Business Plan Components

Elements of a Business Plan

A business plan is mainly contain seven major sections including the effective summary, the business description, the market strategy, the competitive analysis, the design and development plan, the financial component and the sources. The following will describe each of this sections and the way that it should be written.

  • Top of Form
  • Bottom of Form

Executive Summary

It should be kept short and professional. It has to provide a synopsis of the entire business plan. It should briefly include the concept, which it describes the business, the product and the market that it will serve; the financial feature (highlight the important financial points of the business) and the financial requirement. It states the capital needed to start the business and to expand.

Current business position and major achievement should be mentioned on the executive summary as well. The current business position should furnish appropriate information about the company, its legal form of operation, when it was formed, the principal owners and key personnel. The major achievements detail any developments within the company that are essential to the success of the business.

It should be brief, concise, clear and direct on the objective and the capacity of the company. It should not take more than one page

Business description

It would usually start with a small explanation of the industry. Then, it should offer data on all the different market in the commerce. Indeed, investors would like to have reliable sources and financial security (do not want to make investment based on assumptions or conjecture). It must be structured and specified whether it is a new company or a preexistent establishment. The legal form of the business should be restated with some specific details (sole proprietorship, partnership or corporation; who are they and they will bring to the business). Besides, the public must be identify as well as the product and the support system (be specific in showing that it will gives the business a competitive edge).

In additional, this part should explain why the business should be profitable by explaining the factors which can make it successful.  The business plan can be mentioned briefly as well as factors that support the claim of success. Other key people must be referred and an explanation of the location and the product must be given.

The description can be stated in a couple of paragraph such as one paragraph for the industry, one for the product and three for the business and its factor of success.

Market Strategies

Making a proper market strategy requires that the company must define the market, projecting the market sale, and positioning the business in the market. Then the products have to be priced, distributed, promoted and sale the product.

To be able to define the market, an analysis has to be done accurately. Doing a breakdown can forces the enterprise to become familiar with all aspect of the market. It also makes the company to establish the price, the distribution and the promotional strategies on purpose to be profitable in a competitive environment. The market analysis must include the size, the structure, the growth prospect, the trends and the sale potential. To manage to do that, the target market has to be defining with segmentation factors. It has to be deeply definite on purpose to determine the total feasibility market. Mostly companies will be focused on product segmentation factors that may product gaps in the market.

The company should be able to do a subjective valuation in order to make a projecting market share of a professional plane. It is built on a study of the market and a high capacity of targeting and competitive supplying, pricing and advertising approaches. The ability of realizing objective on distribution, pricing and promotion can define the ability to save market share. Two factors must be considered to estimate the market share for the rime period that the plan will cover: the he industry development, which will raise the amount of customers, by comparing at least two growth sales scenarios to see which strategy they should adopt as well as discussing about the total achievable market from the user perspective. It will be based on a sale cycle, comparable to the product life cycle. The five stages will be the early pioneer users, the early users, the early majority users, the late majority users and the late users.

Positioning the business is an inevitable step on the market strategy. In fact, it is an essential factor that will be affected by a quantity of variable, such as the target clients’ motivations and requirement as well as the main competitor activities. To be able to do that, some strategic issue should be taken in consideration such as the competitors positioning, the specificity of the product compare to the others and the satisfaction of the product oversee the demand. The positioning statement should be clearly indicates that the way the company would like the costumers and the competitors perceive the product.

The price of the product will directly affect the success of the business. To avoid the company failure, some basic price rules should be respects, such as that the prices should covers all the cost, minimize the rate to lowing the sale prices and the fee must reproduce the dynamics of variation in the market and be competitive. Also, prices must be fixed to maintain order in the marketplace and to assure sales as well as the product life cycle must be judged continually. Four different methods can be us to establish a product price, such as the cost-plus-pricing. This technique guaranty that the total cost is covered and the expected profit percentage is reached. The demand pricing is another manner that company can use. It consists on selling the product through assortment of sources at differing prices based on demand. The competitive pricing are based on a market where the product already had an established price and it is difficult to distinguish the products between them. Finally the markup pricing is calculated by adding the desire profit to the cost of the product.

