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1.6 The structure of a business plan.
Ordinarily, a business plan is usually structured to contain the following major topics and sub-headings:
1.0 Executive summary
- Vision and mission statements
- Legal status
- Location and facilities,
- Production plan
- Business strategy
- Key success factors
- Nature and size
- Target market
- Key competitors and players
- Service delivery
- Quality assurance
- Demand/supply analysis
- Competitive edge
4.0 Marketing Plan
- Promotion and distribution strategy
- Market positioning
- Market positioning
- Service delivery strategy
- SWOT Analysis
5.0 Organization and Management
- Organizational structure
- Shareholders and directors
- Management team
- External support
- Personnel plan
- Value and norms of the company.
6.0 Legal, regulatory, social and environmental issues
- Legal issues
- Regulatory issues
- Social issues
- Environmental issues
7.0 Financial Plan
- Forecast of sales
- Estimate of costs
- Working capital projection
- Startup capital required
- Proposed financial structure
- Loan repayment and interest payment schedule
- Projected profit and loss account
- Cash flow projection
- Projected balance sheet
- Financial analysis
8.0 Risk Analysis, Contingency Plan and Exit Strategy
- Risk analysis and mitigants
- Contingency plan
- Exit strategy
9.0 Other considerations, conclusion, and recommendation,
- Economic justification
- Commercial viability
- Conclusion and recommendation.
- Photocopy of certificate of incorporation
- Assumptions behind the figures.
The above are discussed in the sections that follow.
1.0 Executive summary.
The executive summary can easily pass as the most critical aspect of a business plan especially where outside funding is sought (Abrams, 2009). As the name implies, the executive summary presents a summary of the important facts in the business plan. It should be noted that although the executive summary is the first part of the business to be presented, it is usually the part to be prepared last.
As one prepares the executive summary, it is important to bear in mind that the plan is mainly going to be read by individuals who: are being asked to invest their resources in the business (angle investors); bankers, and other would be stakeholders who probably have other business plans to read. In fact, an ideal executive summary should be concise, but must have the important highlights that the investors, bankers and others who the plan is being prepared for are looking for. To make the executive summary appealing, the following tips have been suggested by Abrams (2009):
- Divide the summary into paragraphs that mirror the sections of the business plan.
- Keep each topic brief.
- Use bullets to highlight your most compelling information.
- Include a small chart or graph if it makes an important point clear.
- Use white space and informative subheads to break up text blocks and make pages seem less intimidating.
Ideally, the important issuer in the executive summary could be presented as shown below:
- Give the basic information about your business.
- In a very brief but clear way, the products and or services to be offered by the business are discussed.
- Individuals who are used to analyzing a business plan are interested to know your target market. Who are the customers? To be credible here, you can include a summary of the underlying market research results.
- It is very important for you to identify who the competitors are. If you know the relative market share of the competitors, you should state it. In a short and direct way, state what competitive edge your business has.
- Marketing plan gives a brief highlight, of the marketing and sales strategy. Essentially you need to say how you will market and sell your products and or services.
- Outline the operational features define your business and make it unique. You are to state the critical operational features of your business.
- State the key members of your management team and their qualifications – briefly stating the nature of the experience each brings into the business.
- Is there any legal or regulatory issue pertinent to the success of the business? This must be highlighted together with the accompanying environmental issues.
- Almost all stake holders would be interested to know the expected financial performance of the business. You are therefore expected to state the company’s expected gross sales and net profits. Stating the outcome of some ratio analysis will be of good help.
- You have to show the total required investment and the proposed financial structure.
3.0 Company background.
In this part of this business plan – basic details about the business plan is provided. Unlike the executive summary which strives to persuade readers of the expected success of the business, the background or company description provides all necessary specific information about the business. Expectedly some Individuals spend more time than necessary trying to write this part, but this need not be so. All that is really needed is for you to provide the relevant background information about the name of the company, and other details like your company’s structure, ownership, and important milestones.
K is also in this section that you give a brief of sector and industrial developments relevant to your business. It is important to relate these industry/sector developments to your current and or expected business lance. Particularly the following points should be discussed:
- Vision Statement: This is a statement of how the owner of the business wants the public to see the business.
