COLLEGE OF BUSINESS MANAGEMENT

LEARNING MATERIAL IN MM 105/FM 105//OM 105 (Entrepreneurial Management/ Entrepreneurial

Behavior and Competitions)

MIDTERM COVERAGE
LESSON 2.B: THE BUSINESS PLAN

LEARNING OUTCOMES:

At the end of the lesson, the student should be able to:

 Summarize in brief the pertinent sections comprising the business plan.
 Apply the steps of business planning.

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 at a
time. However, it will be very difficult for him if problems occur simultaneously.

The entrepreneur is not entirely hopeless, however. The benefits afforded by business planning may help him
achieve his objectives. When problems occur, some of them require immediate solution, leaving no sufficient
time for the entrepreneur to think clearly. Effective business planning is used to eliminate this difficulty. This
alone justifies engagement in business planning.

Planning may be viewed as a systematic approach to achieve certain objectives. It is an attempt to eliminate
mistakes inherent to "on-the-spot" decisions. Planning provides the decision-maker with ample time to
consider relevant variables before a decision is reached. This is important because the resources required must
be identified early as possible to preclude shortages arising from procurement difficulties. Planning is useful
not only to big business. Small business may also reap the benefits of planning if it is undertaken even on a
small-scale basis.

What is a Business Plan? The business plan is 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.

The business plan is a sort of a business blueprint, and it keeps the entrepreneur on the right track. It gives a
sense of purpose to the business. It also provides guidance, influence, and leadership, as well as
communicating ideas about goals and the means of achieving them to partners, associates, employees, and
others.

Purposes of a Business Plan. A business plan is written for two main purposes. They are the following:

A. The Plan as a Guide. While writing the business plan, the small business operator (SBO) is afforded
sufficient time to consider all factors relevant to operating the business. Through analyses of the environment
and derivation of what can be expected to happen, decisions about various aspects of business operations can
be considered in advance.

As periodic objectives are accomplished one at a time, the business plan serves as a useful tool for comparing
what was planned against what was achieved. Discrepancies will provide the bases for implementing changes
or adjusting in the business plan.

The timetable indicated in performing the various aspects of operations is also a very useful guide for the
management of the firm.

B. A Tool for Securing Funds. When the SBO needs initial or additional funding for his business venture, the
business plan is a handy means for convincing lenders and investors. In many cases, the business plan
indicates that the proponent SBO is fully aware of what he is getting into. Lenders will be more comfortable to
see various documents that indicate the borrower can repay the loan. Such documentation takes the form of
financial projections which are usually included in the business plan.

The business plan will serve as a means of providing some assurance that the investor will place his funds in a
worthwhile investment.

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C. Revising the Plan. A business plan is prepared in consideration of the current and expected situations. In
the process of implementing the plan, however, the expected development or changes in the environment
may not happen fully or even partially. In that case, the business plan or portions of it may no longer be
relevant. When that happens, a revision of the business plan is in order.

The implication is that even with a business plan, the SBO must strive to be well informed about what is
happening to his business and to the industry where his business belongs. Necessary steps must be
undertaken to adjust to changes. For instance, if the usual source of labor has become unreliable, the
corresponding portion of the business plan must be revised.

Parts of the Business Plan. The contents of the business plan will depend upon the purpose. Usually,
however, they contain the following:

I. Title Page and Contents. The business plan must be easily identifiable through a cover page with a listing
of the following:

1. the name of the business;

2. the name/s of the proponents (in this case, the SBO);
3. address;
4. telephone number;
5. e-mail and website address;
6. the date; and
7. the name of the person who prepared the business plan.
The next page should provide a table of contents so the readers can easily find the information they need.

II. Executive Summary. The executive summary is prepared after the business plan is written.
The executive summary is a portion of the business plan that summarizes the plan and states the objectives of
the business. If the SBO is intending to borrow money or is seeking capital from investors, the following must
be indicated:

1. the capital needs of the business;

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

III. Description of the Business. This portion of the business plan is very useful to the SBO, as well as
prospective investors and lenders.

This is divided into two parts:

1. a short explanation of the industry; and

2. 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:

1. the industry sector where the business falls into (retail, manufacturing, education, entertainment,
and
others);
2. whether the business is new or established;
3. the ownership status of the business (sole proprietorship, partnership, or corporation);
4. information on who the customers are;
5. information on the size of the market; and
6. information on how the product or service is distributed.

