Introduction to Small Business Management 2

CHAPTER 2
Building the
Business Plan

Objectives
After studying this unit, you will be able to:
 Explain the concept of business plan
 Discuss the scope of business plan
 Describe the value and importance of a business plan
 Explain the steps involved in building a business plan

Introduction
A company’s business plan is one of its most important documents. It can be
used by managers and executives for internal planning. It can be used as the basis for loan
applications from banks and other lenders. It can be used to persuade investors that a company
is a good investment. For start-up ventures, the process of preparing a business plan serves as
a
road map to the future by making entrepreneurs and business owners think through their
strategies, evaluate their basic business concepts, recognize their business’s limitations, and
avoid a variety of mistakes.

Business Plan
A business plan is a plan for the business, clarifying why it exists,
who it
exists for, what products and services it provides these client
groups, how it intends to develop and deliver these products and
services, and where it is headed,”
Rebecca Jones wrote in Information Outlook. “A business plan is a
roadmap for the organization, showing the destination it seeks, the
path it will follow to get there, and the supplies and where with all
required to
complete the journey.”

The objectives of a business plan are to:
1. Give directions to the vision formulated by entrepreneur.
2. Objectively evaluate the prospects of business.
3. Monitor the progress after implementing the plan.
4. Persuade others to join the business.
5. Seek loans from financial institutions.
6. Visualize the concept in terms of market availability, organizational, operational and
financial feasibility.
7. Guide the entrepreneur in the actual implementation of the plan
8. Identify the strengths and weakness of the plan
9. Identify challenges in terms of opportunities and threats from the external markets.
10. Clarify ideas and identify gaps in management information about their business,
competitors and the market
11. Identify the resources that would be required to implement the plan.
12. Document ownership arrangements, future prospects and projected growths of the
businessventure.

Preparing a business plan is not an easy task. A business plan
makes the entrepreneur forcibly plan all the critical dimensions of b
usiness and it also ensures that entrepreneur does a thorough
research about the planned business venture. The process of
researching and writing the business plan helps to identify the gaps
in the existing plan. For any business venture all the functional plans
(marketing, operations/production, finance, human resources) have
to be prepared.
Note:

Value and Importance of a Business Plan
Business plans have several major uses. These include internal planning
and forecasting, obtaining funding for ongoing operations or expansion,
planned divestiture and spin-offs, and restructuring or reorganizing. While
business plans have elements common to all uses, most business plans are
tailored according to their specific use and intended audience.
When used for internal planning, business plans can provide a blueprint
for the operation of an entire company. A company’s performance and
progress can be measured against planned goals involving sales,
expenditures, time frame, and strategic direction.

Preparation and Evaluation of Business Plan
The various steps involved in business planning process are;

Preliminary Investigation
Before preparing the plan entrepreneur should:
1) Review available business plans (if any).
2) Draw key business assumptions on which the plans will be based (e.g.
inflation, exchange rates, market growth, competitive pressures, etc.).
3) Scan the external environment and internal environment to assess the
strengths, weakness, opportunities and threats.
4) Seek professional advice from a friend/relative or a person who is already
into similar business (if any).

Idea Generation
Idea generation is the first stage of business planning process. It involves
generation of new
concepts, ideas, products or services to satisfy the existing demands, latent
demands and future demands of the market. The various sources of new ideas
are :
1. Consumers/Customers
2. Existing Companies
3. Research and Development
4. Employees
5. Dealers, retailer

The various methods of generating new ideas are:
1. Brainstorming, Reverse Brainstorming and Brain Writing
2. Group discussion
3. Data collection through questionnaires/schedules etc. from
consumers,existing companies, dealers, retailers
4. Invitation of ideas through advertisements, mails and the Internet
5. Value addition to the current products/services
6. Market research
7. Commercializing inventions

Environmental Scanning
Next step is environmental scanning, which
is carried out to analyze the prospective
strengths, weakness, opportunities and
threats of the business enterprise.

External Environment
Following are the components of external environment:
1) Socio-cultural Appraisal: It assesses the social and cultural norms of a
society in a given period of time. The variables that are appraised are
values, beliefs, norms, and fashions of a particular society. It can help
inunderstanding the level of rigidity/flexibility of a given society towards a
new product/service/concept.
2) Technological Appraisal: It assesses the various technological know-how
available to convert the idea into a product. It can also be done to assess
the various modern technologies expected in the near future and their
receptiveness by the industry.

3) Economic Appraisal: It assesses the status of economy in a given society
in terms of inflation, per capita income and consumption pattern, balance of
payments,consumer price index etc. A healthy economy offers greater
opportunities for growth and development of the industry and therefore provides
greater confidence to the entrepreneur about the success of his business
venture.
4) Demographic Appraisal: It assesses the overall population pattern of a
given geographical region. It includes variables like age profile, distribution, sex,
education profile, income distribution etc. The demographic appraisal can help
in identifying the size of target customers.
5) Governmental Appraisal: It assesses the various legislations, policies,
incentives, subsidies, grants, procedures etc. formulated by government for a
particular industry. The softer the government norms for the industry, the easier
it is for the entrepreneur to establish and run the business.

Internal Environment
Following are the components of internal environment of a business:
1) Raw Material: It assesses the availability of raw material now and in the near
future. If the availability of raw material is less now or would be less in future
then the entrepreneur should give a serious thought to establishing a
venture as the entire system can come to a standstill due to shortage of raw
material.
2) Production/Operation: It assesses the availability of various machineries,
equipments, tools and techniques that would be required for
production/operation.
3) Finance: It assesses the total requirements of finance in terms start-up
expenses, fixed expenses and running expenses. It also indicates the
sources of finance that can be approached for funding

4) Human Resource: It assesses the kind of human resources required
and its demand and supply in the market. This further helps in
estimating the cost and level of competition in hiring and retaining the
human resources.

