BUSINESS PLANS



A company's business plan is one of its most important documents. It can serve many purposes. It can be used by corporate or business 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.

Virtually every business needs a business plan. Lack of proper planning is one of the most often cited reasons for business failures. Business plans help companies identify their goals and objectives and provide them with tactics and strategies to reach those goals. Business plans are not historical documents; rather, they embody a set of management decisions about necessary steps for the business to reach its objectives and perform in accordance with its capabilities.

SITUATIONS REQUIRING A BUSINESS
PLAN

Business plans have several major uses. These include internal planning and forecasting, obtaining funding for ongoing operations or expansion, planned mergers and acquisitions, 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 as well as specific divisions and departments. A company's performance and progress can be measured against planned goals involving sales, expenditures, time frame, and strategic direction. Business plans also help management identify and focus on potential internal and external problem areas. Proposed solutions and contingency plans are incorporated into the business plan. Business plans also cover such areas as marketing opportunities and future financing requirements that require management attention. By mapping out a business's future, business plans can be used to persuade management and others outside the company of its promising future.

Ideally, everyone in the company, from the upper to lower echelons, will use the information contained in the company's business plan. At the upper levels of management, the business plan is used to set performance targets for overall and divisional operations. At the divisional or departmental level, managers use the business plan to guide their decision making with regard to ongoing operations. They also assess personnel performance in terms of the objectives set forth in the business plan. Workers who are informed about the business plan can evaluate and adjust their own performance in terms of company objectives and expectations.

Another internal use of business plans is in the restructuring or reorganization of the business. In such cases, business plans describe actions that need to be taken in order to restore profitability or reach other goals. Necessary operational changes are identified in the plan, along with corresponding reductions in expenses. Desired performance and operational objectives are delineated, often with corresponding changes in production equipment, workforce, and certain products and/or services.

Banks and other lenders use business plans to evaluate a company's ability to handle more debt and, in some cases, equity financing. The business plan documents the company's cash flow requirements and provides a detailed description of its assets, capitalization, and projected financial performance. It provides potential lenders and investors with verifiable facts about a company's performance so that risks can be accurately identified and evaluated.

The business plan is the primary source of information for potential purchasers of a company or one of its divisions or product lines. As with outside lenders and investors, business plans prepared for potential buyers provide them with verifiable facts and projections about the company's performance. The business plan must communicate the basic business premise or concept of the company, present its strengths as well as weaknesses, and provide indications of the company's long-term viability. When a company is attempting to sell off a division or product line, the business plan defines the new business entity.

PREPARING THE BUSINESS PLAN

The process of preparing and developing a business plan is an interactive one that involves every functional area of a company. Successful business plans are usually the result of team effort. Functional managers, with help from their workforce, provide input based on their special areas of expertise and technical skill. Top management provides overall support for the planning process as well as general guidelines and feedback on the plan as it is being developed.

Some companies make the planning process an ongoing one. In other cases, such as for a business acquisition, it may be necessary to prepare a business plan on short notice. The process can be expedited by determining what information is needed from each participant. Then, participants can meet to complete only those plan components that are needed immediately. During the planning process, it is usually desirable to encourage teamwork, especially across functional lines. Different functional managers may work together to collect and analyze data prior to a formal planning session, thereby helping diverse managers reach consistent objectives.

A few basic steps can be identified in the planning process. The first step is to organize the process by identifying who will be involved, determining the basic scope of the plan, and establishing a time frame within which the plan is to be completed. Upper management not only communicates its support of the planning process, it also defines the responsibilities of each party involved. Work plans that supplement the general timetable are helpful in meeting deadlines associated with the planning process.

Once the planning process has been fully organized, participants can begin the process of assessment. Internal and external evaluations are based on extensive information gathering. Strengths and weaknesses are identified in every functional area of the business. In addition, the overall management structure of the company is evaluated. It is useful to assess and evaluate such external factors as the general economy, competition, relevant technologies, trends, and other circumstances outside the control of the company that can affect or be affected by it.