- Mission Statement: This is a statement of what the business entity essentially does in order to realize her vision.
- Ownership/Legal Status: Who owns the business? Is it registered? If registered, what is the ownership structure? Also state whether the business has trademarks, copyrights, or patents. What are the other legal issues relevant to the company? Particularly, state if there is any distribution or licensing agreements and whether there are regulatory issues relevant to the company.
- Key Milestones: This is mostly for existing businesses that are probably seeking expansion. Important milestones could include any of the following: incorporation; major changes in product design; target markets penetrated; strategic alliances; etc.
- Location and Facilities: Where is the business located and why is it located there? You need to state the specific address of the business. Alternatively the general area or city could be named if a particular location has not been chosen. Sometimes, the company might have more than one location from where it executes its locational addresses, and where this is not possible list the areas you plan to operate in.
- Products/Services: Clearly identify the products and or services the business would render (or is rendering). Describe the product (s) or service (s) you are going to offer. Discuss the branding, the packaging (where applicable), ongoing product development, etc. An analysis should be done of the features and their benefits and they should be compared to the major competitors. Sometimes the products might; be too many and listing all the products might make the business plan voluminous. In this case use of categories to present the products/services is advised. Also when discussing your products, you; should be cautious about divulging proprietary or technical information.
- Industry Trend: Since your business is part of a larger whole which is the industry, it would help issues if you could discuss industry trend In fact stating industry trends helps in providing facts that could used to buttress claims made for your company. In the industry trend, the following questions should be addressed: what industry does you company belongs; is the industry a growth industry; and what are the challenges of the industry? Particularly state the opportunities in the industry and how you would utilize them.
- Production Plan: There is no general agreement amongst scholars regarding which part of the business plan the operations production plan should be discussed. Some scholars create a separate section for this, and others discuss it where they judge it would contribute in making for more understanding, logical sequence and ease of presentation. Here our main consideration for discussing the operations here is due to the later.
In the production plan, we must consider the following issues: required facilities and why they are required; output target and the revenue base; the required inputs; production process; and quality control. Note however that the production plan (operations) section of the business plan is not intended to be a detailed operation manual. In some instances, especially where the business is small and the operations basic and simple, it could be skipped. In the operations pattern you adopted, you should highlight its advantages and particularly the edge it confers on your business. Also to be considered here is the issue of the operational challenges being experienced or expected.
- Business Strategy: The business strategy adopted is part of your success factors. Here you consider those things you need to do to distinguish your business and also make customers to consider you as an option of first choice. A business strategic could be any of the following: to be known as the company that produces the best quality product without endangering the environment; a reliable source of product supply at any point in time; the player with the best ethical standards; etc.
- Key Success Factors: Generally what are those factors that predispose your company to success? Is it location, product quality, etc? Specifically discuss them.
Whether the proposed business will succeed or not, depends on the market. In this section describe who will buy your products or services. Is the market growing or declining? What influences will affect the market? Are there seasonal trends? It is very important to consider whether your company’s products and services meet the needs and desires of the target market. In this section, you must be able to show that customers exist for your business, that you know these customers (i.e. who they are, what they Bee, what they want, and even where they live), that the number of the customers are enough to support your business, and that the customers are ready for your products and services and that they are willing to buy them. [The following hints will serve well here:
- Identify the geographic location and reach of your target market and where you consider it necessary state: Whether it is an urban suburban or rural area, and other details like climate and culture.
- Identify the demographic attributes of the market: What is the population characteristics of the target market, especially those highly associated with the probability of whether they will buy or not. Included here are; age; income; gender; hobbies; occupation; marital status; family size; etc.
- Customer motivations and purchasing patterns: Certain customer attributes are less physical, but formidable in making customers behave the way they do. Abrams (2009) suggested that in describing customer motivations the following questions should be considered:
- What concerns your customers most when making purchases? (Is it price? Quality? Convenience?)
- How quickly do they make their buying choices?
- Where do they usually buy their products or services?
- With what kinds of companies do they prefer to do business? (Large? Small? Socially responsible? Locally based?)
