7 – Building the Business Plan

Introduction

The concept of grassroots entrepreneurs was discussed in the preceding unit. This class will teach you how to create a business plan and how to grasp the concept of a business plan. The feasibility study and the relevance of a business plan will be summarised in this unit’s numerous sections and sub-sections. One of a company’s most significant papers is its business plan. Managers and executives might use it for internal planning. It can be used to apply for loans from banks and other financial institutions. It can be used to persuade investors that a business is worth investing in. Writing a business plan acts as a road map to the future for start-up businesses by forcing entrepreneurs and business owners to think through their strategy, review their basic business principles, understand their company’s constraints, and avoid a range of blunders.

A business strategy is required for almost every company. One of the most frequently mentioned reasons for business failure is a lack of appropriate planning. Business plans assist firms in identifying their aims and objectives and provide tactics and methods for achieving those objectives. They are not historical documents; instead, they represent a series of management decisions concerning the measures that must be taken for the company to achieve its goals and perform to its potential.

“By definition, a business plan is a plan for the business,” Rebecca Jones wrote in Information Outlook. “It clarifies why it exists, who it exists for, what products and services it provides to these client groups, how it intends to develop and deliver these products and services, and where it is headed.” “A business plan is a road map for an organisation, outlining the destination it seeks, the route it will take to get there, and the goods and resources needed to get there.”

7.1 Business Plan Concept and Scope

The first and most important step in starting a business is planning. A well-designed business plan can turn a simple concept or innovation into a profitable venture.

A business plan is a step-by-step guide to launching and running a company. A well-crafted business plan discovers possibilities, scans the external and internal environment to assess company feasibility, and distributes resources efficiently, ultimately leading to the plan’s success. It informs all interested parties, including venture capitalists and other financial institutions, investors, and employees. It includes information on the various functional requirements for running a firm (marketing, finance, operations, and human resources).

A business plan is a roadmap for the step-by-step process of turning a business idea into a profitable venture. It identifies an innovative idea, researches the external environment to identify opportunities and threats, assesses the idea’s feasibility, and then allocates resources (production/operations, finance, and human resources) in the most efficient way possible to make the plan successful.

The goals of a business plan are to:

1. Provide direction for the entrepreneur’s vision.
2. Evaluate the business possibilities objectively.
3. After you’ve put the strategy into action, keep track of how things are going.
4. Convince people to join the company.
5. Apply for a loan from a financial institution.
6. Consider market availability and organisational, operational, and financial feasibility while visualising the project.
7. Assist the entrepreneur in putting the plan into action.
8. Determine the plan’s strengths and weaknesses.
9. Identify external market challenges in terms of opportunities and risks.
10. Clarify ideas and identify gaps in management information about their business, competitors, and the market.
11. Determine the resources needed to put the plan into action.
12. Make a record of the business venture’s ownership structure, prospects, and expected growth.

Creating a company plan is a difficult task. A business plan forces the entrepreneur to plan all of the important aspects of the business and guarantees that the entrepreneur conducts thorough research on the intended business venture. The process of researching and drafting the business plan aids in identifying any holes in the current strategy. All functional plans (marketing, operations/production, finance, and human resources) must be prepared for any business initiative.

We want to emphasise that creating a business strategy is a continuous process rather than a one-time event. A successful enterprise regularly improves its business plan based on market dynamics and learning experiences.

Writing a business plan for an entrepreneur involves explaining the business idea to the stakeholders clearly and accurately.

A business plan is a written document that must be submitted to various stakeholders to gain their approval. It requires shareholders to determine ownership patterns and prospects, the government to issue various certifications, such as pollution control, and financial institutions, such as venture capitalists, to estimate the prospects and risks involved in disbursing funds to a business venture.

7.2 The Importance and Value of a Business Plan

There are numerous applications for business strategies. Internal planning and forecasting, acquiring funds for continued operations or expansion, planned divestment and spin-offs, and restructuring or reorganisation are just a few examples. While all business plans have universal features to all applications, most business plans are adapted to the specific use and audience in mind.

