Components of a Business Plan

Story 493154406 [caption id="" align="alignnone" width="500"]business plan photo Photo by Sebastiaan ter Burg [/caption] A business plan is basically composed of the following: * Introduction or executive summary. Just like the preface or foreword of a book, the introduction or executive summary gives a general idea about the contents of the business plan. It also states the name of the person who is planning to set up the business, form of ownership, the business address, type of project, objective(s) of the business, and total project cost. * Marketing aspect. This generally refers to the product or service that the business will offer. It gives details of the product or service, how it will benefit the buyer, how it will look like; who are expected to buy the product or use the service, where they can buy, and how much it will cost. This component also includes data on how much sales the business can expect - in a year, in two years, or longer - in units and in peso values. This portion also looks at the general situation outside the proposed business. The information will consist, among others of the following: how many buyers or users there are in the market as against the number of makers of similar products or services, how the latter are doing in the market; details as to how they make the buyers and users know about their products or services and convince them to buy; and many more information. One of the first steps to take in preparing a business plan is to study the present situation of the market - the buyers and sellers. You have to know thy enemy. Like a soldier in a war you should have some idea of the products or services similar to yours that are already available in the market, who are making or offering them, how these other makers or providers sell their products or services, how they make their products or services known to the buying public, how go-betweens handle their products, and how they price their products or services. The next step is to study supply and demand. Determine the volume produced by the different makers or providers (supply) against the volume needed by the buyers (demand). If the supply is greater than the demand, then it might be better for you to abort the business idea. Once you are convinced that there is a good market opportunity for your product or service, it is time to stretch those finger muscles and work out the marketing plan. Begin by describing your target market or the specific group of customers you would expect to buy from you. After knowing their needs and wants, proceed to describing the product or service you have in mind. Then plan how your product or service will get into the hands of your expected buyers or users. If, for instance, you intend make bath soap, you may consider supplying the bath soap needs of people living within the vicinity where you live. Let us say you live in Quezon City and your target market is just 0.001% of the total household population of the city. If the total household population of the city is 480,000, your target share then is 480 homes. Let us further assume that an average family of four consumes two bars of soap a month. That will mean you have to produce 960 bars of soap a month. With this target market in mind, you may have the marketing strategy shown below: * Product: Bath soap with green papaya extract for whitening skin packed in an attractive box at 150 grams. * Promotional activities: Eye-catching signboard inside the supermarket and the storefront of sari-sari stores. * Place or channel of distribution: Supermarkets and variety stores. * Price (from the factory): 20 pesos per 150-gram pack. After estimating the number of packs of soap you expect to sell, where to sell them and how much to charge per pack, you can now calculate your projected sales: 960 bars of soap a month * P25 = P24,000 a month or P288,000 a year. Let us take the case of a service business, say, a laundry shop. * Service: Laundry services consisting of the following combinations: dry clean, wash-dry-fold, wash-dry-iron, steam-dry-iron. * Promotional activity: Signboard at the shop, movable signboard on the pavement. * Place or channel of distribution: Front of the main gate of the public market * Price: Dry clean – from P150 to 700 per piece, depending on size, wash-dry-fold at P25 per kilo, wash-dry-iron at 30 per kilo, steam-dry-iron at 40 per kilo. * Production or technical aspect. This component deals with how the product is made or the service completed; when it is made or completed; type and number of materials and equipment and number of people needed to make the product or complete the service; type and amount of electricity, power and water to use; arrangement and location of machines, work stations, storage and other areas; physical space and facilities; quality control system; waste disposal system; and many more. In our example on the soap-making business, technical information may consist of the following: * Product specification: This refers to the characteristics and components of the bath soap. In other words, it will describe how the soap will look like and what it is made of. In this case, it would be: 150-gram soap with green papaya extract that comes in three different scents. In the case of the laundry shop, the specifications will describe the nature of the different combinations of laundry services being offered. * Production process: This is a step-by-step description of how the product is made or the service completed. In the soap-making example, you will show the different steps for making soap in a manner similar to the recipes you see in cookbooks. This is best illustrated by using a chart similar to the one below: In the case of the laundry shop, use a similar chart to trace the steps and the amount of time required to complete each step from the time the shop receives the clothes for washing until the time they are done and temporarily stored, waiting to be claimed. There are two methods for making soap, the cold process and the hot process. The process flow chart above illustrates the cold process. It does not need heating but requires additional