A Standard Business Plan Format Guide For an Entrepreneur

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By: Site Engineer, Staff

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Background of the Business

The introductory pages of the business plan aim to indicate the identity of the business, the management team a description of the product or services of the venture, the market and potential customers and the major competitors.

Identity of the Business

  • Name and address of the company
  • The legal form of the business-sole proprietorship partnership or limited liability company
  • Value of equity capital of incorporation or registration of the business name
  • Date of commencement of trading
  • Name and address of bankers

Management Team

Names qualifications, age, experience and position of members of the management team including the entrepreneur. The purpose of this is to highlight the competencies and skills available to the business venture to execute its programmes. It is useful therefore to provide information on the business background entrepreneur and other key staff especially as they relate to the business venture being reviewed.

The Product or Service

Describe the product or service of the business venture in terms of

  • The name of the product or service and trademarks.
  • The uses of the product/service and how it works
  • The unique characteristics/features of the product or service that makes
it different from the products/services of competitors.
  • The specific benefits/satisfaction that customers erect to derive from the use of the product/service.

The Market

  • Describe the market in general and specify the various market segments.
  • Analyze the different market segments by estimating the size and future growth potential of each segment.
  • To understand the future growth potential of the market analyses the demographic, economic social, political, legal and technological trends affect the market from your analysis, it may turn out that some market segments are small initially but have high growth potential in the future.
  • Define the specific market target or market segment selected for your business venture.

Customers

  • Identify and describe the potential customers in terms of their geographical location, the number, and other characteristics.
  • Reasons for purchasing and benefits expected.

Competitors

  • Identify who the competitors are, where they are and their number.
  • Barriers for entry of new competitors into the market.
  • Analyze the quality of their products and services their major strong points and weak points.
  • Describe the competitive edge of your business venture – the advantages your business has over your competitors that are likely to be attractive to customers. Also, highlight the advantages competitions have over your business.

Personal Goals, Business Goals and Objectives

What are the personal aims of the entrepreneur for starting a business? Entrepreneurs are unique individuals and so are their personal aims for starting a business. Generally, some start their businesses to earn a living and support their families; others aim to have independence and autonomy. Yet others want to build a business that will enable them to pursue an interest, become wealthy and famous. A first step in planning a business is to be clear about the personal aims you want to achieve in starting a business.

Business aims are different from personal aims. But business aims are related to the personal aims of the entrepreneur in that they support and make the achievement of the latter possible. Business aims refer to the unique reason for the existence of the business enterprise – the customer needs it is set up to satisfy and how the needs will be met. Business aims also indicate what the business wants to be to its customers, investors, employees, and the community in which it operates. They create a picture of what the business will be in the distant future. Two businesses may operate in the same industry but one will be different from the other in terms of the specific customer needs it intends to focus upon, product offering, cost, quality reliability, etc.

A small restaurant may have one of the following aims:

  • To be tine restaurant of the first choice among middle-income employees in the business district of big cities.
  • To be the restaurant you will be proud to take an important guest to.
  • To be the purveyor of the culture of South-Eastern Nigeria by serving the traditional dishes of its peoples in the big cities.

It takes a little bit of time and reflection to state as crisply as possible the aims of the business enterprise that are lofty and capable of inspiring others to achieve them. Write down what this business could want to be to its employees or to its investors.

Business Goals

Business goals state the direction in which the business will go in the next five or more years. Setting goals takes into account the entrepreneur’s assessment of the business environment and the resources at his disposal.