When used for internal planning, business plans can serve as a blueprint for a company’s overall operation. Sales, expenditures, time frames, and strategic direction can all be used to measure a company’s performance and progress. Business plans can also assist an entrepreneur or management in identifying and focusing on potential issue areas both inside and outside the organisation. Once potentially difficult areas have been identified, proposed solutions and contingency plans can be integrated into the company strategy.

Business plans, which demand managerial attention, also cover marketing opportunities and future funding requirements. Sometimes, such as when an entrepreneur turns a favourite hobby into a home-based business, the business plan can be as simple as a one—or two-page paper. On the other hand, a company proposal with significant intricacy and financial ramifications should have a far more detailed plan.

For example, a tool-and-die company looking for investors to expand production capacity will almost certainly need a more detailed business plan than a computer hobbyist who wants to start a desktop publishing firm from home.

In an ideal world, everyone in the firm will utilise the information in the business plan to set performance targets, guide decision-making in ongoing operations, or evaluate people’s performance in terms of their capacity to accomplish the business plan’s objectives. Workers aware of the business strategy can also assess and alter their performance in light of the company’s goals and expectations.

Business plans can also be used to help a company restructure or reorganise. In such circumstances, they outline the steps that must be followed to restore profitability or achieve other objectives. The plan identifies necessary operational improvements as well as associated cost reductions. Desired performance and operational goals are defined, with corresponding modifications in production equipment, labour, and specific products and services.

Banks and other lenders use business plans to determine a company’s capacity to handle increased debt and, in some cases, equity financing. The business plan details the company’s cash flow requirements, assets, capitalization, and predicted financial performance. It gives reliable information about a company’s performance to potential lenders and investors, allowing risks to be appropriately detected and evaluated.

Finally, the business plan is the key source of information for potential buyers of a firm or one of its divisions or product lines. Business plans for possible buyers, like those prepared for outside lenders and investors, offer reliable data and projections regarding the company’s performance. The business plan must describe the company’s primary business assumption or concept, its strengths and limitations, and indicators of its long-term survival.

7.3 Business Plan Preparation and Evaluation

When the specifics are drawn, a strategy that appears to be very lucrative/feasible at first glance may not be. As a result, one of the first actions an entrepreneur should take is to document their company plan. As previously stated, a successful entrepreneur creates a step-by-step plan to follow when starting a new business. This business plan serves as a dynamic guide for the entrepreneur; it must be reviewed and updated regularly to ensure that the plan stays viable in changing business conditions. The following are the steps included in the business planning process:

7.3.1 Preliminary Investigation

Before drafting the strategy, the entrepreneur should do the following:

1. Review existing business plans (if any).
2. Make essential business assumptions on which the plans will be built (e.g., inflation, exchange rates, market growth, competitive pressures, etc.).
3. Evaluate the external and internal environments’ strengths, weaknesses, opportunities, and dangers.
4. Seek expert counsel from a friend/relative or someone with experience in a related field (if any).

7.3.2 Brainstorming

Entrepreneurship comprises incremental value addition to the concept/product/service given to the consumer, shareholder, and employee, as well as innovation (creation of an altogether new concept, product, or service). Even at the conception stage, value addition is an essential word that an entrepreneur must remember when producing new ideas.

The first stage of the business planning process is idea generation. This phase distinguishes between a businessman and an entrepreneur. An entrepreneur is a highly creative person who develops a novel idea for a product or service that can be sold. Let us reiterate at this point that it is not necessary to have a completely original idea; even value added to new items on the market is included in innovative products/services. The first stage of the business planning process is idea generation. It entails the creation of new concepts, ideas, products, or services to meet the market’s current, latent, and future wants. The following are some of the various sources of new ideas:

1. Consumers/Customers
2. Pre-existing Businesses
3. Innovation and Research
4. Dealers and retailers
5. Employees

The following are some of the strategies for coming up with new ideas:

1. Group conversation
2. Brainstorming, Reverse Brainstorming, and Brain Writing
3. Data collection from consumers, existing firms, dealers, and retailers via questionnaires, schedules, etc.
4. Invitation of ideas via marketing, mail, and the Internet
5. Additional value to existing products/services
6. Research into the market
7. Generating revenue from inventions
8. Nowadays, contests are held to identify company ideas, such as Star TV’s ‘business bazaar,’ which allows participation and rewards the best business plan.