The distribution process is to move a product from the factory to the costumer. To decide the type of delivery that the company can use is that after analyzing carefully the competitors’ distribution strategy, decide rather or not using the same methodology. However, the companies can consider about the different distribution channels, including:

  • Direct sales
  • The Original equipment manufacturer (OEM)sales: the company sale the product to the OEM, then it will be combined into their finished product and it will be distributed to the end user.
  • The Manufacturer’s representatives:the salespeople, who work out of agencies, will handle a collection of harmonizing products and will divide the selling time between the coworkers.
  • The Wholesale distributors:the product will still go from the producer to the costumer. However, it will go through a trader, who will diffuse the product to different agent before getting to the costumer.
  • Brokers:it is the third agent who get the product either directly from the manufacturer or from other wholesale, and will sell it to other retailer or to the costumer
  • Retail distributors: it is use only if the final costumer is the general consuming public.
  • Direct Mail: Selling directly to the user through the mailing system.

The sixth step of the market strategy is to build a promotion plan. It is use to controlled the product or service distribution communication. For this objective, different tools can be used, such advertising with the budget, and the schedule; packaging including the description of the wrapping strategy and the public relations (the strategy that will be used to approach media and the events schedule). The sales promotions and the personal sale methods can also be used. The personal sales is an outline of the sales strategy including pricing procedures, returns and adjustment rules, sales presentation methods, lead generation, customer service policies, salesperson compensation, and salesperson market responsibilities.

To conclude this part, the company must evaluate the sales potential. It should be estimate through the target market, the product position, price, the distribution and strategy for sale. The sales or income model charts, the potential for the product, as well as the business, over a set period of time are used for the evaluation. The revenue projection is often made for the next three or five years. The equation for projecting sales is:

Sale projection = total number of people * average revenue per costumer

Beside the equation, every segment of the target market that is treated differently must be accounted too.

Competitive Analysis

The objective of the competitive analysis is to determine the strengths and weaknesses of the competitors in the market. First the company has to identify every current or further potential competitor straights and weakness. It can be recognized by their reputation among customers or by their strategies. Then the enterprise can wonder about the reasons of a firm success or fairness, the customer motivation foundations, the major component costs and the industry barriers on purpose to be able to stay on the market. Finally a marketing strategy must be created to provide a distinctive and persistent competitive advantage.

In additional, to perform a better understanding on challengers, the company should create a competitive strength grid. It is a network which related all the key asset and skills of the rivals. Besides, it gives a clear understanding on the focusing points to be a successful company and can set up the distinct competitive advantage. The following table can be used:

Key assets and skills Strength Weakness
Category 1 Company 1,5 Company 2,4
Category 2 Company 2,3 Company 1
Category 3 Company 1, 4 Company 3,4,5

After that, the strategy must be communicates on purpose to attract the market, share and protect the company position. The principal focuses of the competitiveness are based on the product, the distribution, the price, the promotion and the advertising. The different strategies goals are to enter in the product life cycle and stay competitive as long as possible. They must be evidently definite to make the reader understand the company goals and the strategies.

Design and Development Plan

The main purpose of this section is to provide an understandable description of the product, a development chart in the context of production, marketing, the company itself and the budget plan. It should cover the different area: the development of the product, the market and the organization. Each of the must be clearly examined and be based on the structure and the goals. The objectives should be define in the previous section (market strategy and competitive analysis) and should be quantifiable in order to set up time lines, directed, consequential and feasible. Therefore, they will be related to the success and the impact on the business and will not outside the inevitable actual accomplishment.

A product development should have the purpose to focus on the technical and the marketing aspect of the product. Subsequently, employee could concentrate their energy on that point.

Next, a set of procedural tasks for each goal must be determined and developed for the product, market and organization development. It should include the allocation of the resources, the person in charge for each goal and the way that it will be interacted. The stages of development that coordinate the work assignment need to be provided as well. Before setting product deliverable date and send it on testing purpose, the company needs to make adjustment on the work assignments. It includes three different verifications: the review of the basic structure, then the progress of the schedule and finally the assurance of following the goals and the integrity of the product.

Scheduling is essential because it should coordinate the time with all the key works, the different phases that the product must get through before the distribution and the budget.  The table can include the number of the task, the name of the task, the beginning and the end.

To develop a budget plan, all the expenses require to design the product must be taken in consideration. The basic payments comprise the material, and the direct work, overhead and miscellaneous costs which are associated and required to operate with the development of the product. The G & A and Marketing and Sales costs are related to the wages of executive, administrative and marketing personal. The professional service expenses are connected to the meeting of outside experts and the capital equipment is the cost put into the tools that is necessary for the product.