Goals can be set in the area of:

  • Marketing – The market position the business will occupy in the next five years, sales growth customer services new product development, product quality, and price.
  • Production – The state of the production facilities and their utilization
  • Innovation – Emphasis on technological and product innovation.
  • Personnel – Training of staff
  • Growth – Growth through expansion diversification
  • Financial – Desired debt financing reinvestment of profit equity financing
  • Rewards – Rewards to the owner’s reward to employees
  • Public responsibility – Payment of taxes and rates, preservation of the environment, employment of disabled people, consumer protection
  • Profitability – Return on investment, increase in net profit over a period of time

Objectives

Objectives are goals stated in short specific and measurable terms. They are targets to be met in annual budgets or a specified period of time. Objectives are set for the various operational units such as product development, distribution, inventory, training, etc. Achievement of short-term objectives makes the attainment of business goals and personal goals possible.

Examples of objects are:

  • To increase annual sales of product X by 20 percent next year
  • Reduce downtime of vehicles by half in the next six months
  • To reduce the delivery time of produces to customers from two weeks to one week
  • To introduce a safety training program within three months.

Marketing Plan

The marketing plan is based upon the market analysis and business goals earlier discussed. It contains the following:

  • Statement of marketing goals.
  • Sales forecast.
  • Statement of marketing objectives.
  • List of marketing actions to be taken to achieve objectives within a given time frame.
  • An estimate of the cost of marketing actions (budget).
  • Statement of the measures by which marketing performance will be evaluated.

Marketing Goals

This is a statement of the customers the firm wants to serve and the benefits it will provide to meet the needs of its customers.

Sales Forecast

You may wonder if it is possible to forecast what quantities of the product the firm can sell during the plan period or the sales revenue that can be generated during the period. It is indeed possible to estimate your potential sales if you have a good understanding of the market and your potential customers as well as your firm’s main strength and weakness. Your sales forecast is, in fact, the basis of subsequent marketing activities of the firm.

We can illustrate the process of undertaking a sales forecast with an example of a small business center which provides photocopying, type-setting, project binding, and snacks to students and staff in a University community. This business enterprise will need to estimate its potential sales revenue from the different services month by month, quarterly and for the year. First, it can obtain information on the amount spent by individual student and staff on photocopying per semester. With this information, the possible expenditure on photocopying by students and staff in the university is estimated. Next, the proportion of the total of such expenditure that the firm can attract is estimated, given the competition and the unique advantages the business enterprise has. This is its potential market share of the photocopying market in the university.

This process is repeated for the other services and the sales forecast of the firm is obtained.

Marketing Objectives

These are specific statements of what the entrepreneur wants to achieve in key marketing areas such as overall sales increase, product, distribution, price, and promotion. Objectives can be set in these areas but it important to note that the more the number of objectives, the less that can be achieved on the whole. It is wise therefore to focus on those areas where significant impact can be made.

Objectives can be stated as follows:

Overall Sales

  • Target sales volume (or revenue) during the year
  • Increase in sales volume (or revenue) by a stated percentage during the year

Product

  • The target date for introducing a new product or service
  • Product modification to be effected during the period
  • Percentage reduction in waiting time for after-sales service

Distribution

  • Number of new sales outlets to be opened
  • Number of new distributors to be recruited to carry the firm’s products
  • Geographical area to be covered
  • New distribution channels to be utilized
  • New distribution equipment to be purchased

Price

  • Profit margin to be achieved
  • Discount to be allowed
  • Credit to be allowed

Promotion

  • Percentage increase in the number of sales calls to be achieved by sales personnel
  • Number of advertising slots to be done over the plan period
  • Trade fairs to patronize
  • Quantity of posters/flyers to be produced and distributed

Marketing Actions to Achieve Objectives

The marketing objectives can be achieved through a variety of different action programs. The entrepreneur reviews the possible actions that can be taken and selects those that are most viable given the firm’s strengths and weaknesses. List what will be done, when it will be done during the plan period and by whom. For example, the possible action programs open to a small restaurant whose objective is to increase the number of patrons by 20% include:

  • Introducing a new item in its menu (e.g., ice cream)
  • Introducing a system of takeaways
  • Providing a new uniform for its salespersons so that they appear neat and smart all the time
  • Fainting the restaurant in attractive colors and refurbishing the tables and chairs
  • Training of salespersons in service delivery
  • Sales promotion activities such as the free distribution of note pads indicating the name and address of the restaurant etc.