New ideas should be screened so that promising new ideas may be recognised and impractical ideas can be discarded.

7.3.3 Environmental Scanning

After a promising idea arises from the idea creation process, the next step is environmental scanning, which involves analysing the business enterprise’s potential strengths, weaknesses, opportunities, and dangers. As a result, before diving into the finer points of starting a firm, it’s a good idea to scan both the external and internal environments for potential opportunities, threats, and strengths and weaknesses. The various variables to be scanned are changes in the external environment regarding socio-cultural, economic, governmental, technological, and demographic changes, as well as raw material, machinery, finance, and human resource availability with the entrepreneur. Informal sources (family, friends, coworkers, etc.) and formal sources are used to gather information (bankers, magazines, newspapers, government departments, seminars, suppliers, dealers, competitors). The goal of a successful environmental scanning should be to get the most information possible, thus the entrepreneur should gather data from as many sources as possible and then analyse it to see if the information is helpful or hindering the business effort. The more reassuring the data is, the more optimistic one can be about the company’s prospects.

However, mechanical errors (wrong interpretation of data, misrepresentation of facts), failure to record rapidly changing variables such as technology, and lack of farsightedness can all occur during this process. Furthermore, because culture is diverse, a thorough understanding is essential.

External Conditions

The components of the external environment are as follows:

Socio-cultural Appraisal: This method evaluates a society’s social and cultural norms over time. The variables that are evaluated are a society’s values, beliefs, norms, trends, and fads. It can assist in determining a society’s level of rigidity/flexibility toward a new product/service/concept. The socio-cultural norms of the United States and the United Arab Emirates, for example. Arabs are traditional, but Americans are experimental and daring. If an entrepreneur wants to develop a novel product like bungee jumping, it would be more acceptable in America than in the UAE.

Technological Appraisal: This evaluates the numerous technological know-how that can be used to turn the concept into a product. It can also examine the numerous new technologies projected shortly and the industry’s acceptance of them. For example, suppose an entrepreneur has the idea of producing tobacco-free herbal cigarettes that are safe for smokers’ health; a technological appraisal can determine whether such a product is feasible.

Economic Appraisal: It evaluates the state of the economy in a given society in terms of inflation, per capita income, consumption patterns, the balance of payments, and the consumer price index, among other things. A robust economy creates more prospects for industry expansion and development, which gives the entrepreneur more confidence in the success of his business enterprise.

Demographic Appraisal: It evaluates a particular geographical region’s overall demographic trend. Variables such as age profile, distribution, sex, education profile, income distribution, and so on are included. The demographic analysis can assist in determining the size of potential clients.

Governmental Appraisal: It evaluates the numerous government-formulated legislation, policies, incentives, subsidies, grants, and procedures for a specific industry. The easier it is for an entrepreneur to start and maintain a business, the softer the government regulations are for the industry. Consider the government’s subsidised electricity programmes in Uttaranchal. A manufacturing unit heavily reliant on electricity has a distinct advantage in establishing industry. Take, for example, Uttar Pradesh. Here, electricity is expensive and insufficiently supplied, forcing entrepreneurs in UP to rely on personal generators for power and raising product costs. As a result, setting up/shifting a manufacturing facility to Uttaranchal would be a prudent option for an entrepreneur.

When evaluating the government’s policies, the results of its policies in other sectors should also be considered. One such example is the government’s intention to allow only partial FDI in the retail industry. Because of this condition, global retail shops such as Wal-Mart cannot enter the Indian market despite the country’s enormous potential and financial viability.

Internal Situation

The following are the elements of a company’s internal environment:

1. Raw Material: It evaluates the current and near-term availability of raw materials. If raw material supply is limited now or in the future, an entrepreneur should seriously consider starting a business because a scarcity of raw materials can bring the entire system to a halt.
2. Production/Operation: It evaluates the availability of various machinery, equipment, tools, and procedures needed for production/operation.
3. Finance evaluates the entire financial requirement in terms of start-up costs, fixed costs, and ongoing costs. It also identifies the sources of money that can be sought.
4. Human Resources: It evaluates the type of human resources required, market demand, and availability. This also aids in assessing the cost of hiring and keeping human resources and the amount of competition.

