CHAPTER THREE

DEVELOPING BUSINESS PLAN

WHAT IS A BUSINESS PLAN?
One of the most important steps in setting up any new business is to develop a business plan.
However, business planning is not a result or an outcome but an ongoing process . To be useful,
the development of a business plan must become part of the very foundation of the
entrepreneur’s business venture. There is no substitute for a well-prepared business plan, and
there are no shortcuts to creating one! The business plan may be the most important business
document that he/she will ever prepare for his/her business venture and it will also probably
be the most difficult.
A business plan is a written document that sets out the basic idea underlying a business and
related start-up considerations. For the entrepreneur starting a new venture, a business plan
has basic objectives:
 It identifies the nature and context of the business opportunity why does such an
opportunity exist?
 It presents the approach the entrepreneur plans to take to exploit the opportunity.
 It identifies the factors that will most likely determine the success of the venture,
 It also serves as tool to raise financial sources.
A business plan can be viewed as an entrepreneur’s game plan: it crystallizes/clears the dreams
and hopes that motivates the entrepreneur to start the business . A plan should lay out your
basic idea of the venture, describe where you are now , indicate where you want to go , and
outline how you propose to get there . Above all, a business plan should explain the key variables
of success or failure, thereby helping you prepare for both the good and the bad. In fact, this
is the business plan’s most important function. While your business plan will represent your
vision and context of a start-up, there are just too many unexpected things that opportunity
for an entrepreneur and management team to think about the key drivers of the new venture’s
success or failure.
The business plan is also the “blue print” for creating a new venture for the entrepreneur
activity, in essence, it is a bridge between an idea and reality without first mentally visualizing
the desired end result, the entrepreneur is not likely to see the venture become reality. For
anything, such as to build a house or a business, there is always a need for written plan. The
role of the business plan is to provide a clear visualization of what the entrepreneurs intends
to do. A business plan may also address major expansion of an existing firm. For example, an
entrepreneur who has started a small local business may propose opening additional branches
or extending the business success in other ways, or a business may use to plan, a plan as a
response to opportunities. Therefore, writing a business plan should be thought of as ongoing
process and as the means to an end product.
Scope and Value of the Business Plan

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From the previous topic, we hope you have understood the phrase “business plan”. The
entrepreneur should determine and know how valuable and detail his/her business plan in
preparing of the entire business plan. The depth and detail of the business plan depends on
the size and scope of the proposed type of new venture.
For example, an entrepreneur planning to market a new portable computer will need a much
more comprehensive business plan, largely because of the nature of the product and
market pursued. On the other hand, an entrepreneur who plans to open retail video house
will not need the comprehensive coverage required by a new computer manufacturer. Thus,
differences in the scope of the business plan may be dependent on whether the new
venture is a service; involves a manufacturing or is a consumer good or industrial product.
The size of the market, competition, and potential growth may also affect the scope of a
business plan. Generally, large and rapid growth firms need to have elaborative and
comprehensive business plan than the small and slow growth ones, though success for
business of all size is improbable without business plan.
Business plan is more valuable to the entrepreneur, potential investors, or even for the
review of new personnel. The business plan is important to these people because:
 It helps to determine the viability of the venture in the designated market
 It provides guidance to the entrepreneur in organizing his/her planning activities.
The planning process forces the entrepreneur to bring objectively to the idea and reject
on such questions as:
 Does the idea make sense?
 Will it work?
 Who is my customer?
 Does it satisfy customer needs and wants?
 What kind of protection can I get against imitation by competitors?
 Can I manage such a business?
 Whom will I compete with? And so on.
Such kind of self-assessment and evaluation may even be similar to role playing since the
entrepreneur will be required to play out various scenarios and consider obstacles that
might prevent the venture from succeeding. The acting out of these scenarios allows the
entrepreneur to confront these obstacles and plan ways to avoid them. It may even be
possible that, after the business plan has been prepared, the entrepreneur should realize
the obstacles may not be avoided. Hence, the venture may be terminated while still on
paper. Although this certainty is not the most desirable conclusion, it would be much
better to terminate the business endeavor before investing further time and money, then
failing.
Users of a Business Plan

