BUSINESS PLAN GUIDE. Realise your Idea. A business plan is the road map to the FUTURE for your new business. How to sell your idea to the money people

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1 BUSINESS PLAN GUIDE Realise your Idea Every business starts with an idea. No matter what that idea is, a well thought out business plan is what helps turn that idea into a reality. This guide is designed to guide you through the steps of developing and fine-tuning your business plan. A business plan is the road map to the FUTURE for your new business It shows where you re starting from, your hoped-for destination (your business goals) and how you plan to get there (your business strategy). And, like a good map, it will illustrate the territory you re travelling into (your markets, customer base, competitors), obstacles (competition, potential funding or cash flow shortages, production bottlenecks), alternative routes (contingency plans, other sources of funding), and so on. And it allows you to check your progress as you go to see how far you ve travelled toward your destination and how far you still need to go. The most important reason for writing a business plan should be that it is an important tool for you. A business plan is simply a written document that describes the future path of a business. A good business plan will: Draw a clear picture of your business objectives and give you goals to shoot for Give you a better understanding of the industry and business you are getting into Show the potential strengths and weaknesses of your business Give prospective investors the means to determine whether your company is a suitable investment Give you a chronology of events and financial milestones against which you can compare your actual results How to sell your idea to the money people Financing your new business and yourself while you re starting your new business is the toughest challenge for many entrepreneurs. It can be especially difficult for women if they haven t worked outside the home or established their own credit rating. Although it is a common misconception that business plans are written for the sole purpose of obtaining financing, this guide on how to prepare a business plan was written with the aim of easing access to finance for female entrepreneurs and in particular start-up female entrepreneurs. For many reasons banks are paying more attention to the relative riskiness of 1

2 their clients. To estimate the risk of their client firms, banks also need more information than before. SMEs that can show that they are stable can expect to benefit with lower interest rates and better access to loans. Riskier SMEs are likely to face higher interest rates and higher collateral requirements. One reason for changes in bank behaviour is the reform in banks capital requirements (the Basel II agreement). This agreement aims to make the international financial system safer by having the riskiness of banks loan portfolios to be reflected in the capital charges they need to set aside against unexpected losses. The agreement sets out the details for adopting more risksensitive minimum capital requirements for banking organisations 1. Financial statements (i.e. balance sheets, income statements and cash flow statements) are very essential tools when examining the financial performance of an already established business. In cases, however, of startup businesses such reports do not exist and the Commercial Loan Officer will have to rely on a business plan which is prepared for the purpose. Business plans should give the Commercial Loan Officer a clear picture of how the company will be run and what its goals and objectives are. With this guide 2 we want to particularly help women entrepreneurs like you put together your business plan and get access to finance in order to build your business, step by step, brick by brick Let s go! 1 For more information on the Basel II agreement, please consult 2 This guide was developed through the project Women on Board of Local Development, Grant Agreement No. VS/2006/0426, with the support of the European Community, Programme relating to the Community Framework strategy on gender equality. The information contained in this guide does not necessarily reflect the position or opinion of the European Commission. 2

3 A few good tips before you get started The hardest part of writing a business plan is getting started. The thought of writing a document of this length may seem overwhelming to many people. This is why it is recommended that you use the bite-size approach to writing your business plan. set aside a specific period of time each day to sit down and write a few paragraphs or pages if you are not able to fully answer a question, write a few short notes that immediately occur to you, and think further about what the question suggests as you continue to write and do more research, you can go back and add things that you have previously missed you may not find it possible to answer every question; however, you should be aware of these issues as they may affect your venture in the future A common mistake in writing a business plan is to recognise only the data that supports your concept and to ignore facts that, when considered objectively, might change the direction of your business. issues must be seriously and objectively considered and you should be somewhat open minded in your approach it is better to recognise needed changes when your business is in the planning stage than when the business is already underway and your investment is at stake many good business plans go through several revisions and take up to six months to complete as changes in the business environment occur (i.e. new competition, new product design), a company s business plan should be modified to reflect the new environment. A business plan is not a static document it will continue to evolve as the business grows and things change in the internal and external environment. Avoid highly technical terms and diagrams that the reader may not be familiar with. You want to write the plan as if the reader (even if she/he is a banker!) knows nothing about the type of business you are starting. Think of your business plan as a sales document. After all, it must convince you and other readers that your venture has the potential to be successful. Your enthusiasm, dedication and confidence in the project should be evident to the reader, to the point that they will share your view. 3

