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Entrepreneurship/Leadership/Innovation- MGT 2251Y

UNIT 15:

THE BUSINESS PLAN

Unit Structure 15.0 15.1 15.2 15.3 15.4 Overview Learning Objectives Introduction The Business Plan within the Strategic Planning Process The Business Plan: Structure, Contents and Style 15.4.1 General Structure 15.4.2 Contents and Size 15.4.3 Format (or Type) The Constituents of a Business Plan 15.5.1 Cover Page and Table of Contents 15.5.2 Executive Summary 15.5.3 The Nature of the Business 15.5.4 Legal Forms of Ownership, IPR and Ownership 15.5.5 Industry analysis 15.5.5.1 Competitors 15.5.5.2 The Market/Potential Markets 15.5.6 Marketing Plan 15.5.7 Market Research and Competitor Analysis 15.5.8 Operations Plan 15.5.9 Financial Planning 15.5.9.1 Financial forecasts 15.5.9.2 Analysis of Financial Forecasts 15.5.10 Risk Planning The Entrepreneur and his/her Team Business Plan Outline Summary References

15.5

15.6 15.7 15.8 15.9

Entrepreneurship/Leadership/Innovation- MGT 2251Y

15.0 OVERVIEW
This Unit gives the SME owner-manager the general guidelines for building the Business Plan. A generic outline of a Business Plan is proposed, followed by a description of contents/tasks under each heading.

15.1 LEARNING OBJECTIVES


By the end of this Unit, you should be able to do the following: 1. Explain the position of the Business Plan in the Planning process. 2. 3. 4. 5. Follow the guidelines for writing a Business Plan in a logical order. Describe the general outline of a Business Plan as applied to a proposed business idea. Formulate the constituent elements of a Business Plan in a stepwise approach. Realise the importance of each element in the context of the business plan as communications tool.

15.2 INTRODUCTION
The Business Plan is can be viewed as a versatile tool in the hands of the Entrepreneur. It can be considered as a communications tool in that it serves the purpose of informing stakeholders as to the pertinence and scope of the plan. It also serves as a strategic tool, being a forecasting instrument. It enables the entrepreneur to plan how to exploit opportunities under environmental uncertainty while measuring future risks and threats. The planning process is consequently a powerful learning opportunity for the entrepreneur.

15.3

THE BUSINESS PLAN WITHIN THE STRATEGIC PLANNING PROCESS

The Business Plan actually forms part of a sequence of steps followed by entrepreneurs in the strategic planning process. The following are critical steps in the strategic planning process (according to Schaper & Volery, 2004).

Entrepreneurship/Leadership/Innovation- MGT 2251Y

1. Set preliminary goals by committing preliminary goals to paper. 2. Conduct initial secondary research by collecting information from existing secondary data sources Activity 1 Distinguish between secondary data and primary data in information search.

3. Confirm goals from primary research Initial objectives are confirmed (or modified) following primary research, for example, a market survey. 4. Conduct subsequent detailed research Market viability having been confirmed, it is now necessary to collect detailed information on the remaining aspects of the business e.g. finance, operations, risks management and so on. 5. Develop draft Business Plan which is a preliminary version of the proposed business plan as per his/her business plan outline. 6. Critically assess the proposed business plan through an independent collaborator or using a focus group. 7. Implementation of the plan according to original goals and objectives. 8. Evaluation as to consistence with original goals. If necessary, the original goals may be reassessed, for example, if they appear unrealistic in the present context. The plan needs to be flexible and responsive to changes in the environment.

15.4 THE BUSINESS PLAN: STRUCTURE, CONTENT AND STYLE


The Business Plan is the first visible, physical aspect of a future venture. Being given that investors or Bankers will rely upon it to make a decision whether or not to give support to the venture, it is important for the SME owner to measure the importance of the structure, content and style of presentation of the Business Plan.

15.4.1

General Structure

In most cases, Business Plans are adapted from a standard template, allowing the entrepreneur ample room for his/her own creativity. A straightforward, conventional structure is suitable for
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the busy investor to look for and easily find essential elements to be used in his/her assessment prior to decision-making. In presence of a plan lacking structure, the investor/banker may set aside a project if certain vital elements of the Business Plan are hidden out of place. It is sometimes helpful to ask an independent collaborator to review a plan for inconsistencies. Beyond the facts and figures structure of a Business Plan, the overall between the lines plan ought to project ambition, drive and enthusiasm as being the personality traits of the entrepreneur. This can be achieved only if the entrepreneur him/herself has personal inputs in the plan (even if the plan has been structured by a consultant). Activity 2 How can an entrepreneur show ambition, drive and enthusiasm in his/her Plan?