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Who do you think are the users of a business plan? The users of a business plan will vary
based on its function. The business plan has two major functions. First, it provides a
clearly articulated statement of goals and strategies for the entrepreneur and called as
internal users. Second, it serves as a selling document to be shared with outsiders such as
investors, government officials and interested parties.
Internal users of the Business plan
Any activity begins without adequate preparation tends to be disorganized. This is
particularly true of such a complex process as initiating a new business. Although planning
is a mental process, it must go beyond the realm of speculation. Thus, the established new
business becomes rigorous as rough ideas crystallize and are quantified.
A written plan is essential to ensure systematic coverage of all the important features of
a new business. By identifying the variables that can affect the success of the business,
the business plan becomes a road that helps the entrepreneur focus on important issues
and activities of the new venture.

Firm’s
Insiders management

Employees
New venture
business plan
Customers

Outsiders
Suppliers

Preparing a formal written plan imposes needed discipline

Investors on the entrepreneur and the
management team. In order to prepare a written statement about marketing strategy, for
example, the entrepreneur and the team must perform some type of market research;
likewise, a study of financial needs requires a review of projected receipts and
expenditures, month by month. Otherwise, even a good opportunity is likely to fail because
of negative cash flows. In short, business plan preparation forces an entrepreneur to
exercise the discipline that managers must possess if their venture is to succeed.
A business plan should also be effective in selling the new venture to those within the
company. It provides a structure for communicating the entrepreneur’s mission to current
and prospective employee of the firm.
External users of business plan

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On the other hand, by enhancing a firm’s credibility, the business plan can serve as an
effective selling tool to use with prospective customers and suppliers, as well as investors.
Suppliers, for example, extend trade credit, which is often an important part of new firm’s
financial plan. A well-prepared business plan may be helpful in gaining a supplier’s trust and
securing favorable credit terms. Occasionally, a business plan can improve sales prospects.
For example, by convincing prospective customers of a firm’s potential for longevity, the
plan may reassure those customers that the new firm is likely to be around to service a
product or to continue as a procurement source. It should be noted that customers do not
simply buy products only on the basis of price, rather take into account other benefits
such as after sales services. Almost any one starting a business fails the task of raising
financial resources to supplement personal savings. Unless an entrepreneur has a rich
relative or friend who will supply funds, he/she must appeal to bankers, individual
investors, or venture capitalists. And the business plan serves as the entrepreneur’s calling
card when she/he is approaching these sources of financing.
Since both investors and lenders use the business plan to better understand the new
venture, the type of product or service it offers, the nature of the market, and the
qualifications of the entrepreneur, as well as the management team. A venture capital firm
or other sophisticated inventors would not consider investing in a new business before
reviewing a properly prepared business plan. The plan can also be externally helpful in
establishing a good relationship for a new firm with banks. Particularly if you need to use a
business plan to raise capital it is important that you understand the investor’s basic
perspective. You must see the world as the investor sees it. For most entrepreneurs
however, this is more easily said than done, as entrepreneurs normally focus on the
positive potential of the start-up that is what will happen if everything goes right.
The prospective investor, on the other hand, plays the role of the skeptic thinking more
about what could go wrong. An entrepreneur’s failure is not only to understand but also to
appreciate this difference in perspectives almost certainly ensures rejection by an
investor.
An entrepreneurial venture fails far too many unknowns to predict revenues, let alone
profits. Moreover, few if any entrepreneurs correctly anticipate how much capital and
time will be required to accomplish their objectives. Typically, they are widely optimistic,
padding their projections. Investors know about the padding effects and therefore
discount the figures in business plans. These maneuvers create a vicious circle of
inaccuracy that benefits no one.
Business plans should include some numbers of financial statements and projections, but
those numbers should appear mainly in the form of a business model that shows the
entrepreneurial team has though failure. The model should also address the break even