As previously stated, environmental scanning should aim to collect information from as many sources as possible and maximize that information to increase the likelihood of company success.

7.3.4 Analysis of Feasibility

A feasibility study determines whether the proposed project is feasible (in light of the aforementioned environmental assessment). At this point, it’s critical to distinguish between an ecological assessment and a feasibility study. Environmental appraisal assesses the external and internal environment of the geographical area/areas where the entrepreneur wishes to establish his firm. In contrast, feasibility analysis assesses the project’s feasibility in a specific environment in greater depth. As a result, while a feasibility study depends on environmental assessment, it is significantly more descriptive. The following are the numerous variables/dimensions:

Market Research

Market research is necessary for the following reasons:

1. To forecast future demand for the proposed product/service.
2. To forecast the future market share of the proposed product/service.

Demand analysis and market share are determined by various factors, including consumption patterns, the availability of substitute goods/services, and the type of competition. A large amount of data must be gathered to create these estimates.

To evaluate consumer preferences, present, latent, and potential demands, competition strategy, and distributor, retailer, and supplier practices, a preliminary discussion with consumers, retailers, distributors, competitors, and suppliers is conducted. The goal of a formal study should be broad enough to allow for the generation of the desired responses to the following questions:

1. Who are the current and potential clients (consumers)?
2. What is the current and future demand for your product?
3. How is demand distributed seasonally (for example, air conditioners are required in most parts of our country from May to September)?
4. What is the regional distribution of demand?
5. What is the maximum price the customer is willing to pay?
6. What is your competitor’s marketing mix?
7. What marketing mix would consumers be willing to accept?

In almost every case, research is required to gather sufficient data to answer the above questions and determine whether a project is feasible. This is accomplished by conducting market research.

Analyses (technical/operational)

A technical/operational analysis aims to evaluate the proposed commercial enterprise’s operational capability. The cost and availability of technology may be necessary to a project’s viability, or it may not be an issue at all. The following are some of the most important questions to address:

1. What technology requirements does the proposed business have?
2. What other equipment is required by the planned business?
3. Where will you get this technology and equipment?
4. Could you tell me where I can get the raw material?
5. What kind of technology and equipment would you need?

Data on the following parameters is collected by Technical/Operational Analysis:

1. Material Availability: It is critical to determine whether or not the raw materials required for producing goods/services are available. The following variables should be considered while conducting a material feasibility study:
   1. Raw material availability in terms of quality and quantity
   2. The factors that influence raw material availability
   3. Raw material price sensitivity (elasticity)
   4. Raw material perishability
2. Planning for Material Requirements: The amount of material necessary to keep the production running smoothly is being investigated; this will depend on the material availability variable indicated before.
3. Technology Selection Analysis: It is used to determine whether or not the product generated during the idea generation stage is technologically feasible, answering issues such as:
   1. Is the product’s technology available or not?
   2. Which technology would be most profitable for the company if it exists in multiple forms?
   3. The following factors would affect the technology:
      1. Plant capacity
      2. Investment

• Technology availability

1. Production cost
2. Recent developments
3. Quantity of anticipated production

• Environmental impact.

4. Planting Site: The term “plant site” refers to a somewhat large area where the business will be built, such as a city, an industrial zone, or a coastal area. The manufacturing process, employee safety, low production costs, growth potential, and adequate space utilization all impact a company’s plant location, which refers to its physical structure. The following criteria have an impact on the location selection:
   1. Proximity to raw materials and markets.
   2. Infrastructure includes power, transportation, water, and means of communication.
   3. Favourable government regulations.
   4. Other considerations, such as climatic conditions, manpower availability, and so on, can influence plant placement decisions.
5. Machinery and Equipment: The price of machinery and equipment depends on manufacturing technology, plant capacity, purchase price, maintenance costs, and operation costs.

Possibility of Finance

After a successful marketing and operations analysis, a final financial feasibility analysis is performed to evaluate the proposed business venture’s economic concerns. The following cost estimates must be completed:.