15.4.2

Contents and Size

The Plan normally contains clear, concise and accurate information on all the major aspects of the venture. It should be long enough to provide essential details and short enough to arouse and maintain interest. The executive summary is an accurate synthesis of the business plan. It can by itself arouse interest of stakeholders who generally wont spend time reading the whole Plan. Depending on the size of the business, a Business Plan can be written in 10-50 pages. However, number of pages should not be approached prescriptively as this is not a general rule. Certain information, for example, C.V of entrepreneur, site plans and so on, can be made to appear in Appendix instead of overloading general contents. It is always advisable to ask collaborators to review the Plan. They normally check problems of visibility of essential information and for spelling or grammatical errors which may alter the purported sense of the authors. At times, entrepreneurs are so focused on technical content that they omit to include their address and phone number.

15.4.3

Format (or Type)

Appearance is an issue of psychological importance although the first impression is as important as the last. One perception is that entrepreneurs should use limited resources with caution, thereby limiting spending on the visual aspect of the plan. Although the Plan should look formal and professional, it should not give the impression that a lot of money has been spent on
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presentation. Another perspective is that a winning presentation should have reasonable style and presentation for image and first impression reasons. In written business communications, an excessive use of word processing design elements e.g. bold, italics, clip art, font size and colour can end up giving a negative impression. A balance should be struck between design and formality, the more so that the Plan is a professional document and should not be constructed as an Art portfolio. The length of the document follows a number of criteria. In general, entrepreneurs distinguish between three types of Business Plan. Barringer & Ireland (2008) propose the following distinctions: Summary Plan 10-15 pages long, works best for companies that are very early in their development, similar to a feasibility analysis prior to a full Business Plan. Full Business Plan 25-35 pages. It spells out a companys operations and plans with more structure and detail than summary business plan. Operational Business Plan 40-100 pages. This is meant for management and staff (i.e. for internal use) and features a great deal of detailed information on procedures, timing, and processes with a view to providing guidance to operational managers. Depending on purpose, in addition to the Plan, a covering letter should be sent to prospective investors, finance agencies, partners and so on, giving essential information on the project and the reasons for sending the document e.g. request for funding, or request for partnership.

Activity 3 For what reason would an established entrepreneur looking for funds write a relatively longer business plan?

Entrepreneurship/Leadership/Innovation- MGT 2251Y

15.5

BUSINESS PLAN OUTLINE

Cover Page Table of Contents I. Executive Summary A. The Opportunity B. C. D. E. F. Can be a problem to be solved or a need to be filled. Brief Description of the Business How the business proposes to solve the problem or fill the need Source(s) of Competitive Advantage Brief Description of the business model The Target Market (One or more segments) The Management Team Brief Summary of the Financial Projections The amount of capital needed and what the capital will be used for, (if the plan is going to a potential investor/financer) Description of Business Needs Any exit Strategy for Investors (if the plan is going to investors)

G. H. II.

The Business A. The Opportunity B. Detailed description of the problem to be solved or need to be filled. From idea to Business Opportunity. The Description of the Business Description of how the proposed business plans to solve the problem or fill the need

C.

Company history or background Company Vision, Mission and objectives Competitive Advantage Description of the business model How the business will create a sustainable competitive advantage Current Status and Requirements Description of where the business stands today Description of what the business needs to move forward

D.

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III. Management Team A. Management Team Management qualifications/experience Management ability/competences Technical expertise Board of Directors Number of directors Composition of the board and responsibilities Board of Advisers (if any) Number of advisers Composition of the advisory board Key Professional Service Providers

B.

C.

D.

Law & Accountancy firms Bankers IV. Organisation Structure, Ownership and Intellectual Property A. Organisational Structure B. Organisational chart Legal Structure Legal form of business Ownership of the business Intellectual Property

C. V.

Patents, trademarks, and copyright applied for or already approved Industry Analysis A. Industry description Industry trends, size, attractiveness Profit potential Target Market Description of target market Competitive position within target market

B. C.

Competitor analysis VI. Marketing Plan A. Product Feasibility and Strategy Concept testing Product strategy Pricing Strategy Channels of Distribution
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B. C.

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D. E.