- How do your customers view themselves? (Do they see themselves as having a leading -edge? Technically savvy? Smart shoppers?)
Also when describing customer purchasing patterns, consider:
- Who makes the decision to purchase, if other than the end user?
- How often do they buy?
- How do they pay? (Cash? Credit? Purchase order? 30 – 60 -90 day terms).
- Market Size: By the market is meant all the people within a specific geographical area and are in need of a certain product or service and have the resources to buy it and also within reach to buy the product or service. This definition brings out certain dimension about the size of a market by implicitly considering:
- People within a geographic area – population area.
- Who need a product and or a service – have expressed interest.
- Able to buy the people who have both access and money. understand the issues involved in determining market size, the issues above are diagrammatically shown in exhibit I below:
Exhibit I: Market Dimensions
Adapted from Philip Kotler’s marketing management, page 22
- Potential market
Potential market is a subset of the total market. It consists of only those members of the total population who have professed interest in the product/service being offered. It totally excludes every member of the total population who has no interest in the product/service being offered
- Available Market
Potential consumers must have adequate income to afford a purchase. By corollary, if the price is high, the number of consumers within this market will be low. Also some consumers could have interest and adequate income and still may not be a part of the market because of access. Thus, the available market consists of those members of the population that are interested in given product/service offering, who have adequate income to effect purchase and have market access.
- Qualified Available Market
Sometimes a business enterprise may restrict its sales to certain groups. For instance, in Nigeria, banks offer banking service to individuals who have money to save and who are willing to save. However, if an individual is less than 18 years, such an individual is considered to be a minor and will not be served. Most market offerings in product/service have no restriction thus making the Available market to be the same as the qualified available market.
- Served Market:
This is the proportion of the qualified available market that an organization decides to pursue.
- Penetrated Market:
This is the set of consumers who really buy the product. We can use these definitions as a useful tool for marketing planning of our selected product/service. However, to get information regarding these dimensions of the market, we must carry out a market survey. Other Issues that ought to be discussed in this section are as follows:
- Key Competitors and players
In this section, you have to specifically identify the major competitors in your line of business. These competitors are to be evaluated based on how customers view them and .how they operate. You must consider what is the market share of each competitor? Do they have renowned brands? Are they market leaders and are they targeting the same geographical market as you? How do their products and services compare with your own?
Do you think you have any winning strategy against these competitors and can you persuade interested stake holders that you can beat these competitors in the game? Exhibit 2 below can help you articulate the relevant issues in this section.
Exhibit 2: Competition Analysis table
- Service delivery: For businesses that are service based, it will be necessary that a description of the sequence and how the service will be rendered are included. Young (2010) giving a specific example of a client with a computer system to repair has suggested that a typical example of a service delivery procedure may be as shown below:
Source: Adapted from Young (2010) How to prepare a winning Business plan PP. 27
- Quality assurance: Most businesses lose customers due to faltering quality of their products. It is therefore very important that the business owner would spare time to think on how to maintain quality. Other stake holders would want to be assured that the business they are investing in would not lose out due to lack of quality. In this section, steps to be taken to ensure quality assurance should be discussed.
Demand and supply analysis: This is also called demand supply gap analysis or market analysis. In this section, the demand for the products and services of the business are estimated. This will help you determine if there is a sound customer base for the business. You should also articulate the market needs and client dynamics, and the product Supply analysis. To state the market demand, the following might be necessary: describe how you have carried out your customer and market research. Customers want to know what the benefits are of the product or service features, especially with a new product. Why do you think the customer will leave other products/services for your own? The current supply is the subtracted from current demand and whatever figure that is got is adjusted for competition from existing concerns, expansionary ambition of existing concerns and even firms that are planning to open up shop in that line of business. For example consider exhibit 3 below. In the exhibit it is assumed that market research carried out reveals that annual average demand for the product (refrigerators) is 100,000 units and that 35% of this market is already served. Also it is further assumed that 20% of the demand will be served by new entrants into the business and by increases in the output of existing concerns.