1. Land and building costs: Land and buildings can be hired, leased, or owned, depending on the need and financial resources available.
2. Plant and machinery costs: This comprises estimates of plant and machinery costs and their operating and maintenance costs.
3. A preliminary cost estimate is prepared to determine the amount of money needed to perform market research, write a feasibility study, register and incorporate the machine, set up a shop, solicit funds from the public, and cover other extraneous costs.
4. Provision for contingencies must be made to cover unexpected expenses that may arise due to changes in the external environment, such as an increase in raw material prices or transportation costs if gasoline prices are changed.
5. Estimates of working capital are also made for the operation of the business.
6. Production costs include raw materials, labour, overhead charges, and utilities such as power, water, and fuel.
7. Estimates of sales and production: Production and sales projections are made based on facility capacity, which aids in estimating profitability.
8. The following parameters are used to calculate profitability projections:
   1. Production costs
   2. Sales expenses
   3. Administration costs
   4. Sales projections

All of the preceding adds up to gross profit.

The following projections are created based on the preceding data:

1. Break-even point
2. Cash flow statement
3. Balance sheet statement
4. Multi-year estimates

Drawing Functional Plans: After the feasibility study yields positive results, functional plans are produced. Some scholars and writers like to combine feasibility studies with functional plans; however, they were treated separately in this book since the feasibility study is a prelude to the plan and is used to assess the project’s viability from various perspectives. After the feasibility study indicates the project’s viability, functional plans can be prepared to outline the strategies for all operational areas, including marketing, finance, human resources, and production.

Marketing plan: A marketing plan outlines the marketing techniques that can lead to business success. These plans are based on the Marketing Mix (product, price, place, and promotion). Market feasibility studies and marketing research evaluate customers’ potential/present demand, aiding in understanding their profiles and, as a result, developing market segmentation strategies, target market identification techniques, and target market development strategies.

Production/Operation Plan: Production plans are created for businesses in the manufacturing industry, while operational plans are created for businesses in the service industry. The strategy for the following parameters should be included in the production/operation plan:

1. The site and the reasons for choosing it
2. Physical layout
3. Machinery, equipment, and raw material costs and availability
4. Suppliers and, if possible, distributors’ lists
5. The cost of manufacturing and running the business
6. Quality Control
7. Production planning, capacity planning, and inventory control
8. Changes to those above in the event of business expansion.

Organizational Plan: An organization’s plan specifies the kind of ownership: sole proprietorship, partnership business, corporation, private limited liability company, or public limited liability company. It also proposes an organisational structure and human resource management methods to guide the proposed commercial enterprise’s successful operation.

Financial Plan: A financial plan outlines the projected business’s financial requirements.

1. Expenses incurred in ensuring the efficient operation of all financial schemes (marketing, operation and human resources).
2. Cash flow projections
3. Income statement projections
4. Break-even point forecast
5. Ratios expected
6. Balance sheet projections

Hindustan Liver Limited (HLL) devised a new approach to deal with the increasing competition: Every Month, a New Product!

7.3.5 Preparation of Project Reports

A project report is written after environmental scanning and feasibility research. It’s a written document outlining the strategies for starting and running a business. A project report aids in the understanding of the company’s prospects, issues, and weaknesses. It assists the entrepreneur with the actual start-up and operation of the business. It allows him to track whether the company is growing as expected in the business strategy. It aids in the documentation of the company’s expense projections. It can be a valuable tool for convincing investors and financial institutions to fund the project. It can aid in the efficient use of all resources. It has the potential to boost employee, owner, and investor morale. It may eventually lead to the organization’s long-term success.

The Crucial Elements of a Project Report

The following are the essential components of a project report:

1. The project report should be organised in logical order.
2. The project report must be comprehensive (covering all the details about the proposed project).
3. The project report should be concise and objective.
4. The projections should be explained rationally and objectively in the project report.
5. Projections should be made for a period of two to ten years.
6. The project report should be professionally written to show that the promoters are business savvy and have relevant experience.
7. The financial demands and estimates should be justified in the project report.
8. Market prospects and demands should also be justified in the project report.
9. The project report should appeal to financial institutions and investors.
10. The project report should also be visually appealing.