Setting goals and defining strategies are the next key steps in the planning process. Using the assessment and evaluation of internal and external factors, fundamental goals for the business are developed. Pertinent areas are the way it decides to compete, its market focus, and its customer service philosophy. Specific performance and operational strategies are then established, based on these goals.

After strategies and goals have been defined, they are translated into specific plans and programs. These plans and programs determine how a company's re-sources will be managed in order to implement its strategies and achieve its goals. Specific areas that require their own plans and programs include the overall organization of the company, sales and marketing, products and production, and finance. Finally, these specific plans are assembled into the completed business plan.

HELP FOR BUSINESS PLAN WRITERS

Writing a business plan can be a daunting experience, especially for small business owners seeking a bank loan and entrepreneurs looking for start-up capital. One source of help in writing business plans in the U.S. Small Business Administration (SBA). In addition to offering seminars on writing business plans, among other topics, the SBA through its Service Corps of Retired Executives (SCORE) matches retired business executives with small businesses seeking advice on writing business plans and other business issues.

First-time business plan writers also have a wide range of software programs to chose from that are specifically designed to help create a business plan. Business planning software typically provides a template for entering the necessary information, then formats it to give the business plan a professional appearance. Among the business planning software programs favorably reviewed in PC World are BizPlan Builder Interactive, by Jian; Business Plan Pro 2.0, by Palo Alto Software; and Plan Write Expert Edition, by Business Resource Software.

ELEMENTS OF A BUSINESS PLAN

Business plans must include authoritative, factual data, usually obtained from a wide range of sources. The plans must be written in a consistent and realistic manner. Contradictions or inconsistencies within a business plan create doubts in the minds of its readers. Problems and risks associated with the business should be described rather than avoided, then used as the basis for presenting well-thought-out solutions and contingency plans. Business plans can be tailored to the needs and interests of specific audiences by emphasizing or presenting certain categories of information in different versions of the plan.

Business plans contain a number of specific elements as well as certain general characteristics. These include a general description of the company and its products or services, an executive summary, management and organizational charts, sales and marketing plans, financial plans, and production plans. They describe the general direction of a company in terms of its underlying philosophy, goals, and objectives. Business plans explain specific steps and actions that will be taken as well as their rationale. That is, they not only tell how a company will achieve its strategic objectives, they also tell why specific decisions have been made. Anticipated problems and the company's response to them are usually included. In effect, business plans are a set of management decisions about how the company will proceed along a specified course of action, with justifications for those decisions. Listed below are brief descriptions of the major elements found in business plans.

EXECUTIVE SUMMARY.

This is usually a two- to five-page summary of the entire business plan. It is an important part of the plan, in that it is designed to capture the reader's attention and create interest in the company. It usually includes the company's mission statement and summarizes its competitive advantages, sales and profit projections, financial requirements, plans to repay lenders or investors, and the amount of financing requested.

DESCRIPTION OF BUSINESS.

The business description includes not only a profile of the company, but also a picture of the industry in which the company operates. Every business operates within a specific context that affects its growth potential. The description of a company's operating environment may cover new products and developments in the industry, trends and outlook for the industry, and overall economic trends.

The intent of the company's profile is to provide readers with unique features that give the company a competitive edge. A brief history reveals how specific products and services were developed. Contracts and agreements affecting the business may be mentioned (and also included in an appendix to the business plan). Other topics covered include operational procedures and research and development.

DESCRIPTION OF PRODUCTS AND/OR SERVICES.

The goal of this section is to differentiate a company's products or services from those of the competition. It describes specific customer needs that are uniquely met by the firm's products or services. Product features are translated into customer benefits. Product life cycles and their effects on sales and marketing can be described. The company's plans for a new generation of products or services may be included.