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analysis issue: at what level of sales does the business begin to move a profit? And even
more important, when does cash flow turn positive? Without doubt, these questions
deserve a few pages in any business plan.
At the most basic level, the prospective investor has a single goal, to maximize potential
return on an investment while minimizing personal risk exposure. Even venture capitalists,
who are thought to be great risk takers, want to minimize their risk. Like any informed
investors, they will look for ways to evaluate risks to the entrepreneur.
Given such fundamental differences in perspective between the investors and the
entrepreneur the important questions become “How do I write a business plan that will
capture a prospective investors interest?” should come to your mind, of course, there is no
easy answer but at least two things are certain.
1. Investors have a short attention span: Because they receive many business plans. They
can not read them in detail. Therefore, business plan should be designed to
communicate effectively and quickly
2. Certain features appeal to investors, while others distinctly unappealing. The business
plan must be the “right” plan that is; it must speak the investor’s language. You must
know what is important and what is not to investors and how to present your idea or
concept clearly to get creditability and potential sources of financing.
Nevertheless, investors are more market oriented than product oriented, realizing that
even most patented inventions never can earn a dime for the investor. The essence of the
entrepreneur’s process is to identify new product, but only of they meet an identifiable
customer need. Thus, it is essential for the entrepreneur to appreciate investors market
orientation and more importantly, to join investors in their concern about market
prospects.
There are some additional desirable features that attract investors in a good business
plans as follows:
 It is used as evidence of customer’s acceptance of the ventures product or service.
 Also is an appreciation of investor’s needs through recognition of their particular goals,
as evidenced in their required rates of return.
 Helps as prove of focus to concentrate on only alienated number of products of
services.
 Partly also as proprietary position, as represented by patents, copy rights and business
secrete.
On the other hand, unpleasant and ill planned business plan may cause unfavorable reaction
for potential investors. This may be due to the following:
 Infatuation with the product or the service rather than familiarity with and awareness
of market place needs.

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 Some financial projections that is not compatible with the accepted industry norms.
 Unrealistic and far from the tangible situation projections.
 Need to customization or applications of engineering by such potential investors which
make them substantially difficult for growth. And others.
Information Needs of an Entrepreneur
We have seen in the previous section the importance of a business plan form both internal
and external user’s point of view. Now let’s look the information needs part of the
entrepreneur while he/she is developing their business plan.
Before investing time and energy to preparing a business plan, the entrepreneur should do
a quick feasibility study of the business concepts to see if there are any possible barriers
to success. The information which can be obtained from many sources should focus on
marketing, finance, and production and operations. Before beginning the feasibility study,
the entrepreneur should clearly define the goals and objectives to be done and how it will
be accomplished. These goals and objectives also provide a frame work for the business
plan, marketing plan and financial plan. However, these goals and objective should not be
too general since objectives must be attainable single and achievable with the available
capacity which lead it to be realistic. This approach makes control more effective and easy
which may provide a good basis for implementing the business plan; which otherwise could
not be possible.
1. Market Information Needs
One of the initial important elements of information need by the entrepreneur is the
market potential for the product/service. The size of the market can be determined by
using secondary sources or by developing a marketing research study. Given the limits of
financial resources of most new ventures, the entrepreneur should first explore a number
of secondary sources before considering any primary research study. To asses the total
market potential, the entrepreneur should consider trade associations, government
reports, and other published studies.
Thus, the information’s obtained in this market feasibility study should support the
entrepreneur’s marketing decisions in the business plan. It should also include information
on competition, margins for distribution, market trends and grow potentials as well as the
important marketing mixes.
2. Operation Information Needs
The relevance of a feasibility study of the manufacturing operation depends on the nature
of the business. As a result of this fact, most of the information needed can be obtained
in different ways through direct contact with the appropriate sources. The information
needed over operational issues by the entrepreneur usually include the followings:

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► Manufacturing operations: Information with regard to basic machines and assembly
operations needed to be identified, as well as whether any of these operations would
be subcontracted and how and by whom.
► Raw material: The kind and quantity of raw materials needed and supplier’s names,
addresses, and costs should be determined. Equipments – the equipment needed should
be listed and whether it will be purchased, rented or leased also should be clearly
indicated.
► Space and Area: The total amount of space and area needed should be determined,
including whether the space and the area will be owned, leased. Rented and so on.
► Over heads: Each items needed to support production or manufacturing, such as tools,
supplies, utilities, salaries and so on, should be clearly determined.
Most of the above information’s should be incorporated directly in to the business plan.
Each item may require some research but as necessary to those who will assess the
business plan and consider funding of the proposal.
3. Financial Information Needs
Before preparing the business plan, the entrepreneur must have a completer evaluation of
the profitability of the venture. The assessment will primarily tell potential investors if
the business will be profitable, how much money will be needed to launch the business and
meet short-term financial needs, and how this money be obtained.
There are traditionally three areas of financial information that will be needed to
ascertain the feasibility of the new venture. These are:
a. Expected sales and expense for at least the first three years
b. Cash flow figures for the first three years; and
c. Current balance sheet figures and forecasted balance sheets for the first three
years.
Thus, determination of the expected sales and expenses figures for each of the first 12
months and each subsequent year is based on the market information which is discussed
earlier. In similar fashion, each expense time should be identified and given on a monthly
basis for the year. Estimates of cash flow consider the ability of the new venture to meet
expenses at chosen times of the year. The cash flow forecasts should identify the
beginning cash, expected account receivable and other receipts, all disbursements on a
monthly basis for the entire year. Current balance sheet figures, on the other hand, show
the financial conditions of the business at any particular time (usually on that specific
date). They identify the assets of the business, the liabilities and the investment made by
the owner or other partners.
3. Technology and Internet as Sources of Information

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The changing world of technology offers new opportunities for entrepreneurs to access
information for any business activities efficiently, expediently and cheaply. This is
possible by using specially the internet which is an important source of information in the
preparation of the business plan for such segment and industry analysis competitor’s
analysis, and measurement of market potential, to later stage planning and decision making.
Besides being a business intelligence resources, the internet also provides opportunities to
market the new venture’s products and services through a website (i.e. on line selling’s). A
firm’s website typically describes the company’s history, existing products or services,
backgrounds of the founders and management team, and any other information that will
create a favorable image. Thus, a website can be a vehicle for advertising or for the direct
marketing of the venture’s products and services orders can actually be placed through e-
mails or on-line services consequently; many new ventures are using websites to increase
sales contacts and to enhance their opportunities to reach potential customers.
Contradictorily, an entrepreneur can also accesses competitor’s website to gain more
knowledge of their strategy in the market place with the use of a browser, the
entrepreneur can select identifying terms that will allow him/her to access these
websites. In using websites, it is often possible to highlight other key words, such as
“products” which provide more information on the competitor’s product or service line. The
internet seems ideal in Ethiopian case where most potential entrepreneurs are not in to it.
However, it is of paramount importance to see its inevitability as e-commerce is gaining
momentum.
Preparation of business plan and its major parts
Preparation and writing of a business plan is a must for the entrepreneur who start a new
venture though the content and duration of time varies from one person to other person.
Writing and preparing business plan could take more than one expects it to take,
depending on the experience and knowledge of the entrepreneur as well as the purpose; it
is intended to serve. It should be comprehensive enough to give any potential investors a
complete understanding of the new venture. Many entrepreneurs incorrectly estimate the
length of time that an effective plan will take to prepare. However, once the process has
begun, the entrepreneur will realize that it is invaluable is sorting out the business
functions of a new venture.
Since the business plan is also a description of the business and what the owner
entrepreneur wants it to become for the future. It should contain targets, estimates and
projections as well as describes how they will be achieved in most cases the format of
such business plan has the following parts and these parts are shown below
1. 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:

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 ► The name and address of the company
► The name of the entrepreneur(s) and address.
► A paragraph describing the company and the nature of the business
► The amount of financing needed. The entrepreneurs may offer a package that show
stock, debt, asset 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 purpose and is
important for the entrepreneur.
Outline of a Business Plan

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 I. Introductory Page
A. Name and address of business
B. Name(s) and address(s) of principals
C. Nature of business
D. Statement of financing needed
E. Statement of confidentially report
II. Executive Summary
III. Industry Analysis
A. Future outlook and trends
B. Analysis of competitors
C. Market segmentation
D. Industry forecasts
IV. Description of venture
A. Product(s)
B. Service(s)
C. Size of business
D. Office equipment and personnel
E. Background of entrepreneurs
V. Production Plan
A. Manufacturing process (amount sub contracted)
B. Physical plant
C. Machinery and equipment
D. Names if suppliers of raw materials
VI. Marketing Plan
A. Pricing
B. Distribution
C. Promotion
D. Product forecasts
E. Controls
VII. Organizational Plan
A. Form of ownership
B. Identification of partners or principal share holders
C. Authority of principals
D. Management-team background
E. Roles and responsibility of members of organization
VIII. Assessment of Risk
A. Evaluation of weakness of business
B. New technologies
C. Contingency plans
IX. Financial Plan
A. Pro forma income statement

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 B. Cash flow projections
C. Pro forma balance sheet
D. Break-even analysis
E. Sources and application of funds
X. Appendix
A. Letters
B. Market research data
C. Leases or contracts
D. Price lists from suppliers
Cover page
This cover page sets out the basic concept that the entrepreneur is attempting to develop.
Investors consider, it important because they can determine the amount of investment
needed without having to read through the entire plan.
2. Executive Summary
This section of the business plan is prepared after the total plan is written. About three
to four pages in length, the executive summary should stimulate the interest of the
potential investor. The investor uses the summary to determine if the business plan is
worth reading in total. Thus, it would highlight concisely and convincing the key points in
the business plan, that is, the nature of the venture, financing needed, market potential,
and support as to why it will succeed.
3. Industry Analysis
It is important to put the new venture in a proper context. In particular, the potential
investor, while assessing the venture on a number of criteria, needs to do an industry
analysis in order to know which industry the entrepreneur will be competing in. discussion
of the industry outlook, including future trends and historical achievements, should be
included. The entrepreneur should also provide insight on new product developments in this
industry. Competitive analysis is also an important part of this section. Each major
competitor should be identified, with appropriate strengths and weaknesses described
particularly as to how they might affect the new venture’s potential success in the market.
Who is the customer? The market should be segmented and the target market for the
entrepreneur identified. Most new ventures are likely to compete effectively in only one or
a few of the market segments. This strategy may be a function of the competition. Any
forecasts made by the industry or by the government should be noted. A high growth
market may be viewed more favorably by the potential investor. Some key questions the
entrepreneur should consider are
1. What are total industry sales over the past five years?
2. What is the anticipated growth in the industry?

