Small Business Planning

A resource for: BSBSMB404A Undertake small business planning

Small business planning

A resource for: BSBSMB404A Undertake small business planning

Copyright MINISTER FOR EMPLOYMENT, TRAINING AND FURTHER EDUCATION, acting through TAFE SA, Government of South Australia 2010 TAFE SA is a registered trade mark in Australia of the Minister for Employment, Training and Further Education, Government of South Australia. All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, electrical, mechanical, photocopying, recording or otherwise, or stored in any retrieval system of any nature other than pursuant to the terms of the Copyright Act 1968 (Cwth) or with the written permission of the Minister for Employment, Training and Further Education, Government of South Australia. Purchase enquiries to: www.tafe.sa.edu.au/resources Educational enquiries: Small Business Training Centre TAFE SA Adelaide City Campus GPO Box 1872 Adelaide SA 5001 Tel: 61 8 8410 0000 Fax: 61 8 8410 0633 Email: sbtc@tafesa.edu.au Contribution & Authorship This document was developed by TAFE SA, Adelaide City Campus, Small Business Training Centre in association with TAFE SA Learning Materials. TAFE SA, Small Business Training Centre Elaine Pittwood, David Byrne Authors: Elaine Pittwood Instructional Designer: TAFE SA Learning Materials Project Coordinator: Evelyn Chefalachis Desktop Publishers: Evelyn Chefalachis, Suzi Marchioro Graphics: Maya Roinich

TAFE SA acknowledges the valuable contribution that the project team made to the development of this publication, and the contribution of others who provided input and reviewed drafts. Guide This publication has been developed in line with the National Training Package/curriculum for use within the learning programs of TAFE SA and is based on a philosophy of flexibly delivered, competency based education and training. Disclaimer These training resources were prepared for use in conjunction with a formal training program for delivery in South Australia and were correct at the time of preparation.

Revised Edition 2007 Revised Edition 2008 Revised Edition June 2010 Revised Edition September 2010 Revised Edition December 2010 ISBN 9781865069678 ISBN 1865069671

Publised by TAFE SA Learning Materials

07.149.0859-E7

About this resource

This resource has been written to provide the underpinning knowledge and skills for the Unit:

4BSBSMB404A

Undertake small business planning

This unit is from Level IV of the Small Business domain of the Business Services Training Package. This unit covers the research and development of an integrated business plan for achieving business goals and objectives. It can be used to set up a new business, or expand an existing small business. Completion of this unit will count towards the qualification:

4BSB40407 Certificate IV in Small Business Management

Important disclaimer

No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that: 1. 2. the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any errors in or omission from this publication. the publisher is not engaged in rendering legal, accounting, professional or other advice or services.

The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Contents

About this resource Business planning for small business

Types of business planning How to use this book

i
2 3

Why conduct a feasibility study? Planning the feasibility study Assess the critical factors
Licences, registrations, and government regulations Codes of Practice Environmental impact studies Intellectual property Contractual arrangements Your entry method Risk analysis

5 7
14 15 16 17 18 18 19

13

Does a market exist?

Sources of information Analyse your product or service Analyse the market Analyse the competition I cant do market research. !

21 23 24 25 26

21

Do you have the resources?

Business premises Plant and equipment Distribution channels Supply of stock, components or raw materials Technical expertise Management expertise

32 32 33 34 34 35

31

Is it financially viable?

Businesses that provide a physical product Retail services Businesses that charge an hourly rate Summary

40 47 51 56

39

What about capital?

Estimating establishment costs How much capital will you need? Return on Investment

59 61 63

59

Drawing conclusions
SWOT analysis

67

67 71

Presenting your report

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Strategic planning

Articulate your vision Set objectives and goals Conduct a SWOT analysis Develop strategies Operational planning Set key performance measures The written business plan Summary

78 80 82 84 84 87 87 88

77

Appendix 1: A sample feasibility study Appendix 2: A full written business plan Feedback questionnaire

89 115

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 Business planning for small business