Exhibit 3: Estimating Demand Supply Gap
|Estimated average annual demand
Less 35% of supplies due to existing similar shops in the area
|Less 20% due to expansion of existing shops and establishment of new ones||65,000
|Less 5% estimate error||52,000
|Estimated Demand Supply Gap
Installed capacity of shop
The estimate made for the demand supply gap enables us to plan for capacity to be installed in our business. This also helps us to plan the operations that will generate the business’s target output which is usually less than the installed capacity which in turn is less that the estimated demand supply gap. le. where D represents demand supply gap, and K stands for installed capacity, then let T be the target output The relationship is given thus:
- Technology: Technology plays vital roles in businesses today. The type of technology adopted say a lot on how far the business will. Particularly, some issues that need to be considered here are: is the technology product or process technology; is it complex or simple; does it easily get obsolete; is local or foreign; is it expensive; and does it need special training.
- Competitive edge: Your products or services must have products and services that compete with it either directly or indirectly. Be very careful to identify those competing products, services or businesses. Do not “assume” that there are no competitors look hard. Check the newspapers, search in magazines, check the internet and look in all the places you expect them to advertise. How do you compare to your competitors on pricing, product, promotion and distribution? Tabulate a list that shows your features against their and what gives you a competitive edge. Do not ignore the negatives if there are any, as you must address them.
Marketing and sales plan.
The marketing and sales plan discusses how you intend to win over your ‘Customers and through that means ensure adequate sales for the business. Note that there two major ways you handle your marketing: one of the ways is through marketing – which essentially deals with activities to make customers aware of your products or services and the values associated with them (this is usually done through advertising in print, radio, TV, and internet; producing collateral materials like brochures, and product information sheet; preparing company web sites; public relation events (press ‘releases, and events); attending trade show exhibitions; and offering free sample giveaways), Generally describe in detail how you planed your marketing activities.
- Market segmentation: Also called niche marketing. The segmentation strategy considers how to separate the customers into groups with similar needs and or characteristics. Segmentation could be done on the basis of geographic and or demographic considerations.
- Promotion Strategy: Promotion what type (i.e. road shows, raffle draw, a type of competition by customers, etc) where and how often?
- Marketing Strategy: A good marketing strategy is crucial to the success of a business. Customers must know about the product (s) or service(s) to be predisposed to buying them. List in detail the key strategies and explain how they will work and dovetail together if relevant The strategies might include:
- Pricing how is this to be used?
- Literature what type and how used
- Customer Service what Benefits?
- Advertising what and where and the outline cost,
- Product or Service launch) plan
- Market Positioning: Messages are usually sent by businesses via marketing to customers. The ways the customers understand this message and associate their understanding of the message to the business’s image define the market positioning enjoyed by the business. Market positioning defines what are you known for regarding the market offering you are making? Is it quality? Excellence? Reliability? Flexibility? Or what? Note that the use of slogans help to create a good market position.
Management, organization and ownership.
Provide a clear description on the proposed ownership structure and why it is being chosen. Refer to the background of the key persons in the business and what other staff or contractors will be required. What level of remuneration it? Either expected or anticipated. Briefly list any issues that might be pertinent with the employment of staff. You use the subheading below to present your discussions.
- Shareholders/Directors: who is the main promoter of the business, his experience, qualifications and other attributes? Who are the other members of the management team and what benefit do they bring to the company?
- External Support: The business can do more where there is the possibility that it can get outside collaboration. From where else does the organization draw help, mention the sources and what they do?
- Personnel plan: What types of skills are needed? What is the recruitment policy? What is the proposed organizational structure; positions in the business; does the positions arise from the structure; how many employees; and how much do you pay in wage bill? Exhibit 5 shows a hypothetical organizational structure of a piggery which could help address the above issues.
Exhibit 4: Organizational structure of a hypothetical small scale piggery
- Value and Norm of the enterprise: Does the company adopt: best practices; integrity; accessible; do business within the ambits of the law.
Legal, environmental, social and regulatory issues.
- Legal Issues: Will the business be registered? What legal form and why? Registered with whom? There are many options as to how a new business can be structured. For example, is it going to be registered as a Sole Trader; a Partnership; a Limited Partnership or a Proprietary Company? Will there be Trade Marks or Patents and will the company trade under a business name or a company name? What of the necessary business permits, and licenses, franchises, etc.