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 3. How many new firms have entered this industry in the past three years?
4. What new products have been recently introduced in this industry?
5. Who are the nearest competitors?
6. How will your business operation be better than this?
7. Is each of your major competitors sales growing declining, or steady?
8. What are the strengths and weaknesses of each of your competitors?
9. What is the profile of your customer?
10. How does your customer profile differ from that of your competitor
4. Description of the Venture
The description of the venture should be detailed in this section of the business plan. This
will enable the investor to ascertain the size and scope of the business. Key elements are
the product(s) or service(s), the location and size of the business, the personnel and
office equipment that will be needed, the background of the entrepreneur(s), and the
history of the venture. There are some of the important questions the entrepreneur needs
to answer when preparing this section of the business plan. Location of any business may
be vital to its success, particularly if the business is retail or involves a service. Thus, the
emphasis on location in the business plan is a function of the type of a business. In
assessing the building or spaces the business will occupy, the entrepreneur may need to
evaluate such factors as parking, delivery rates, access to customers, suppliers,
distributors and accommodating town regulation or zoning laws. An enlarged local map may
help give the location some perspective with regard to roads, highways, access, and so
forth.
Recently an entrepreneur considered opening a restaurant at the Megenagna-Gergy ring
road. Traffic counts indicated a large potential customer base if people would stop for
coffee and so forth on their way to work. Unfortunately, the ring road does not have a
flying bridge for pedestrians and with no break to allow for entry into the proposed
location. Due to the aforementioned reason, the entrepreneur eliminated this site from
any further consideration.
This simple assessment of the location, market, and so on saved the entrepreneur from a
potential disaster. Maps that locate customers, competitors, and even alternative locations
of a building or she can be helpful in this evaluation. Some of the important questions that
might be asked by an entrepreneur are: how much space is needed? Should I buy or lease
the building? What is the cost per square foot? What town restrictions exist for sign,
parking etc? Is renovation of the building necessary? Is the facility accessible to traffic?
Is there adequate parking? Will the existing facility have room for expansion? What is the

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economic, demographic profile of the area? Is there adequate labor available? What are
local taxes? And are sewage, electricity, and plumbing adequate?
If the building or site decision involves legal issues, such as lease, the entrepreneur should
hire a lawyer. Such problems can be avoided easily, but under no circumstances should the
entrepreneur try to negotiate with the town or a landlord without good legal advice.
1. What are your product(s) and/or service(S)?
2. Describe the product(s) and/or service(s), including patent, copyright, or trademark
status.
3. Where will the business be located?
4. Is your building new? Old? In need of renovations? (I renovation needed, state costs.)
5. Is the building leased or owned? (state the term)
6. Why are these building and location right for your business?
7. What additional skills or personnel will be needed to operate the business?
8. What office equipment will be needed?
9. Will equipment be purchased or leased?
10. What is your business background?
11. What management experience do you have?
12. Describe personal data such as education, age, special abilities, and interests.
13. What are your reasons for going into business?
14. Why will you be successful in this venture?
15. What development work has been completed to date?
5. Production 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, reasons 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, she will need to
describe the physical plant lay out; the machinery and equipment needed to perform the
manufacturing operations; raw materials and suppliers’ names, addresses, and terms; costs
of manufacturing; and many further capital equipment needs. In a manufacturing operation,
the discussion of these items will be important to any potential investor in assessing
financial needs.
1. Will you be responsible for all part of the manufacturing operation?
2. If some manufacturing is subcontracted, who will be the subcontractor(s)? Give
names and addresses.
3. Why were these subcontractors selected?
4. What are the costs of the subcontracted manufacturing? Include copies of any
written contracts.

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 5. What will be the layout of the production process? Illustrate the steps if possible.
6. What equipment will be needed immediately for manufacturing?
7. What raw materials will be needed for manufacturing?
8. Who are the suppliers of new materials and appropriate costs?
9. What are the costs of manufacturing the product?
10. What are the future capital equipment needs of the venture?
If the retail operation or service:
1. From whom will merchandise be purchased?
2. How will the inventory control system operate?
3. What are storage needs of the venture and how will they be promoted
If the venture is not a manufacturing operation but a retail store or service, this section
would be titled “merchandising plan” and purchase of merchandise, inventory control
system, and storage needs should be described.
6. Marketing Plan
The marketing plan is an important part of the business plan since it describes how the
product(s) or service(s) will be priced, promoted and distributed. Specific forecasts for
product(s) or service(s) are indicated in order to project profitability of the venture. The
budget and appropriate controls needed for marketing strategy decision should be
discussed. Potential investors regard the marketing plan as critical to the success of the
new venture. Thus, the entrepreneur should make every effort to prepare as
comprehensive and detailed plan as possible so that investors can be clear as to the goals
and strategies of the venture. Marketing planning will be an annual requirement (with
careful monitoring and changes made on a weekly or monthly basis) for the entrepreneur
and should be regarded as the road map for short-term decision-making.
7. Organizational Plan
The organizational plan describes the venture’s form of ownership-that is, proprietorship,
partnership, or corporation. For instance, 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, names and addresses and resumes of the
directors and officers of the corporation. It is also helpful to provide an organization
chart indicating the line of authority and the responsibilities of the members of the
organization. Here are the summaries some of the key questions the entrepreneur needs
to answer in preparing this section of the business plan. This information provides the
potential investor with a clear understanding of who controls the organization and how
other members will interact in performing their management functions.
1. What is the form of ownership of the organization?