An Estimate of the Cost of Marketing Actions

Each selected marketing action is costly in terms of:

  • Direct personnel costs
  • Direct material costs
  • Indirect (overhead) costs

Statement of measures by which performance will be measured

This should be objective and verifiable measures such as:

  • Actual sales growth achieved
  • The actual number of sales calls recorded
  • The decrease in the number of complaints by customers
  • Increase in the number of inquiries, etc

Devising Your Production/Operation Plan

A production or operations plan is based on the target sales of the product over a period of time. The target sales for the period (say one quarter) is the broken down to target sales per month, and per week as necessary. For example, if the target sales/quarter is 100,000 units, this may be broken down as follows:

Month 1          –           30,000 units

Month 2          –           35,000 units

Month 3          –           45,000 units

Production in month 1 is then broken down to weekly production as follows:

Week 1            –           5000 units

Week 2            –           8000 units

Week 3            –           8000 units

Week 4            –           9000 units

Total               –           30,000 units

Given this schedule, the production plan specifies:

  • Direct labor: These are the employees who are engaged directly in producing the output. It excludes employees such as supervisors and managers, salespersons maintenance and security staff.
  • Names and addresses of suppliers of raw materials.
  • The operation required to process raw materials into finished products. For each operation estimate, the number of employees needed to produce the expected output. Direct labor cost is then determined by multiplying the number of an employee by the wage rate.
  • Factory overhead expenses. This includes indirect cost items such as oil, gas, grease, supplies, utilities, repairs, insurance, depreciation and indirect labor (supervisors salaries).
  • The stage by stage process of converting the raw materials to finished products including packaging.
  • The machines and equipment needed to carry out operations at each stage of the production process.
  • The layout of facilities to ensure a smooth flow of material, and personnel.
  • The number of raw materials required for producing the volume of products expected to be sold during the period. This results in a schedule of raw materials to be purchased per period. The raw material schedule converted to cost schedule by multiplying by unit price.

Organizational and Human Resource Plan

At the early stages of the business, the entrepreneur or owner/manager is involved in all the operational activities of the enterprise and takes all the key decisions. Job descriptions are loosely defined as employees are often required to perform any duty need to achieve operational targets. The reporting relationships are flexible. All of these make it possible for the small business enterprise to respond quickly to opportunities and threats that may arise from the environment. Indeed this flexibility is the hallmark of small businesses and accounts for their adaptability and speed in responding to new situations.

Organizational and human resources plan is based on the need for the small business to remain flexible and at the same time able to achieve its major objectives.

To develop the plan involves the following activities:

  1. Training objectives and policy: the percentage of employees to undergo training in the three year period.
  2. Welfare: contribution to the National Social Insurance Trust Fund.
  3. Estimate the total personnel cost as in the format below
  4. List all the activities that may be performed to achieve the objectives of the enterprise.
  5. Group these activities into broad areas of responsibility or departments. Common ways of grouping the activities are marketing and sales, accounting and finance, operations, administration, etc.
  6. Write out the duties and responsibilities (job description) that the persons-in-charge of the departments are expected to perform and the results they are required to achieve.
  7. State the skills, abilities, the educational qualifications and experience (job specification) that would be required of persons taking charge of the departments.
  8. Also, write out the job description and job specification of the key supporting staff in the respective departments.
  9. Estimate the number of personnel needed to perform the key jobs in the enterprise.
  10. Determine the composition and size of the Board of Directors and the role it is expected to play in the enterprise.
  11.  State the compensation objectives and policies of the enterprise. The compensation objectives and policies of the business enterprise should be stated with respect to:

(a) The Entrepreneur:

(i) As a Manager: Compensation package that will enable him/her meet his/her personal expenses and sustain a preferred lifestyle.