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IV. 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:

1. 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.
2. A detailed description of how the product is used.
3. What makes the product or service different from others available in the market. Examples are the
availability of the product or service~ 24 hours a day, or the water-based feature of the product insect
repellant:

The objective of product or service description is to show that that firm has a competitive edge over the
others. If the. business plan can 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:

1. superior organization of the business;

2. latest equipment that are currently used by the company;
3. superior location of the company;
4. fair price of the product or service; and
5. superior customer service offered by the company.

V. Market Strategies. Market strategies refer to what the SBO plans to do to achieve the market objective of
the firm. These strategies are formulated after undertaking market research.

Market strategies consist of the following:

1. Definition of the Market. The objective of 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 terms of size,
demographics, structure, growth prospects, trends, and sales potential. To determine the total
potential market, the total aggregate sales of the competitors must be presented.

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.

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

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.

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

a. What does the customer really want to buy from the firm? Apart from product quality, the
answer could vary from fast and efficient service to clean and friendly environment, to good reputation,
and the like.

2. How is the product or service different from the competitors? A product or service may be different
from competition in terms of quality, maintenance requirements, number of uses, ease of operation,
among others.

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 b. What makes the product or service unique? The firm's product or service may be unique in
many ways. It may only be the one that is delivered free to the customer's house, or it may be the only
product that provides a trade-in option to the customer.

4. 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:

1. customer's perception of value in the firm's kind of business;

2. costs involved such as, overhead, storage, financing, production, and distribution; and
3. 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.

5. Distribution Strategy. Distribution refers to the process of moving goods and services from the
firm to the buyers. The distribution channel that 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 to move goods directly to the ultimate
users.

b. Original equipment manufacturer sales - involves selling a manufactured product to another

manufacturer who, in tum, incorporates the same to his product and which is later sold as a finished
product to the end user. An example is the sound system incorporated into cars.

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 mails -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.

6. Promotion Strategy. How the company's products or services will be promoted is an important c
Component of the marketing strategy. The promotion strategy must include the following:

a. Advertising aspects:

1. advertising budget;
2. positioning message; and
3. first year's media schedule.

b. Packaging - describes how the company's products will be packaged.

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 c. Public relations - will be a detailed presentation of the publicity strategy of the firm. This
will include a list of media that will be tapped to convey the firm's message to the target
market. The schedule of special events like product launching will also be included.

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

1. Personal sales - present the sales strategy including:

2. Pricing procedures;
3. Rules on returns and adjustments;
4. Methods of sales presentations;
5. Generation of leads;
6. Policies on customer services;
7. Compensation of salesmen; and
8. Responsibilities of the salesmen

VI. Analysis of the Competition. The small business operator (or the entrepreneur) 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:

1. strengths and weaknesses of the firm's competitors;

2. strategies that will give the firm a competitive advantage;
3. barriers that can be developed to prevent competitors or would-be competitors from exploiting the firm's
market;
4. any opportunity that can be exploited.

The competitors of any business may either be or both direct and/or indirect. A direct competitor offers a
similar product. For example, Nescafe is a direct competitor of Kopiko Coffee. Both will cater to the same
target market. An indirect competitor will take away sales from a company in an indirect manner. For instance,
RC Cola is an indirect competitor of Great Taste Coffee.

The marketing strategies of the firm's competitors must also be analyzed. Such action will provide clues as to
which part of the target market the firm must serve. For example, if the competitor's strategy is to reach its
target market by forging agreements with big malls, the firm may attempt to reach such market by using
alternative channels. For instance, the firm may tap the services of retail stores located within the area where
its target market is situated. Of course, the firm will have to adapt such strategy if it has the strength and
capacity to implement such.

The aim of competitor analysis is to determine how the firm stands against competition. After determining its
position, the firm must take stock of its strengths and weaknesses and craft an appropriate strategy to achieve
its business objectives.

In designing an effective business strategy, the entrepreneur will benefit from using a prepared table of
comparative strengths and weaknesses of competing firms.

VII. 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. organizational structure;
2. operating expenses;
3. capital requirements; and
4. cost of goods sold.

Organizational 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 aspect. Generally, they
will be concerned how the firm is organized along the following concerns:

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 1. marketing (including sales, customer relations and service);
2. production {including quality assurance);

3. research and development;

4. management; and
5. human resources.

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: rent; advertising and sales promotion; supplies; utilities; and shipping;
maintenance and repair; equipment leases; payroll; payroll taxes and benefits; bad debts; professional
services; insurance; loan payments; depreciation; and travel.

