23 Formulation of Business Plans

Monica Bansal

1. Learning Outcome:

After completing this module the students will be able to:

Understand the procedure of Formulation of a Business Plan.
To have the knowledge about advantages of Creating a Business Plan.
Describe the Nature and Scope of Business Plan.
Clear Understanding of the Features of a Successful Business Plan.
To know about the Procedure to Write a Business Plan
Knowledge about the Various Elements of a Business Plan
Understand how to Implement a Business Plan by the Entrepreneur

2. Introduction

A business plan refers to a formal statement of plans of an enterprise. It explains business goals of the enterprise and means to achieve those goals. It seeks to address the strengths, weaknesses, opportunities, and threats of starting a venture. The business plan differs from enterprise to enterprise depending on various factors, such as complexity in organizational structure, types of products and services, and demand for the product. However, the basic elements of a business plan remain the same. The business plan is often an integration of all the functional plans such as finance, marketing, manufacturing, and human resources. It helps the entrepreneur in both short term and long term decision making.

In the words of Tariq Siddique, “If you are failing to plan, you are planning to fail.” The definition explains the importance of a plan to succeed.

David Gumpert has defined a business plan as, “It’s a document that convincingly demonstrates that your business can sell enough of its product or services to make a satisfactory profit and to be attractive to potential backers.” In the view of Gumpert, a business plan is essentially a selling document that convinces the key investors that the venture has a real potential to be successful.

The advantages of creating a business plan are as follows:

Encourages individuals to take into consideration all the aspects of business.
Helps in obtaining the opinion of trusted and experienced external advisors on initial plans. It helps to identify the weaknesses, missed opportunities, and unsupportable assumptions, which further help in improving the prospects, reducing the probability of rejections, and chances of operational failure.
Helps in formulating a proposed budget, as it involves proper financial forecasting. This further helps in matching the results with projections and inducing corrective measures on time.
Forms an important document for creditors and investors, as they would always refer the business plan before investing. An investor looks into the following 5Cs of an entrepreneurial venture while evaluating the business plan:

Capital: Refers to the amount of money invested in the business by the entrepreneur
Capacity: States whether the financial budget is realistic and sufficient
Collateral: Refers to the security provided by the entrepreneurs
Character: Refers to the trustworthiness of the entrepreneur
Conditions: Signifies whether the environment is conducive for the purposed business.

Helps in obtaining statutory permissions/approvals for starting a business.

Thus, it is essential for an entrepreneur to create a realistic business plan. The business plan should ideally be prepared by the entrepreneur. However, he/she may consult advisors, such as lawyers, accountants, marketing consultants, and engineers, to prepare an accurate plan.

3. Nature and Scope of Business Plan

A well-prepared business plan helps in gaining the trust of suppliers and various other parties and securing favorable credit terms. It states the vision, future plans of the enterprise, and products and services offered by it. This helps investors and lenders to take interest in the enterprise as both of them use the business plan to understand the new venture and relate it with the current market opportunities. Mark Steven, an advisor to small businesses aptly expressed the importance of the business plan in dealing with investors. In his words, “If you are inclined to view the business plan as just another piece of useless paperwork, it’s time for an attitude change. When you are starting out, investors will justifiably want to know a lot about you and your qualification for running a business and will want to see a step-by-step plan for how you intend to make it success.”

However, the business plan is not a legal document for raising the required capital. When it comes to a solicit investment, a memorandum is also needed. An entrepreneur uses the business plan to create interest of investors in the enterprise and then follow up with a formal offering of memorandum to investors, who are willing to invest in the enterprise. Furthermore, it helps in communicating the entrepreneur’s vision to current and prospective employees of the enterprise. Thus, a business plan is used by both the insiders and outsiders, as shown in the following Figure:

Figure: Users of a Business Plan

Features of a Successful Business Plan

Containing an executive summary, a table of contents, and chapters in the right order
Exhibiting the right appearance and the right length-not too long and too short, not too fancy and too plain
Providing a clear idea of what the founders and the enterprise expect to accomplish in the future
Explaining the benefits of products and services to be given to customers
Presenting hard evidence of the marketability of products or services
Justifying the means that is selected to sell products or services
Explaining and justifying the level of product development
Providing the details of the manufacturing process and associated costs
Portraying the partners as a team of experienced managers with complementary business skills
Stating clearly how the entrepreneurs’ products are better than that of its competitors
Mentioning the superiority of the team members
Containing realistic financial projections
Providing a well-organized oral presentation

