Chapter Three:

Business Planning

3.1. Meaning and Importance of Planning

Before we go into the nitty-gritty part of business plan, it is important that every individual
understand the importance of planning for the success of any venture. As the matter of fact, in
Ethiopia most of us are not used to the planning process. Planning which is the process of setting
objectives and devising actions to achieve those objectives, answers such as what business I
have? What is my sales strategy? Where I can found the needed personnel? How much profit can
I expect? Planning is the process never ends for a business. It is extremely important in the early
stage of any new venture when the entrepreneur will need to prepare a preliminary business plan.
The plan will be finalized as the entrepreneur has a better sense of the market, the product or
service to be marketed, the management team, and the financial needs of the venture. For any
given organization, it is possible to find financial plan, marketing plan, and human resource plan,
production plan, and sale plan, etc.

3.2. Meaning of Business Plan

Business Plan is a written document that describes where the business heading and how to
achieve its goals and objectives. Develop a “road map” to follow in executing its strategies and
plans. Introduces potential investors and other stakeholders with the business opportunity the
firm is pursuing and how it plans to pursue it.

It must describe current status, expected needs, and projected results of the new business. Every
aspect of the venture needs to be covered: the project, marketing, research and development,
manufacturing, management, critical risks, financing, and milestones or a timetable. A
description of all of these facets of the proposed venture is necessary to demonstrate a clear
picture of what that venture is, where it is projected to go, and how the entrepreneur proposes it
will get there. The business plan is the entrepreneur’s roadmap for a successful enterprise.
Whatever the name, it should lay out your idea, describe where you are, point out where you
want to go, and how you propose to go there. The business plan may present a proposal for
launching an entirely new business. More commonly, perhaps; present a plan for a major
explanation of a firm that has already started operation.

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3.3.Benefits of a Business Plan
Specifically for the entrepreneur:

• The time, effort, research, and discipline needed to put together a formal business plan
force the entrepreneur to view the venture critically and objectively.

• The competitive, economic, and financial analysis included in the business plan subject
the entrepreneur to close scrutiny of his or her assumptions about the venture’s success.

• Since all aspects of the business venture must be addressed in the plan, the entrepreneur
develops and examines operating strategies and expected results for outside evaluators.

• The business plan quantifies objectives, providing measurable benchmarks for comparing
forecasts with actual results.

• The completed business plan provides the entrepreneur with a communication tool for
outside financial sources as well as an operational tool for guiding the venture towards
success.

• Details of the market potential and plans for securing a share of that market.

• The venture’s ability to service debt or provide an adequate return on equity.

• Identifies critical risks and crucial events with a discussion of contingency plans.

• A clear, concise document that contains the necessary information for a thorough
business and financial evaluation.

3.4.The Purpose of Business Plan

The most important steps in establishing any new business is the constructions of a business
plan. Business plan:

1. It can help the owner/manager crystallization and focus his/her idea.

2. Although planning is a mental process, it must go beyond the realm thought. Thinking
about a proposed business become more rigorous as rough ideas must be crystallized and
qualified on paper.

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 3. It can help the owner/manager set objectives and give him a yardstick against which to
monitor performance.
4. It can also as a vehicle to attack any external finance needed by the business.
5. It can convince investors that the owner has identified high growth opportunities.
6. It entails taking a long _term view of the business and its environment.
7. It emphasizes the strengths and recognizes the weaknesses of the proposed venture.
8. The plan can uncover weakness or alter the entrepreneur to sources of possible danger.

3.5.Users of Business Plan:

A business plan has two primary functions:

 To provide clearly articulated statement of goals and strategies for internal use and,
 To serve a selling document to be shared to the outsiders.
Those who might have an interest in a business plan for a new venture consists of outsiders who
are critical to the firm’s success: customers, suppliers, and investors. The other group is the
internal users of the business plan: the new firm’s management. Let us consider the internal
users first.
I. Internal User of the Business Plan: Any activity without adequate preparation
tends to be disorganized. This is particularly true of such a complex process as
initiating a new business. Although planning is a mental process, it must go
beyond the realm of speculation. Internal users are, firms management and
employees of the venture.
II. External Users of the Business Plan: By enhancing a firm’s credibility, the
business plan can serve as an effective selling tool to use with prospective
customers and suppliers, as well as investors. Suppliers for example, extend
credit, which is often an important part of a new firm’s financial plan. A well-
prepared business plan may be helpful in gaining a supplier trust and securing
favorable credit terms. Both investors and lenders use the business plan to better-
understand the new venture, the type of product/service it offers, the nature of the
market, and the qualification of the entrepreneur and the management team.

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3.6.When the Business Plans are Produced?