Feasibility Analysis
Feasibility study is done to find whether the proposed
project (considering the above environmental appraisal)
would be feasible or not.
The variousvariables/dimensions are:
1. Market Analysis
 To estimate the demand of the proposed product/service in future.
 To estimate the market share of the proposed product/service in future.

2. Technical/Operational Analysis
 Material Availability: It is imperative to assess the availability of the raw material
required for production of goods/services. The feasibility study of material should
make an account of following variables.
 Material Requirement Planning: It is undertaken to analyze the quantity of material
that would be required to let the production run smoothly; it would be dependent on
material availability variable mentioned above.
 Analysis of Choice of Technology: It is done to identify whether the product
developed at the idea generation stage is technologically feasible or not.
 Plant Location: Plant location refers to a fairly broad area where the enterprise is to
be established, like city, industrial zone or costal area. Plant location is the physical
layout of the business and is affected by process of production, safety of personnel,
minimum production cost, scope of expansion, proper space utilization etc.
 Machinery and Equipment: Machinery and equipment is dependent on
productiontechnology, plant capacity, investment cost of buying, maintenance and
running cost.

Project Report Preparation
A project report helps to understand the opportunities, problems and
weakness of the business. It guides the entrepreneur in actually starting up and
running the business venture. It helps him to monitor whether the business is
growing as was projected in the business plan or not. It helps in documenting
the cost estimates of the business. It can be used as a handy tool to persuade
investors and financial institution to fund the project. It can help in proper
utilization of all the resources. It can keep the morale of employees, owners and
investors up. It can finally lead to a sustainable development of the
organization.

Steps involved in preparing a project report are given
below:
I. Cover Sheet: Cover sheet is like the cover page of the book. It mentions the name of the
project, address of the headquarters (if any) and name and address of the promoters.
II. Table of Contents: Again, the table of contents is like the table of contents of a book; it
guides the person reviewing the project report to the desired section quickly.
III. Executive Summary: Executive summary is the first impression about the business
proposal. As the saying goes, the first impression is the last impression. A careful
presentation of information should be done to attract the attention of the evaluators. It
should be in brief (not more than two or three pages) yet it should have all the factual
details about the project that can improve its marketability. It should briefly describe the
company; mention some financial figures and some salient features of the project.
Generating interest in the minds of the readers is the prime motive of the executive
summary.

IV . The Business: This will give details about the business concept. It will discuss the
objectiveof the business, a brief istory about the past performance of the company (if it is an
old company), what would be the form of ownership (whether it would be a single proprietor,
partnership, cooperative society or a company under company law). It would also label the
address of the proposed headquarters.
V . Funding Requirement: Since the investors and financial institutions are one of the key
bodies examining the project report and it is one of the primary objectives of preparing the
project report, a careful, well-planned funding requirement should be documented. It is also
necessary to project how these requirements would be fulfilled. Debt equity ratio should be p
repared, which can give an indication about how much finance would the company require and
how it would like to fund the project.
VI. The Product or Services: A brief description of product/services is given in this subsection.
It includes the key features of the product, the product range that would be provided to the
customers and the advantages that the product holds over and above the similar products/
substitute products available in the market. It also gives details about the patents, trademarks,
copyrights, franchises, and licensing agreements.

VII The Plan: Now the functional plans for marketing, finance, human resources and
operations
are to be drawn.
1. Marketing Plan: Marketing mix strategies are to be drawn, based on the market
research. The market research will provide information about the following
parameters: (i) Market demography like profiles of customers and end-users;
preferences and needs of the customers (ii) Strengths and weaknesses of competitors
(iii) SWOT analysis of the market.
2. Operational Plan: The operational plan would give information about (i) Plant location:
why was a particular location chosen? Is it in the vicinity of the market, suppliers,
labour or does it have an advantage of government subsidies for that particular
location or are there any other specific reasons for choosing the particular location?,
(ii) Plant layout is also at times mentioned in the project report to provide a pattern
of arrangement of the organization and would indicate the exhaustive planning for
the business, (iii) Plan for material requirements, inventory management and quality
control are also drawn for identifying further costs and intricacies of the business.
Finally, the budget for operational plan is also drawn.

3. Organizational Plan: The organizational plan indicates the pattern of flow of
responsibilities and duties amongst people in the organization, it provides details
about the board of directors, it can also enlist the manpower plan that would be
required to put life into the company and it would also enlist the details about the
laws that would be governed in managing the employees of the organization. In the
end the organizational plan is also budgeted.
4. Financial Plan: The financial plan is usually drawn for two to five years for an existing
company. A summary of previous financial data is given, whereas for a new
organization the following projections are drawn:
(a) Projected Sales
(b) Projected Income and Expenditure Statement
(c) Projected Profit and Loss Statement
(d) Projected Cash Flows
(e) Projected Funds Flow

VIII Critical Risks: The investors are interested in knowing the tentative risks to evaluate the
viability of the project and to measure the risks involved in the business. This can further
give confidence to the investors as they can calculate the risks involved in the business
from their perspectives as well.
IX Exit Strategy: The exit strategies would provide details about how the organization would
be dissolved, what would be the share of each stakeholder in case of winding-up of the
organization. It further helps in measuring the risks involved in investing.
X Appendix: The appendix can provide information about the Curriculum Vitae of the owners,
Ownership Agreement, Certificate from Pollution Board, Memorandum of Understanding,
Articles of Association and all the supporting agreements/documents that can help in
marketing the project viability at large.

Introduction to Small Business Management 2

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