4. Writing a Business Plan

Creating a business plan is the first step of the planning process of an enterprise. An enterprise needs to conduct lot of research to develop an effective business plan. Figure shows the essentials of an effective business plan:

Figure: Elements of a Business Plan

The elements of an effective business plan (as shown in Figure) are explained in the next sections:

Title Page

The title page of a business plan includes the name of the business, date, and the name, address, and contact number of the entrepreneur or the concerned person. The cover page can be simple or complex depending upon the choice of the entrepreneur.

Table of Contents

The structure of the table of contents may vary from one enterprise to another depending upon the scale and nature of business operation. An entrepreneur generally prepares the table of content after adding all the features of the business plan. The table of content consists of main headings and sub-headings with related page numbers.

Executive Summary

The executive summary is a brief summary of the entire plan, highlighting all important aspects of the plan in a concise and appealing manner. It contains basic information, such as the name of an enterprise and its location, nature of business, types of product or services, and financial requirements. The executive summary may also contain important points or news about the enterprise, which attract investors, suppliers, and other target audience. It is the most critical section from readers’ point of view because people generally go through this to decide whether to read other sections. The executive summary should not exceed 3-4 pages and should be short and comprehendible. It should provide the technical, marketing, managerial, and financial details of the venture.

Description of the Business

The business description presents the details of the business opportunity and the strategy to capture that opportunity. It contains a detail description of enterprise’s background, country of origin, strengths of employees, stakeholders, products, and portfolio. The description of the enterprise comprises the historical background and current status of the enterprise as well as details about its products and services.

Different components of strategic management, such as enterprise’s vision, mission, profile, and external environmental objectives, need to be considered before creating a business plan. A comprehensive study of these components helps in designing effective plans for the future of the enterprise. A process of building these components in a systematic manner is called strategic intent.

Concept of Strategic Intent

Strategic intent is a process that helps the management team to set priorities, make decisions, and achieve the goals of the enterprise. These priorities, decisions, and goals are integrated to form the vision and mission statements of the enterprise. Following figure shows the process of strategic intent in an enterprise:

Figure: Strategic Intent

The importance of vision and mission statement is drawn in the following points:

Infuses a common purpose throughout the enterprise. This statement helps in providing the direction of enterprise’s goal to managers and employees.
Enables superiors to delegate authority to subordinates and ensure whether the targets are fulfilled.

Product description involves information about the products or services offered by the enterprise. It helps customers to understand whether the product or service is as per their expectations. Important points to be included in product description are as follows:

Product Specification: Includes characteristics of the product related to a particular industry. For example, if a product relates to the manufacturing industry, it should be contain the ISO trademark. The product specification includes information about patents, copyrights, and trademarks owned by the enterprise.
Production Process: Includes information about the type of products manufactured by the enterprise. It also involves information related to inputs used to get the required output.
Unique Selling Proposition (USP): Refers to the competitive advantage or uniqueness of a product that would help in attracting customers.
Quality Assurance: Refers to the process of inspecting the quality of the product through various quality management system standards, such as ISI marks, ISO 9000:2000, Agmark, and Hallmark.

Market Plan

A market plan describes how the product or service would be distributed, priced, and promoted. It involves the analysis the current market conditions and trends. The market plan involves critical marketing decision strategies and sales forecasting. Potential investors view the marketing plan as critical to the success of the new venture. Thus, the market plan should be comprehensive and detailed as much as possible, so that investors can clearly understand the goals of the enterprise and the strategies to be implemented to achieve these goals effectively. Marketing planning is an ongoing requirement for the entrepreneur, which serves as a road map for short-term decision making.

Equipment and Material Description

An entrepreneur needs to provide a clear description of the equipment and materials required to carry on the operations of the enterprise. Equipment and materials include plant, machinery, and raw materials that act as inputs to produce the output (product). They form the most expensive purchases of an enterprise. An entrepreneur makes an advance payment to get customized some parts of the machinery as per his/her requirements. He/she should aim to achieve cost minimization and timely delivery of the materials while purchasing the materials and equipment. An entrepreneur should have good bargaining skills to get customized machinery at optimal cost.