4 Remember not to ignore or omit risk factors that are inherent within your project. Risk is inherent in every business venture. The following pages provide a suggested outline of the material that should be included in your business plan. However, the final product will need to be tailored to fit the circumstances of your business. Important Disclaimer This guide is not intended to replace legal, accounting or other professional services or advice. You may want to consult a professional business counsellor or seek out accounting advice before completing your business plan. The authors of this guide accept no liability even in the unlikely event that damage is directly or indirectly caused to any person or property as a result of using or relying on this guide. 4

5 Business Plan Guide Contents 1. Cover Title Page 2. Table of Contents 3. Executive Summary 3.1. Business Overview 3.2. Product or Service Features 3.3. Market Analysis 3.4. Marketing Strategy 3.5. Key Objectives and Financial Overview 4. Detailed Plan 4.1 Market Analysis 4.2 Product(s) or Service(s) 4.3 Marketing Strategy 4.4 S.W.O.T. Analysis 4.5 Business Structure and Ownership 4.6 Management 4.7 Key Objectives 4.8 Risks 4.9 Financial Information Establishment Costs First Year s Projected Profit & Loss Cash Flow Balance Sheet Source of Finance Break-even Analysis Return on Investment 4.10 Action Plan 5. Final Point 5

6 1. Cover Title Page State the business name, physical address, phone number, fax number, address, internet address and the names of the principal owners. Indicate the date of issue of the plan and the copy number. 2. Table of Contents A single page that lists section headings with corresponding page numbers (as the contents page of this Guide in the preceding page). 3. Executive Summary The Executive Summary should be written AFTER the business plan is complete. It is a brief (one to two pages) summary of the main topics covered within the business plan. This section may be the most important part of your plan. Investors will read the summary to decide whether to read the entire plan. For this reason, your summary should be: convincing attract the reader s interest brief 3.1. Business Overview What the business is all about in general terms? What industry is it in? What is the key benefit, rather than the product or service, that you are going to provide? What are the products or services, who buys them, and a general statement as to where the business will be in two to five years and how this will be achieved Product or Service Features Give a brief description as to what the products or services are and the outline features that are going to give you the edge in the market place. State clearly what you are actually going to sell Market Analysis Outline what market the product or service is going to be aimed at and why. What research is there to support your business expectations? 6

7 3.4. Marketing Strategy Make a broad statement of the marketing plan and the tools to be used Key Objectives and Financial Overview List your Key Objectives. There will only be a few at this summary level but they will be the ones that are essential for you to achieve. For example: achieve sales in the first year of X at a gross margin of X. achieve a net profit before tax in the first year of X. Explain the basic financial needs of the new business, starting with the initial capital and your expected cash needs to run the business. 4. Detailed Plan This section goes into the details that will make the Business Plan a working and ultimately a control document. It is therefore important that care is taken to get it right. It is not just a collection of words but a document that really sets out what is going to happen and can be reviewed at any time to check progress. When the Business Plan is going to be used for the basis of obtaining finance then it will be critically reviewed Market Analysis It is essential to show that there is a sound customer base for the business. Is the market growing or declining? What is the geographical area? Is the market segmented and if so, how? By segmenting the market, you can focus your marketing efforts on the segment(s) which are most likely to purchase your product/service What influences will affect the market? How are you going to reach your customers? Are there seasonal trends? What is the pricing sensitivity? What competitive edge do you have? Explain how you have carried out your customer and market research where have you found out the information (desk and/or field research)? 7