DESCRIPTION OF MANAGEMENT AND ORGANIZATIONAL STRUCTURE.

The quality of a company's management team can be the most important aspect of a business plan. This section presents the strengths of the company's management team by highlighting relevant experience, achievements, and past performance. Key areas include management's ability to provide planning, organizational skills, control, and leadership. This section also contains information about the company's ownership and workforce. It may present an existing or planned organizational structure that will accomplish the goals set forth in the business plan. Specific management and control systems are often described.

MARKET ANALYSIS.

A thorough market analysis serves as the basis for a company's sales and marketing plans. The analysis generally covers the company's competition, customers, products, and market acceptance. The competitive analysis details the competition's strengths and weaknesses, providing a basis for discovering market opportunities. A customer analysis provides a picture of who buys and uses the company's products or services. This section of the business plan highlights how the company's products or services satisfy previously unfulfilled market needs. It also includes evidence of market acceptance of the company's unique products or services.

SALES AND MARKETING PLAN.

The marketing plan delineates the methods and activities that will be employed to reach the company's revenue goals. Different revenue outcomes may be presented to allow for contingency planning in the areas of finance and production. This section describes the company's customer base, products or services, and marketing and sales programs. The latter is supported by conclusions drawn from the market analysis.

PRODUCTION PLAN.

A production plan is usually included if the business is involved in manufacturing a product. Based on the sales and marketing plan, the production plan covers production options that are available to produce a desired mix of products. The production plan contains information that allows for budgeting (e.g., for labor and materials). In non-manufacturing companies, this section would cover new service development.

FINANCIAL PLAN.

This section covers the financing and cash flow requirements implicit in other areas of the business plan. It contains projections of income, balance sheet items, and cash flow. The company's method of budgeting and its financial controls are described. Financial projections must be supported by verifiable facts, such as sales figures or market research. Monthly figures are generally given for the first two years, followed by annual figures for the next three to eight years. If the business plan is written for investors or lenders, the amount of financing required may be included here or in a separate section.

IMPLEMENTATION SCHEDULE.

This section provides key dates pertaining to finance, marketing, and production. It indicates when specific financing is needed, when specific aspects of the marketing campaign will take place, and delivery dates based on production schedules.

CONTINGENCY PLANS.

This section defines problems and challenges that the company may face and outlines contingency plans for overcoming those problems and meeting the challenges. Specific topics that may be explored are competitive responses, areas of weakness or vulnerability of the company, legal constraints, staffing, and continuity of leadership.

OTHER DETAILS.

Most business plans include a table of contents and a cover sheet containing basic information about the company. An appendix may include a variety of documentation that supports different sections of the business plan. Among the items that may be found in an appendix are footnotes from the main plan, biographies, graphs and charts, copies of contracts and agreements, and references.

TAILORING THE BUSINESS PLAN TO
SPECIFIC AUDIENCES

Business plans are organized to address major concerns and interests of their intended audience. They are commonly tailored to a specific audience by emphasizing aspects that directly relate to the interests of the reader. For example, a business plan written to obtain a loan for ongoing operations would address the major concerns of potential lenders.

BANKS, INVESTORS, AND OTHER SOURCES OF FUNDING.

Business plans are frequently written to obtain additional funding. Start-up capital may be needed for a new venture. The company may require additional working capital for ongoing operations. New capital may be needed to acquire assets for expansion. Equity financing may be needed to support a company's long-range growth. Potential lenders of debt or equity financing are usually concerned with minimizing their risks and maximizing the return on their investment.

Business plans written for this audience generally have a strong financial presentation and good documentation of projected sales and cash flow. Areas to be stressed in the business plan include the predictability of the company's cash flow, how well cash flow will cover debt servicing, the reasons additional funding is needed, strengths of the company's financial management, assets used to collateralize debt, and the capital and ownership structure of the company. In addition, business plans written to obtain funding for expansion provide details on the overall scope of the market and profit potential. Such plans typically enumerate the return on investment for equity investors.