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 2. If a partnership, who are the partners and what are the term of agreement?
3. If incorporated, who are the principal shareholders and how much stock do they
own?
4. What type and how many shares of voting or non-voting stock have been issued?
5. Who are members of the board of directors? Given names, addresses, and resumes.
6. Who has check-signing authority of control?
7. Who is each member of the management team and what is her background?
8. What are the roles and responsibilities of each member of the management team?
9. What are the salaries, bonuses, or other forms of payment for each member of the
management team?
8. 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 and prepares effective strategy to deal with them. Major risks for a new venture
could result from a competitor’s reaction; weaknesses in the marketing or production, and
new advances in technology that might render the new product obsolete. Even if these
factors present no risks to the new venture, the business plan should discuss why that is
the case. It is also useful for the entrepreneur to provide alternative strategies if any of
the above risk factors occur. These contingency plans and strategies illustrate to the
potential investor that the entrepreneur is sensitive to important risks and is prepared
should any occur.
9. Financial Plan
The financial plan, like the marketing, production, and organization plans, is an important
part of the business plan. It determines the potential investment commitment needed for
the new venture and indicates whether the business plan is economically feasible.
Generally, three financial areas are discussed in this section of the business plan. First,
the entrepreneur should summarize the forecasted sales and the appropriate expenses for
at least the first three years, with the first year’s projections provided monthly. It
includes the forecasted sales, cost of goods, sold, and the general and administrative
expenses. Net profit after taxes can then be projected by estimating income taxes.
Second, cash flow figures must be presented for at least the first three years, with first
year’s projections provided monthly. Since bills have to be paid at different time of the
year, it is important to determine the demands on cash on a monthly basis, especially in the
first year. Remember that sales may be irregular, and receipts from customers may also
be spread out, thus necessitating the borrowing of short-term capital to met fixed
expenses such as salaries.

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The last financial item needed in this section of the business plan is the projected balance
sheet. This shows the financial condition of the business at a specific time. It summarizes
the assets of a business, its liabilities, the investment of the entrepreneur and any
partners, and retained earnings or cumulative losses. Any assumptions considered for the
balance sheet or any other item in the financial plan should be listed for the benefit of
the potential investor.
10. Appendix
The appendix of the business plan generally 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 itself.
Letter from customers, distributors, or subcontractors are examples of information that
should be included in the appendix. Any documentation of information, that is, secondary
data or primary research data used to support plan decisions, should also be included.
Leases, contacts, or any other types of agreements that have been initiated may also be
included in the appendix. Lastly, price lists from suppliers and competitors may be added.
Using and Implementing the Business Plan
The business plan is designed to guide the entrepreneur through the first year of
operations. It is important that the implementation of the strategy contain control points
to ascertain progress and to initiate contingency plans, if necessary. Most important to the
entrepreneur is that the business plans not end up in a drawer somewhere once the
financing has been attained and the business launched.
There has been a tendency among many entrepreneurs to avoid planning. The reason often
given is that planning is a boring and done only by large companies. This may be an excuse;
perhaps the real truth is that some entrepreneurs are afraid to plan. Planning is an
important pat of any business operation. Without good planning the entrepreneur is likely
to pay an enormous price. All once has to consider is the planning done by suppliers,
customers, competitors, and banks to realize that it is also important for the
entrepreneur. It is also important to realize that without good planning the employees will
not understand the company’s goals and how they are expected to perform in their jobs.
Many businesses fail because of the entrepreneur’s inability to plan effectively. Intelligent
planning is not a difficult or impossible exercise for the inexperienced entrepreneur. With
the proper commitment and support from any outside resources, the entrepreneur can
prepare and effective business plan. In addition, the entrepreneur can enhance effective
implementation of the business plan by developing a schedule to measure progress and to
institute contingency plans.
Business Plan and Its Importance