8 4.2. Product(s) or Service(s) The purpose of this section is to introduce the reader to the products and services you will be selling. Provide a description of your products and services and their key features. Why will customers buy your products/services instead of another company s? Explain what makes your products/services unique in the marketplace and how they will differ from those of your competitors Describe how your products/services will be produced. You may wish to highlight the resources used (both human resources and materials) and the process involved in the production of your products/services Highlight any future plans you have to upgrade existing products/services or introduce new products/services Is there anything about your production capabilities that may give you an advantage over your competition? For example, do you have specialised skills, new technology, access to cheaper materials, or low overhead costs? 4.3. Marketing Strategy Your readers after understanding your industry (see Market Analysis), they will want to know how your business will fit in. A good marketing strategy is vital to the success of a business. Customers must know about the products/services to be exposed to buying them. List in detail the key strategies and explain how they will work. Target Markets In the Market Analysis section you described the key market segments within your industry. Which of these customer groups or market segments will your business specifically target? You can define your target markets both by type of customer and by geographic region. Explain how your target markets may change during the term of the business plan. Competition There will be other businesses or competitors who are also competing for these target markets. List your key competitors and provide a brief description of their businesses in terms of location, products and services, marketing strategies, and market position. Do not assume that there are no competitors look hard! Check the Yellow Pages, look in magazines, check the internet, look in places you would expect them to advertise and of course consult Chambers of Commerce and Industry. 8

9 Analysis of Competitive Position Now you need to compare your business to that of your competitors. In what ways will you have an advantage over your competitors and in what ways will you be at a competitive disadvantage? In which markets will you have the greatest competitive advantage? Pricing Strategy Briefly discuss how you will price your products/services. How will the pricing of your products/services compare to that of your competitors? For example, will you follow a penetration pricing policy (where you offer low prices in order to generate higher sales volumes)? Promotion Strategy Having a good product/service is no guarantee of success. You have to make potential customers aware of your products and tell them how and where they can buy them. Describe how you will create awareness of your products and services. Highlight the types of promotional activities you will undertake such as media advertising, trade shows, direct mail, sales calls and any other means of promotion that you will use to reach your target markets. Distribution Strategy How will you distribute your products/services to your target markets? Discuss where your customers will be able to buy your product/service, and how you will provide customer service and after sales support S.W.O.T. Analysis A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as Strengths or Weaknesses, and those external to the firm can be classified as Opportunities or Threats. Such an analysis of the strategic environment is referred to as a SWOT analysis. Strengths A firm s strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include: patents strong brand names good reputation among customers cost advantages from proprietary know-how exclusive access to high grade natural resources favourable access to distribution networks 9

10 Weaknesses The absence of certain strengths may be viewed as a weakness. For example, each of the following may be considered weaknesses: lack of patent protection a weak brand name poor reputation among customers high cost structure lack of access to the best natural resources lack of access to key distribution channels In some cases, a weakness may be the flip side of a strength. Take the case in which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it may also be considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment. Opportunities The external environmental analysis (legal, political, economic, social, technological, competitive and ethical environment) may reveal certain new opportunities for profit and growth. Some examples of such opportunities include: an unfulfilled customer need arrival of new technologies loosening of regulations removal of international trade barriers Threats Changes in the external environment may also present threats to the firm. Some examples of such threats include: shifts in consumer tastes away from the firm s products/services emergence of substitute products/services new regulations increased trade barriers 4.5. Business Structure and Ownership There are many options as to how a new business can be structured. For example, is it going to be as a Sole Trader; a Partnership; a Limited Company; are there Trade Marks or Patents and will the business trade under a business name or a company name. You should provide a clear description on the proposed ownership structure and why it is being chosen. 10