four to six weeks of curing. If you intend to follow the hot process, just change the process flow chart. * Production machinery and equipment: This refers to the machines and equipment necessary to make the product or complete the service. For the soap-making example, list the equipment, tools, and machinery you will need to make 960 bars of bath soap. While a startup business of making bath soap per se will not need much equipment, you may still need at least a computer and a printer to make attractive packaging for the soap. A table like this one will help you describe the equipment you will need: For the laundry shop, list down the type, specifications, and number of washing machines, dryers, steam irons, ironing tables, laundry baskets that will be used to complete the service. * Production materials: This refers to the major materials that you will use to make a product or complete a service. There are two types of production materials, direct materials and indirect materials. Direct materials refer to the materials that become part of, or are directly related to the product you make or service you offer. Indirect materials refer to some materials that are usually used in small amounts to make a product or complete a service. Following the same format of the machinery and equipment, make another table for the materials and supplies and the quantity or amount necessary to produce the 960 soap bars. For the soap, the direct materials would be base oil, caustic solution, and papaya extract. The solution that will provide the scent is considered as indirect material. For the laundry business, major materials would consist of laundry detergent and water. Indirect materials would be the solution that will give the pleasant smell on the clothes. * Utilities, plant location and layout: This relates to the sources of water and electric power, the site of the business, and arrangement of facilities and workstations. Indicate whether you will use tap water, deep well, or any other source. Do the same for the electric power. Mention the availability or unavailability of your water and power source and whether you need to do some installations. * Production schedule: This gives in detail how the work is going to be spread out in the next 12 months. This has to be made in order to ensure that the number of units to be sold or services to be completed, based on the projected sales, are produced in time. Among others, the schedule will show the status of production at any point during the production period; the specific periods when production or service will start and when the product or service will be completed. For the soap-making example, make a production schedule based on the data given in the process flow chart. Find out how long each step takes in minutes or hours. In the soap example, you may have noticed that the curing period is long. You may have to prepare the mixture for all the 960 bars of soap in advance. Once you have computed the length of period required for one production cycle (960 bars), you will be able to determine the number of cycles you can do in a week, a month, and a year. This information will help you to decide whether to concentrate on the business or consider it as a part-time project. In the case of the laundry shop, the production schedule should indicate how many washing jobs can be done in one day, week, month, and a year given the estimated amount of time that were identified to complete one washing job, number of washing machines, dryers, flat irons, and ironing tables, as well as the number of workers in the shop. * Labor requirement: This comes in the form of direct labor and indirect labor. Direct labor refers to the people who are actually involved in making the product or completing the service. In the soap business, this will be the mixer. Indirect labor refers to the people who perform tasks that do not have anything to do directly with making the product or completing the service. They are the production helpers, quality control inspector, supervisor, etc. The decision to hire people will depend on your choice on whether to operate the soap-making business full time or part time. Let us assume that you want to go full time. The type of people you will need to help you and their number will be dictated by your production schedule. You could have some use for a table like this: * Inventory schedule: Inventory refers to the stock of materials, supplies, and spares required for making the product or completing the service. The inventory record will keep you informed of the date of purchase, quantity purchased, cost, date released for production, quantity issued, and remaining balances. Keeping track of these items will ensure that you do not only have the materials you need to make the product or complete the service on short notice but also to prevent you from keeping obsolete or expired materials in your stock. You can devise something similar to the chart below for this purpose. * Total production cost schedule: This is a summary of the costs involved to produce your product or complete the service. It is composed of the direct materials cost, direct labor cost, and the supplies, utilities, depreciation of machines and equipment, and indirect labor costs, collectively known as manufacturing overhead cost. Use the charts below to help you compute your total production cost. * Organizational aspect. This refers to the details of putting the business together. It involves getting the people, setting up systems and procedures, acquiring the machines and equipment, and registering the enterprise. It includes coming up with a timetable of activities to do until the enterprise formally opens for business. You start by defining your vision for the enterprise and setting up your goals and objectives. Then decide on the form of ownership, whether it will be a sole proprietorship, a partnership, or a corporation. If you have a group, you may also choose to form a cooperative. Show the organizational structure by means of an organizational chart arranged according to the four functional areas: marketing, production, finance and administration. Below is an example