(ii) As an Investor: A satisfactory return on his/her investment

(b) Employees: Compensation packages (basic salary, allowances for housing, transportation, etc) that will enable the enterprise to attract and retain the caliber of employees desired.

(c) Members of the Board of Directors: This is the number of fees to be paid.

Personnel Cost

Position No Basic Salary Allowances Pension/NSITF Contribution Total
Managing Director

Head, Administration, and Finance

Head, Marketing

Head, Production

Other Position

Total

Financial Plan

Estimating Capital Expenditure Needs

The first step in this process is to identify and list the various assets required in the business venture. Then the estimated cost of each item is determined. Information on costs may be obtained from various sources including a quotation from equipment suppliers Estate Surveyors or Quantity Surveyors, Engineers, etc.

In a typical startup small business, the capital expenditure list may include:

  • Land
  • Site development including cost of surveying, leveling the site, building an access road, etc.
  • Buildings (or rent) including renovation or remodeling costs
  • Plant, machinery, and equipment (including port charges, insurance, and freight)
  • Cost of installation of plant and equipment Utilities (including the cost of extending water electricity, telephone, etc)
  • Motor vehicles
  • Furniture and fittings
  • Office equipment
  • Legal and promotional fees (lawyers’ fees, incorporation/registration charges other professional charges, traveling costs
  • Licenses and permits.
  • Contingency (usually about 5-10% of the sum of a-k above)

Total Capital Expenditure Requirement              =N=

Estimating Working Capital Needs

Most businesses fail due to the inadequacy of funds to execute the day-to-day operations of the business. Small businesses are particularly vulnerable if working capital is inadequate. The estimation of working capital needs is of great importance to the entrepreneur.

Working capital in accounting parlance is current assets less current liabilities. In practical terms, current assets translate to be:

  • The amount of cash required to meet transactions needs of the business (e.g. wages and salaries, payment of energy bills, telephone bills, repairs, and other incidental expenses
  • The amount needed to purchase the stock of raw materials (that is, raw materials awaiting processing, the raw material content of work-in-process, and raw material component of finished goods awaiting delivery to customers
  • The amount of money needed to finance credit sales to customers.

Current liabilities include:

  • Amount of money involved in credit purchases from suppliers
  • Loan repayment due in the current year
  • Rents, rates, taxes, etc due but unpaid.

In estimating working capital, therefore, careful consideration should be paid to:

  1. The cash required to meet payroll obligations, supplies, utilities and to pay for incidental expenses.
  2. The minimum number of days/weeks/months stock of raw material coverage.
  3. The minimum number of days/weeks of work-in-progress coverage.
  4. The minimum number of days/weeks of finished products coverage.
  5. The minimum number of days/weeks of accounts receivable coverage.

Cash Flow Forecast

Cash is the livelihood of your business. Cash flows into the business from various sources. Before operations begin, the owners of the business inject their own investment (owners’ equity) in the form of cash into the business. Cash may also flow into the business in the form of loans, sales, interest from deposits at the bank, sale of assets, etc.

Cash flows out of the business when payments are made for items purchased. Examples of such items are land, plant, and equipment, furniture, vehicles, raw materials, etc. Cash also flows out of the business when payments are made for rents, wages arid salaries, electricity, and telephone bills, taxes, rates, etc.

For the business to survive, the pattern of this inflow and outflow of cash must be understood and managed carefully so that:

  • You can anticipate when the business is likely to experience a cash deficit. This enables you to make necessary arrangements ahead of time to borrow the needed funds.
  • You can also anticipate when there is likely to be cash surplus and to arrange for die excess cash to be put into productive use rather than being left idle at the bank.

Without cash flow forecast, the business can mil into serious difficulties because the owner/manager of the business did not anticipate that sufficient cash will not be available to purchase the raw materials needed to fill the orders of customers,

Preparing a cash flow forecast requires you to identify the sources of cash inflow and their timing. Also, you will need to identify all the cash payments that must make and when. By matching the inflow of cash against the outflow of cash month by month, the periods in which cash deficit or cash surplus will be experienced can be known.

