Chapter 5

Developing Business Plan

What is Business Plan?

A business plan is a written document prepared by the individual entrepreneur or
partners that describes the goals and objectives of the business along with steps necessary
to achieve those goals. It is also referred to as a proposal, a prospectus, or game plan.

It is to force the entrepreneur to organize his thinking about the feasibility of his business
idea. It eliminates seat-of-the-pants organizing. It leads to the preparation of a written
document by putting down in black and white the rationale for starting and operating a
business. It replaces oral statements of faith with documented logic and cold figures.
Types of Business Plans
One of the most common questions that the writers of business plans ask is,” How long
and detailed should it be?” The answer to this question depends on the type of business
plan that is being written. There are three types of business plans, each of which has a
different rule of thumb regarding length and level of detail. The three types of business
plans are as follows:

a. Summary plan

A summary business plan is 10 to 15 pages and works best for companies that are very
early in their development and are not prepared to write a full plan. The authors may be

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asking for funding to conduct the analysis needed to write a full plan. Ironically,
summary business plans are also used by very experienced entrepreneurs who maybe
thinking about a new venture but don’t want to take the time to write a full business plan.

b. Full business plan

A full business plan is typically 25 to 35 pages long. This type of plan spells out a
company’s operations and plans in much more detail than a summary business plan, and
it is the format that is usually used to prepare a business plan for an investor.

c. Operational business plan

Some established businesses will write an operational business plan, which is intended
primarily for an internal audience. An operational business plan is a blueprint for a
company’s operations. Commonly running between 40 and 100 pages in length, this plan
can obviously feature a great amount of detail that provides guidance to operational
managers.

Business Plan Questions

What Is a Business Plan?
 A document which spells out the goals and objective of a business and clearly
outlines how and when they will be achieved.
 A structured guideline to achieve a business goal.
 A road map to owning and operating a business.
 A proposal that describes a business opportunity for financing agencies or
investors.
 A detailed action programme outlining every conceivable aspect of the proposed
business venture.
Why Write a Business Plan?
 Keeping you focused on your goals and strategies
 Obtaining financing from outside sources
 Guiding the opening of a business

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  Guiding the managing of a business
 Communicating clearly with interested parties
 Showing your business has chances of success
 Showing you have the ability to manage the business
 Showing there is a good market for your product or service
 Comparing how the actual business performance differs from the forecasted
performance

When Is a Business Plan Written?

 When thinking of going into business
 Before starting the business
 When updating the business is required
 When new information is obtained
 When new experiences are gained
Who Writes the Business Plan?
 Each prospective business owner/manager writes a business plan for the
business he/she wants to start
 An advice/support agency, or a professional figure such as an accountant, may
assist in writing certain areas of the business plan for it to look professional
 A computer programme providing a model that can be modified to suit your
business can also be utilized. The internet can also provide examples
What Is Done With a Business Plan?
 The owner refers to it often to see whether actions and plans are consistent
 He/she takes it to the bank when discussing funding
 He/she discusses other sections of it with the relevant interest group
What Is Contained in a Business Plan?
 Customers  Employees
 Competitors  Products
 Suppliers  Locations
 Financiers

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Outline of the Business Plan
A suggested outline of the full business plan appears in the following table. Specific plans
may vary, depending on the nature of the business and the personalities of the founding
entrepreneurs. Most business plans do not include all the elements introduced in the
following table; we include them here for the purpose of completeness.

i. Cover Page and Table of Contents

The cover page should include the company’s name, address, phone number, the date,
the contact information for the lead entrepreneur, and the company’s Web site address if

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 it has one. The contact information should include a land-based phone number, an e-mail
address, and a cell phone number.

ii. Executive Summary

The executive summary is a short overview of the entire business plan; it provides a busy
reader with everything she needs to know about the new venture’s distinctive nature. As
mentioned earlier, in many instances an investor will first ask for a copy of a firm’s
executive summary and will request a copy of the full business plan only if the executive
summary is sufficiently convincing. The executive summary, then, is arguably the most
important section of the business plan. The most important point to remember when
writing an executive summary is that it is not an introduction or preface to the business
plan. Instead, it is meant to be a summary of the plan itself.

