Unit-3

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Developing a business plan

Chapter 7
Learning objective of the chapter
Understanding the meaning and merit of business
ADMAS
plan UNIVERSITY
for business Managing Growth and
DEPARTMENT OF
The right time to have a businesstransaction
plan
ACCOUNTING
HRML
Who and how it can developPreparing for the
The time when plan is required launch of the venture
Deciding on the format and common elements of
Lecturer: Zakeria Eid Ismail
business
M S c oplan
f Economics
Developing a sample business plan
1
 Objectives
• At the end of this chapter student should be
able to
– Prepare for the launch of the venture
– Manage early growth of venture
– New venture expansion strategies and Issues
(Mergers, licensing and Franchising)
 INTRODUCTION
•Many companies are formed by people who have retired,
moved, or been fired. Another cause of disruption is
completing an educational degree.
•The decision to start a new company occurs when an
individual perceives that forming a new enterprise is both
desirable and possible.
•Although the desire of new venture formation derived
from the individual’s culture, subculture, family, teachers
and peers needs to be present before any action is taken
•the second feature necessary centers around this question
“What makes it possible to form a new company?”
 Managing Early Growth Of Venture
A. RECORD KEEPING
• It is necessary to have good records for effective control
and for tax purposes.
• The entrepreneur should be comfortable and able to
understand what is going on in the business.
• With software packages, much of the record keeping can
be maintained on a personal computer.
• The goals of a good record keeping system are to
identify key incoming and outgoing revenues that can
be effectively controlled.
 Sales (Incoming Revenue)
• It is useful to have knowledge about sales by
customer both in terms of units and
dollars/Shilling.
• The entrepreneur of a retail store might try to
identify the profile of the type of customer that
patronizes the store.
• Retailers also like to have information on specific
customers.
• Credit card purchases can be tracked for
information on the type and amount of
merchandise purchased.
 Expenses/Costs (Outgoing Revenue)

• Records of expenses are easily maintained through

the checking account.
• It is good business practice for the entrepreneur to
use checks as payment for all expenses.
• Canceled checks provide proof of payment. In the
early stage, it may be desirable to make all payments
on time to establish credibility with suppliers.
• Records on all assets owned may be needed. With a
good record keeping system it is easy to
maintain controls over cash disbursements,
inventory, and assets.
 B. Recruiting And Hiring New Employees

• The entrepreneur will generally need to establish

procedures and criteria for hiring new employees.
• Advertising in local newspapers and referrals from
friends and associates is most effective for entry-
level positions.
• For senior management the most effective strategy
is networking with friends and business associates.
Cont…
• Some criteria must be used in the resume
evaluation.
• Factors such as education, prior experience,
entrepreneurial activities, and interests can be
used to assess candidates.
• From the initial screening of resumes, a few
candidates can be invited in for an interview.
• Most firms use an interview form with critical
factors listed for evaluating the interview
candidates
CONT…
• The interview: The interviewer should ask all of
his or her questions at the beginning of the
interview.
• It allows the interviewer to evaluate the
candidate’s behavior.
• It avoids talking too much and not listening.
• Upon completion of the interview, the firm should
be sure to check all of the candidate’s references
 C. Motivating And Leading The Team

• The entrepreneur will usually be a role model for

any other employees.
• Good work ethic will go a long way toward
achieving financial and emotional success.
• During the early stages employees need
incentives to remain committed and loyal to the
long run success of the new venture.
Cont…
• It is important that the founder assume the role of
leader to the management team and employees.
• Leadership is also influencing and inspiring others
in the organization to strive to meet the mission of
the venture.
• Below are some behaviors that can exhibit the
leadership qualities necessary for the new venture.
• Set an example with an ethical set of values for other
managers and employees.
• Show respect and concern for the personal well-being
of employees
 D. Financial Control
• The entrepreneur will need some knowledge of
how to provide appropriate controls to ensure
that projections and goals are met.
• Financial skills are needed for the entrepreneur
to manage during early years.
 Managing Cash Flow
• An up-to-date assessment of cash position, such as a
monthly cash flow statement, is needed.
• The cash flow statement may show the actual amounts
next to the budgeted amounts.
• It is useful for adjusting the pro forma and indicating
potential cash flow problems.
• A cash flow crisis can occur suddenly and unexpectedly.
• Cash flow analysis can also involve sensitivity analysis:
for each monthly expected cash flow the entrepreneur
can use a +/-5% that would provide a pessimistic and
optimistic cash estimate.
Cont…
• An enterprise may be considered growing when
there is a permanent increase in its sales turnover,
assets; volume of output, etc.
• Business growth is natural and ongoing process.
• Many business firms started small and have
become big through continuous growth.
• But growth may be restricted by constraints of
market demand, finance, technology, management
skills, etc.
 Need for Growth
• The important motives which drive business firms
towards growth are the advantages of growth which are
described below:
• Survival: severe competition forces a firm to grow and
gain competitive strength.
• Economies of scale: large scale operations provide
several economies in production, marketing, finance,
and management.
• Expansion of market: increase in demand for goods
and services have led business firms to expand in size.
Population explosion and transportation led to widening
of markets which in turn resulted in mass production.
Cont…
• Owner’s mandate: the owner of a company gets the ultimate
benefit of growth in the form of higher dividends and rise in the
market value of shareholdings.
• Technology: business firms also grow in order to reap the benefits
of modern technology.
• Prestige and power: some business people have a lust for
economic and social power. Big business commands power and
respect.
• Government policy: generally, business firms operate under a
plethora of government controls. Government may provide several
incentives in the form of subsidies and tax concessions to industrial
units in backward areas and those producing goods for export
purposes.
• Self-sufficiency: some firms grow to become independent in terms
of marketing of raw materials or marketing of products.
 New Venture Expansion Strategies And Issues
Types of Growth Strategies
• Different firms may adopt different strategies in
order to grow. The main strategies for growth are as
follows:
1. Expansion;
• product mix, market coverage, market share, or other
accounting and market-based variables
• Moves involving investments, exploration and attack
into new products, new technology and new markets,
innovative decisions and action programs and other.
 2. Merger