Operations Plan

An operations plan involves actions that need to be taken to make the efficient use of resources and processes. It includes information about the following:

Capacity Planning: Determines the maximum amount of work that an enterprise can do in a given period of time. Generally, enterprises forecast the capacity utilization over the years and make targets to attain the final capacity utilization level. For instance, if an enterprise’s current capacity is 40% within one year and it aims to attain 60% of the capacity, then it needs to perform proper capacity planning and make judicious use of resources.
Personnel: Refers to the human capital of an organization. The success or failure of an enterprise depends on the efficiency of its human resource. Therefore, the enterprise strives to adopt efficient human resource management system, so that the growth and development of employee is possible.

Therefore, operations planning provide a map for resource and personnel planning.

Management and Organizational Plan

Management and organizational plan provides information background, skills, abilities, and competencies of an entrepreneur or the management team. It also contains information regarding the form of ownership of the enterprise and its organizational structure. For example, if an enterprise is running in partnership, the details of its partners, their names, and designations must be provided in the management and organizational plan. In addition, the management and organizational plan should also contain description about roles, responsibilities, and authorities of individuals in the enterprise. This can be explained easily with the help of a tool called organizational chart.

Management plan also includes human resource policy and its strategies, such as recruitment and selection policy, promotion and increment, retention policy incentives, or motivation. Thus, management and ownership forms the most essential part without which the process of planning in an organization cannot be implemented.

Financial Plan

A financial plan constitutes an important component of the business plan. It provides financial information and startup timeline for the business. An entrepreneur needs to raise sufficient amount of capital for starting a business. Businesses require capital to purchase fixed assets, such as land and machines, and to meet day-to-day expenses. In case of small enterprises, funds can be raised through own savings; however, in case of large enterprises, funds have to be raised by public, commercial banks, and financial institutions. Therefore, the entrepreneur is required to generate financial forecasts to raise finances. These forecasts help in calculating the amount of funds and debt financing required to carry on the business. These further help in planning the potential return on investment.

The financial portion of a business plan must be examined closely by all the partners and investors. Thus, accurate financial projections attract investors, lenders, and serve as a guide to future business decisions.

The importance of financial planning is shown in the following points:

Acts as an integral part of corporate planning for the business
Ensures adequate funds from various sources for smooth conduct of business
Attempts to achieve a balance between the inflow and outflow of funds
Ensures adequate liquidity throughout the year
Leads to minimization of waste of resources

Financing any new venture can be done in the following two ways:

Debt Financing: Refers to an interest bearing investment that needs collateral security, for example, loans
Equity Financing: Offers investor’s ownership to the extent of size of investment and does not need collateral security, for example, shares

Financial decisions are required with respect to the following:

The amount of long-term capital required
The cost of raising funds
Determination of optimum capital structure
The estimation of return on investment

Thus, these decisions involve making financial forecasts that require projections for three to five years. These projections include:

Income Statement: Refers to a profit and loss statement, which shows the cash management of the enterprise by subtracting expenses from receipts.
Cash Flow Statement: Shows all cash receipts and expenses. Cash flow is crucial for the survival of any business.
Balance Sheet: Shows assets, liabilities, and retained earnings. It indicates the value of the cash position and owner’s equity at a given point.
Break-even Analysis: Shows the volume of revenue from sales that are needed to balance the fixed and variable expenses. It is a no loss-no profit point.
Key Financial Assumptions: Includes assumptions about expected cash flow in an organization, market share, and rate of return. For example, an enterprise can assume that its product would be able to capture 40% of the market and then can make plans and decisions about the investment and marketing strategies.

Financial forecasts are mostly set up on yearly basis. The yearly plans are divided into quarterly or monthly plans. These projections and forecasts form an essential part of a financial portfolio; therefore, it is required to make sure that they are valid, realistic, and accurate.

Contingency Plan

A contingency plan mentions all the anticipated risks associated with a business and ways to mitigate those risks. One of the most important characteristic of an entrepreneur is that they are risk takers. Risks are the most important part of the business. Ignorance of the risks may lead to a negative impact on the operations or profitability of business. Risks can arise from the following two types of factors:

Internal Factors: Refers to the controllable factors of an organization. For example, if the manufacturing plants of an enterprise are not operating at optimum efficiency, then the enterprise can correct it by revamping the operational structure of plants. These factors can be identified and corrected easily.
External Factors: Refers to the factors that are beyond the control of an enterprise and may affect its financial condition. For example, threat of new entrants in business and uncertainties, such as natural disasters.