Marketing Communications Strategy Customer Support

Customer support strategies Customer support obligations VII. Operations Plan A. Method of Production or Service Delivery B. Availability of Qualified Labour Pool (may require separate HR Plan) C. Location Plan, Layout Plan Quality Control

VIII. Financial Plan A. Capital Requirements for the Next 3 to 5 Years B. C. D. E. F. Sources and uses of funds Overview of Financial Projections Profit & Loss Cash Flow Projections Balance Sheets Payback and Exit Strategy (if the business plan is sent to potential investors)

IX. Critical Risk Factors A. Management Risks B. Marketing Risks C. Operating Risks D. Financial Risks E. Intellectual Property Infringement F. Other Risks as Appropriate X. Appendix A. Supporting Documents C.Vs of founders and key employees Diagrams of product prototypes Other documents as appropriate

Entrepreneurship/Leadership/Innovation- MGT 2251Y

15.6

THE ELEMENTS OF A BUSINESS PLAN

The following is a general approach to the constituents of a Business Plan. Specific, tailor-made plans may vary slightly in contents and depth of analysis and detail. The elements are given for the sake of completeness and each entrepreneur must make a decision as to where to focus and what to disregard. Following changes in the business environment, Business Plans remain open for changes. For example, Operational Plans need to be reviewed six monthly or yearly in order to keep pace with changes, e.g. a change in Business Legislation. Activity 4 How did the changes in labour legislation in March 2009 affect business?

A Business Plan in general has the following elements:

15.6.1 Cover Page and Table of Contents


Top of cover page to include name of company, trade name, logo, address, other contact details (phone, fax, website address, etc). Such contact information should also appear on the covering letter mentioned earlier. Bottom of cover page usually indicates confidentiality caution while the middle of the cover page can hold the logo or trade mark if any. The page next to the cover page contains the table of contents for ease of reference.

15.6.2 Executive Summary


Busy stakeholders will normally read the executive summary in toto even if they can overlook large chunks of detail in the body of the text. The summary must therefore be a concise but accurate overview of the business plan. If the summary fails to attract stakeholders (e.g. investors), then the Plan stands little chance to be read and approved, even if it is a good plan. Arguably, therefore, the executive summary can be the most critical part of the Business Plan. Entrepreneurs often mistake the executive summary to be an introduction. It should in fact be a one to two page summary of the whole plan.

Entrepreneurship/Leadership/Innovation- MGT 2251Y

15.6.3 The Nature of the Business


The Business may be introduced by describing the business idea and how it became an opportunity. The entrepreneur can explain how he/she plans to fill the gap in the market. This may be followed by a brief historical background of the company. At this point the Vision and Mission (or Mission Statement) if any is to be spelt out along with the organisation objectives and values. The challenge in this section is to convince the reader that the enterprise has a competitive advantage. The product service should enable the firm to distinguish itself and gives it an edge over its competitors. Activity 5 What are the characteristics of competitive advantage? Give an example

A conclusion to this section would summarise the companys current status and propose what it needs to go forward, including the major forecasted events.

15.6.4

Industry Analysis

In order to accurately identify stakeholders, entrepreneurs need to clearly define the Industry they are in. In general, the industry comprises the sum total of all competitive sellers, that is, of the products (and their substitutes). The status of the industry is a major issue, for example, whether a monopoly, an oligopoly or whether characterised by an open market approach. Other industry issues include the industry trends (e.g. influence of technology), industry attractiveness (e.g. industry life cycle or Porters Five Forces Model) and profit potential.

15.6.4.1 Competitors
Entrepreneurs vitally ought to conduct a competitor analysis to assess their products/services (e.g. for quality), market share, pricing strategies and other business policies. Much of this information is publicly available and can be searched from company annually published documents, press releases, industry statistics and so on.

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Some of the questions to be answered are: 1. On what market segments do they position themselves? 2. Are they importing, manufacturing or just reselling? 3. What is their annual turnover? 4. Do they focus on price, on product or on customers? 5. Do they sell branded or generic products? 6. What are their sources of competitive advantage? 7. What are their strengths and weaknesses?

15.6.4.2 The Market/Potential Markets


The market is composed of actual and potential buyers. People care little whether they buy from you or your competitor else unless you create psychological preferences for your products. Therefore the entrepreneur must influence customers by advertising and promotions or branding. The target market also needs to possess the capability to buy (e.g. the disposable income and access to the product). Marketers now realise (unlike former marketing thinking) that people may not be aware of their needs. They need to be made aware and be informed of benefits of new products/services. Activity 6 Give examples of successful unsought goods.