- Environmental issues: Are you environment friendly? Do you comply with environmental laws and requirements, etc?
- Social issues: How does the business affect the wider society, economically, in poverty reduction and job creation?
- Regulatory issues: Who are the regulatory authorities? Do you keep to the rule?
Risk analysis, contingency plan, and exit strategy.
- Risk analysis: What risks are the business open to? Have you identified such risks and what are the mitigants?
- SWOT Analysis: It is crucial to carry out a SWOT analysis for a business plan. SWOT stands for strengths, weaknesses, opportunities, and threats. SWOT analysis could be categorized into two: influences that is company specific – and hence could be manipulated by the company – like strengths and weaknesses; and influences that is economy wide and cannot be manipulated by the company. Strengths could derive from location, management, and or technology. Strengths are those that the company can exploit. Weaknesses could be as a result of poor product quality, poor capital base, etc. Weaknesses are areas of the business that need to be addressed. On the other hand opportunities can arise on account of export potentials, government priorities, increasing GDP growth rate, etc. Opportunities show the market place areas that can be built on. While threats could be due to unstable government policies, adversely changing demographic attributes within the target market. Threats are those issues that could affect the business. Not only should you list each of the Strengths. Weaknesses, etc. but you should also assess what each means to the shape, direction, and tactical running of the business.
- Exit Strategy: Sometimes a business may not turn out to be rewarding as initialing expected. When such is the case, it might be reasonable to withdraw from such a business. The danger here is that any attempt to back out from a business after making the investment outlays always portends huge losses for the investors. Therefore investors want to know how withdrawal from the business could be effected with minimal lose. This section addresses the questions: are there plans for exit? And at what point should exit be contemplated. The owner might contemplate diversification and not exit. Also there could be buy off.
Company financial analysis.
The financial plan is so important due to the fact that it most provides answers, in numeric terms, to three basic questions that a business plan ought to provide answers to. The three basic questions are:
- Will the proposed business be profitable?
- Will the business be able to pay its maturing obligations without sinking into insolvency, and or bankruptcy? In order words, how liquid would the business be?
- Will the proposed business deliver wealth to its owners or promoters?
To answer these questions, the company financial analysis must be performed. To do this analysis, the following steps are to be followed”
- Reconsider the Schedule of production: The production plan was earlier considered in section I of the chapter. You should spell out how the product(s) or services(s) are to be produced and “costed” and the quantity. For instance, is it a manufacturing process or is it a bought-in-item. The cost and price should be clearly stated. It might also be necessary to state what proportion is material, labour and overhead recovery, and how they relate to the selling prices. If it is a service on what basis is the cost charged? For instance consider the exhibit below. This productions plan of a piggery.
Exhibit 4: Production schedule of a piggery
PS -parent stock, LS – lactation stage, WS – weaners stage. PkS – PorkersStage, NPkS number of porkers sold, NPD – number of porkers dressed, FPS – feed for parents stock, FWS- feed for weaners stage, FFS – feed for fattening stage, FPkSC – feed for porkers stage DrC- dressing cost, and DgC – drug cost.
Note that capacity to prepare the production plan is based on knowledge of the business and it automatically brings out the periodic outputs, production cost, and possible sales. Even out details about the business are embedded here. In fact once one is able to draw a realistic production plan, the business plan is almost home and dry.
- Estimate of Sales: Also based on the ability of the production schedule to show the sales estimate.
- Cost Estimate: This must also be based on the schedule of production show the cost estimate.
