Chapter 7

THE BUSINESS PLAN

What is Business Plan?

A business plan is a document that helps the small business owner determine what resources are
needed to achieve the objectives of the firm, and provides a standard against which to evaluate results.

The business plan is a sort of a business blueprint and it keeps the entrepreneur on the right track.
It gives a sense of purpose to the business. It also provides guidance, influence, and leadership, as well as
communicating ideas about goals and the means of achieving them to partners. Associates, employees,
and others.

Purpose of Business Plan

A business plan is written for two main purposes. They are the following:

1. To serves as management’s guide during the lifetime of the business; and

2. To fulfill the requirement for securing the lenders and investors.

Parts of the Business Plan

The contents of the business plan, they contain the following will depend upon the purpose.
Usually, however they contain the following:

1. The page and contents;

2. Executive summary;
3. Description of the business;
4. Description of the product or service;

5. Market strategies;

6. Analysis of the competition;

7. Operations management;

8. Financial data; and

9. Supporting documents.
Title Page and Contents

The business plan must be easily identifiable through a cover page with a listing of the following:

1. The name of the business;

2. The name/s of the proponent ( in this case, SBO);

3. Address;

4. Telephone numbers;

5. E-mail and website address;

6. The date; and

7. The name of the person who prepared the business plan.

Executive Summary

The executive summary is a portion of the business plan and states the objectives of the
business. If the SBO is intending to borrow money or is seeking capital from investors. The following
must be indicated:

1. The capital needs of the business;

2. How the will be used;

3. What benefits will be derived by the business from the loan or investment; and

4. In case of loan, how it will be repaid with interest, and in the case of outside investment, how
profit will be generated.

Description of the Business

This particular portion of the business plan is very useful to the SBO, as well as prospective
investors and lenders. This is divided into two parts:

1. A short explanation of the industry; and

2. A description of the business.

Statements about the following will be useful in describing the business:

1. Industry sector where the business fall into (retail, manufacturing, education, entertainment,
and others);
 2. Whether the business is new or established;

3. The ownership status of status of the business (sole proprietorship, partnership, or corporation);

4. Information who the customer are;

5. Information on the size of the market; and

6. Information on how the product or service is distributed.

Description of the Product

The product or service must be described clearly in the plan. To achieve this, the following must
be presented.

1. The important features of the product or service, such as the maintenance free feature of the
product, or the home delivery service for products or ordered through the phone.

2. A detailed description of how the product is used.

3. What makes the product or service different from others available in the market? Examples are
the availability of the product or service 24 hours a day or the water-based features of the
product insect repellant.

Factors that will make the business successful must be described. Some of these positive factors that are
worth describing are:
1. Superior organization of the business;
2. Latest equipment that are currently used by the company;
3. Superior location of the company;
4. Fair price of the product or service; and
5. Superior customer’s service offered by the company.

Market Strategies

Market strategies refers to what the SBO plans to do to achieve the market objective of the firm.
These strategies are formulated after undertaking market research.
Market strategies consist of the following:
1. Definition of the market;
2. Determination of the market shares;
3. Positioning strategy;
4. Pricing strategy;
5. Distribution strategy; and
 6. Promotion strategy.

Definition of the Market. The objective of the market definition is to determine which part of the
potential market will be served by the firm. Hence, the market must be defined in terms of size,
demographic, structure, growth prospect, trends, and sales potential.
To determine the total potential market, the total aggregate sales of the competitors must be
presented.

SALES

Company 50,000 units

A

Company 65,000 units

B

Company
C 80,000 units

Other
10,000 units
Companies
_______________ _______________
THE MARKE
FOR
PRODUCT X 205,000 UNITS

FIGURE 16. The Market for Product X

Determination of the Market Share. The business plan will be more useful to the reader, especially
lenders and investor, if the projected market share of the firm is presented.
To determine the firms market share, the following steps may be used:
1. Determine the number of prospect in the target market;
2. Determine the number of times the product or service is purchased by the target market;
3. Figure out the annual purchase; and
4. Determine the percentage of the potential annual purchase that the firm can attain.

Positioning Strategy. Positioning refers how the firm differentiates its product or service from those of
the competitors and serving a niche.
 Positioning Strategy is one where the firm identifies a target market segment and develops a
strategy mix to address the desires of the segment. The objective of positioning is to establish the firm’s
product or service identify in the mind of mind of the buyer

Before adapting a positioning strategy, the following questions must be first considered:
1. What does the customer really want to buy from the firm?
2. How is the product or service different from the competitors?
3. What makes the product or service unique?