of an organizational chart. The organizational chart is useful for indicating the hierarchy or the levels of authority and communication in a company. It identifies who is responsible for whom and who reports to whom. It also visually presents how the various job assignments are classified among the staff. This chart shows that the owner is a hands-on manager. He may have some staff to assist him but he is on top of the business and makes all decisions. Besides the organizational chart, you have to describe the duties and responsibilities that go with the positions, the number of people you will need, the qualifications of those who will carry out each task, and the corresponding salaries and benefits, in the organizational plan. An important part of the organizational plan is the Gantt Chart. This is a list of all the activities you are to do prior to launching the business and the timeframe for accomplishing them. Preparing the Gantt Chart is a useful exercise that allows you to have a view of the pre-operating activities and their cost implications. These activities include writing of the business plan, negotiation for financing, construction or improvement of the building, acquisition of machinery and equipment, recruitment (and training, as applicable) of personnel, registration of the business etc. Your Gantt Chart could look like the one below. * Financial aspect. Just as money is very important to any business, this section is critical to any business plan. This component will let you know how much you will need to put up the business, where you will get the money to finance it, and keep it going. Vital to this component is an estimate of how much you will need to operate the business for at least a year up to, probably five years, especially if you will borrow from a bank, how you are going to use the loan, how much profit the business will earn, how you are going to repay the bank loan, and some other information. While you usually go to a doctor only if you are ill, it is nonetheless advisable that you see your doctor regularly for a checkup. In the same manner, you should know the financial status of your business regularly (preferably once a month) and not just whenever you experience cash flow problems. The financial plan can be both a tool for prognosis for a healthy business and diagnosis for one that is experiencing difficulties. The financial plan translates into monetary terms what you have learned after completing the first three major components of your business plan. In doing the marketing plan, you learned things related to sales generation, whereas in the production and organizational plans, you learned about things related to expenses. The financial plan translates all of this information into monetary figures, and from these data you will be able to assess whether the profit that you expect the business to earn is greater than the cost of setting it up and operating it. In the soap business for example, you expect to realize a monthly sales of P24,000 or P288,000 within a year. After computing your expenses, deduct this amount from your total sales. If you get a positive number, it could mean that the business is profitable. This is a very simplistic way of measuring the profitability of a business. There are a lot of other factors to consider and methods to use for evaluating a business plan. Chapter 10 will discuss this in more detail. One of the financial schedules you are to prepare for the financial plan is the total project cost schedule, which is composed of items relating to the total fixed assets, the working capital, and the pre-operating expenses. Examples of fixed assets are land, building, vehicle and equipment. Working capital, on the other hand, refers to funds you need to pay for expenses related to production, marketing, and organization within a short period or until the revenues start coming and the business will be able to finance its own operation. Pre-operating expenses, meanwhile, consist of the fees you incur when you register with the government and consultancy fees you pay to a consultant or researcher who prepared the feasibility study. You include your sources of funds. The money may come from your own pocket and from fellow owners of the business or equity contributions, if any. It may also come from relatives, friends, banks or financial institutions. External sources of funds are referred to as creditors. In the soap-making business, the blender, weighing scale, computer and printer are considered your fixed assets. If you put up a stall or improve a part of your house for the business, the costs for putting up the stall and house improvement are also considered your fixed assets. Your working capital will consist of the money you will need to buy the direct and indirect materials, pay your direct labor, take care of overhead costs, and sell the soap. If you loaned from the bank or from an informal source, the interest will also form part of your working capital. If you will train your workers, hire a consultant, or do some research these expenses, and the fees you will pay for business registration will be part of your pre-operating capital. A financial plan includes the preparation of the following financial statements: income statement, which presents the net result of a company's revenues, minus expenses, over a given period; balance sheet, which is a “financial snapshot” of your business at a given time that tells you how much your assets and liabilities are, as well as the net worth of your business; and cash flow statement, which shows the sources and uses of cash for your business over a certain period. You are not expected to acquire the skill of preparing financial statements after reading this. You can ask somebody to prepare these statements for you. A well-experienced bookkeeper or an accountant can easily do the task. The more important thing is for you to understand how to use the financial plan, particularly the financial statements, to come up with good business decisions. Source: Your Guide to Starting a Small Enterprise

Source: Business Diary Philippines

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