Business Plans: Part 1
About the Author:
Paul Wilton (editor)
CA with degrees in commerce, accounting and information technology. Paul worked overseas in the “Big 4” accounting firms and served as a director at Audit New Zealand before setting up his own consultancy. Author of A-Z of New Zealand Business Law, Paul has over 20 years of experience as a business owner and consultant. He joined FBA in 2004 and is totally committed to providing excellence in quality and value to our subscribers.
This is the first article in a three part series. For Part 2 click here, for Part 3 click here
It is generally accepted in western countries that 80% of new business ventures fail (or cease to trade) within the first 5 years of start-up with 45% failure within 2 years!
Research carried out by Small Business Resource amongst thousands of small businesses in UK shows that the greatest perceived problems of business owners are:
Cash-flow
Funding
Profitability
Marketing
Legislation
Loneliness
Lack of time
Lack of personal exit strategy
Lack of original vision for the business
Lack of up-to-date information
According to Statistics Canada, most businesses fail because of weak general management, weak financial management, and/or weak marketing capabilities. According to a Dun & Bradstreet survey, 90% of business failures can be traced to poor management, lack of planning and under capitalisation. However, all these issues can be addressed by having in place an effective business plan since planning reduces the chance of failure.
Statistics show that up to 80% of business failures could have been avoided if they had developed and used a proper business plan. Research also shows that businesses that properly plan are significantly more likely to be more profitable and to achieve greater growth.
While most business plans share a similar structure and contain similar information about a business, your business plan will be distinguished by those characteristics that are unique to your business.
This is the first in a series of three articles on business plans and the next two issues of Financial and Business Advisor will provide you with detailed information on how to compile a workable business plan.
Types of Business Plan
There are two types of business plans: start-up business plans and continuance business plans. The latter is a business plan which is updated on a regular basis since you are operating in a dynamic environment. Both business plans have the same structure as all criteria should be reviewed regularly.
Driving the Business Plan
The business plan is driven from the top. In larger businesses and corporate environments the CEO spends a considerable amount of time trying to align the business to the business plan and reviewing/updating the business plan. In smaller businesses this may not be possible due to other constraints including time. In such circumstances it is highly recommended that such businesses engage the services of a professional director or consultant to assist with the review of the business plan. This will ensure that the business stays on track and continues to grow.
Components of a Business Plan
We believe that Growthink have best captured the essence of the business plan with 10 Key Business Plan Components which they consider are the cornerstone of their business plan development process. Each of these components is required to fulfill the needs of sophisticated investors and should be reviewed on an ongoing basis by all businesses.
SECTION
1. Executive Summary
Summary of business plan highlighting key points.
Provides a succinct description of all other business plan sections: the concept, the marketing plan, the amount of financing the company seeks, etc.
2. Company Analysis
Provides a strategic overview of the current or proposed business.
How is the business organised (e.g. private limited liability company, partnership, etc..)?
What opportunity is the company capitalizing on?
With what products and/or services?
How is the company and product/service unique? What makes the company qualified to succeed in this business?
3. Industry Analysis
Evaluates the playing field in which the company is/will be competing.
What is the size, in unit and dollars, of the market in which the company (will) compete(s)?
What market trends, if any, are affecting the market size?
How many competitors are there?
What are the barriers to entry?
How do these industry parameters favour the company?
4. Analysis of Customers & Competition
Defines competition and assesses customer needs.
Who are the (proposed) customers? What are their demographics? (Where do they live? What are their income levels? etc.)
What products/services are these customers currently buying to fulfill the need that the company hopes to fill?
What are the customers' true (underlying) needs, and what trends are affecting these needs?
Who are the major competitors?
How large are they?
What are their strategies?
5. Marketing Plan
Provides strategy for penetrating the marketplace.
Overall Marketing Strategy - how does the company plan to introduce the product/service/website into the marketplace and generate long-term sales?
What are the specifications of the product/service/website being (to be) offered?
At what price point(s) will the offerings be sold?
How does the company plan to promote the product/service/website?
6. Design & Development Plans
Details strategy for taking the idea from concept to reality.
What is the current status of product/service/website development?
When is the proposed "finish" date of development? What obstacles, if any, must the company overcome in this process? What specific tasks must be completed?
Who, if anyone, outside the company will be involved?
How is the company protecting its proprietary information/technology?
7. Operations Plans
Defines how all tasks will be accomplished.
What functions will be needed over time to make the venture a success?
What specific tasks will be performed?
8. Management Team
Demonstrates that the company has the required human resources to be successful.
Who are the key management personnel and what are their backgrounds?
Who are the other investors and/or shareholders, if any?
Who comprises the Board of Directors and/or Board of Advisors?
Who are the professional advisors (e.g., lawyer, accounting firm)?
9. Financial Plan
Assesses how much money the company needs and for what, and how much it plans to earn in the future.
Actual Income Statements & Balance Sheets (if applicable)
Pro Forma Income Statements, Balance Sheets and Cash Flow Statements (quarterly for Years 1 & 2, annually for Years 1-5)
How much capital does the firm need? When?
What is the exit strategy?
10. Appendices
Includes all non-textual but pertinent materials.
Financial spreadsheets and calculations
Product/service specifications
Copies of pertinent legal documents
Statistics and Articles
Each of the above will be discussed in subsequent parts to this article. A number of accepted tools and techniques can be employed to satisfy some of the above and the merits of such techniques will be examined.
Examples
There are many examples of business plans freely available on the web. Many of these are lightweight and are teasers to entice you onto websites. However, the fundamentals similar to the above are covered by most of them. We suggest you also refer to the Book Review in this edition of Financial & Business Advisor whereby we have provided a list of interesting sites that you may find useful in this regard.
Strategy
Many of us can go through the motions and assemble a Business Plan to meet the above requirements. However, if it is not done properly it will be a meaningless document. One of the major issues of any business plan is developing the business plan so that the outcomes, or proposed structure, in fact align with the data and research. In other words, there is a clear and reasoned argument for the business to be developed as proposed.
A major downfall of many business plans is that the proponent of the business plan has written the plan with an overly optimistic view of the possible outcomes, particularly when it comes to the projected level of sales and associated income. It is very easy to envisage how much potential money can be made in a particular venture and then convert that into cash through the business plan. More often than not reality of the business falls well short of expectations.
So, keep it real, ensure that conclusions are well founded, and look at other like businesses in particular and try to estimate their profit levels as a comparison.
Many strategies exist in business to achieve an end. Often business’ goals may be very well aligned but these businesses are differentiated simply by their different approaches or strategies. For instance, one freight company may be more efficient in the area of operations management than another freight company but both companies strive to deliver on time at a competitive cost.
In order to be competitive you need a niche market or a competitive edge. A business plan will help you find this edge.
Reignite the Passion