Business plans

Business plans This section covers the following: What a business plan is The role and importance of a business plan Benefits of a business plan Drawbacks of a business plan The purpose of planning business activity

Key words Business plan A detailed document setting out the marketing and financial thinking behind a proposed new business Competitive advantage Identifying the features of your own product that will make it succeed against competitors

What is a business plan? A business plan is a detailed document setting out the marketing and financial thinking behind a proposed new business. A business plan is a formal method of recording what the business aims to achieve and by when. It is particularly important for new businesses to produce a plan as banks often require one before they consider lending any money.

Role and importance of a business plan A plan should be written to help educate and persuade potential investors of the benefits of starting the business. The plan also needs to show what the entrepreneur wishes to achieve and why. The plan should highlight the businesses competitive advantage – what it will do better than the competition. A plan should be concise, specific, show knowledge of the market and be financially aware. Example: Samsung’s competitive advantage over Apple is the speed at which products are brought to market.

What a business plan should contain (1) The business idea, e.g. Dysons may have said a vacuum cleaner with no bag Business aims and objectives. Objectives need to be SMART – what does this stand for? Target market – the trends and whether there is market growth A marketing plan, giving details of how the business will communicate with customers and the price products will be sold at and why. The marketing mix showing the marketing objectives and how these will be achieved

What a business plan should contain (2) Forecast revenue, costs and profit in order to work out break-even point and the margin of safety. This will be normally forecast for 18 months. Cash flow forecast. The plan can show a cautious approach to inflows and higher outflows to add realism to predictions. Sources of finance, showing where initial funds will be obtained. The plan should give short and long term sources and state why. Location, looking at issues such as affordability, workforce access and type of product offered.

The purpose of a business plan The plan is a process to help inform the entrepreneur about the potential risks and rewards they face. It helps give focus, question ideas and provide more concrete evidence regarding success. It is critical in gaining financial help from a bank or other source of finance.

Benefits and drawbacks of business plans Business plans need a lot of research to be effective and useful. The table summarises the benefits and problems of writing a business plan. Benefits Problems Forces the entrepreneur to think carefully about every aspect of the start-up, which should increase the chances of success May make the entrepreneur realise that she or he lacks the skills needed for part of the plan, and therefore try harder to employ an expert or buy in advice If the plan is well received by investors, they may compete to offer attractive terms for obtaining capital Many entrepreneurs have the whole plan in their head, not on paper; if illness or accident strikes, others will only be able to keep things going with a paper plan Making a forecast (e.g. of sales) doesn’t make it happen; entrepreneurs sometimes confuse the plan with reality; poor sales can come as a terrible shock Problems arise if the plan is too rigid; it is better to make it flexible, so that you are prepared for what to do if sales are poor (or unexpectedly high) Plans based on high sales will include lots of staff to meet the demand; risks are lower if the business starts with a low-cost/low-sales expectation Business success is often about people, not paper. An over-focus on a perfect plan may mean too little time

Summary questions Write down or discuss the answers to these questions. How many parts should a good business plan have? Name a competitive advantage for a business planning to make a new electric car. True or false? A cash flow forecast in a business plan should be very optimistic with is figures. Which type of organisation will be particularly interested at looking at a business plan? Give a drawback of creating a business plan.