cash flow figures for three
years, with the first year’s projection provided monthly. Since bills have to
be paid at different times of the year, it is important to determine the
demand on cash in a monthly basis, especially for the first year. Remember
that sales may be irregular; receipts from customers may also be spread out,
thus necessitating the borrowing of short-term capital to meet fixed
expenses such as salaries and utilities.
The last financial item needed in this section of the business plan is the
projected balance sheet. This shows the financial conditions of the business
at a specific time. It summarizes the assets of the business, its liabilities
(what is owed), the investment of the entrepreneur and any partners, and
retained earnings (or cumulative losses).
Appendix: the appendix of the business plan 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 it self. Information that should be given in the
appendix might include:
Letters from customers, distributor, or subcontractors
Any documentation of information- that is, secondary data or primary
research data used to support the decisions made in the plan
Leases, contracts or any other types of agreements that have been initiated
Price list from suppliers and competitors
… Etc.
