UNIT 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 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 as early as possible to prelude 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:
1. to serve as management’s guide during the lifetime of the business; and
2. to fulfill the requirement for securing lenders and investors.
The Plan as a Guide
In the course of 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 making adjustments 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.

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.

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 following:
1. title page and contents;
2. executive summary;
3. description of the business;
4. description of the product or service;
5. market strategies;
6. analysis of the competition;
7. operations and management;
8. financial data; and
9. supporting documents.

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.

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 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.
The executive summary is prepared after the business plan is written.
Description of the Business
This particular 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 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 in 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.
Description of the Product or Services
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 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:
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.
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
2. determination of the market share;
3. positioning strategy;
4. pricing strategy;
5. distribution strategy; and
6. promotion strategy.
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 (Figure 16).

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Figure 16. The Market for Product X
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:
1. determine the number of prospects in the target market;
2. determine the number of times the product or service is purchased by the target market;
3. figure out the potential annual purchase; ;and
4. determine the percentage of the potential annual purchase that the firm can attain
(Table11).

Positioning Strategy. Positioning refers to how the firm differentiates its product or service for
those of the competitor 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
firm’s product or service identify in the mind of the buyer.
Before adapting a positioning strategy, the following questions must first be considered:
1. 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
users, ease of operation, of among others.
3. 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.
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:
1. Cost plus pricing – covers all costs, variable and fixed, plus an extra increment to deliver
profit.
2. 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.
3. Competitive pricing – calls for price-setting on the basis of prices charged by competitors.
4. 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.
Each of the various methods of pricing has corresponding strengths and weaknesses. In a given
situation, one pricing method could be the most effective.

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:
1. Direct sales – is the most effective channel if the plant is to move goods directly to the
ultimate users.
2. 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. An example is the sound system incorporated
into cars.
3. Manufacturer’s representatives – are wholesalers employed by one or several producers
and paid on commission according to quantity sold.
4. Wholesalers – are channel members that sell to retailers or other agents for further
distribution through the channel until they reach the final users.
5. Brokers – are distributors who buy directly from distributors or wholesalers and sell to
retailers or end users.
6. Retailers – sell directly to consumers.
7. 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
(Figure 17).

Figure 17. Common Distribution Channels

Promotion Strategy
How the company’s products or services will be promoted is an important component of the
marketing strategy. The promotion strategy must include the following:
1. Advertising aspects:
a. advertising budget;
b. positioning message; and
c. first year’s media schedule.
2. Packaging – describes how the company’s products will be packaged.
3. Public relations – will be 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.
4. Sales promotions – are means used to support the sales message like special sales, coupons,
contests, premium awards, trade-in, among others.
5. Personal sales – present the sales strategy including:
a. pricing procedures;
b. rules on returns and adjustments;
c. methods of sales presentations;
d. generation of leads;
e. policies on customer services;
f. compensation of salesmen; and
g. responsibilities of the salesmen.

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; and
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. An example is shown in Table
12.
Table 12. A Comparison of the Strengths and Weaknesses of Competing Firms

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 particular aspect. Generally,
they will be concerned how the firm is organized along the following concerns:
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. Lender and investors are especially interested
in scrutinizing such statements.
In determining operating expenses, labor and overhead must be considered. The organizational
structure in useful in providing information in the determination of labor expenses. Overhead,
which may be fixed or variable, includes the following:
1. rent;
2. advertising and sales promotion;
3. supplies;
4. utilities;
5. packaging and shipping;
6. maintenance and repair;
7. equipment leases;
8. payroll;
9. payroll taxes and benefits;
10. bad debts;
11. professional services;
12. insurance;
13. loan payments;
14. depreciation; and
15. 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 consist of products purchased for
the resale, while the cost of goods 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.
In both types of business, all merchandise sold are indicated as cost of goods, and those that are
not sold are categorized as inventory.

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:
1. income statement;
2. balance sheet; and
3. cash flow statement.

Income Statement
The income statement shows the income, expenses, and profits of a firm over a period of time. 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.
Figure 18 is an example of a firm’s income statement.

Figure 18. Sample Income Statement

Balance Sheet
The balance sheet is a type of financial statement that shows the financial condition of the business
as of given date. The information provided by this statemen
t 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. assets;
2. liabilities; and
3. owner’s equity.
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:
1. 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.
2. 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.
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:
1. Accounts payable – refer to all expenses incurred by the business that are purchased on an
open account from suppliers and are due for payment;
2. Accrued liabilities – refer to operational expenses that are not yet paid. Examples are
overhead and salaries; and
3. 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 to 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.
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. Figure 19 is an illustration of the projected balance
sheet.

Figure 19. Sample Balance Sheet

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 of time. A proper balance
between the cash inflows and outflows will result to profits. Figure 20 illustrates a sample of cash
flow statement.
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.
4. Other incomes – are income derived from investments, interest on money loaned to
borrowers, and on cash derived from sale of assets.
 Figure 20. Sample Cash Flow Statement

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-to-day 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 & D, G & A, taxes, 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.

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