Elements Of A Business Plan by jeffafro


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									Elements Of A Business Plan
Executive Summary

you're asking for in the summary.

business plan. Key elements that should be included are:

competitive advantage.

2. Financial features. Highlights the important ﬁnancial points of the business including
sales, proﬁts, cash ﬂows and return on investment.

provided for funding. If the loan for initial capital will be based on security instead of eq-
uity, you should also specify the source of collateral.


5. Major achievements. Details any developments within the company that are essen-
tial to the success of the business. Major achievements include items like patents, pro-

glance both your needs and capabilities.
Business Description - Tell Them All About It

any new products or developments that will beneﬁt or adversely affect your business.
Base all of your observations on reliable data and be sure to footnote sources of infor-
mation as appropriate. This is important if you're seeking funding; the investor will want
or conjecture.

When describing your business, the ﬁrst thing you need to concentrate on is its struc-

what they will bring to the business.

and customer service.

Once you've described the business, you need to describe the products or services you
the reader a clear idea of your intentions. You may want to emphasize any unique fea-
tures or variations from concepts that can typically be found in the industry.

Be speciﬁc in showing how you will give your business a competitive edge. For exam-
ple, your business will be better because you will supply a full line of products; competi-

How Will I Proﬁt?

do I think I can make a proﬁt that way?" Answer that question for yourself, and then
pages on why your business will be proﬁtable. Just explain the factors you think will
the-art equipment, its location is exceptional, the market is ready for it, and it's a dyna-
mite product at a fair price.

If you're using your business plan as a document for ﬁnancial purposes, explain why the
added equity or debt money is going to make your business more proﬁtable.


Show why your business is going to be proﬁtable. A potential lender is going to want to
your claims for success can be mentioned brieﬂy; they will be detailed later. Give the
know what suppliers or experts you've spoken to about your business and their re-
sponse to your idea. They may even ask you to clarify your choice of location or rea-
sons for selling this particular product.

the business and its success factors in three or four paragraphs that will end the state-

While you may need to have a lengthy business description in some cases, it's our opin-
ion that a short statement conveys the required information in a much more effective
funding for the project.

Market Strategies

Deﬁne Your Market

forces the entrepreneur to become familiar with all aspects of the market so that the tar-
get market can be deﬁned and the company can be positioned in order to garner its
share of sales. A market analysis also enables the entrepreneur to establish pricing, dis-
tribution and promotional strategies that will allow the company to become proﬁtable
within a competitive environment. In addition, it provides an indication of the growth po-
tential within the industry, and this will allow you to develop your own estimates for the
future of your business.

Begin your market analysis by deﬁning the market in terms of size, structure, growth
prospects, trends and sales potential.

The total aggregate sales of your competitors will provide you with a fairly accurate es-
timate of the total potential market. Once the size of the market has been determined,
the next step is to deﬁne the target market. The target market narrows down the total
market by concentrating on segmentation factors that will determine the total address-
able market--the total number of users within the sphere of the business's inﬂuence.

For instance, if the distribution of your product is conﬁned to a speciﬁc geographic area,
then you want to further deﬁne the target market to reﬂect the number of users or sales
of that product within that geographic segment.

Once the target market has been detailed, it needs to be further deﬁned to determine
the total feasible market. This can be done in several ways, but most professional plan-
ners will delineate the feasible market by concentrating on product segmentation factors
brew a premium lager beer, the total feasible market could be deﬁned by determining

very little competition. In most industries this is simply not the case. There are other fac-
tors that will affect the share of the feasible market a business can reasonably obtain.

Projecting Market Share

they can buy it. How effectively you can achieve your distribution, pricing and promo-
tional goals determines the extent to which you will be able to garner market share.

plan, you'll need to consider two factors:

utilize a minimum of two growth models by deﬁning different industry sales scenarios.
and historical precedence.

similar to a product life cycle where you have ﬁve distinct stages: early pioneer users,
with late users.

