THE BUSINESS PLAN

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What is a business plan?

A business plan is a document that outlines the key functional areas of a business, including operations, management, finance, and marketing.  It should serve as the road map for your business and follow a basic format, but could be fairly simple or rather large and complex for a larger company.  There are two main reasons for having a business plan: (a) to assist the entrepreneur in planning and developing the business and (b) to demonstrate the feasibility and potential profitability to potential investors, lenders, and other outside audiences.

The actual length of a business plan is normally determined by the scope and detail as well as the size of  the  prospective  business. The  plan  itself  can  be utilized both internally for management purposes and externally to assist in identifying quality employees and possible partners.   It serves as a feasibility study in the sense of defining the business’s strengths, weaknesses, opportunities,  and  threats  (SWOT). The  business  plan can also assist in decision making and the evaluation of processes.

How can I get help with my business plan?

•     Small  Business  Development Centers are located across the commonwealth and are an excellent resource.   The centers provide a certain number of hours of free assistance to entrepreneurs, with much of that time allocated for assistance with business and financial plan  development.    Visit  www.virginiasbdc. org for a listing of the centers with telephone and e- mail contacts.

•     Virginia Department of Business Assistance operates the Virginia Business Information Center and has a number  of  staff  and  on-line resources.    Visit  Virginia Business Information Center at (866) 248-8814 or www. dba.virginia.gov/virginia/center/. In addition, the VDBA’s Business Resource Center has a number of helpful resources, including information on business plans listed on its website at www.dba.state.va.us/virginia/center.

•     SCORE is another resource with business counselors who are usually experienced entrepreneurs trained to work with you . Visit www.score.org.

•     Virginia Cooperative Extension has offices in every county in the commonwealth. Your local Extension office connects you to Virginia Tech and/or Virginia State University faculty members who may be able to assist with business planning or technical needs.

There are also numerous VCE publications available online or in the local office related to small business development.  Contact your county Extension office or visit www.ext.vt.edu.

•     Virginia Tourism Corporation has staff and resources to assist with tourism-related business development, expansion  and  marketing.     Visit  www.vatc.org and select Tourism Development for a list of contacts and services.

Are there any tips for creating business plans?

SCORE offers five tips for effective business planning:

1.  Clearly  define your  business  idea  and  be  able  to succinctly articulate it.  Know your mission.

2.  Examine your motives.   Make sure that you have a passion for owning a business and for this particular business.

3.   Be   willing   to   commit   to   the   hours,   discipline, continuous learning, and the frustrations of owning your own business.

4.  Conduct  a  competitive  analysis  in  your  market, including  prices, promotions,  products, advertising, distribution, quality, service, and be aware of the outside influences that affect your busines.

5.   Seek  help  from  other  small  businesses,  vendors, professionals, government agencies, employees, trade associations, and trade shows . Be alert, ask questions, and take advantage of the resources available.

The SCORE web-site has a number of helpful tips.   See www.score.org.   SCORE also has counselors available to meet with you.

What are the elements of a business plan?

The key elements that many effective business plans have in common are these:

I .         Cover Page and Executive Summary

II .       The Industry, the Company, and its Products

III .     Market Research and Analysis

IV .      Marketing Plan

V .        Operating Plan

VI .     Management Team

VII .    The Financial Plan

Cover Page

The cover page of the plan clearly identifies the name of the business and contact information, including addresses, phone numbers, e-mail addresses, and also the  date  the  plan  was  created.    With  the  potential  for numerous revisions, the date may be used to track the revisions and to recall where you were and where you are heading with respect to your business venture.  When the plan is distributed, some businesses actually number each individual copy of their plan, keeping a record of who received the plans. It is not uncommon for superb ideas to be “borrowed” from one plan and used by another.

Executive Summary

The executive summary serves as a concise (usually one page) overview of the vital elements of the business plan. Its purpose is to give the reader a quick glimpse of the entire business plan. If the summary sparks an interest, the reader will find more details throughout the actual plan.

 The Industry, the Company, and its Products

Include a history/general description of the proposed company with the reasons for starting the business or adding the new product.   Also discuss the structure of the business.   In addition, this is the place to include a description of the industry in general and of your company’s formal legal structure and its mission.  Describe in detail the products and services you will offer, including:

•     Important customer benefits

•     Intended quality level

•     Intended use

•     Intended price/performance relationship

•     How the product fits into your current product “portfolio”

•     Technical developments involved

•     Regulatory status, e .g ., EPA requirements, if applicable, and current status

•     Other considerations that influence the plan

For the services you provide, include:

•     Warranties

•     Marketing support

•     Technical support

•     Any other “field” support you provide

Market Research and Analysis

Successful marketing requires relevant and updated information. Even if you think you know, it is still important to thoroughly and objectively assess who your competitors are, what they offer, and what factors might differentiate your  products or  services  from  theirs.    In  other  words, what is your competitive advantage? There needs to be a reason why customers will come to you instead of to their competitors.   According to the VDBA, research provides the “what,” “where,” and “how much” that every business owner needs in order to be successful .  This also includes a look at (a) customers (who are they), (b) market size and trends, (c) competition (who are they), and (d) market share and sales.   There are two basic types of market research information: (a) primary (information you gather directly from customers, potential customers, competitors, etc .) and (b) secondary (general data from other sources). Your local Small Business Development Center, SCORE counselor, or other resource can help you with designing and conducting primary market research.

