Knowledge Base

About Business Plans

About Business Plans

An effective business plan is often regarded as the pre-requisite for any commercial discussions and planning for most business activities. Although most people have a fundamental feel for what a business plan is, they often are unaware of its character, structure and the purposes to which it is put.

The business plan can be used for both internal-to-company purposes, as well as external-to-company reasons. To be effective therefore, it needs to be accurate, realistic and ideally, prepared by independent sources who have no vested interest in misrepresenting the company or activity at the heart of the plan.

What is a business plan?

The business plan is a document which:

  • identifies the company, its purpose for existing, and its objectives
  • explains what it does, where it does it, how it does it, and how effectively it is done
  • identifies what it wants to do, why it wants to do it, when it wants to do it and with whom it wants to do it
  • identifies what the company needs to do or have in order to achieve what it wants
  • estimates the results of what it plans to do if it gets what it wants/needs or does what it says it is going to do

The plan therefore, should provide accurate and believable information which is both sufficient and necessary for business decision makers to base their decisions.

What is the purpose of a business plan and what do readers want to see?

There are a variety of purposes for which a business plan is used. Some include:

An internal planning tool.

Companies use a business plan in order to:

  • know where they are going
  • provide performance criteria against which they can measure their performance
  • provide a method whereby "all" staff can participate in formulating company's direction, assist in setting the key objectives, and "own" the resultant outcomes - the process properly undertaken, ensures participation, engenders understanding, lifts morale and ensures loyalty.
  • acts as a decision making benchmark against which options and alternatives are judged.

As a tool for raising loan funds.

Lending organisations require a business plan from prospective borrowers in order to:

  • understand the entity that they are dealing with and "lending money" to
  • determine whether the entity, its industry and its products/services fall within their approved lending guide-lines
  • verify that the entity does not have an unfavourable borrowing record
  • verify that the people (equity stakeholders and management) do not have an unfavourable borrowing record
  • determine the level of experience of the company and management to do what they are proposing
  • determine the level of risk of making the loan
  • determine the ability of the lender to service the loans
  • determine the ability of the lender to repay the loans
  • determine the level and structure of security against which any loans may be made

As a tool for raising equity participation

Prospective investors require a business plan of the target investment in order to:

  • understand the entity that they are dealing with and considering investing in
  • determine whether the entity, its industry and its products/services fall within their investment guide-lines
  • determine the level of experience of the company and management to do what they are proposing
  • verify that the incoming generating potential promised is realistic in fact and timing
  • determine the level of risk of making the investment
  • determine the ability of the entity to pay dividends
  • determine the ability of the investor to sell all or part of the investment - determine the level of control being offered and whether that is sufficient to protect/manage the investment
  • gauge the degree of financial and other benefits and limitations and other constraints that may stem from this investment

As a tool for obtaining government grants

An application for a government grant will need a business plan to:

  • determine whether the applicant falls within the strict guide-lines of the granting framework
  • understand the entity that they are dealing with and granting money to
  • determine whether the entity, its industry and its products/services fall within their approved grant guide-lines
  • verify that the entity does not have an unfavourable record that may reflect on the granting body or the government
  • verify that the people (equity stakeholders and management) do not have an unfavourable record that may reflect on the granting body or the government
  • determine the level of experience of the company and management to do what they are proposing to do with the granted funds
  • determine the level of political, economic and social implications of making the grant

As a tool for reporting to parent companies

Subsidiaries use business plans to:

  • account to their parent for the resources they have been allocated or intend to use
  • advise their parent of their anticipated activities in the market place in order to coordinate, rationalise and plan group-wide activity
  • advise their parent of the financial returns they may anticipate
  • advise their parent of the financial and legal implications of their intended activity
  • identify medium and long term needs that the subsidiary may have in order to capitalise on its stated opportunities and plans

As a tool for providing guidance to subsidiaries

Parent companies call on business plans from their subsidiaries in order to:

  • ensure that the subsidiary activities and plans are compatible with the parent company's core objectives
  • plan for, and control the level of resources their subsidiary has been allocated or intends to use
  • ensure that the anticipated activities of their subsidiary in the market place are coordinated and rationalised on a group-wide basis
  • be aware of, and plan for, the financial returns they may anticipate from their subsidiary
  • be aware of, and plan for the financial and legal implications of their subsidiary's intended activity
  • be aware of, and plan for the medium and long term needs that the subsidiary may have
  • identify under-utilised or under-performing resources

Typical structure of a business plan

Business plans will vary in structure and content according to the authoring entity, the independent analyst/compiler or the character of the intended reader. However, as a general guide, most business plans will include the following areas of discussion:

Summary

Background

Corporate Objectives (Owner Objectives)

Marketing and Markets

Product/Service description and analysis

Management and Personnel

Manufacturing/Service delivery process

Financial Information

Risk Factors and Rewards

Timetables and Benchmarks

Summary

As an illustration of the priorities and call on funds of venture capitalists, it is often cited that of every 100 business plans that a venture capitalist sees only two get funded as follows:

100 Business plans received

60 Rejected after a quick scan

25 Rejected after a few hours study

15 Remained after the initial study and were investigated more fully

10 Rejected after further investigation

5 Were considered investment-worthy

3 Eliminated after unsatisfactory price negotiations

2 Proposals funded

Although this example is for venture capitalists, it illustrates the criticality of the business plan and the need to "speak" to the reader to ensure that his key success factors are addressed. In order to have the reader actually read the document, it is necessary to "entice" him early - ie in the Summary to the proposal. Most external-to-company readers will not get past the summary.

Accordingly, the summary should provide a concise overview of the plan and should include:

  • the reason for writing the plan
  • if the plan forms the rationale for a loan, grant or equity funds, then it is necessary to state how much is being sought and for what purpose - a brief description of the products/services and markets identifying the key benefits to the reader
  • managerial and track record experience and its relevance to the plan
  • financial highlights
  • details of proposed exit or payback method if applicable
  • return expected and when, showing clearly the benefits to the parent company/investor/lender/grantee if applicable

Background

Depending on the intended reader, you should provide details about the company, when it was incorporated, brief history of its growth and major highlights, significant success and recognise failures and their reasons.

The company's current financial performance, share structure and securities should also be identified here.

Corporate and/or Owner Objectives

State the core outcomes that the organisation is striving to deliver in quantifiable terms (#, %, $). These outcomes represent the organisation's Mission.

Marketing and Markets

Again, depending on the character of the intended reader, it is necessary to place the current and future activity of the company into a rational, pragmatic market context. Readers will need to know that the company's activities are rationally based and likely to succeed in an often dynamic and competitive market place. The context of the discussion should be the ability of the selected or chosen markets to contribute to the organisation's core mission elements.

Most readers will need to understand the following issues:

  • own industry character
  • structure
  • geographic spread
  • input and output analysis
  • competitors
  • performance
  • key success factors
  • key influencers
  • forecasts
  • international trends
  • competitors
  • who are they
  • where are they
  • what are they doing in the market place - strengths & weaknesses
  • how well are they doing it
  • who owns them
  • international trends
  • market share positions and trends
  • major customers
  • who are their suppliers
  • what are their distribution methods
  • customers
  • how many are there
  • who are they
  • where are they
  • degree of contract and standing orders
  • repeat business levels
  • supplier loyalty
  • what percentage of your total sales is held by the top 10 customers
  • why do they buy
  • which distribution channel do they use
  • who makes the "buy" decision
  • average sale
  • seasonality
  • geographic variation
  • advertising and promotion activity
  • describe the advertising and promotion strategy
  • public relations
  • trade shows
  • sales force
  • promotional literature
  • direct marketing and catalogues sales

Production or Service delivery process

Subject to the character of the intended reader, it may be necessary to provide details on the processes involved in making the product or creating the service. These may include:

  • a brief step-by-step description of the product/service-delivery process
  • a description of the facilities available
  • production capacity now, in the future and the steps required to be undertaken to get there
  • percentage yield and waste, and description of the quality control program
  • security of raw material supply
  • availability of necessary labour
  • degree of own-make versus buy-in
  • production advantages/disadvantages over competitors
  • cost effectiveness of production/service delivery
  • if a new product, describe the transition steps from prototype to full production

Product/Service description and analysis

Subject to the character of the intended reader, the following details should be provided about you existing and intended products and services:

  • details of its price relative to competitive products or services
  • details of its quality as perceived by users relative to competitive products or services
  • details of special or unique features of the product or service and the justification that the consumer/user perceives these features as being unique
  • what advantages will the consumer/user obtain from using the product/service
  • what is the current status of the product or service in terms of its lifecycle. Is it in concept form, under Research and Development, at a mature stage in the market or is it "over the hill"
  • what is the likely life-span of the product/s/service
  • what effect will competitive products/services and new introductions have on your product or service
  • what protection have you for your product or services in the form of patents, licences etc.
  • do the products or services operate in or under any government regulation, approval, grant etc
  • do your products/services comply/exceed with any industry norms or expectations
  • what are future product plans and timeframes for their introduction
  • what is the relationship between your product/services and technology
  • what is the relationship between your product/service and labour
  • what is the relationship between your product/service and capital
  • what is the profitability of your product/service
  • what are the service, warranty and guarantees offered

Management and Personnel

Many investors/lenders believe that it is "better to support good management with poor products, than good products with poor management". Ultimately, the plan will boil down to whether the reader believes that management can do what has been promised. It is necessary therefore, to communicate the capabilities of the senior staff to fulfil the objectives in a honest, reliable and efficient manner.

Accordingly, and depending on the character of the intended reader, it is necessary to provide details on key staff and organisational information as follows:

  • a summary for each key manager:
  • role description
  • age, experience and expertise
  • past record and achievements, particularly how they have succeeded in the past attempting similar challenges or objectives
  • a brief discussion of the relationship between ownership and management and the long-term aims and objectives of the key individuals
  • a description of the remuneration policy. Details of performance-based structures and of any service contracts.
  • organisational chart
  • a list of non-executive directors and their roles
  • a description of future personnel and skill needs
  • an appraisal of organisational/management weaknesses or gaps
  • a description of management information systems, control mechanisms and performance measurement methods
  • state of the unions: relevant awards and industrial relations history of the company

Financial Information

Ultimately every reader will require financial information. The particular character of the reader will determine where the financial emphases will be placed and the degree of detail required. However, the following information will be generally required:

  • audited (if possible) financial statements for the most recent completed year and pro-rata for the last 6 to 9 months
  • three year forecasts for:
  • sales
  • gross profit margin
  • net profit margin
  • retained earnings
  • cash generated/used
  • capital expenditure
  • dividend to shareholders
  • commentary on the forecasts used outlining all assumptions
  • pro-forma balance sheets as at infusion/investment date (if applicable)
  • description and justification of intangible assets such as goodwill.,
  • intellectual property, licences held, patents etc.
  • future capital requirements

Risk Factors and Rewards

Most external entity will need to understand the risks associated with supporting your plan. Accordingly, it is necessary to provide an honest, frank and accurate assessment of the company's risk scenarios as follows:

  • identify all known risks and discuss the factors that will influence them coming to fruition.
  • discuss and describe all contingency strategies developed to minimise risk loss
  • provide a sensitivity analysis
  • provide a probability assessment on the listed risks

Timetables and Benchmarks

Naturally, readers of the plan will want to know what is going to happen and when. Once the plans have been activated, the reader will want to know how the company will know that it is achieving and whether their achievements are good, bad or indifferent. Accordingly, the following issues should be addressed here:

  • list all specific objectives sought and identify for each,
  • which department is responsible for the outcomes
  • when are the results expected
  • what exact performance result is desired
  • how does this result relate to competitors/industry standards

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