Deﬁning the market is but one step in your analysis. With the information you've gained
through market research, you need to develop strategies that will allow you to fulﬁll your

Positioning Your Business

primary competitors.

such as:

 1. How are your competitors positioning themselves?

 2. What speciﬁc attributes does your product have that your competitors' don't?

 3. What customer needs does your product fulﬁll?
should merely point out exactly how you want your product perceived by both custom-
ers and the competition.


How you price your product is important because it will have a direct effect on the suc-
cess of your business. Though pricing strategy and computations can be complex, the
basic rules of pricing are straightforward:

 1. All prices must cover costs.


  3. Your prices must reﬂect the dynamics of cost, demand, changes in the market and
response to your competition.

  4. Prices must be established to assure sales. Don't price against a competitive op-
eration alone. Rather, price to sell.

target prices adjusted accordingly.


There are many methods of establishing prices available to you:

costs, both ﬁxed and variable, are covered and the desired proﬁt percentage is attained.

  * Demand pricing. Used by companies that sell their product through a variety of
sources at differing prices based on demand.

   * Competitive pricing. Used by companies that are entering a market where there is
already an established price and it is difﬁcult to differentiate one product from another.

  * Markup pricing. Used mainly by retailers, markup pricing is calculated by adding
your desired proﬁt to the cost of the product. Each method listed above has its strengths
and weaknesses.


Some of the more common distribution channels include:

  * Direct sales. The most effective distribution channel is to sell directly to the end-

  * OEM (original equipment manufacturer) sales. When your product is sold to the
OEM, it is incorporated into their ﬁnished product and it is distributed to the end user.

   * Manufacturer's representatives. One of the best ways to distribute a product,
that handle an assortment of complementary products and divide their selling time
among them.

  * Wholesale distributors. Using this channel, a manufacturer sells to a wholesaler,
until it reaches the end user.

  * Brokers. Third-party distributors who often buy directly from the distributor or
wholesaler and sell to retailers or end users.

  * Retail distributors. Distributing a product through this channel is important if the
end user of your product is the general consuming public.

  * Direct Mail. Selling to the end user using a direct mail campaign.

your pricing strategy and your own internal resources.

Promotion Plan

to sell your product or service. In order to accomplish this, the promotion strategy en-
compasses every marketing tool utilized in the communication effort. This includes:

ﬁrst quarter's media schedule.

   * Packaging. Provides a description of the packaging strategy. If available, mockups
of any labels, trademarks or service marks should be included.

   * Public relations. A complete account of the publicity strategy including a list of me-
dia that will be approached as well as a schedule of planned events.

   * Sales promotions. Establishes the strategies used to support the sales message.

   * Personal sales. An outline of the sales strategy including pricing procedures, re-
turns and adjustment rules, sales presentation methods, lead generation, customer
service policies, salesperson compensation, and salesperson market responsibilities.

Sales Potential

that will supply a quantitative outlook concerning the potential of the business. The ﬁrst
ﬁnancial projection within the business plan must be formed utilizing the information
drawn from deﬁning the market, positioning the product, pricing, distribution, and strate-
up to three years, although ﬁve-year projections are becoming increasingly popular
among lenders.

sales is fairly simple. It consists of the total number of customers and the average reve-

the revenue model. Since the revenue model is a table illustrating the source for all in-
come, every segment of the target market that is treated differently must be accounted
the product have to be considered. As we've already mentioned, those strategies in-
clude distribution, pricing and promotion.

Competitive Analysis

Identify and Analyze Your Competition

with a distinct advantage, the barriers that can be developed in order to prevent compe-
tition from entering your market, and any weaknesses that can be exploited within the
product development cycle.

The ﬁrst step in a competitor analysis is to identify the current and potential competition.
There are essentially two ways you can identify competitors. The ﬁrst is to look at the
according to their various competitive strategies so you understand what motivates

identify the areas where they're most vulnerable. This can be done through an examina-
tion of your competitors' weaknesses and strengths. A competitor's strengths and weak-
nesses are usually based on the presence and absence of key assets and skills needed
to compete in the market.