15.6.5

Marketing Plan

This is based on the Marketing Mix, the 4 Ps, referring to Product, Price, Place (Distribution) and Promotion. The fundamental objective of successful marketing is customer satisfaction. Simply providing good service may not necessarily achieve this objective. Effective Market planning is the key to success.

15.6.6 Market Research and Competitor Analysis


Market research is the systematic process of gathering, recording and analysing data to assist in making marketing decisions. The first question to be answered by an entrepreneur is to know whether a sizeable market exists for his/her product/service. Secondly, the entrepreneur has to investigate who are the likely customers. Thirdly, how the enterprise can be positioned in the

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market and finally what strategies to be adopted to price, promote and distribute the product/service. Market research may also include analysing competitors strengths and weaknesses.

15.6.7

Operations Plan

The organisation chart identifies the key positions and the persons occupying them along with the reporting relationships. Organisational details, day to day operations and issues other than marketing and finance are usually included here, as well as HR issues (including a Human Resource Plan if necessary).

15.6.8 Legal Forms of Ownership, IPR and Ownership


The business name (company name and trade name) and legal structure of the business are specified as well as the operating licenses the business requires. For example, businesses liable to affect the natural environment may require an EIA licence. It is recognised that entrepreneurs, in general, are not aware of all the intricacies of business law. It is therefore advisable that an entrepreneur consults an attorney and/or certified accountant to seek assistance in interpretation of business legislation. A number of advantages and disadvantages are associated with each form of ownership (Company, Partnership, Sole proprietorship, etc). The entrepreneur makes a choice based upon the nature of the business and his/her personal circumstances. The following are typical factors an entrepreneur considers when choosing a legal form for his/her ventures. Liability exposure Businesses can, during the course of their commercial activities, become liable due to financial mishaps, defective products, health and safety incidents and so on. According to legislation, a company (limited liability) exposes only the firms assets while keeping personal assets shielded, whereby the attractiveness of this form of legal ownership. Tax issues The Authorities usually have differentiated tax rates for each form of ownership, whereby entrepreneurs may have to ascertain the tax bill under each option before engaging in any option.

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Control Working as a sole trader, the entrepreneur keeps total control over the business. In a partnership, ownership and control are diluted. Managerial ability Owner/Managers can reasonably run a small sized business. When the firm grows in size, they must honestly assess their own ability to manage their companies successfully. In the U.S. the decline and failure of Internet companies in 2001 was directly linked to the lack of managerial skills, for example, HR Management, Marketing and Finance. Activity 7 Why will owner managers resist handing over management to qualified professionals?

Cost of Formation Some forms of ownership may be more complex and expensive to create, while others may be simpler, whereby entrepreneurs must weigh the costs and benefits. Activity 8 Research on the provisions of Business Facilitation Legislation in Mauritius.

Women entrepreneurs starting small businesses often choose to run cooperatives, whereby they can pool resources and benefit from inherent facilities/grants from the parent Ministry. Intellectual Property Innovative entrepreneurs constantly come up with creative ideas that bring innovation in products and services. Innovators can protect such intellectual property from unauthorised use via three important tools: patents, trademarks and copyrights. Patent A patent is a grant from relevant authorities (for example, Patent and Trademark Office) to the inventor a product, giving the latter the exclusive right to use or sell the invention for a given period (usually 20 years) from the date of filing the patent.
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Design patents carry a shorter period of protection (3 to 14 years), while plant (vegetal) patents can last for 7 years. The monopoly given to the inventor has the purpose of stimulating creativity and innovation. The innovator is a also given sufficient time to recoup investment in R & D. Trademarks A trademark is any distinctive word, phrase, symbol, design, name, logo, slogan that a company can use to distinguish a product/service from other goods in the market. It serves as a companys signature in the market place. Copyrights A Right that protects creators of original works of authorship e.g. musical and other artistic works. Owner/Partner/Management details: Personal and contact details about owners/managers and partners including full name, residential address, phone number and so on. Organisation structure and staffing: The organisation structure and reporting relationships, the positions (the person specifications and job descriptions), recruitment and selection strategies, employee training, pay and compensation issues and so on. (Sometimes, a separate HR Plan may be required). Location/Business premises: Geographical location of the business, design and accessibility of premises to customers, access to public roads, parking facilities and other infrastructure. If the building is leased, to specify the conditions as spelt out in lease agreement and so on. Plant and Equipment: This part of the Plan specifies equipment numbers, type and make, cost, life expectancy, running costs, maintenance issues, etc Production planning: A description of the production process, normally a flow diagram and protocols. Quality Assurance: Quality control systems to be put in place, procedures, systems (e.g. TQM), ISO standards (Certification and Accreditation issues, if any).