Pricing Strategy
Factors in determining the right price.
1. Customer’s perception of value in the firm’s kind of business;
2. Costs involved such as, overhead, storage, financing, production, and distribution; and
3. Profit objectives of the firm.

The firm’s price may be established through any of the following methods:

1. Cost plus pricing –covers all costs, variable and fixed, plus an extra increment to deliver profit
2. Demand pricing – is a method of pricing where the firm sets prices based on
buyer desires. The range acceptable to the target market is determined.
3. Competitive pricing – calls for price – setting on the basis of prices charged by competitors.
4. Markup pricing – is a form of cost-oriented pricing in which the firm sets
prices by adding per-unit merchandise costs, operating expenses and desired
profit.

Distribution Strategy. Distribution refers to the process of moving goods and services from the firm to
the buyers. The distribution channel that will be adapted must provide a strategic advantage of the firm.
Common distribution channels are as follows:
1. Direct Sales – is the most effective channel if the plant is to move goods directly to the ultimate
users.
2. Original equipment manufacturer sales – involves selling a manufactured product to another
manufacturer who, in turn, incorporates the same to his product and which is later sold as a
finished product to the end user. An example is the sound system incorporated in to cars.
3. Manufacturer’s representatives – are wholesalers employed by one or several producers and
paid on commission according to quality sold.
4. Wholesalers – a channel members that sell to retailers or other agents for further distribution
through the channel until they reach the final users.
5. Brokers – are distributors who buy directly from distributors or wholesalers and sell to retailers
or end users.
6. Retailers – sell directly to consumers.
7. Direct mails – are printed materials used in targeted campaign to consumers. These are sent
directly to consumers. These include catalogs, letters, e-mail, and other direct appeals.

Promotion Strategy
1. Advertising Aspects:
 a. Advertising budget;
b. Positioning message; and
c. First year’s media schedule
2. Packaging – describes how the company’s products will be packaged.
3. Public Relations – will be a detailed presentation of the publicity strategy of the firm. This will
include a list of media that will tapped to convey the firm’s message to the target market. The
schedule of special events like product launching will also be included.
4. Sales Promotions – are means used to support the sales message like special sales, coupons,
contests, premium awards, trade-in, among others.
5. Personal sales – present the sales strategy including:
a. Pricing procedures;
b. Rules on returns and adjustments;
c. Methods of sales presentations;
d. Generation of leads;
e. Policies on customer services;
f. Compensation of salesmen; and
g. Responsibilities of the salesmen.

Analysis of the Competition

The small business operator (or the entrepreneur) will be find it difficult to compete if his
competitors are unknown to him. This makes it necessary to make an analysis of the competitors.
Competitive analysis:
1. Strength and weaknesses of the firm’s competitors;
2. Strategies that will give the firm a competitive advantage;
3. Barriers that can be developed to prevent competitors or would-be competitors from exploiting
the firm’s market; and
4. Any opportunity that can be exploited.

Table 12. A comparison of the Strengths and Weaknesses of Competing Firm’s

Key Assets and Skills Our Company Competitors A Competitor B
Superior product Strength Weakness Strength
Good business location Weakness Strength Weakness
Strong sales team Weakness Strength Strength
Strong financial Strength Weakness Weakness
capacity

Operation and management

How the firm will be operated on a continuing basis is an important components of the business
plan. As such, the plan must contain the following:
1. Organizational Structure;
2. Operating expenses;
3. Capital requirements; and
4. Cost goods sold.

Organizational Structure
A well-defined and realistic organizational structure is an important element of the business
plan. Investors and lending institutions will be interested to look at this particular aspect.
 1. Marketing (including sales, customer relations and service)
2. Production (including quality assurance);
3. Research and development;
4. Management; and
5. Human resources.
Operating Expenses
1. Rent;
2. Advertisement;
3. Supplies;
4. Utilities;
5. Packaging and shipping;
6. Maintenance;
7. Equipment leases;
8. Payroll;
9. Payroll taxes and benefits;
10. Bad debts;
11. Professional service;
12. Insurance;
13. Loan payments;
14. Depreciation; and
15. Travel.

Capital Requirements
Capital equipment are necessary items in operating business. The business plan will not be
complete unless listing of capital equipment needed to be purchased is drawn up.

Cost of Goods Sold

Cost of goods expensive:
1. Material;
2. Labor; and
3. Overhead.