  1. The reasons behind successful as well as unsuccessful ﬁrms

  2. Prime customer motivators

  3. Major component costs

  4. Industry mobility barriers
should reveal the causes behind such a successful track record. This analysis, in con-
junction with an examination of unsuccessful companies and the reasons behind their
successful within a given industry and market segment.

will generate an asset or skill competitors don't have, which will provide you with a dis-
tinct and enduring competitive advantage. Since competitive advantages are developed
their applicable assets and skills and how your own company ﬁts on this scale.

Create a Competitive Strength Grid

and "strength." In each asset or skill category, place all the competitors that have weak-
nesses in that particular category under the weakness column, and all those that have
strengths in that speciﬁc category in the strength column. After you've ﬁnished, you'll be
able to determine just where you stand in relation to the other ﬁrms competing in your

and have deﬁned your distinct competitive advantage, you need to communicate them
in a strategic form that will attract market share as well as defend it. Competitive strate-
gies usually fall into these ﬁve areas:

  * Product

  * Distribution

  * Pricing

  * Promotion

  * Advertising
highlighted in previous sections, speciﬁcally in marketing strategies. Strategies primarily
competitive advantage. As we've already discussed, this involves deﬁning the elements
how you will accomplish your goals, but also why your strategy will work.

Design and Development Plan

What You'll Cover in This Section

description of the product's design, chart its development within the context of produc-
tion, marketing and the company itself, and create a development budget that will en-
able the company to reach its goals.


  * Product development

  * Market development

  * Organizational development

where the business begins to experience a continuous income. Although these ele-
ments will differ in nature concerning their content, each will be based on structure and

The ﬁrst step in the development process is setting goals for the overall development
and organizational development goals will be readily apparent. Each goal you deﬁne
should have certain characteristics. Your goals should be quantiﬁable in order to set up
actual completion.

Goals For Product Development
might be "Produce recipe for premium lager beer" or "Create packaging for premium la-
ger beer." In terms of market development, a goal might be, "Develop collateral market-
ing material." Organizational goals would center on the acquisition of expertise in order


developed for product development, market development, and organization develop-
ment. In some cases, product and organization can be combined if the list of proce-
dures is short enough.

Procedures should include how resources will be allocated, who is in charge of accom-
plishing each goal, and how everything will interact. For example, to produce a recipe

  * Gather ingredients.

  * Determine optimum malting process.

  * Gauge mashing temperature.

  * Boil wort and evaluate which hops provide the best ﬂavor.

  * Determine yeast amounts and fermentation period.

  * Determine aging period.

  * Carbonate the beer.

  * Decide whether or not to pasteurize the beer.

The development of procedures provides a list of work assignments that need to be ac-
complished, but one thing it doesn't provide are the stages of development that coordi-
nate the work assignments within the overall development plan. To do this, you ﬁrst
individual work elements are accounted for in the development plan. The next stage in-
volves setting deliverable dates for components as well as the ﬁnished product for test-
ing purposes. There are primarily three steps you need to go through before the product
is ready for ﬁnal delivery:

 1. Preliminary product review. All the product's features and speciﬁcations are

gauged against the development schedule to make sure everything is going ac-
cording to plan.

assure the integrity of the prototype.

Scheduling and Costs

This is one of the most important elements in the development plan. Scheduling in-
cludes all of the key work elements as well as the stages the product must pass through
before customer delivery. It should also be tied to the development budget so that ex-
penses can be tracked. But its main purpose is to establish time frames for completion

Development Budget

That leads us into a discussion of the development budget. When forming your devel-
opment budget, you need to take into account all the expenses required to design the
product and to take it from prototype to production.

Costs that should be included in the development budget include:

  * Material. All raw materials used in the development of the product.

  * Direct labor. All labor costs associated with the development of the product.

  * Overhead. All overhead expenses required to operate the business during the de-
velopment phase such as taxes, rent, phone, utilities, ofﬁce supplies, etc.
   * G&A costs. The salaries of executive and administrative personnel along with any
other ofﬁce support functions.

  * Marketing & sales. The salaries of marketing personnel required to develop pre-
promotional materials and plan the marketing campaign that should begin prior to deliv-
ery of the product.

  * Professional services. Those costs associated with the consultation of outside ex-
perts such as accountants, lawyers, and business consultants.

  * Miscellaneous Costs. Costs that are related to product development.