Every entrepreneur should have the ability to identify the risks and have readymade solutions to avoid the risks. The various types of risks faced by an entrepreneur are as follows:

Economy Risks: Refer to the risk associated with the economy in which business operates. For example, inflation and recession.
Industry Risks: Refer to the risk associated with the industry in which business operates. For example, competition and change in government policies
Internal Risks: Refer to the risk unique to the business and are controllable in nature. For example, lack of funds and managerial skills.

The different measures taken by enterprise to mitigate risks are as follows:

Risk Avoidance: Implies avoiding the activities involving risk. For example, an entrepreneur avoids the liability that he/she feels may affect negatively in future, if he/she is unable to pay it back.
Risk Reduction: Implies using various methods to reduce risks. It lessens the possibility of loss from occurring. For example, enterprises use fire extinguishers to reduce the risk of loss arising from fire.
Risk Transfer: Implies transferring the risk to the other person or party. It can be done by the purchase of an insurance contract, which helps in transferring the risk. For example, marine insurance covers the loss of damage of ships, cargo, and any transport or property by which cargo is transferred.
Risk Retention: Implies accepting the loss when it occurs. All types of risks that cannot be avoided or transferred are retained, by default. This includes risks that are so large that they cannot be insured. For example, emergence of a war can lead to loss of property, which has to be retained by individuals. In most of the cases, property is not insured against war.

Every business involves a certain amount of risk. Therefore, an entrepreneur should have the ability to identify the risks, evaluate the critical risks, and make realistic contingency plans.

5. Implementing a Business Plan

After developing the business plan, the next important step is to execute it. An enterprise communicates the progress of activities carried according to the plan, to its employees. This helps the enterprise to achieve its key objectives and mission. A business plan guides the entrepreneur throughout the entrepreneurial process. In the implementation phase, the entrepreneur arranges the essential resources, such as men, machine, and material, to achieve the set objectives. Next, he/she assigns tasks to employees to meet the goals and ensures that the assigned tasks are performed efficiently. Lastly, the entrepreneur ensures that objectives projected in the business plan are achieved effectively.

6. Summary

In this module, you have learned the importance of developing a business idea before setting up an enterprise. An entrepreneur needs to take into consideration various factors, such as size and location of the enterprise, before setting up an enterprise. In addition, the module has detailed upon the significance of generating a business plan and the procedure of implementing it. The various elements of a business plan are discussed in detail.

Learn More

Few important sources to learn more about Taxation Benefits to Small Scale Entrepreneurs are as follows:

Ahmad Khan Mukhtar (1992).Entrepreneurial Development Programmes in India. New Delhi. Kanishka Publishing House.
Janakiram B, Raveendra P.V., & Srirama V. K. (2010). Role and Challenges of Entrepreneurship Development. New Delhi-110028: Excel Books.
Prasain G. P. (2003). Entrepreneurship Development. New Delhi-110002: Jain Book Agency.
Robert D Hisrich (2007). Entrepreneurship. New Delhi. Tata McGraw-Hill Publishing Company Limited.
Trehan, Aplana (2012). Entrepreneurship. New Delhi-110002: Dreamtech Press.
Vaish Kalpna (1993).Entrepreneurial Role of Development Banks in Backward Areas. New Delhi-110059. Concept Publishing Company.
www.yourarticlelibrary.com/business/planning-business/…formulation…
www.pccc.edu/home/pctc/documents5/businessplan_part_one.pdf
www.ctpd-namibia.com/management…/business-plan-formulation-practi.
articles.bplans.com/writing-a-business-plan/

Points to Ponder

A business plan refers to a formal statement of plans of an enterprise. It explains business goals of the enterprise and means to achieve those goals.
A well-prepared business plan helps in gaining the trust of suppliers and various other parties and securing favorable credit terms. It states the vision, future plans of the enterprise, and products and services offered by it.
Creating a business plan is the first step of the planning process of an enterprise. An enterprise needs to conduct lot of research to develop an effective business plan.
The executive summary is a brief summary of the entire plan, highlighting all important aspects of the plan in a concise and appealing manner.