POTENTIAL BUYERS.

Potential buyers are generally interested in such factors as the basic business concept underlying the company, its long-term viability, and its strategic position within its industry. They also look for strengths and weaknesses in the company's basic functional components and its management team. Business plans written for this audience stress the company's strengths and include contingency plans designed to overcome weaknesses, challenges, and other possible developments.

Other factors that might be emphasized in a business plan written for potential buyers are the company's ability to improve profitability and market share, the company's competitive edge, the company's potential to take advantage of opportunities in related industries, managerial and technical skills within the company, and the company's financial capacity.

PARTIES INTERESTED IN REORGANIZATION OR RESTRUCTURING.

Businesses plans written for a company reorganization may be tailored for a variety of readers, including internal management, outside creditors, or new owners. Such a plan sets forth the necessary action designed to reorganize or restructure the company to achieve greater profitability or production capacity. The business plan identifies operational changes that need to be made in different functional areas of the company. It establishes performance and operational measures against which the functional areas of the company are evaluated.

The audience for this type of business plan is interested in such factors as the timing and sequence of specific changes, the operational impact of such changes, and how those changes will affect costs, production, and cash flow. The business plan provides details on the new functional organization, as well as key personnel and their responsibilities. Transitional plans are typically furnished, and operating and financial goals are defined.

INTERNAL USERS.

Business plans written primarily for use within the company generally stress the benefits that will result from the plan. These may include improved and more consistent performance, improved coordination and consistency among management, greater ability to measure performance, empowerment of the workforce, and a better motivated and educated workforce. The plan provides a comprehensive framework and direction for ongoing operations.

Business plans written for internal use typically identify the company's strengths and weaknesses, potential problems, and emerging issues. They set forth performance standards on which expectations will be based. Goals and objectives are clearly stated to allow for coordination and better communication between the company's functional areas. Desired outcomes are evaluated in terms of what can feasibly be achieved.

BUSINESS PLANS AS PLANNING
DOCUMENTS

Business plans are not historical documents about a company's past performance. Rather, they are planning documents that provide information to decision makers who can help the company achieve its goals and objectives. These decision makers may be the company's own managers and executives, or they may be sources of capital or potential buyers. Regardless of the intended audience, all business plans address the fundamental strategic issues facing a business. They provide verifiable data and projections covering marketing and sales; production, service, and quality; product development; organization and management structure; and financial requirements.

[ David P Bianco ]

FURTHER READING:

Business Plans Handbook. 5th ed. Detroit: Gale Research, 1998.

Cavanah, Cassandra. "Making Plans: Create a Business Plan that Will Grow along with Your Company." Entrepreneur, August 1997, 38-40.

Cohen, William A. Model Business Plans for Product Businesses. New York: Wiley, 1995.

Model Business Plans for Service Businesses. New York: Wiley, 1995.

Covello, Joseph A., and Brian J. Hazelgren. The Complete Book of Business Plans. Naperville, IL: Sourcebooks Trade, 1994.

Gotschall, Mary G. "Capital Ideas." Working Woman, December-January 1997, 60-61.

Hodges, Susan. "One Giant Step toward a Loan." Nation's Business, August 1997, 34-35.

Hogan, Mike. "Business Planning." PC World, October 1997, 180-81.

Kravitt, Gregory 1. Creating a Winning Business Plan. Chicago: Probus, 1993.

Massarella, Gregory J., and others. How to Prepare a Results Driven Business Plan. New York: AMACOM, 1993.

Mello, John P. "Plan Write: Expert Help for Business Plans." PC World, December 1997, 144.

Peterson, Steven D. Business Plans for Dummies. Indianapolis: IDG Books Worldwide, 1997.

Shaw, Gordon, and others. "Strategic Stories: How 3M Is Rewriting Business Planning." Harvard Business Review, May-June 1998, 41-48.



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