1. At the start up of a new business : After the concept stage of initial ideas and feasibility
study, a new business start up many go through a more detailed planning stage of which
the main output is the business plan.
2. Business Purchase:
Buying an existing business does not neglect the need for an initial business plan. A
detailed plan, which tests the sensitivity of changes to key business variables, greatly
increases the prospective purchasers understanding of the level of risk they will be
accepting, and likelihood of rewards being available.
3. Ongoing:
Ongoing review of progress, against the objectives of either a start up or small business
purchase, is important in a dynamic environment. An initial business plan is not a
document to be put in a drawer and forgotten.
4. Major Decisions:
Even if planning is not carried out on a regular basis, it is usually investigated at a time of
major change. For example, the need for major new investment in equipments, or funds
to open a new outlet, It may be linked to failure, such as a recovery plan for an ailing (or
in bad condition) business.

3.7.Who Produced the Business Plan?

Three types of people will be interested in a business plan:
1) Managers: are involved in small business planning as both producers and recipients
of the plan. Business plans are written to aid small business managers.
2) Owners: the manager of a small enterprise may also be the owners and take a keen
(eager) interest in the planning process, wearing their shareholders hat.
3) Lenders: the major banks/lenders all encourage the production of business plans to
justify overdrafts and loans, offering literature and advice on putting together
business plans.

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3.8.Why the Business Plans are produced?

1. Assessing the feasibility and viable of the business plan/project: it is in every ones interests
to make mistakes on paper, hypothetically testing for feasibility, before trying the real
thing.
2. Setting objectives and budgets: having a clear financial vision will believable budgets is a
basic requirement of everyone involved in a plan.
3. Calculating how much money is needed: a detailed cash flow with assumptions is vital
ingredient to precisely quantify earlier the likely funds required.
3.9.The Format of a Business Plan: The business plan needs to answer three –straight forward
questions:

1. Where are we now?

Ananalysis of the current situations of the market place, the competitions, the business
concept and the people involved. It will include any historical background relevant to the
position to date.
2. Where do we intend going?
Qualitative expression of the objectives, quantifiable targets will clarify and measure
progress towards the intended goals.
3. How much we get there?
Implementing of accepted aims is what all the parties to a plan are interested in as a final
result.
Plans for marketing and managing the business, with detailed financial analysis are the
advisable preliminaries before putting it all in to practice.

Who Needs to Write/See the Business Plan?

• Most banks loaning money, especially if the business does not have a track record

• Farmers, to insure they have considered everything

• Investors or partners who have some doubts about your abilities/integrity

• Highly required or important potential employees

• Anyone wondering if they should take the risk

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How can a business plan help a company?

1) obtain bank financing (separates you from the run-of-the-mill competition, you are
serious enough to do formal planning, those that plan are better risks)

2) seeking investment funding: this is the document most venture capitalists first ask for

3) arranging strategic alliances: small/large companies

4) obtaining large contracts: proof of recognition to large companies checking out small
ones

5) attracting key employees: can help an executive come over to your side

6) completing mergers and acquisitions: for selling and buying companies, buyers seldom
look at only one company

7) motivating management team: causes everyone to be working toward the same goal,
reduces customer confusion, lays out financial, marketing and production goals

3.10 Writing the Business Plan: The business plan could take much time to prepare,
depending on the experience and knowledge of the entrepreneur as well as the purpose it
is intended to serve. It should be a comprehensive enough to give any potential investor
a complete understanding of the new venture.

Components of Business Plan (Outline of a Business Plan)

1. Introductory Page
A. Name and address of the business
B. Name(s) and address(s) of principals
C. Nature of business
D. Statement of financing needed
E. Statement of confidentiality of report
2. Executive Summary
3. Industry Analysis
A. Future outlook and trends
B. Analysis of competitors

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 C. Market segmentation
D. Industry forecast
4. Description of Venture
A. Product(s)
B. Service(S)
C. Size of business
D. Office equipments and personnel
E. Background of entrepreneur
5. Production Plan
A. Manufacturing process (amounts sub contracted)
B. Physical plant
C. Machinery and equipments
D. Names of supplier of raw material
6. Marketing Plan
A. Pricing
B. Distribution
C. Promotion
D. Production forecast
E. Controls
7. Organizational Plan
A. Form of owner ship
B. Identification of partners and principal share holders
C. Authority of partners
D. Management team background
E. Roles and responsibility of members of organization
8. Assessment of Risks
A. Evaluation of weakness of business
B. New technologies
C. Contingencies plan
9. Financial Plan
A. Pro forma income statement
B. Cash flow projections

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 C. Pro forma balance sheet
D. Break even analysis
E. Source and application of funds
10. Appendix
A. letters
B. market research data
C. leases and contracts
D. price lists from suppliers

1. Introductory Page: This is the title or cover page that provides a brief summary of the
business plan’s contents. The introductory page contains the following:

❖ The name and address of the company

❖ The name of entrepreneur(s) and telephone number
❖ A paragraph describing the company nature of the venture
❖ The amount of financing needed. The entrepreneur may offer a package that is
stock, debt and so on.
❖ A statement of the confidentiality of the report. This is for security purpose and it is
important for the entrepreneur.

This title page sets out the basic concept that the entrepreneur is attempting to develop. Investors
consider it important because they can determine the amount of investment needed without
having to read to the whole through the entire plan.