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15.6.9 Financial Planning


In this section of the Business Plan, the financial statements e.g. Profit and Loss, Balance Sheet etc. are presented as well as the financial forecasts for coming years. A number of basic assumptions about financial management need to be stated at the start, for example, depreciation rules, inflation forecasts, interest rates, changes in e.g. salaries within the year. Bank details fees charged, loans, finance overdrafts, leases and terms and conditions are specified.

15.6.9.1

Financial Forecasts

These include the following: Cash flow forecast, a summary of monthly amount of cash moving in and out of the business over a year. Projected Profit and Loss Statement. This shows business revenue, expenses and net profit for the coming years. Balance Sheet: provides details about the assets (resources owned by the firm) liabilities (the claims against the business) and the net worth of the business.

15.6.9.2

Analysis of Financial Forecasts

From the financial statement data mentioned above, a number of financial ratios can be calculated for control purposes e.g. profitability ratios, liquidity ratios etc.

15.6.10

Risk Planning

Risk management requires owner/managers to identify risks in advance, to assess their probability of occurrence, and take steps to reduce or eliminate them. It is, however, almost impossible for an entrepreneur to forecast with accuracy what can happen in future. Efficient risk management includes a contingency plan i.e. a course of action (planned and tested) to operate when the threatened risk occurs e.g. a fire outbreak. Security in general is related to a broad range of possible occurrences, for example, Theft of assets (equipment and ideas). Leaks from staff acting unethically (e.g. critical information, formulae). Defective goods/services. Health and safety incidents. Faulty equipment. Environmental risks (e.g. pollution). Financial loss, embezzlement, etc. Technological obsolescence.
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Most rules can be covered by different types of insurance although insuring against each and every risk could be very costly. Activity 9 How should an entrepreneur therefore decide what to insure and what not?

15.6.11

Appendix

A Business Plan Appendix contains a broad range of supporting documents, for example: C.Vs of founders and key staff. Site plans, location and layout plans. Design of plant and equipment. Copies of contractual agreements with partners, employees, suppliers, customers etc.

15.7

THE ENTREPRENEUR AND HIS/HER TEAM

The purpose here is to demonstrate the strength of the management team. This may be perceived as a guarantee for the viability of the project. This section contains a brief summary of the qualifications, competences and experience of each team member. Emphasis is laid on the complementarity of competences in the team. Activity 10 Can a group of people with similar skills and competences start a business and claim to make it succeed? Why?

What options are open to them?

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The composition of the Board of Directors should be mentioned, as well as lines of authority/responsibility especially in partnerships. The legal structure of the organisation needs to be specified as well as the Organisation Chart, any regular service providers, for example, accountancy firms, Insurers, service providers and so on.

15.8 SUMMARY
A business plan is a written outline of a business to demonstrate feasibility. It may be prepared for a new start-up business, for an existing businesss growth or expansion project or for the purchase of an ongoing concern. Planning advantages include informed decision making and assisting in raising finance and convincing stakeholders in general (e.g. prospective partners, finances and so on). Mishaps in planning include erroneous decision-making based on uncertainty, incorrect assumptions, inflexibility in approach (e.g. when conditions change) and unrealistic expectations following wishful thinking. Plans vary from business to business, but in general contain an executive summary, a background of the firm and its founders, marketing, operational, financial and other relevant details. Business planning is an ongoing process whereby the plan can and should be reviewed and evaluated periodically following changes in the business environment.

15.9 REFERENCES
1. 2. 3. 4. 5. 6. 7. 8. Arnold, J.E. (1962). Education for Innovation. New York, Scribner. Bolton, W.K. & Thomson, J.C. (2000). Entrepreneurs, Talent, Temperament, Technique. Burns, P. (2007). Entrepreneurship and Small Business. Palgrave, Macmillan. Bygrave, W. (1997). The Entrepreneurial Process. New York: John Wiley & Sons. Majaro (1988). The Creative Gap. London: Longman. Parkhurst, H.B. (1999). Journal of Creative Behaviour. Proctor, T. (2002). The Essence of Creativity. Prentice Hall, India. Timmons, J.A. (1999). New Venture Creation. Irwin/Mc Graw Hill.

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9. Thomson, V. (1969). Bureaucracy and Innovation. University of Alabama Press. 10. Von Oech, R. (1998). A Whack on the Side of the Head. New York: Warner Books. 11. Wertheimer, M. (1945). Productive Thinking. New York: Harper & Row.

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