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Perhaps the most important step in launching any new venture or expanding an existing one
is the construction of a business plan. Such a plan must include your goals for the
enterprise, both short- and long-term; a description of the products or services you will
offer and the market opportunities you have anticipated for them; and finally, an
explanation of the resources and means you will employ to achieve your goals in the face of
likely competition. A business plan will make you feel more confident in your ability to set
up and operate the venture.
Preparing a comprehensive business plan along these lines takes time and effort. You will
need between 200 and 400 hours, depending on the nature of your business and how much
data you have already gathered. Nevertheless, such an effort is essential if you are both
to crystallize and to focus your ideas, and to test your resolve about entering or expanding
your business. Once completed, your business plan will serve as a blueprint to follow, which,
like any map, improves the user's chances of reaching the destination.
There are a number of other important benefits you can expect to arise from preparing a
business plan. These include testing your ideas, building your confidence, understanding
your financing needs, and giving you planning experience.
Testing Your Ideas: This systematic approach to planning enables you to make your
mistakes on paper, rather than in the marketplace. One potential entrepreneur made the
discovery while gathering data for his business plan that the local competitor he thought
was a one-man outfit was in fact the pilot operation for a proposed national chain of
franchised outlets. This had a profound effect on his market-entry strategy!
Another entrepreneur found out that, at the price she proposed charging, she would never
recover her expenses or break even. Indeed "expenses" and "break even" were themselves
unknown terms before she started preparing a business plan. This naive perspective on
costs is by no means unusual.
Confidence: Once completed, a business plan will make you feel more confident in your
ability to set up and operate the venture. It may even compensate for lack of capital and
experience, provided of course you have other factors in your favor, such as a sound idea
and a sizable market opportunity for your product or service.
Financing: Your business plan will show how much money is needed, what it is needed for,
and when and for how long it is required. Because under capitalization and early cash flow
problems are two important reasons why new business activities fail, it follows that
entrepreneurs with a soundly prepared business plan can reduce these risks of failure.
They can also experiment with a range of alternative viable strategies and so concentrate
on options that make the most economic use of scarce financial resources.

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It would be an exaggeration to say that your business plan is the passport to sources of
finance. It will, however, help you display your entrepreneurial flair and managerial talent
to the fullest extent and to communicate your ideas to others in a way that will make it
easier for them to understand and to appreciate the reasoning behind your ideas. Your
audience could be bankers, potential investors, partners, or government agencies. Once
they know what you are trying to do, they will be better able to help you.
Planning Experience: Preparing a business plan will give you an insight into the planning
process. It is this process itself that is important to the long-term health of a business,
and not simply the plan that comes out of it. Businesses are dynamic, as are the commercial
and competitive environments in which they operate. No one expects every event recorded
in a business plan to occur as predicted, but the understanding and knowledge created by
the process of business planning will prepare the business for any changes that it may
face, and so enable it to adjust quickly.
Despite these many valuable benefits, thousands of would-be entrepreneurs still attempt
to start without a business plan. The most common among these are businesses that either
appears to need little or no capital at the outset, or whose founders have funds of their
own; in both cases it is believed unnecessary to expose the project to harsh financial
appraisal.

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