Surveys have shown that few small businesses have a written business plan. That is not to say that small business operators dont plan ahead, but often they keep their plans in their heads rather than commit them to paper. Evidence shows that those who do engage in more structured business planning increase their chances of success. This does not mean you have to write a business plan, but it does mean that you should follow a structured process of business planning. Planning helps you to work smarter rather than harder. It keeps you future-orientated and motivates you to achieve the results you want. Perhaps, most importantly, the process of planning enables you to determine what commitment you are prepared to make to your business venture. Planning significantly increases your chances of success by focusing on five areas where small business operators sometimes get lost: 1 2 3 Realism. It is easy to be excessively optimistic about a new idea. Planning helps to prevent you from viewing the future in ways that the facts do not support. The need for outside advice. Planning enables you to recognise problems that call for outside sources of information and assistance. Recognising change. The nature of markets and consumer needs change rapidly. Planning cannot predict change but it helps you to recognise it and to define your business strategy accordingly.

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Balancing growth. Small businesses tend to either grow too fast for their capital base or too slow to maintain cash flow. Planned growth enables you to plan your capital needs in advance and to ensure that funds are available when you need them. Result orientation. A detailed business plan enables you to monitor your results against an established set of goals and performance standards.
(Reprinted with thanks from How to Organise and Operate a Small Business in Australia 3 rd edition: J.W. English.)

There are many other benefits of business planning. It reduces firefighting. Many small business operators spend so much time putting out the fires that they never have a chance to do anything else. By planning, you can anticipate problems that are likely to occur and decide how they should be handled. It also forces you to justify your plans and actions. Often one decides to do something because it sounds or feels right. You may do something because that is the way it has always been done. Planning forces you to prove the validity, or at least explain the reasoning, of your plans and actions. Through business planning, you can test your ideas on paper. It is much better to produce a plan and find out that the business is likely to be unprofitable than to start the business and find out the same thing.

Types of business planning

Business planning can be used for three main purposes:

4 To investigate and evaluate new business opportunities (The feasibility study) 4 As a long term management tool to guide decision making in accordance with
the strategic aims of the business. (The strategic plan)

4 To put a case for finance by presenting a clear picture of the business and its
potential, or to be used as a blue-print for the management of your business. (The full business plan)

Specific business plans can be produced to meet each of the above purposes. Much of the content is common to all three. However, the type and depth of information required will vary with the purpose of the plan.

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There are times in business when you might use all three types of planning. For example, an established business should already have a strategic plan in place. As part of that planning process, it may identify an opportunity to add some new venture to its operations. To test this opportunity, it should undertake a feasibility study to test its viability and potential. If this proves positive, it may be necessary to attract finance to establish the venture. This may require a full business plan that presents a complete picture of the business to any potential investor. This full business plan will formally record and present much of the information that already exists as a result of the strategic plan and feasibility study. This book introduces the business planning process in the context of undertaking a feasibility study. The last chapter discusses strategic planning and preparing a full business plan.

How to use this book

This book is one of a series in Small Business Management. It assumes you have mastered some basic management skills in marketing and finance, and have some understanding of the legal issues of operating a business. These skills were covered in the following books in the Small Business Management series:

4 Legal issues 4 Small business marketing 4 Financial planning

This book focuses on the process of applying your knowledge and skills to prepare a feasibility study. You will undertake a project, guided by your tutor, to produce a report on the feasibility of a business opportunity you have identified. This is not something you can do sitting in a classroom. It is a hands-on, real world project that will take some time. It will also be most worthwhile and can set you up for business success in the future. The following text is deliberately comprehensive it is designed to provoke your thinking and ensure you have taken into account all of the factors that might affect your business plans. Some of the issues raised may not apply to your venture. Thats fine, just focus on the ones that do. The depth of your feasibility study will depend on the complexity of your business opportunity. Good luck with your project.