11 4.6. Management A strong management team is the key to a successful business. Investors will look for a committed management team with a balance of marketing, technical, operational and financial skills and experience. Show that your management team has these necessary skills or is making efforts to attain them. list management personnel and the position they will fill in this business venture. Emphasize the skills and abilities each person brings to the operation if the management team has direct experience in this proposed business area, it should be stated. Support this experience by listing accomplishments related to other successful ventures include an organisational chart if your business is very large. It is necessary for the company to determine the relationship between the key management roles. In addition, show who has authority and responsibility for the successful completion of each business function. An organisational chart may make this area easier for you to explain and easier for the reader to understand. Most management textbooks will tell you how to construct a good organisational chart Key Objectives This section clearly identifies the long-term and short-term objectives that will contribute to the overall mission of the business. These objectives will give the operation direction for future activity and serve as a measuring stick for the success of the operation. You should list your objectives or goals for the first year of operation. It is important to separate your objectives/goals under the operating sections of your business such as Sales & Marketing, Production, Finance, etc. They should be relevant and concise and must in addition be quantifiable, achievable and measurable. For example: Sales & Marketing: To achieve sales in the first quarter of X. To achieve sales in the second quarter of Y. To achieve X% market share. Production: To have zero defects To decrease production time for X quantity by Y%. Finance: To achieve a maximum debtor days of X. To reduce the overdraft from X to Y. 11

12 4.8. Risks Some people think that you should not discuss risks in your business plan. However, readers will want to know that you have thought about what could go wrong and that you have taken steps to protect your business. In this section, you need to identify any risks that could affect the success of your business and discuss how you would overcome them. Market Risks Are there any events that could affect your customers need or demand for your products/services during the term of the business plan? If yes, discuss how likely it is that these events will occur and what steps you will take to limit the impact should these events occur. Other Risks Discuss any other risks that could affect the success of your business and how you will overcome them. Such risks could include changing economic conditions, the loss of key management personnel, new government regulations, the inability to obtain needed financing, a change in technology, a change in production process, lack of qualified staff. Contingency Plan In the event that the business fails, what type of exit strategy has been considered? No new business owner likes to consider this possibility. However, if factors beyond your control force you to discontinue your business, you should consider what can be done to lessen the problems this situation presents Financial Information There are a number of key financial items that need to be prepared to show the progress and health of the business Establishment Costs It is vital to assess the total funds required to set up the business and cover its operating costs until it becomes profitable. These should be listed and totalled. They should be split between prebusiness costs and initial costs of operating First Year s Projected Profit & Loss The Profit and Loss for the first 12 months should be calculated. For a new business this should be done on a monthly basis and include the establishment costs. Make sure that you include all Sales Revenue, Cost of Sales (what the product costs are), the resultant Gross Profit/Loss and all the Overhead Expenses. It is important to ensure that you do not overestimate the sales revenue and 12

13 underestimate the overhead costs. There is no point in fooling yourself or the source of finance by massaging the numbers to look OK if you know they are unlikely. Shown below is an example of a simple Profit and Loss schedule. It is important for you to give careful thought to the make-up of the items, particularly the expenses. Sales Revenue and Product Costs should be expanded if there are distinct product categories. In the example, it is assumed that the business s start of operations is September. Projected Profit & Loss First Year Sales Revenue Less Product Costs GROSS MARGIN % of Sales Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Total Less Expenses Salaries Rent Telephone Electricity Advertising Entertainment Insurance Legal Office supplies Motor vehicle Etc. Total Expenses NET PROFIT/LOSS Provision for Tax PROFIT/LOSS AFTER TAX 13

14 Cash Flow This is probably the single most important control schedule that any new business needs. Irrespective of the profitability of the business it is critical to ensure that your plans don t result in your running out of cash. The projected cash flow highlights the surpluses and shortfalls of cash. In its simplistic form it records when you actually receive cash from sales (as opposed to when you might invoice a product) according payment terms and any other cash receipts less cash payments made for, buying products, raw materials, overheads, tax, etc. The Cash Flow schedule should commence right at the start of the new business set-up with a zero Bank Balance and with the initial cash investment inserted. This ensures that the true cash requirement of the business, from start-up, is tracked. Shown below is an example of a simple Cash Flow schedule that shows some of the more usual items, again assuming the month of September to be the start of the business. 14