- Fixed Assets Cost: Also called cost of machinery, equipment, and other permanent assets. Note that the machinery and other requirements must be such that can enable the realization of the production plan. Where the production plan is on a large scale, the equipment | necessarily should be on a large scale. See exhibit 5 below for our hypothetical piggery:
Exhibit 5: Equipment, Machinery, and other requirements of the Piggery
|s/n||Detail||Qty||Unit price (N)||Total amount (N)|
|1||Pig houses with 24 pens||4||200000||800000|
|4||Water tanks (2000 gallons) lanterns||1||50000||50000|
|7||Metal wasting basin||10||1600||160000|
|8||Sub-total A Investment in livestock’s Sows||20||120000||1946000 240000|
|Subtotal B Grand total (A + B)||244000 2170000|
- Working capital projection: It is vital to assess the total funds required to set up the business and cover its operating costs until it becomes profitable. The equipment and machinery cost allow you to set up the physical structure required for your business. But then what of salary for workers, and other expenses before the business starts to yield revenue. You need therefore to make provision for all expected initial expenses so that the business will die before its investments mature. How do you provide for your initial operating expenses? See exhibit 6:
|Exhibit 6: Working capital projection for a hypothetical piggery|
|Working capital items||Year 0 (N)||Year 1 (N)||Year 2(N)||Year 3 (N)|
|– Increase/Decrease in working capital||–||68000||119000||269000|
The working capital forms the basis for credit policies of the business, and shows whether the business expects to get funding from suppliers by way of trade credit or whether it will help in funding the business operations of its customers through purchases. These have implications on the health of the business and must be correlated to the production schedule through sales and cost plans which depend on the production schedule.
- Startup capital required: Total Fixed assets and working capital. See exhibit 7 below:
Exhibit 7: Total Start-Up Capital Required the hypothetical piggery
|s/n||Capital items||Amount (N)|
|1||Machinery, Equipment and others||2170000|
|2||Working Capital Requirement||706000|
- Financial structure proposed: How do you intend to fund the needed startup capital. How much is equity and how much is to be borrowed?
- See exhibit 8.
Exhibit 8: Financing structure
|Equity contribution Bank loan||666000 2210000|
- Depreciation: How do you plan for asset replacement as they are worn out in the business? A popular and simple method usually used by many people is the straight line method of depreciation. See exhibit 9 below. The annual depreciation is calculated using the straight line method. We express the straight line depreciation as: Dep. = (iv -sv)/ls
Exhibit 9: Schedule of Annual Depreciation
|1||Pig houses||20||800000||600000||1 0000|
The parent livestock actually does not depreciate in value and could be sold even more than the cost of purchasing, as such it (parent livestock) is not included as an item in the depreciation schedule.
- Loan repayment and interest payment schedule: When do you start paying what you borrowed? When will you finished and how much interest and principal do you pay per period? Exhibit 10 on our hypothetical piggery shows how to generate loan interests and repayments.
Exhibit 10: Loan repayment and interest payment schedule
The above approach is rather simplistic and rather presented for ease ‘of understanding. A better but more rigorous approach is to use the expression below:
Where PV is the amount borrowed, n is the period of repayment, and r is the rate of interest payment A is the annual installment payment required
Projected profit and loss account: The profit and loss for the first one year or 12 months should be calculated. As a new business this should be done on a monthly basis and include the establishment costs. You include all Sales Revenue, costs of sales, the gross profit/loss and every overhead expense. Make sure that you do not overestimate the sales and underestimate the overhead costs. Below is an example of a simple profit and loss schedule (Inforpreneur, 2008).
You will be required to do this projection for the first three years.
This is almost the most important control schedule that any new business needs. Whatever the profitability of the business might be it is critical to ensure that your business does not run out of cash. The projected cash flow shows periods of surpluses and shortfalls of cash. In its simplest form it records when you actually receive cash from sales. It also records when cash payments are made for; buying product, overheads, tax, etc. It is ideal to draw your plan with the cash flow schedule starting right at the beginning of the new business set-up with a zero Bank Balance and with the initial cash investment inserted. This helps to us have a more realistic figure for the cash requirement of the business. See an example of a simple Cash Flow schedule below.
|Opening Bank Balance|
|Total cash received|
|Total Cash Available|
|Cash Payments Admin.|
|Cost of Goods|
|Net Cash in for mth|
|Closing Bank Balances|
- Balance of Sheet
The Balance Sheet shows the net worth of the owners (i.e. the shareholders) of the business and its composition, at a particular point in time. It combines the result from the profit & loss statement and the Cash Flow Statement. If you are going to commit borrowed fund to the business, it is will be a useful for you to draw up this statement.
|Balance Sheet Assets||Start Date||Six Months||Year End i.e. Yr 1||Yr 2||Yr 3|
|Capital (plan & equipment|