The recruiting is also an important step on the business plan. To be able to do that the company must identify which area in the development process will need extra worker. Then the establishment should produce a job description and specification. Afterward, an organization chart should be made for all the employees and appropriate training program should be given for the new recruit.

Defining the proper risks can lead the company to develop a plan to avoid them. Usually the risks are related to the technical issue of the product, marketing, staff member and budgeting.

The operation and management plan is designed to describe the functionality of the business and it will focus on the logistic of the organization such as the diverse responsibilities of the management team. This plan will allow making the financial table which should include the operation expense table, the capital requirement table and the cost of goods table. The organizational structure of the company, and the expenses and capital requirements associated with its operation are needed to be accounted as a part of the operation of the company.

The organizational structure provides the origin of the project operating expenses and will be examined by investors. Every company is different, so each of them must be organized conferring to its own condition and objectives. The basic stages for an organization are that establishing a list of task by using the most general classification, organizing  the task to the most suitable department, identify the most appropriate workers and establishing the functionality of each task and the way that it will be related to the generation of revenue.

The following equations can help to determinate the number of employee the department will required as well as the labor expenses:

The overhead expenses are related to all non-labor costs required to operate the business. It can be classified into fixed, based on the volume, and variable or semi-variable, which are based on the amount of business. It may include travel, maintenance, equipment lease, rent and supplies. It also can contain advertising and promotion, utilities, packaging and shipping, payroll taxes and benefit as well as uncollectible receivable, professional services, insurance, loan payment and depreciation. It can be calculated with the following formula:

The capital requirement table is use to represent the total cost and the amount of depreciation that the business will gain on purpose to obtain the equipment that the company will use to start and pursue actions. Different element that will require capital must be determined, including the sales (capital for manufacturing companies based on testing, assembly and packaging), the number of costumer, in term of sale and the cost. It can be calculate by the following equation:

Finally the cost of good table is used for business where the product is places into inventory, including the products for resale and merchandise that is not sold. Besides, this table will allowed the company to represent the flow of inventory, the placement of assets and the rate of the inventory. On that purpose the company will need to know additional information.

Financial Components

The financial statement will comprise three different documents: the cash flow statement, the income statement and the balance sheet. Each of them measure different aspect of a company’s financial situation.

The income statement can be considered as the most important document.  It related the financial performance of the business by reflecting whenever the sale and the expenses are made. Moreover, it illustrates the income variation of the company during the year. This statement should be generated every month the first year, then every quarter and from the third year, it should be provided annually. It should contain those elements: the income, the cost of goods (product in the inventory), the gross profit margin (difference between revenue and cost of good) and the operating expenses. It also comprises the total expenses, the net profit (difference between gross profit and total expense), the depreciation and the net profit before income. In addition, the income statement should include the interest which is determine by the amount of investment in the company,  the net profit before taxes, the taxes and the profit after taxes.

The cash flow statement gives the information about the proper amount that the company needed the schedule of the flux. The following item should be stated: the cash sales, the receivable, other income, total income and the material/merchandise.  It also has to embraces the production labor, the overhead, the marketing/sales (direct cost associate to marketing and sales department), the R&D (Research and development) and the G&A (administration function). As well as taxes, capital, loan payment, total expenses, cash flow and cumulative cash flow.

Finally, the balance sheet is a summary of all the preceding financial information broken into three areas: asset, liabilities and equity. To be able to obtain financing support, the company must deliver a projection plan and a personal financial statement or balance sheet. Assets and liability are classified as current and long term. The total asset is the accumulation between the total current asset (addition between the cash, the account receivable and inventory) and the total long term asset (capital and plants plus investment plus the miscellaneous asset). It is the same for the total liability, it is the cumulative between the total current liability (sum of account payable, accrued liabilities and taxes) and the long term liability (addition between bonds payable, mortgage payable and note payable). Then the equity, the amount attributed to the owner’s equity is the difference between the total asset and the total liabilities. This amount will determine whether or not the company should invest. Each of those documents should be kept short and cover the key point of the industry.

Sources

All the sources that help the company to build each section should be related.

References:

Elements of a Business Plan. (n.d.). Retrieved from http://www.entrepreneur.com/article/38308

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