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Its feasible that something is not quite right here ... Why conduct a feasibility study?
New ideas and business opportunities can emerge at any time from an enormous range of sources. Ideas and opportunities are needed, not only in the creation of new business ventures, but also to sustain a vibrant and competitive edge in an established enterprise. Entrepreneurs are always searching for new ideas and opportunities. Successful entrepreneurs spend time investigating the opportunity before launching ahead. The method used to investigate an opportunity is known as a feasibility study. The content and extent of this study will vary depending upon the investment in time and resources that the opportunity requires. For example, an existing business may undertake a simple feasibility study to add a new line to its existing products. On the other hand, it may undertake an in-depth study if it is considering a major change in direction. Starting a new business usually requires a considerable investigation of the market and the financial aspects to assess the potential of the opportunity. However, far too many people jump straight into business opportunities, or commence detailed planning, without undertaking a feasibility study. For example, building plans are often drawn up, discussions held re finance etc, before the opportunity is shown to be capable of generating sufficient revenue to produce a profit. The fundamental reason to conduct a feasibility study is to minimise risk. It is easy to get carried away with enthusiasm for a new idea. The feasibility study imposes a reality check forcing you to check the viability of the business opportunity on paper. It is better to know in advance that an idea would never work, than to experience business failure, with associated loss of money and self-esteem, further down the track.

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At the completion of a feasibility study you should be able to conclude if the opportunity has potential for profit and is thus worth the investment of further time, effort and finance. Should the study prove that the business opportunity is financially viable, then much of the information collected can be incorporated into further planning.

TAFE SA 2010, TAFE SA | Small business planning The SMALL BUSINESS M A N A G E M E N T Series

 Planning the feasibility study

A feasibility study can be used in any one of the following situations:

4 investigating a new business start-up 4 buying an existing business 4 acquiring a franchise 4 assessing the introduction of a new product or service into an existing business 4 considering the potential for expansion in an existing business.
Given the variety of applications, it follows that some feasibility studies will be extensive and others quite short. For example, an investigation into the establishment of a new tourist park, requiring an investment of $1m. will be quite different to investigating the addition of a further product line in a retail shop. Nevertheless the principles are the same. The first step in planning a feasibility study is to fully describe the business opportunity you are investigating. Are you developing your existing business, buying a business, or starting something completely new? What products and services will be offered? What is the proposed commencement date to take up this opportunity? What investment of time and money will the opportunity require? Is it substantial or minimal? Will you have to leave your current employment to take up this opportunity? Are you considering mortgaging the family home? There are always opportunity costs things you will have to give up to go in another direction. All of these questions point to how seriously you will approach the feasibility study.

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The owner of a retail pet shop might be considering an opportunity to do pet grooming on the premises. If she has quiet trading days in the week, diversifying into another product/service will require minimum investments of time and money and no opportunity costs. Her feasibility study might involve limited market research, some initial advertising, and a try it and see approach. If it doesnt work, she has not lost anything. On the other hand, if major extensions to the shop were required with the installation of special plumbing, she would need to conduct a more serious feasibility study. She would need to be sure that there were sufficient customers willing to pay her prices to allow her to recoup her investment in a reasonable time frame. There may be other factors that will affect her idea. Does she need special training to groom pets? Does she need a licence or local council permission? Is there a legal limit to the number of animals allowed on the premises at one time? How easy will it be to find skilled staff to help her if demand is high? Conducting a feasibility study is like running your idea through a series of tests. As it passes each test, you will proceed with the next one, and the next one, until it has passed all the tests and can be declared a viable proposition. The skill in planning the feasibility study is deciding which test comes first. We suggest the following order:

4 Test 1
What are the key or critical factors to the success of the opportunity? Test these first, starting with the easiest. For example, the pet shop owner would be wasting her time conducting extensive market research if council approval for her building extensions was not forthcoming or she could not raise the finance for the project.

4 Test 2
Next, undertake some market research to see if sufficient demand exists for your product or service. What price will people pay for what you offer?

4 Test 3
Do you have the resources to match the market demand? What is your production capacity? The pet shop facilities may limit the number of grooming appointments she can cope with each day.

4 Test 4
This test will crunch the numbers to see if your idea is financially viable. The pet shop owner will have to compare the cost of providing the grooming service with the price customers want to pay to see if the resulting profit is worthwhile.

4 Test 5
Assess the amount of capital you will need. If you cant raise the money, you cant proceed with your idea.

TAFE SA 2010, TAFE SA | Small business planning The SMALL BUSINESS M A N A G E M E N T Series

State your hypothesis

The dictionary definition of the word feasible is something that is capable of being done, effected or accomplished. In a feasibility study, we need to be clear what that something is. Then we can set about proving it can be done, effected or accomplished.