Even though the executive summary appears at the beginning of the business plan, it
should be written last. The plan itself will evolve as it’s written, so not everything is
known at the outset. In addition, if you write the executive summary first, you run the
risk of trying to write a plan that fits the executive summary rather than thinking through
each piece of the plan independently.

iii. Industry Analysis

The main body of the business plan begins by describing the industry the business will
enter in terms of its size, growth rate, and sales projections. It is important to focus
strictly on the business’s industry and not its industry and target market simultaneously.
Before a business selects a target market, it should have a good grasp of its industry—
including where its industry’s promising areas are and where its points of vulnerability
are located.

You should also provide your reader a feel for the nature of the participants in your
industry. Issues such as whether the major participants in the industry are innovative or
conservative and are quick or slow to react to environment change are the types of
characteristics to convey.

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Industry trends should be discussed, which include both environmental and business
trends. The most important environmental trends are economic trends, social trends,
technological advances, and political and regulatory changes. Business trends include
issues such as whether profit margins in the industry are increasing or falling and
whether input costs are going up or down. The industry analysis should conclude with a
brief statement of your beliefs regarding the long-term prospects for the industry.

iv. Company Description

This section begins with a general description of the company. Although at first glance
this section may seem less critical than others, it is extremely important in that it
demonstrates to your reader that you know how to translate an idea into a business. The
company history section should be brief, but should explain where the idea for the
company came from and the driving force behind its inception. If the story of where the
idea for the company came from is heartfelt, tell it.

A mission statement defines why a company exists and what it aspires to become. If
carefully written and used properly, a mission statement can define the path a company
takes and act as its financial and moral compass. The products and services section
should include an explanation of your product or service. Include a description of how
your product or service is unique and how you plan to position it in the marketplace. A
product or service’s position is how it is situated relative to its rivals.

v. Market Analysis

The market analysis is distinctly different than the industry analysis. Whereas the
industry analysis focuses on the industry that a firm will participate in (i.e., toy industry,
software industry, men’s clothing industry), the market analysis breaks the industry into
segments and zeroes in on the specific segment (or target market) to which the firm will
try to appeal. Most start-ups focus on servicing a specific target market within an
industry.

The first task that’s generally tackled in a market analysis is to segment the industry the
business will be entering and then identify the specific target market on which it will

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focus. This is done through market segmentation, which is the process of dividing the
market into distinct segments. Markets can be segmented in many ways, such as by
geography (city, state, country), demographic variables (age, gender, income),
psychographic variables (personality, lifestyle, values), and so forth.

It’s important to include a section in the market analysis that deals directly with the
behavior of the consumers in a firm’s target market. The more a start-up knows about
the consumers in its target market, the more it can gear products or services to
accommodate their needs. A competitor analysis, which is a detailed analysis of a firm’s
competitors, should be included.

vi. The Economics of the Business

This section begins the financial analysis of a business, which is further fleshed out in the
financial projections. It addresses the basic logic of how profits are earned in the business
and how many units of a business’s product or service must be sold for the business to
“break even” and then start earning a profit.

The major revenue drivers, which are the ways a business earns money, should be
identified. If a business sells a single product and nothing else, it has one revenue driver.
If it sells a product plus a service guarantee, it has two revenue drivers, and so on. The
size of the overall gross margin for each revenue driver should be determined. The gross
margin for a revenue driver is the selling price minus the cost of goods sold or variable
costs.

The costs of goods sold are the materials and direct labor needed to produce the revenue
driver. So, if a product sells for $100 and the cost of goods sold is $40 (labor and materials),
the gross margin is $60 or 60 percent. The $60 is also called the contribution margin. This
is the amount per unit of sale that’s left over and is available to “contribute” to covering
the business’s fixed costs and producing a profit. If you have multiple products in a given
revenue driver category, you can calculate the contribution margin for each product and
take an average.