Forecasting Income Statement

Broadly, there are two ways to prepare a projected income statement. The first is to begin from a sales forecast and then work down through the various cost items to arrive at the net profit. The second is for the entrepreneur to have a target net profit, which he/she considers to be:

  • Adequate compensation for his/her time devoted to the business
  • Satisfactory return on his/her total investment in the business.

Starting from a sales forecast, the step-by-step process of projecting the income statement involves:

  • Forecasting sales revenue over a three year period, month by month in the first year. The figures are taken from the marketing plan.
  • Given the sales forecast for the period, estimate cost of goods sold. This is the direct cost of producing the product or service. It includes purchases of raw materials, direct wages and salaries, and other direct inputs.
  • Deducting (b) from (a) gives the gross profit earned
  • Estimate the marketing, selling and distribution costs. This includes the cost of advertising, sales promotion materials such as posters, banners, gift items, etc, selling expenses such as commission, warehousing expenses, and travel expenses incurred by salespeople.
  • Estimate administrative costs. This includes wages and salaries, rent, utilities, insurance, stationery, and other office supplies. Items (d) and (e) constitute operating expenses.
  • Deducting operating expenses from gross profit yields operating income.
  • Estimate interest expenses payable on loans and bank overdrafts obtained. This is known as the financing cost,
  • Estimate depreciation cost on major items – buildings, plant, machinery, equipment, motor vehicles, furniture, and fittings.
  • Deducting (g) and (h) from operating income yields earnings before taxes.
  • Estimate tax expenses.
  • Deduct (j) from (i) to obtain net income available to the owners of the business.

Projected Balance Sheet

A balance sheet shows the financial conditions of a business enterprise at a point in time. It shows ire relationships between the assets owned by the business and the liabilities owed to others, inducing the owners of the business. The balance sheet enables the entrepreneur to determine whether or not the financial condition of the business is healthy.

The balance sheet projections are developed from the data in the cash flow projections and profit and loss statement.

Break-Even Analysis

It is useful for the entrepreneur to know the point of sales at which revenue from sales is just enough to cover business expenses. This point is called the break-down point. At this point, the business is neither making a profit or sustains a loss.

The break-even point is important because the entrepreneur then knows the point to which sales can drop for the firm to sustain a loss. Hence he/she strives to drive sales beyond this point. The further it is away from the break-even point, the higher the profit expected.

Break-even (in sales) is computed using the following general formula:

(i) Total Fixed Costs/Gross Margin %

(ii) Total Fixed Costs/Contribution per unit

In the second formula, contribution per unit is defined as the unit selling price less variable cost per unit.

Risk Assessment

It is possible to assess the risk associated with the business given the entrepreneur’s knowledge of the break-even point. To do this, three alternative scenarios of sales performance are projected. The first is to forecast sales on the assumption that the worst of conditions occur in the first year. In the second, the sales forecast is based on the occurrence of the most likely conditions and the third assumes that the most optimistic conditions occur.

By computing the breakdown point in each case, you can see how environmental conditions are likely to affect your business performance.

If you recognize the risk what can you do about it? You can re-evaluate the different elements used in your break-even analysis. For example, is it possible to reduce your fixed costs? What happens if the selling price is increased by say 10%? In what ways can variable cost be reduced? Can you find a cheaper source of supply or cheaper materials? For each course of action considered feasible, the earnings projections are revised and become the basis of action during implementation.

Implementation Plan

List the major activities that must be executed.

Estimate the time it will take to execute giving the beginning and ending dates.

Map the activity and time schedule using the format below.

Activities Time (Month, Quarter or Year)
1 2 3 4 5 6 7 8 9 10 11 12
 

 

 

 

 

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