 King's College of the Philippines   Jay-Ar Ron Borgonio

Entrepreneurship in Tourism and Hospitality

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Lesson 7: The Business Plan

LESSON 7: THE BUSINESS PLAN

The number of problems that may be felt when the small business is already in operation may just overwhelm the entrepreneur. If he is good enough, he may be able to handle them successfully if they happen one time at a time. However, it will be very
difficult for him if problems occur simultaneously.

Business Plan

A document that helps the small business owner determine what resources are needed to achieve the objectives of the firm, and provides a standard against which to evaluate results.
A sort of a business blueprint and it keeps the entrepreneur on the right track.

A. Purposes of a Business Plan

To serve as management’s guide during the lifetime of the business; and

To fulfill the requirement for securing lenders and investors.

B. Parts of the Business Plan

I. Title or Cover Page

The business plan must be easily identifiable through a cover page with a listing of the following:

The name of the business;

The name/s of the proponents;
Address;
Telephone number;
E-mail and websites address;
The name of the person who prepared the business plan; and
Date.

II. Table of Contents

The page should provide a table of contents so the readers can easily find the information they need.

III. Executive Summary

The executive summary is a portion of the business plan that summarizes the plan and states the objectives of the business. If the small business operator is intending to borrow money or is seeking capital from investors, the following must ne
indicated;

The capital needs of the business;

How the money will be used;
What benefits will be derived by the business from the loan or investment; and
In case of loan, how it will be repaid with interest, and in the case of outside investment, how profits will be generated.

The executive summary is prepared after the business plan is written.

IV. Description of the Business

This particular portion of the business plan is very useful to the small business operator, as well as prospective investors and lenders.

This is divided into two parts:

A short explanation of the industry; and

A description of the business.

In describing the industry, it is important to present the current situation and the outlook for the future. Information must be provided regarding the various markets within the industry, as well as new products or developments that could affect the
business. The sources of information must be indicated.

Statements about the following will be useful in describing the business:

The industry sector where the business falls into (retail, manufacturing, education, entertainment, and others);
Whether the business is new or established;
The ownership status of the business (sole proprietorship, partnership, or corporation);
Information on who the target customers;
Information on the size of the markets; and
Information on how the product or service is distributed.

V. Description of the Product or Service

The product or service must be described clearly in the plan. To achieve this, the following must be presented:

The important features of the product or service, such as the maintenance-free feature of the product, or the home delivery service for products ordered through the phone;
A detailed description of how the product is used;
What makes the product or service different from others available in the market.

The objective of product or service description is to show that the firm has a competitive edge over the others. If the business plan is able to show that edge, lenders and investors may just respond favorably. It is very important to explain that the
business will be profitable. Factors that will make the business successful must be described. Some of these positive factors that are worth describing are:

Superior organization of the business;

Latest equipment that are currently used by the company;
Superior location of the company;
Fair price of the product or service; and
Superior customer service offered by the company.

VI. Marketing Strategies

Market strategies refer to what small business operator (SBO) plans to do to achieve the market objective of the firm. These strategies are formulated after undertaking market research.

Markets strategies consist of the following:

1. Definition of the Market

The objective of the market definition is to determine which part of the total potential market will be served by the firm. Hence, the market must be defined in term of size, demographics, structure, growth prospects, trends, and sales potential.

2. Determination of the Market Share

The business plan will be more useful to the reader, especially lenders and investors, if the projected market share of the firm is presented. To determine the firm’s market share, the following steps may be used:

a. Determine the number of prospects in the target market;

b. Determine the number of times the product or service is purchased by the target market;

c. Figure out the potential annual purchase; and

d. Determine the percentage of the potential annual purchase that the firm can attain.

Positioning Strategy is one where the firm identifies a target market segment and develops a strategy mix to address the desires of that segment. The objective of positioning is to establish the firm’s product or service identity in the mind of the buyer.

Positioning refers to how the firm differentiates its products or service from those of the competitors and serving a niche.

Before adapting a positioning strategy, the following questions must first be considered:

a. What does the customer really want to buy from the firm?

b. How is the product or service different from the competitors?

c. What makes the product or service unique?

Pricing Strategy

How the firm prices its product or service is a very important component of the business plan? If the firm wants to achieve its objectives, the right price for its product or service must be maintained. In determining the right price, the following factors
must be considered:

a. Customer’s perception of value in the firm’s kind of business;

b. Costs involved such as overhead, storage, financing, production, and distribution; and

c. Profit objectives of the firm.

The firm’s price may be established through any of the following methods:

a. Cost Plus Pricing covers all costs, variable and fixed, plus an extra increment to deliver profit.

b. Demand Pricing is a method of pricing where the firm sets prices based on buyer desires. The range acceptable to the target market is determined.

c. Competitive Pricing calls for price-setting on the basis of prices charged by competitors.

d. Markup Pricing is a form of cost-oriented pricing in which the firm sets prices by adding per-unit merchandise costs, operating expenses and desired profit.