   * Capital equipment. To determine the capital requirements for the development
budget, you ﬁrst have to establish what type of equipment you will need, whether you
will acquire the equipment or use outside contractors, and ﬁnally, if you decide to ac-
quire the equipment, whether you will lease or purchase it.


achievement of the development goals.

Before you begin recruiting, however, you should determine which areas within the de-
velopment process will require the addition of personnel. This can be done by reviewing
have an idea of the positions that need to be ﬁlled, you should produce a job description
and job speciﬁcation.

Once you've hired the proper personnel, you need to integrate them into the develop-
ment process by assigning tasks from the work assignments you've developed. Finally,
the whole team needs to know what their role is within the company and how each inter-
relates with every position within the development team. In order to do this, you should
develop an organizational chart for your development team.

Assessing Risks

Finally, the risks involved in developing the product should be assessed and a plan de-
veloped to address each one. The risks during the development stage will usually cen-
ter on technical development of the product, marketing, personnel requirements, and
ﬁnancial problems. By identifying and addressing each of the perceived risks during the
those of investors as well.

Operations and Management Plan

The Purpose Of This Section

functions on a continuing basis. The operations plan will highlight the logistics of the or-
ganization such as the various responsibilities of the management team, the tasks as-
signed to each division within the company, and capital and expense requirements re-
lated to the operations of the business. In fact, within the operations plan you'll develop
the next set of ﬁnancial tables that will supply the foundation for the "Financial Compo-
nents" section.

The ﬁnancial tables that you'll develop within the operations plan include:

  * The operating expense table

  * The capital requirements table

  * The cost of goods table

company. The ﬁrst area is the organizational structure of the company, and the second
is the expense and capital requirements associated with its operation.

Organizational Structure

plan because it provides a basis from which to project operating expenses. This is criti-
cal to the formation of ﬁnancial statements, which are heavily scrutinized by investors;
therefore, the organizational structure has to be well-deﬁned and based within a realistic
framework given the parameters of the business.

into several broad areas that include:

  * Marketing and sales (includes customer relations and service)
  * Production (including quality assurance)

  * Research and development

  * Administration

These are very broad classiﬁcations and it's important to keep in mind that not every
one must be structured according to its own requirements and goals.

The four stages for organizing a business are:

1. Establish a list of the tasks using the broadest of classiﬁcations possible.

2. Organize these tasks into departments that produce an efﬁcient line of communica-
tions between staff and management.


within the company.

Calculate Your Personnel Numbers

structure: C / S = P

number of customers that can be served by each employee, and P represents the per-
sonnel requirements. For instance, if the number of customers for ﬁrst year sales is pro-
jected at 10,110 and one marketing employee is required for every 200 customers, you

when calculating labor expense (LE) are the personnel requirements (P) for each de-
partment multiplied by the employee salary level (SL). Therefore, the equation would
be: P * SL = LE
be: 51 * $40,000 = $2,040,000

Calculate Overhead Expenses

Once the organization's operations have been planned, the expenses associated with
the operation of the business can be developed. These are usually referred to as over-
head expenses. Overhead expenses refer to all non-labor expenses required to operate
the business. Expenses can be divided into ﬁxed (those that must be paid, usually at
(those which change according to the amount of business).

Overhead expenses usually include the following:

  * Travel

  * Maintenance and repair

  * Equipment leases

  * Rent

  * Advertising & promotion

  * Supplies

  * Utilities

  * Packaging & shipping

  * Payroll taxes and beneﬁts

  * Uncollectible receivables

  * Professional services

  * Insurance

  * Loan payments

  * Depreciation
the business plan, you need to multiply the number of employees by the expenses as-
sociated with each employee. Therefore, if NE represents the number of employees and

Develop a Capital Requirements Table

than one year.

In order to generate the capital requirements table, you ﬁrst have to establish the vari-
ous elements within the business that will require capital investment. For service busi-
nesses, capital is usually tied to the various pieces of equipment used to service cus-

Capital for manufacturing companies, on the other hand, is based on the equipment re-
quired in order to produce the product. Manufacturing equipment usually falls into three
categories: testing equipment, assembly equipment and packaging equipment.