15 Projected Cash Flow First Year A) Opening Bank Balance Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep CASH INFLOW Cash Receipts Investments Sales Income Bank Interest Other Income B) Total Cash Inflow CASH OUTFLOW Admin. Outgoings Marketing Cost of Goods Interest Expense Capital Costs Tax Other Payments C) Total Cash Outflow D) Net Movement (=B-C) E) Closing Bank Balance (=A-D) 15

16 Balance Sheet A Balance Sheet identifies the net worth of the owners (usually also the shareholders) of the business and how it is made up, at a particular point in time. It brings together the results from the Profit & Loss Statement and the Cash Flow Statement. It is therefore a useful Statement to complete particularly if the new business is going to rely on borrowed money. The lack of sufficient equity in a new business is the greatest cause of failure. It is suggested that a Balance Sheet be prepared for the start of the business, six months later and at the end of the first year drawing the information from the Profit & Loss Statement and the Cash Flow Statement. Below is a simple example of a Balance Sheet that can be expanded if necessary. BALANCE SHEET 1. ASSETS Start Date Six Months Year End 1.1. Cash 1.2. Debtors 1.3. Stock 1.4. Capital (plant & equipment) 1.5. Other Total Assets 2. LIABILITIES 2.1. Loan 2.2. Overdraft 2.3. Creditors 2.4. Provisions Total Liabilities 3. SHAREHOLDERS EQUITY 3.1. Capital (Shares) 3.2. Retained Profits Total Equity TOTAL EQUITY AND LIABILITIES 16

17 Source of Finance The projected cash flow will show how much money is required to set up and commence the operation of the business. You need to explain where this money is coming from and where, if necessary, future additional finance might be available, for say, expansion. This is critically important if the Business Plan is going to be used to obtain finance Break-Even Analysis A break-even analysis is a calculation to show the level of sales or services required to pay for all the overheads of the business and at least come out even. This should be calculated over a 12-month period and can easily be constructed from the Profit & Loss and Cash Flow Statements. A simple commentary with the numbers is all that is required to explain what the break-even picture is Return on Investment Personal money tied up in the business is an investment. If it were not tied up in the business it would, presumably, be earning interest in some other form of investment. Will the business provide a return on the investment, if so, what return, when and if it doesn t will this be an issue? Action Plan The Business Plan has got to be used to manage the business, not simply for gaining access to finance. To ensure that it does serve the purpose of guiding your business development it is important to now set down the specific tasks that have to be done to achieve the Objectives/Goals set. You do this by preparing an Action Plan. This should be done in a tabular form by the operating sections of the business. The items should not be too detailed or else they become unworkable. The purpose of the Action Plan is to act as a checklist of the key actionable items and the time they have to be done by and who is to do them. A simple example is shown below. 17

18 Key Objectives Task By By When Whom MARKETING Determine Launch Outline Plan LP 1 May Plan Agreement and decision on Implementation LP/DP/LR 1 June Create a Brochure Agree concept LR 1 July Approve copy LP/LR/DP 30 July Print SN 1 Brochure ready for distribution LR September 1 October FINANCE Finalise Cash Flow Plan Review P&L with LP/PL/MM Managers Complete Cash Flow Plan LP 1 January 1 February Finalise Finance Initial Review Finance LP/DP 1 March Documents Sign PL/LP 1 April 5. Final Point It must be stressed again that a Business Plan is not just written for obtaining finance (even though it is at least much easier to obtain finance if you have a good Business Plan!). It is an important tool for you as it focuses on what the business objectives are, sets out the thinking behind the business and shows the methods by which the objectives will be achieved. It is for this reason that care must be taken to pull all the details together in one cohesive document. The volume of words used is never the judge of a good Business Plan. It is important to be concise! 18