Distribution Strategy

Distribution refers to the process of moving goods and services from the firm to the buyers. The distribution channel will be adapted must provide a strategic advantage to the firm. Common distribution channels are the following:

a. Direct Sales is the most effective channel if the plant is move goods directly to the ultimate users.

b. Original Equipment Manufacturer Sales involves selling a manufactured product to another manufacturer who, in turn, incorporates the same to his product and which is later sold as a finished product to the end user.

c. Manufacturer’s Representatives are wholesalers employed by one or several producers and paid on commission according to quantity sold.

d. Wholesalers are channel members that sell to retailers or other agents for further distribution through the channel until they reach the final users.

e. Brokers are distributors who buy directly from distributors or wholesalers and sell to retailers or end users.

f. Retailers sell directly to consumers.

g. Direct Mail are printed materials used in a targeted campaign to consumers. These are sent directly to consumers. These include catalogs, letters, e-mail, and other direct appeals.

Promotion Strategy

How the company’s products or services will be promoted is an important component of the market strategy? The promotion strategy must include the following:

a. Advertising Aspects (advertising budget, positioning message, first year’s media schedule)

b. Packaging describe how the company’s product will be packaged.

c. Public Relations will be a detailed presentation of the publicity strategy of the firm.

d. Sales Promotion are means used to support the sales message like special sales, coupons, contests, premium awards, trade-in, among others.

e. Personal Sales present the sales strategy including pricing procedure, rules on returns and adjustments, methods of sales presentations, generation of leads, policies on customer services, compensation of salesmen, and responsibilities of the
salesmen.

C. Analysis of the Competition

The small business operator will find it difficult to compete if his competitors are unknown to him. This makes it necessary to make an analysis of the competitors. In competitive analysis, the following must be determined:

Strengths and weaknesses of the firm’s competitors;

Strategies that will give the firm a competitive advantage;
Barriers that can be developed to prevent competitors or would-be competitors from exploiting the firm’s market, and
Any opportunity that can be exploited.

D. Operations and Management

How the firm will be operated on a continuing basis is an important component of the business plan. As such, the plan must contain the following:

1. Organization Structure

A well-defined and realistic organizational structure is an important element of the business plan. Investors and lending institutions will be interested to look at this particular aspect. Generally, they will be concerned how the firm is organized along the
following concerns;

a. Marketing

b. Production

c. Research and Development

d. Management

e. Human Resources

2. Operating Expenses

Projections of operating expenses are important aspects in the preparation of a business plan. This is a prerequisite in projecting financial statements. Lenders and investors are especially interested in scrutinizing such statements.

In determining operating expenses, labor and overhead must be considered. The organizational structure is useful in providing information in the determination of labor expenses. Overhead, which may be fixed or variable, includes the following:

a. Rent

b. Advertising and Sales Promotion

c. Supplies

d. Utilities

e. Packaging and Shipping

f. Maintenance and Repair

g. Equipment Leases

h. Payroll

i. Payroll Taxes and Benefits

j. Bad Debts

k. Professional Services

l. Insurance

m. Loan Payments

n. Depreciation

o. Travel

3. Capital Requirements

Capital equipment are necessary items in operating businesses. The business plan will not be complete unless a listing of capital equipment needed to be purchased is drawn up.

Equipment needs vary from business to business. Manufacturing firms will need more elaborate types of equipment. Service businesses usually require less equipment.

4. Cost of Goods Sold

Businesses which may carry inventories like those engaged in manufacturing and trading must provide a list showing cost of goods. The cost of goods of trading firms consist of products purchased for resale, while the cost of goods of manufacturing
firms refer to total expenses incurred in manufacturing the products that are intended to be sold. These expenses include the following:

a. Material

b. Labor

c. Overhead

V. Financial Data

Financiers are most interested in the financial aspects of the business plan. To satisfy this requirement, the following statements must be presented in the business plan:

Income Statements shows the income, expenses, and profits of a firm over a period of time. It may cover a certain year, quarter, or month. It provides basic data to help the prospective financier analyze the reasons for the projected profits. 

Sample Income Statement

DPS MANUFACTURING ENTERPRISES

Projected Income Statement

For the Year Ending December 31, 2019

Gross Annual Sales                                                            Php12,000,000                                               

(Less)

      Food Cost                                                             4,000,000

Gross Profit                                                                                                Php7,200,000

(less)

      Operating Costs

             Rent                                                                864,000        

             Salaries                                                           1,920,000

             Utilities, Insurance, Overhead                         600,000

             Owner Salary                                                2,400,000

Net Profit                                                                  5,784,000                                                                                                                                                                                                        Php1,416,000

Balance Sheet is a type of financial statement that shows the financial condition of the business as a given date. A summary of financial information about the business is contained in the balance sheet and are broken down into three areas, namely:

a. Assets

The assets portion of the balance sheet lists the assets of the firm in order of liquidity from the most liquid to the least liquid. As such, this portion is subdivided into the following cash, accounts receivable, and inventory.