Web resources for market data include:

•     SBA research and data sources, www.sba. gov/advo/research/

•     Tourism data, www.vatc.org

•     Entrepreneur .com, tips and sources, www. entrepreneur.com/marketing/index.html

•     Direct Marketing Association, www.the-dma.org

•     General data, www.zapdata.com

•     Trade shows and conferences, www.tsnn.com

•     General marketing tips and data, www. marketingsherpa.com/

Marketing Plan

Entrepreneurs need to have a solid base of customers in order to be successful.  Marketing is the process whereby businesses attract or retain customers.  A marketing plan is an on-going process, not a one-time document.

Your marketing plan should include the following:

•     Overall market strategy

•     Pricing

•     Sales tactics

•     Advertising and promotion

•     Packaging

•     Publicity

A marketing plan may also answer some or all of these questions:

•     Who or what is your market?

•     What are the conditions and trends of your market?

•     What is your market share?

•     What  methods  can  be  used  to  increase  market share?

•     Within  that  market  share,  how  can  you  increase profitability?

It is important to realize that marketing and planning are on- going processes, not just done once for an initial business plan and then stuck on the shelf.   Some experts suggest quarterly self-evaluations of your business performance.

Good general information on marketing may be found at:

•     www.entrepreneur.com/marketing/

•   Small Business Administration at www.sba.gov/ smallbusinessplanner/manage/marketandprice/ index.html

•     SCORE at www.score.org.

Operating Plan

The operating plan simply describes how you plan to manage your company in both the short and long term. This plan includes:

•     Location

•     Facilities and improvements

•     Strategies and plans for operations

•     Labor force

A key component of an operating plan is a list of specific objectives, the means of evaluation, and the timing of the evaluation process.  Often these objectives are based on some benchmarks that are created through previous experience or actual measurement and calculation.

Management Team

Even if you are a company of one, this should say more than just your name.  Readers (and you) are interested in the management team and its background, management structure, duties and responsibilities, and management compensation and ownership.  This might also include a list of business advisors or a formal or informal board of directors.

Financial Plan

Developing a financial plan can be extremely difficult if you do not have an accounting background.  You may want to seek the help of an accountant, counselor, or successful entrepreneur.   Basically, the financial plan consists of a detailed five-year plan, with sources (such as government or industry forecasts) to justify your estimates.  Be sure to use reliable sources.   Generally there are five parts to a financial plan:

A .       Listing of capital requirements, sources of information, contingencies, and reserves.

B .      Description of your financing plan, including all major alternatives considered and all sought.   Describe all sources of capital.

C .       Beginning  balance  sheet  (current  if  presently  in business,  pro  forma  for  a  new  business .     A  pro forma statement provides a forecast of expected financial performance, rather than a history of actual results .).

D .      Complete statement of projected operations and cash flows.   Include monthly data for year one, quarterly data for years two and three, and annual data for years four and five.

       •      Separate   the   plan   into   sales   and   financial sections.

       •      Explain assumptions in footnotes.

       •      Discuss how costs may fluctuate with production volumes.

       •      Describe the cost system and budgets you will use.

E .       A discussion of the investment criteria that you use, including calculations for:

       •      Internal rate of return

       •      Break-even point

       •      Present net worth

       •      Ratio of present net worth to initial investment

       •      Any other ratios requested specifically by your audience

       •      Sensitivity analysis, showing changes in interest rates and their impact on your figures

What pitfalls should I avoid in business planning?

The Virginia Cooperative Extension offers the following pitfalls to avoid when preparing a business plan:

1.   Too much detail. There is a fine line between too little and too much detail in a business plan .   Minute or trivial items that dilute or mask the critical aspects of the plan should be avoided.

2.   Graphics without substance. With the sophisticated computer software available to the average user today,   it   is   easy   to   over-emphasize   aesthetics while compromising substance.   Graphics can be a complement to, but not a substitute for, logic and reasoning.

3.   No executive summary.  Many  readers  of  business plans will not read past the executive summary.  If it does not exist, they may not read the plan at all.

4.   Inability to communicate the plan. The business plan should clearly outline the proposal in understandable terms.  Monumental ideas are worthless if they cannot be communicated.

5.   No sensitivity analysis.  All quantitative aspects of a business plan should be tested for sensitivity.   The most common areas tested a revenues and expenses. However, sensitivity analysis can be conducted on interest rates, yields, production variables, or any other quantitative measure that is relevant to business success.

6.   Failing to anticipate problems.  A good business plan will recognize potential roadblocks that could arise in implementing the plan and provide contingency plans to overcome them.

7.     Lack of involvement.  The business plan should be a team effort and involve not only management but also spouses, children, staff members, and any other stakeholders.   Careful consideration should be given before making the decision to have someone outside the business prepare the plan.

8.  Infatuation with product or service.  Although  a business plan should clearly explain the attributes of the business’s key product or service, it should focus on the marketing plan.   An entrepreneur can often become so intrigued by his/her idea that he/she forgets about the big picture.

9.   Focusing on  production estimates. When  making projections, the focus needs to be on sales estimates, not production estimates.   Production is irrelevant if there are no buyers.

10. Unrealistic financial projections. Potential investors are certainly interested in profitability so that they may earn a return on investment. However, unrealistic financial projections can quickly cause a plan to lose credibility in the eyes of investors.

11. Technical language and jargon. Technical language, acronyms, and jargon that would be unfamiliar to a person without experience in a particular industry should be avoided. The reader will be more impressed if he/she understands the plan.

12. Lack of commitment. The entrepreneur must show commitment to his/her business if he/she expects a commitment from others.   Commitment is exhibited by timeliness and following up on all professional appointments.   Investment  of  personal  money  is looked upon favorably because it shows that the owner is willing to make a financial commitment.

 

Chi Tran

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