It is easy to be enthusiastic about a new opportunity. Underlying this enthusiasm is a belief you are holding about this opportunity and what you might gain from it.
I believe that many small business owners will be confused by the GST and will want someone else to do their bookkeeping. I believe I can make a lot of money selling my newly designed software package to small retailers. I believe that I could offer beauty therapy treatments in my hair salon and generate more profit. I believe my spouse and I could buy a business and earn more than our current salaries.

If you are going to plan a feasibility study, you will have to be more specific in stating your beliefs. Describe the opportunity. What is the product or service? What exactly do you want to gain from this opportunity? This might be a desired profit figure, or profit combined with a lifestyle. It might be growth of your existing business through a larger market share or improved market position. Translate your belief into something that can be researched a hypothesis. If you can clearly state this, your study will be focused and directed. Without it, your research can be meaningless. In simple terms, the questions to be answered in a feasibility study to prove its viability are:

4 What will it cost me to make or provide my product/service? 4 What can I sell it for? 4 Can I sell enough to make a desired profit figure?
In addition you will need to consider what investment you will have to make, in time and money, to obtain these results.

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Quantifying these points will define your study and direct your research. Some examples of hypotheses are: Example 1:
This feasibility study should prove that there are sufficient customers within a radius of 10km from my home based business, each willing to pay a reasonable hourly rate for my bookkeeping services, for me to earn a net profit of $40 000 per year.

To prove this hypothesis, you would use market research to establish sufficient demand in the geographical area indicated. You would have to set an hourly rate and show that it is competitive. You would examine your own productivity rate to see if you could charge out enough hours to pay the costs of running the business and earn $40 000. Example 2: This feasibility study should prove that my software product can be produced for a unit cost of $x, and that there is sufficient demand to generate a sales income which will result in $60 000 pa net profit.

To prove this hypothesis, you would have to show that you could obtain sufficient supplies of the item within the cost parameters, that there was an equal market demand within a price range, producing a margin on sales to cover operating costs and generate the desired $60 000 net profit. Example 3: This feasibility study should prove that there is sufficient demand for beauty therapy services to contribute $20 000 pa gross profit to the business. To prove this hypothesis, you would have to research the cost of providing the services, and show evidence of sufficient market demand at a certain selling price to generate the required volume of sales to earn $20 000 gross profit. Example 4: This feasibility study should prove that my investment of $80 000 to buy a business can generate a consistent net profit of $100 000 per annum if my spouse and I work full time in the business.

10

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To prove this hypothesis, you would have to research businesses for sale in your price range, carefully analysing the historical figures to ensure the net profit figure is achievable under your own style of operation (ie both of you working full time). You can see that these examples are quite specific. In each case, the market research is integrated with the financial research and productivity measures to prove or disprove the hypothesis. You are quite clear about what you have to do, effect or accomplish. Your feasibility study is defined and directed. One point to note is that your ideas will evolve as you process through your feasibility study. It may be that there is far more potential in the opportunity than you had imagined. You may even change direction if you discover a better opportunity. A scientist trying to prove a hypothesis on a cancer cure, would be quite elated to accidentally discover a cure for the common cold! So be flexible. Use your hypothesis to give you discipline and direction but dont set it in concrete. Be prepared to revise your idea and restate your hypothesis as you move through the feasibility process.

I cant write a hypothesis. . .

Of course, you may wish to undertake a feasibility study just to explore the potential of an idea. You might not have any clear expectations on what the idea may generate in terms of profit. It would be difficult to write a hypothesis in this case. As you process your idea through the first three tests, it should become more defined. This will enable you to set some parameters for the financial tests. The following chapters will deal with each of these tests in more detail.

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Write a description of the business opportunity you are considering and the products and services to be offered. Are you starting up a new business, buying a business or considering a franchise? Are you introducing a new product or service to your existing business? When are you going to do this? What time frame are you considering? What do you want from this opportunity? If you can, quantify it in terms of profit, market share, growth percentage, etc something that can be measured. Write a hypothesis of what you would need to prove to make this business proposition viable in terms of what you want to achieve.

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