Current Assets

*Cash which includes cash in checking, savings, and short-term investment accounts.

**Accounts Receivable refer to income derived from credit accounts.

***Inventory refers to the inventory of materials used to manufacture a product not yet sold.

Fixed Assets these are durable assets and will last more than one year.

*Capital and Plant refers to the book value of the capital equipment and others such as land and building, if owned by the firm, less depreciation.

**Investments are investment accounts owned by the company that cannot be converted to cash in less than a year.

b. Liabilities the liabilities portion of the balance sheet is classified as current or long-term.

Current liabilities are due in one year or less.

*Accounts Payable refer to all expenses incurred by the business that are purchased on an open account from suppliers and are due for payment.

**Accrued Liabilities refer to operational expenses that are not yet paid.

***Taxes are due and payable.

Long Term Liabilities

*Bonds Payable are bonds due and payable over one year.

**Mortgage Payable refers to loans used for the purchase of real estate and is repaid for a period of over one year.

***Notes Payable are loans represented by a written document which is payable for a period of over one year.

c. Owner’s Equity refers to how much the owner has in the business.

Sample Balance Sheet

DPS MANUFACTURING ENTERPRISES

Projected Balance Sheet Statement

As of December 31, 2019

Assets                                   

Cash                                                                  Php     70,450

Accounts Receivable                                                2,406,130

Inventories                                                               2,406,791

Prepaid Expenses                                                           9,437

Net Fixed Assets                                                         289,003

Total Assets                                                        Php5,383,811

Liabilities and Owner’s Equity

Notes Payable                                                      Php   497,643    

Accounts Payable                                                            47,665

Accrued Liabilities                                                         112,164

Long-Term Debt                                                          2,638,737

Total Liabilities                                                     Php3,296,20          Owner’s Equity                                                     Php2,087,602

Total Liabilities & Owner’s Equity                       Php5,383,811

Cash Flow Statement is a very useful tool for the business planners. It projects what the business plan means in terms of pesos. It is used for operational planning and estimates the amount of cash inflows and outflows of the business during a
specified period of time. A proper balance between the cash inflows and outflows will result to profits.

a. Cash is the cash on hand in the firm.

b. Cash Sales are the income from sales paid for by cash.

c. Receivables are income collected from credit sales.

d. Other Incomes are income derived from investments, interest on money loaned to borrowers, and on cash derived from sale of assets.

e. Total Income is the sum of cash, cash sales, receivable, and other income.

f. Material or Merchandise

*Raw Material used in the manufacture of the product.

**The cash outlay for merchandise inventory of trading firms.

***The supplies used in the performance of a service.

g. Direct Labor refers to labor required to manufacture a product or perform a service.

h. Overhead refers to all fixed and variable expenses required in the day-to-day operations of the business.

i. Marketing Expenses refers to all salaries, commissions, and other direct costs associated with the marketing and sales department.

j. R & D Expenses are labor expenses required to support the research and development efforts of the firm.

k. G & A Expenses refer to those required to support the general and administrative functions of the firm.

l. Taxes refer to all taxes, except payroll withholding taxes, paid to the government, national and local.

m. Capital represents the fund requirements to obtain any equipment needed to generate income.

n. Loan Payments refer to total payments made to reduce or eliminate any long-term debts.

o. Total Expenses refer to the sum of materials, direct labor, overhead, marketing expenses, R and D, G and A, taxes, capital, and loan payments.

p. Cash Flow refers to the difference between total income and total expenses.

q. Cumulative Cash Flow refers to the difference between current cash flow and cash flow from the previous period. 

Sample of Cash Flow Statement

DPS ENTERPRISES

Projected Cash Flow Statement

2017 to 2019

                                      2017              2018              2019 

Cash Sales                    Php5,000       Php7,000       Php10,000

Receivables                           900            1,000              1,500

Other Incomes                      100               150                 300

Total Income                Php6,000       Php8,250       Php11,800

Material                                 500               700                 900

Direct Labor                           600               700                 850

Overhead                               900               400                 450

Marketing & Sales                 250               300                 400

Research & Development      100               150                 200

General & Administrative       400                400                  400

Taxes                                         55                 80                100   

Capital                                     120                130                 150

Loans                                         50                50                   50

Total Expenses                 Php2,475       Php2,901           Php3,500  

Cash Flow                              3,525             5,340               8,300

Cumulative Cash Flow                                 8,865              17,165

E. Supporting Documents

The business plan would be more meaningful if supporting documents are included. The documents usually consist of the following:

The owner’s resume;

Contracts with suppliers;

Contracts with customers or client;
Letter of reference;
Letters of intent;
A copy of the firm’s lease;
A copy of copyright or patent acquired; and
Tax returns for the past three years.

Last modified: Friday, 1 October 2021, 2:30 PM

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