Financial Data
Financiers are most interested in the financial aspects of the business plan. To satisfy this
requirement, the following statements must be presented in the business plan:
1. Income statement – shows the income, expenses, and profits of a firm over a period of time. It
is also alternatively called “statement of earnings”. It may be cover a certain year, quarter, or
month. It provides basic data to help the prospective financier analyze the reasons for the
projected profits.
2. Balance sheet – is a type of financial statement that shows the financial condition of the
business as of a given date. The information provided by this statement is useful not only to the
entrepreneur but also to the prospective creditors. A scrutiny of the balance sheet will give the
owner some clues if modifications are needed in some of the items listed.
A summary of financial information about the business is contained in the balance sheet and are
broken down into three areas, namely:
a. Assets – portion of the balance sheet lists the assets of the firm in order of liquidity,
i.e., from the most liquid to the least liquid. As such, this portion is subdivided into
the following:
 I. Current Assets
a). Cash – which includes cash in checking, savings, and short-term
investment accounts;
b). Account receivable – refers to income derived from credit accounts, and
c). Inventory – refers to the inventory of materials used to manufacture a
product not yet sold.
II. Fixed assets – these are durable assets and will last more than one year.
These consists of the following:
a). Capital and plant – refers to the book value of all capital equipment and
others such as land and building, if owned by the firm, less depreciation;
and
b). Investments – are investments accounts owned by the company that
cannot be converted to cash in less than a year.

b. Liabilities – the liabilities portion of the balance sheet is classified as current or long
term. Current liabilities are due in one year or less and they include the following:
I. Account payable – refers to all expenses incurred by the business that are
purchased on an open account from suppliers and are due for payment.
II. Accrued liabilities – refers to operational expenses that are not yet paid.
Examples are overhead and salaries; and
III. Taxes that are due and payable
Long term liabilities are due in more than one year. They include the flowing:
I. Bonds payable – are bonds due and payable over one year;
II. Mortgage payable – refers to loans used for the purchase of real estate and
is repaid for a period of over one year; and
III. Notes payable – are loans represented by a written document which is
payable for a period of over one year.
c. Owners’ equity – this section refers to how much the owner has in the business. It
provides a useful means in evaluating the company.
3. Cash flow statement - the cash flow statement is also a very useful tool for business planners. It
projects what the business plans means in term of pesos. It is used for operational planning and
estimates the amount of cash inflows and outflows of the business during a specified period of
time. A proper balance between the cash inflows and outflows will result to profits.

The following items are listed in a cash flow statement:

3.1. Cash – is the cash on hand in the firm.
3.2. Cash sales – are income from the sales paid for by cash.
3.3. Receivables – are income collected from credit sales.
3.4. Other incomes – are income derived from investments, interest on money loaned to
borrowers, and on cash derived from sale of assets.
3.5. Total income – is the sum of each cash, cash sales, receivable, and other income.
3.6. Material or merchandise refers to:
a. Raw materials used in the manufacture of the product; or
b. The cash outlay for merchandise inventory of trading firms; or
c. The supplies used in the performance of a service.
3.7. Direct labor - refers to labor required to manufacture a product or perform a service.
3.8. Overhead – refers to all fixed and variable expenses required in the day-to-day
operations of the business.
3.9. Marketing expenses – refers to all salaries, commissions, and other direct costs
associated with the marketing and sales departments.
3.10. R and D – are labor expenses required to support the research and
development efforts of the firm.
3.11. G and A expenses – refer to those required to support the general and
administrative functions of the firm.
 3.12. Taxes – refer to all taxes, except payroll withholding taxes, paid to the
government, national and local.
3.13. Capital – represents the funds requirements to obtain any equipment needed to
generate income.
3.14. Loan payments – refer to total payments made to reduce or eliminate any long-
term debts.
3.15. Total expenses – refer to the sum of materials, direct labor, overhead,
marketing expenses, R and D, and A, taxes capital, and loan payments.
3.16. Cash flow – refers to the difference between total income and total expenses.
3.17. Cumulative cash flow – refers to the difference between current cash flow and
cash flow from the previous period.

Supporting Documents
The business plan would be more meaningful if supporting documents are included. The
documents usually consists of the following:
1. The owner’s resume;
2. Contracts with suppliers;
3. Contracts with customers or clients;
4. Letters of reference;
5. Letters of intent;
6. A copy of the firm’s lease;
7. A copy of copyright or patent acquired, if applicable; and
8. Tax returns for the past three years.