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 The next section should provide an analysis of the business’s fixed and variable costs. A
firm’s variable costs vary by sales, while its fixed costs are costs a company incurs
whether it sells something or not. The company’s operating leverage should be discussed
next. A firm’s operating leverage is an analysis of its fixed versus variable costs.
Operating leverage is highest in companies that have a high proportion of fixed costs
relative to their variable costs. In contrast, operating leverage is lowest in companies that
have a low proportion of fixed costs relative to variable costs.

This section should conclude with a break-even analysis, which is an analysis of how
many units of its product a business must sell before it breaks even and starts earning a
profit.

vii. Marketing Plan

The marketing plan focuses on how the business will market and sell its product or
service. It deals with the nuts and bolts of marketing in terms of price, promotion,
distribution, and sales. A company may have a great product, a well-defined target
market, and a good understanding of its customers and competitors, but it still has to find
customers and persuade them to buy its product.

A firm’s marketing strategy refers to its overall approach for marketing its products and
services. A firm’s overall approach typically boils down to how it positions itself in its
market and how it differentiates itself from its competitors.

The next section should deal with your company’s approach to product, price,
promotion, and distribution. If your product has been adequately explained already, you
can move directly to price. Price, promotion, and distribution should all be in sync with
your positioning and points of differentiation, as described previously. Price is a
particularly important issue because it determines how much money a company can
make. It also sends an important message to your target market.

viii. Operations Plan

The operations plan section of the business plan outline show your business will be run
and how your product or service will be produced. You have to strike a careful balance

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between adequately describing this topic and providing too much detail. Your readers
will want an overall sense of how the business will be run, but they generally will not be
looking for detailed explanations. As a result, it is best to keep this section short and crisp.

Obviously you can’t comment on each issue in the three to four pages you have for your
operations plan, but you can lay out the key back stage and front stage activities and
address the most critical ones. The next section of the operations plan should describe the
geographic location of your business. In some instances, location is an extremely
important issue and in other instances it isn’t.

This section should also describe a firm’s facilities and equipment. You should list your
most important facilities and equipment and briefly describe how they will be (or have
been) acquired, in terms of whether they will be purchased, leased, or acquired through
some other means.

ix. Management Team and Company Structure

Many investors and others who read business plans look first at the executive summary
and then go directly to the management team section to assess the strength of the people
starting the firm. Investors read more business plans with interesting ideas and exciting
markets than they are able to finance. As a result, it’s often not the idea or market that
wins funding among competing plans, but the perception that one management team is
better prepared to execute their idea than the others.

The management team of a new firm typically consists of the founder or founders and a
handful of key management personnel. A brief profile of each member of the
management team should be provided, starting with the founder or founders of the firm.
Each profile should include the following information:

 Title of the position

 Duties and responsibilities of the position
 Previous industry and related experience
 Previous successes
 Educational background

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The final portion of this section of your business plan focuses on how your company will
be structured. The most effective way to illustrate how a company will be structured and
the lines of authority and accountability that will be in place is to include an
organizational chart in the plan. An organizational chart is a graphic representation of
how authority and responsibility are distributed within the company. The organizational
chart should be presented in graphical format if possible.

x. Financial Projections

The final section of a business plan presents firm’s pro forma (or projected) financial
projections. Having completed the previous sections of the plan, it’s easy to see why the
financial projections come last. They take the plans you’ve developed and express them
in financial terms.

The first thing to include is a sources and uses of funds statement, which is a document
that lays out specifically how much money a firm needs(if the intention of the business
plan is to raise money), where the money will come from, and what the money will be
used for.

The pro forma (or projected) financial statements are the heart of the financial section of
a business plan. Pro forma financial statements include the pro forma income statement,
the pro forma balance sheet, and the pro forma cash flow statement. They are usually
prepared in this order because information flows logically from one to the next.

xi. Appendix

Any material that does not easily fit into the body of a business plan should appear in an
appendix—résumés of the top management team, photos or diagrams of product or
product prototypes, certain financial data, and market research projections. The appendix
should not be bulky and add significant length to the business plan. It should include
only the additional information vital to the plan but not appropriate for the body of the
plan itself.

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