• Merger is an external growth strategy. A merger

means a combination of two or more firms into
one. It may occur in two ways:
1) Takeover of one company by another,
2) Creation of new company by complete
consolidation of two or more units.
• The former is called absorption whereas the latter
is amalgamation.
 Types of mergers
• Horizontal mergers: these take place when there is a
combination of two or more firms engaged in the same
production or marketing process.
• Vertical mergers: it takes place when the combining firms
are complementary to each other either in terms of supply of
inputs or marketing of output. For example, a footwear
company may take-over a leather tannery.
• Concentric mergers: when the combining firms are similar
either in terms of technology or marketing system there is
concentric merger.
• Conglomerate mergers: it occurs when two unrelated firms
combine together, i.e., a footwear company combining with a
cement firm.
 Advantages of mergers
A merger provides economies of large-scale operations
Better utilization of funds can be made to increase
profits
There is possibility of diversification
More efficient use of resources can be made
Sick firms can be rehabilitated by merging them with
strong and efficient concerns.
It is often cheaper to acquire an existing unit than to set
up a new one
It is possible to gain quick entry into new lines of
business
 Disadvantages of Mergers
• The combined enterprise may be unwieldy.
• Effective coordination and control becomes
difficult.
• As a result efficiency and profitability may
decline.
• Mergers give rise to monopoly and concentration
of economic power, which often operate against
the interest of the society and the country.
 3. Licensing
Under a licensing agreement, one firm permits
another to use its intellectual property for
compensation designated as royalty.
The property licensed may include:
– Patents
– Trademarks
– Copyrights
– Technology
– Technical know-how
– Specific business skills
Benefits and Costs of Licensing
• Benefits
It requires neither capital investment nor detailed
involvement with foreign customers.
It capitalizes on research and development already
conducted.
It helps avoid host country regulations applicable to
equity ventures.
• Costs
It is a very limited form of foreign market participation.
It does not guarantee a basis for future expansion.
The licensor may create its own competitor.
 4. Franchising

• Franchising is the granting of the right by a parent

company to another independent entity to do
business in a prescribed manner.
The major forms of franchising are:
– Manufacturer-retailer systems such as car dealerships,
– Manufacturer-wholesaler systems such as soft drink,
companies
– Service-firm retailer systems such as fast-food outlets.
• To be successful, the firm must offer unique
products or propositions, and a high degree of
standardization.
 Key Reasons for Franchising

• Saturated Domestic Markets

• Market Potential
• Financial Gain
5:Inter-firm Cooperation
• A strategic alliance is an arrangement between two
or more companies with a common business
objective.
• To better compete, many companies form strategic
alliances with suppliers, customers, competitors, and
companies in other industries to achieve goals.
Reasons for inter-firm cooperation include:
– Market development
– To share risk or resources
– To block and co-opt competitors
 5. Contractual Agreements
• Strategic alliance partners may join forces for R&D,
marketing, production, licensing, cross-market
activities.
• Contract manufacturing allows the corporation to
separate the physical production of goods from the
R&D and marketing stages.
• Management contracts involve selling one’s expertise
in running a company while avoiding the risk or benefit
of ownership.
• A turnkey operation is a contractual agreement that
permit a client to acquire a complete system following
its achievement.
 6. Joint Ventures

A joint venture involves the participation of two or more

companies in an enterprise in which each party contributes
assets, has some equity, and shares risk.
The 3 reasons for establishing a joint venture are:
– Government policy or legislation.
– One partner’s needs for another partner’s skills.
– One partner’s needs for another partner’s attributes or
assets.
• The key to a joint venture is the sharing of a common
business objective.
 
Thanks !!!
The End