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. A firm engaged in transporting elementary and
high school students, for example, will need buses or jeepneys only.

Cost of Goods Sold. Businesses which carry inventories like those engaged in manufacturing and trading
must provide a list showing cost of goods. The cost of goods of trading firms consists 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:

1. material;
2. labor; and
3. overhead.

VIII. 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:

A. Income Statement. The income statement shows the income, expenses, and profits of a firm over a
period. It is also alternatively called "statement of earnings." 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.

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 Example of Income Statement

B. Balance
Sheet.
The
balance
sheet is a
type of
financial statement that shows the financial condition of the business as of a given date. The
information provided by this statement is useful not only to the entrepreneur but also to the
prospective creditors. A scrutiny of the balance sheet will give the owner some clues if modifications
are needed in some of the items listed.

A summary of financial information about the business is contained in the balance sheet and are broken
down into three areas, namely:

1. The Assets. The assets portion of the balance sheet lists the assets of the firm in order of liquidity, i.e.,
from the most liquid to the least liquid. As such, this portion is subdivided into the following:

Current assets

a. Cash - which includes cash in checking, savings, and short-term investment accounts;
b. Accounts receivable - refer to income derived from credit accounts; and
c. 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.

These consist of the following:

a. Capital and plant - refers to the book value of all capital equipment and others such as land and
building, if owned by the firm, less depreciation; and
b. Investments - are investment accounts owned by the company that cannot be converted to cash in less
than a year.

2. The Liabilities. The liabilities portion of the balance sheet is classified as current or long-term. Current
liabilities are due in one year or less and they include the following:

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a. Accounts payable - refer to all expenses incurred by the business that are purchased on an open
account from suppliers and are due for payment;
b. Accrued liabilities - refer to operational expenses that are not yet paid. Examples are overhead and
salaries;
c. Taxes that are due and payable.

Long term liabilities are due in more than one year. They include the following:

1. Bonds payable - are bonds due and payable over one year;
2. Mortgage payable - refers to loans used for the purchase of real estate and is repaid for a period
of over one year; and
3. Notes payable - are loans represented by a written document which is payable for a period of over
one year.

3. The Owner's Equity. This section refers to how much the owner has in the business. It provides a
useful means in evaluating the company.

Example of Balance Sheet

C. Cash Flow Statement. The cash flow statement is also a very useful tool for 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. A proper
balance between the cash inflows and outflows will result to profits.

The following items are listed in a cash flow statement:

1. Cash - is the cash on hand in the firm.

2. Cash sales - are income from, sales paid for by cash.
3. Receivables - are income collected from credit sales.
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 4. Other incomes - are income derived from investments, interest on money loaned to borrowers, and
on cash derived from sale of assets.
5. Total income - is the sum of each cash, cash sales, receivable, and other income.
6. Material or merchandise refers to:

a. raw material used in the manufacture of the product; or

b. the cash outlay for merchandise inventory of trading firms; or
c. the supplies used in the performance of a service.

7. Direct labor - refers to labor required to manufacture a product or perform a service.

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

9. Marketing expenses - refer to all salaries, commissions, and other direct costs associated with the
marketing and sales departments.
10. R and D expenses - are labor expenses required to support the research and development efforts
of
the firm.
11. G and A expenses - refer to those required to support the general and administrative functions of
the firm.
12. Taxes - refer to all taxes, except payroll withholding taxes, paid to the government, national and
local.
13. Capital - represents the fund requirements to obtain any equipment needed to generate income.
14. Loan payments - refer to total payments made to reduce or eliminate any long-term debts.
15. Total expenses - refer to the sum of materials, direct labor, overhead, marketing expenses, R and
D,
G and A, taxes capital, and loan payments.
16. Cash flow - refers to the difference between total income and total expenses.
17. Cumulative cash flow - refers to the difference between current cash flow and cash flow from the
previous period.

The cash flow must be carefully analyzed, and a short summary must be presented in the business
plan.

Example of Cash Flow Statement

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IX. Supporting Documents. The business plan would be more meaningful if supporting documents are
included.

1. the owner's resume;

2. contracts with suppliers;
3. contracts with customers or clients;

4. letters of reference;
5. letters of intent;
6. a copy of the firm's lease;
7. a copy of copyright or patent acquired, if applicable; and
8. tax returns for the past three years.

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