With these capital elements in mind, you need to determine the number of units or cus-
tomers, in terms of sales, that each equipment item can adequately handle. This is im-
portant because capital requirements are a product of income, which is produced
money to increase production or supply better service. In the business plan, capital re-
quirements are tied to projected sales as illustrated in the revenue model shown earlier
in this chapter.

capital requirements equation, and that is equipment cost.

ment element. Given these parameters, your equation would look like the following: CR
= [(S / NC) * AS] * CC

The capital requirements table is formed by adding all your equipment elements to gen-
erate the total new capital for that year. During the ﬁrst year, total new capital is also the
NC + PC - D

the schedule that best ﬁts your business. Depreciation is also the basis for a tax deduc-
tion as well as the ﬂow of money for new capital. You may need to seek consultation
from an expert in this area.

Create a Cost of Goods Table

while those that aren't sold remain in inventory.

For a manufacturing ﬁrm, cost of goods is the cost incurred by the company to manufac-
ture its product. This usually consists of three elements:

1. Material

2. Labor

3. Overhead
As in retail, the merchandise that is sold is expensed as a cost of goods, while mer-
the operations of a business. It is an important yardstick for measuring the ﬁrm's proﬁt-
ability for the cash-ﬂow statement and income statement.

In the income statement, the last stage of the manufacturing process is the item ex-
pensed as cost of goods, but it is important to document the inventory still in various
is important to determining cash ﬂow and to generating the balance sheet.

have to develop for your business plan, but it's an integral part of portraying the ﬂow of
rate at which your inventory turns.

In order to generate the cost of goods table, you need a little more information in addi-
unassembled inventory. Much of these ﬁgures will depend on the capacity of your
equipment as well as on the inventory control system you develop. Along with these fac-

Financial Components

Financial Statements to Include

less important than up-front material such as the business concept and the manage-
ment team. Astute investors look carefully at the charts, tables, formulas and spread-
sheets in the ﬁnancial section, because they know that this information is like the pulse,
respiration rate and blood pressure in a human--it shows whether the patient is alive
and what the odds are for continued survival.

Financial statements, like bad news, come in threes. The news in ﬁnancial statements
isn't always bad, of course, but taken together it provides an accurate picture of a com-
pany's current value, plus its ability to pay its bills today and earn a proﬁt going forward.

The three common statements are a cash ﬂow statement, an income statement and a
come, balance sheet and cash ﬂow statements.

others, but they measure quite different aspects of a company's ﬁnancial health. It's
hard to say that one of these is more important than another. But of the three, the in-
come statement may be the best place to start.

Income Statement

The income statement is a simple and straightforward report on the proposed busi-
ness's cash-generating ability. It's a score card on the ﬁnancial performance of your
business that reﬂects when sales are made and when expenses are incurred. It draws
information from the various ﬁnancial models developed earlier such as revenue, ex-
net result--which is either a proﬁt or a loss.

For a business plan, the income statement should be generated on a monthly ba-
sis during the ﬁrst year, quarterly for the second, and annually for each year
thereafter. It's formed by listing your ﬁnancial projections in the following man-



  3. Gross proﬁt margin. The difference between revenue and cost of goods. Gross
the GP margin is always stated as a percentage of revenue.

operations of the business.

the business.

  6. Net proﬁt. The difference between gross proﬁt margin and total expenses, the net
income depicts the business's debt and capital capabilities.
  7. Depreciation. Reﬂects the decrease in value of capital assets used to generate in-
come. Also used as the basis for a tax deduction and an indicator of the ﬂow of money
into new capital.

 8. Net proﬁt before interest. The difference between net proﬁt and depreciation.

  9. Interest. Includes all interest derived from debts, both short-term and long-term. In-
terest is determined by the amount of investment within the company.

 10. Net proﬁt before taxes. The difference between net proﬁt before interest and inter-

 11. Taxes. Includes all taxes on the business.

 12. Proﬁt after taxes. The difference between net proﬁt before taxes and the taxes ac-
crued. Proﬁt after taxes is the bottom line for any company.