Preparing a Project Report: A Step-by-Step Guide

The following are the steps required in writing a project report:

1. Cover Sheet: A cover sheet resembles a book’s front page. It includes the project’s name, headquarters address (if any), and promoters’ names and addresses.
2. Table of Contents: Similar to a book’s table of contents, the table of contents directs the reader of the project report to the relevant part quickly. Divide the project report into sections and number or label the sections 1, 2, 3 or I, II, III or A, B, C, and then divide each section into subsections using numerals after the decimal like 1.1, 1.2, 1.3 or I-1, II-2, III-3 or A-a, B-b, C-c. Regardless of the classification method, the entire report should follow the same protocol once a process is chosen.
3. Executive Summary: The executive summary gives the reader an initial idea of the business proposal. The first impression, as the saying goes, is the last. To get the evaluators’ attention, the information should be presented carefully. It should be concise (no more than two or three pages) yet contain all of the relevant facts about the idea that will help it gain marketability. It should briefly describe the company, some financial numbers and key aspects of the project. The executive summary’s primary goal is to arouse curiosity in the readers’ minds.
4. The Business: This section will cover the specifics of the business concept. It will cover the business’s goal, a brief history of the company’s prior performance (if it is an older company), and the ownership structure (whether it would be a single proprietor, partnership, cooperative society, or company under company law). It would also include the planned headquarters’ address.
5. Requirement for Funding: A careful, well-planned finance requirement should be described, as investors and financial institutions are the important bodies assessing the project report, and it is one of the fundamental purposes of compiling the project report. It’s also important to envision how these needs will be met. A debt-to-equity ratio should be calculated, indicating how much funding the company will need and how it plans to fund the project.
6. The Goods and Services: This section briefly describes the product/services. It comprises the product’s essential features, the product range offered to clients, and the advantages over comparable or substitute products currently on the market. Patents, trademarks, copyrights, franchises, and licencing agreements are also detailed.
7. The Strategy: Now, it’s time to create functional plans for marketing, finance, human resources, and operations.
   1. Marketing Plan: Market research will be used to develop marketing mix tactics. The market study will give information on the following parameters: (i) Market demography, such as customer and end-user profiles; consumer preferences and wants; (ii) Competitor strengths and weaknesses (iii) Market SWOT analysis. Thorough market research is the foundation of any product’s success or failure. Marketing mix strategies for product/services, price, promotion, and distribution are meticulously provided based on information gathered from market research and explanations regarding why the targeted market is so appealing. How can the organisation benefit from the market? What marketing methods would ultimately contribute to the organization’s success? The marketing plan’s budgets are drawn towards the conclusion.
   2. Operational Plan: The plan would provide details on (i) Plant Site: Why was a specific location chosen? Is it close to the market, suppliers, or labour, or does it benefit from government subsidies for that particular area, or are there other unique reasons for picking that site? (ii) Plant layout is occasionally mentioned in the project report to provide a pattern of organisation and would indicate thorough planning for the business. (iii) Material requirements, inventory management, and quality control plans are also drawn to identify additional costs and complexities in the business. Finally, a budget for the operating plan is created.
   3. Organizational Plan: The organizational plan depicts the pattern of the flow of responsibilities and duties among people in the organization. It includes information about the board of directors, a manpower plan that would be required to bring the company to life, and information about the laws that would govern the management of the organization’s employees. Finally, the organizational strategy is budgeted.
   4. Financial Plan: A financial plan for an existing business is usually drawn out for two to five years. A summary of prior financial data is provided, and the following estimates are made for a new organisation:
      1. Estimated Sales
      2. Income and Expenditure Statement Projected

• Break-Even Point Estimation

1. Profit and Loss Statement (Proposed)
2. Balance Sheet Forecast
3. Cash Flows Proposed

• Estimated Funds Ratios of Flow Projected

8. Critical Risks: Investors are interested in learning about the potential hazards to assess the project’s feasibility and the business’s risks. This might give investors even more confidence because they can analyse the risks involved in the firm from their viewpoints.
9. Exit Strategy: The exit strategy would explain how the organization would be dissolved and what each stakeholder’s share would be in the event of its winding up. It also aids in calculating the risks associated with investment.
10. Appendix: The appendix can contain information such as the owners’ curriculum vitae, the Ownership Agreement, the Pollution Board Certificate, the Memorandum of Understanding, the Articles of Association, and any other supporting agreements/documents that can aid in the marketing of the project’s viability.