2. Executive Summary: This section of the business plan is prepared after the total plan is
written. About three to four pages in length, the executive summary should stimulate the interest
of the potential investor. The investor uses the summary to determine if the business plan is
worthy reading in total. Thus, it would highlight concisely and convincingly the key points in the
business plan, that, is the nature of the venture, financing needed, market potential, and support
as to why it will succeed.

3. Industrial Analysis: It is important to put the new venture in a proper context. In particular
the potential investors, while assessing the venture on a number of criteria, it needs to do an
industry analysis in order to know which industry an entrepreneur will be competing on it. The
entrepreneur should also provide insight on new product development in this industry.
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Competitive analysis is also an important part of this section. Each major competitor should be
identified, with appropriate strengths and weakness described particularly as to how they might
affect the new venture’s success in the market.
Who is the customer? The market should be segmented and the target market of the entrepreneur
identified. Most new ventures are likely to compete effectively in only one or few of the market
segments.

4. Description of the venture: The description of the venture should be detailed in this section
of the business plan. This will enable the investor to ascertain the size and scope of the
business. Key elements are the product(s) or services(s), the location and size of the business,
the personnel and office equipment that will be needed, the background of the
entrepreneur(s) and the history of the venture. Location of any business may be vital to its
success particularly if the business is retail or involves a service. Thus, the emphasis on the
location in the business plan is a function of the type of business. In assessing the building or
spaces the business will occupy, the entrepreneur needs to evaluate such factors as parking,
delivery rates, access to customers, suppliers and distributer, and accommodating own
regulation or zoning laws.
This simple assessment of the location, market and so on saved the entrepreneur from a potential
disaster.

5. Production Plan: If a new venture is a manufacturing operation, a production plan is

necessary. This plan should describe the complete manufacturing process. If some or all of
the manufacturing process is subcontracted, the plan should describe the subcontractors(s),
including location, reasons for selection, costs, and any contracts that have been completed.
If the manufacturing is to be carried out the whole or in part by the entrepreneur(s), s\he will
need to describe the physical plant nay out; the machinery and equipment needed to perform
the manufacturing operation raw materials and suppliers’ names, address, and terms, cost of
manufacturing and any further capital requirement.
If the venture is not a manufacturing operation but a retail store or service, this section would be
titled ‘’merchandising plan’’ and purchase of merchandise, inventory control system, and
storage needs should be described.

6. Marketing Plan: The marketing plan is an important part of the business plan since it
describes how the product(s) or service(s) will be priced, promoted and distributed. Specific
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 forecasts for products are indicated in order to project profitability of the venture. The budget
and appropriate controls needed for marketing strategy decision should be discussed.
Potential investors regard the market plan as critical to the success of the new venture .thus the
entrepreneur should make any effort to prepare as a comprehensive and detailed plan as possible
so that investors can be clear as to the goals and strategies of the venture. Marketing planning
will be an annual requirement (with careful monitoring and changes made on weekly or monthly
basis) for the entrepreneur and should be regarded as the road map for short term decision
making.

7. Organizational Plan: The organizational plan describes the venture’s form of ownership –
that is, proprietorship, partnership, or corporation. For instance, if the venture is the
partnership, the term of the partnership should be included. If the venture is a corporation, it
is important to detail the share of the stock authorized, share options, names and address and
resumes of the directors and officers of the corporation.
8. Assessment of Risk: Every new venture will be faced with some potential hazards, given the
particular industry and competitive environment. It is important that the entrepreneur makes
an assessment of risk and prepares an effective strategy to deal to them.
Major risk for a new venture could result from a competitor’s reaction; weakness in the
marketing or production, and new advances in technology that might render the new product
obsolete. It also important for the entrepreneur to provide alternative strategies should any of the
above risk factors occur.

9. Financial Risk: The financial plan, like the marketing, production, organization plans, is an
important part of business plan. It determines the potential investment commitment needed
for the new venture and indicates whether the business plan is feasible.
Generally, three financial areas discussed in this section of the business plan. First, the
entrepreneur should summarize the forecasted sales and the appropriate expense at least the first
five years. It includes the forecasted sales, cost of good sales, and the general and administrative
expenses. Second, cash flow figure must be presented for at least the first three years, with the
first year’s projection provided with monthly. The last financial item needed in this section of
the business plan is the projected balance sheet. This shows the financial condition of the
business at specific time. It summarizes the asset of a business, its liabilities, the investment of
the entrepreneur and any partners, and retained earnings or cumulative losses.

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10. Appendix: The appendix of the business plan generally contains any back up material that is
not necessary in the text of the document. Reference of to any of the document in the
appendix should be made in the plan itself.
Questions that every Business Plan should answer:

1. What is the primary product or service?

2. Is there a market for the product or service? Has the opportunity been well defined?

3. Who are target customers?

4. Who is the competition and what and what are the barriers to entry?

5. Who is the management team and what are their specific talents?

6. What are the pricing strategies?

7. What risks and market constraints are involved?

8. What sales distribution channels will be needed to sell product or services?

9. What is the current financial cash flow and break even plan

10. What are the immediate financial needs of the business

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