Cash Flow Statement

The cash-ﬂow statement is one of the most critical information tools for your business,
showing how much cash will be needed to meet obligations, when it is going to be re-
business and expenses that need to be paid. The result is the proﬁt or loss at the end of
the month or year. In a cash-ﬂow statement, both proﬁts and losses are carried over to
your cash-ﬂow statement, it is a strong indicator that you will need additional cash in or-
der to meet expenses.

Like the income statement, the cash-ﬂow statement takes advantage of previous ﬁnan-
cial tables developed during the course of the business plan. The cash-ﬂow statement
including those accumulated during the manufacture of a product. The capital require-
ments are then logged as a negative after expenses. The cash-ﬂow statement ends with
the net cash ﬂow.

The cash-ﬂow statement should be prepared on a monthly basis during the ﬁrst year, on
you'll need to include in the cash-ﬂow statement and the order in which they should ap-
pear are as follows:


 2. Receivables. Income derived from the collection of receivables.

extended, and the liquidation of any assets.


manufacturing operations only), the cash outlay for merchandise inventory (for mer-
chandisers such as wholesalers and retailers), or the supplies used in the performance
of a service.

operations only) or to perform a service.

  7. Overhead. All ﬁxed and variable expenses required for the production of the prod-
uct and the operations of the business.

the marketing and sales departments.

  9. R&D. All the labor expenses required to support the research and development op-
erations of the business.



the generation of income.


 15. Cash ﬂow. The difference between total income and total expenses. This amount is
carried over to the next period as beginning cash.

  16. Cumulative cash ﬂow. The difference between current cash ﬂow and cash ﬂow
from the previous period.

As with the income statement, you will need to analyze the cash-ﬂow statement in a
be long and should cover only key points derived from the cash-ﬂow statement.

The Balance Sheet

The last ﬁnancial statement you'll need to develop is the balance sheet. Like the income
and cash-ﬂow statements, the balance sheet uses information from all of the ﬁnancial
plan and is, more or less, a summary of all the preceding ﬁnancial information broken
down into three areas:

1. Assets

2. Liabilities

3. Equity

To obtain ﬁnancing for a new business, you may need to provide a projection of the bal-
ance sheet over the period of time the business plan covers. More importantly, you'll
need to include a personal ﬁnancial statement or balance sheet instead of one that de-
scribes the business. A personal balance sheet is generated in the same manner as one
for a business.

balance sheet lists your company's assets. Assets are classiﬁed as current assets and
long-term or ﬁxed assets. Current assets are assets that will be converted to cash or will

  * Cash. The cash on hand at the time books are closed at the end of the ﬁscal year.

   * Accounts receivable. The income derived from credit accounts. For the balance
close of the ﬁscal year.
used to manufacture a product not yet sold.


Other assets that appear in the balance sheet are called long-term or ﬁxed assets. They
are called long-term because they are durable and will last more than one year. Exam-
ples of this type of asset include:

the land and building), less depreciation.

   * Investment. All investments by the company that cannot be converted to cash in
long-term investments.


  * Total long-term assets. The sum of capital and plant, investments, and miscellane-
ous assets.

  * Total assets. The sum of total current assets and total long-term assets.

assets, liabilities are classiﬁed as current or long-term. If the debts are due in one year
or less, they are classiﬁed as a current liabilities. If they are due in more than one year,

   * Accounts payable. All expenses derived from purchasing items from regular credi-
tors on an open account, which are due and payable.

  * Accrued liabilities. All expenses incurred by the business which are required for op-
eration but have not been paid at the time the books are closed. These expenses are
usually the company's overhead and salaries.


  * Total current liabilities. The sum of accounts payable, accrued liabilities, and taxes.
Long-term liabilities include:

  * Bonds payable. The total of all bonds at the end of the year that are due and pay-
able over a period exceeding one year.

  * Mortgage payable. Loans taken out for the purchase of real property that are repaid
books for the year.

during the current ﬁscal year.


  * Total liabilities. The sum of total current and long-term liabilities.

Once the liabilities have been listed, the ﬁnal portion of the balance sheet-owner's

just as you need to do for the income and cash ﬂow statements. The analysis of the

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