Module in Business Plan Preparation
Entrepreneurial Thought:
“The successful warrior is the average man,
with laser-like focus.”
-Bruce Lee
Overview
Welcome to Module 7!
This module discusses success assessment and factors which may affect the attainment
of a firm’s business goals. Given such factors, contingency plans are also indicated to
help management adjust to possible scenarios affecting the viability of the project.
Likewise, as the project gets to be implemented, one of the major aspects which potential
creditors and investors would like to be assured of is business continuity. This plan is
usually presented on the last part of the business plan.
LEARNING OUTCOMES
At the end of this module, you should be able to:
• Discuss success assessment and factors which may
affect the attainment of the goals of an organization.
SUCCESS FACTORS
Small business operators must understand the key elements to running a successful
business before they can steer their mission and vision statements in the right
direction. Although the key success factors of a business may not be a one-size-fits-all,
there are some elements that are common to many thriving companies. The following
topics are included on the final section of the business plan:
1. Sensitivity Analysis and Break-Even Analysis
2. Response to Competition
3. Government Regulations, Patents, Trademark Policies
4. Inflation and Other Economic Factors
5. Environmental Concerns
6. Management Team
7. Registration, Licenses, Business Permits, Taxes
8. Influence of Suppliers and Buyers
9. Additional Capital Requirements
10. Labor Availability and Wages
11. Succession Plans
SENSITIVITY ANALYSIS AND BREAK-EVEN ANALYSIS
Sensitivity analysis is a method used to assess the
impact of external and internal factors on the output of
a specific variable like sales and profit performance of
a company. External factors may include entry of
competitors, new products, weather disturbances like
typhoons, customers shifting to a competitor, or even
just customer business entity folding up. Internal
factors may include vacant positions in the company, machine breakdown, delays in
delivery, or simply reduction of productivity.
Breakeven analysis allows management to have an idea as to what level of sales is
needed to achieve a no loss, no profit scenario. It considers the fixed cost, which is
represented by operating expenses, and the variable cost, which is represented by the
cost of goods percentage in relation to sales.
Breakeven Sales Volume = Total Fixed Cost/Unit Contribution Margin
Unit Contribution Margin= Unit Selling Price – Unit Variable Cost
The breakeven analysis can be useful when the company sells only
one product in the market, and that all the costs are either
categorized as fixed and variable costs. Consider the example
below for YCASA Garments on their Sensitivity Analysis Breakeven:
Breakeven Sales Volume Breakeven Sales Amount
Fixed cost (Operating Breakeven volume P 21,260
exp) P2,126,000
Divided by Contribution P100 Multiplied by Sales 500
Margin (P500-400) Price
Breakeven Sales 21,260 units Total Sales P10,630,000
Volume
Examine the comparative Income Statement on the next page to better understand the
analysis.
YCASA Garments
Comparative Income Statement
For the Year Ending Dec. 31, 2018 (Forecast)
Sales Level 100% 90% 80% 50% Breakeven
Sales 13,200,000 11,880,000 10,560,000 5,940,000 10,630,000
Less: Cost of Goods Sold 10,560,000 9,504,000 8,448,000 4,752,000 8,504,000
Gross Profit 2,640,000 2,376,000 2,112,000 1,188,000 2,126,000
Less: Operating Expenses
Salaries 1,105,000 1,105,000 1,105,000 1,105,000 1,105,000
Utilities 600,000 600,000 600,000 600,000 600,000
Maintenance & Repairs 60,000 60,000 60,000 60,000 60,000
Marketing 120,000 120,000 120,000 120,000 120,000
Supplies 50,000 50,000 50,000 50,000 50,000
Registration & Licenses 25,000 25,000 25,000 25,000 25,000
Miscellaneous 60,000 60,000 60,000 60,000 60,000
Depreciation 106,000 106,000 106,000 106,000 106,000
Total Operating Expenses 2,126,000 2,126,000 2,126,000 2,126,000 2,126,000
Income Before Tax 514,000 250,000 (14,000) (938)
Tax 154,200 75,000
Net Income After Tax 359,800 175,000 (14,000) (938,000) -
Annual Cash Inflows (Net
Income+Depreciation) 465,800 281,000 92,000 (832,000) 106,000
On the given financial statement above, at 100% sales attainment, net income after tax
will amount to P359,800 while annual cash flow will amount to P465,000. Cost of goods
was assumed to be 80% of sales (cost of goods sold/sales); cost o product is P400
(selling price x 80%). The total operating expenses was used as the fixed cost for the
company operations (P2,126,000).
At 80% sales attainment, the company will have a net loss. At 50% sales attainment, the
company might not be able to sustain operations as it will lose P938,000 or almost 40%
o its investment. At the level of 21, 260 sales volume, the company will achieve the
breakeven scenario.
RESPONSE TO COMPETITION
There will always be the threat of entry of competitors. Some will
immediately affect the sales attainment f the firm. Others take a
little longer. Regardless of the timing of impact to the company, the
entrepreneur should be ready to react immediately to such threats
in order to sustain survival of the firm or to protect the
market share of the enterprise. Among the usual strategies are:
1. Reduction in price - this may reduce the total sales value but it may help the
company retain its volume market share.
2. Intensive promotional campaign- this will entail additional cost to the company.
However, if this plan succeeds in generating more sales, the cost of promotions
might be recovered.
3. Market expansion- this can be achieved by tapping nearby territories to sales
output or simply recover the lost sales brought about by the entry of a competitor.
GOVERNMENT REGULATIONS, PATENTS,
TRADEMARK POLICIES
Products are also affected by government policies. For example,
higher taxes for cigarettes have reduced the sales output o the
industry. Some companies are registering their products with the
Patent Office in order to enjoy exclusive rights to sell the product for
a certain number of years. A patent registration allows the company
to recover its research and development costs in
discovering a new product through exclusive rights to sell. Some pesticide products can
gets as much as 15 years o sales without competition though patent registration for a
minimal amount of money.
INFLATION AND OTHER ECONOMIC
FACTORS
These factors can alter the overall financial plans of the enterprise.
A high inflation would mean higher cost of the products and higher
operating expenses as price of basic commodities have gone up.
The company has to consider these questions for business
survival:
1. Can it afford to pay additional salaries and remain profitable?
2. How much price increase can be implemented to cover for the cost and
expenses of the company?
3. Which territory should they try to sell additional volume in order to sustain
profitability?
ENVIRONMENTAL CONCERNS
These concerns have to be addressed to every enterprise as citizens are
more aware of the environmental hazards, and that companies should
also eliminate if not reduce polluting the environment. The environmental
agencies are very strict to the adherence of standards; otherwise, it has
the authority to shut down the company for violations.
Companies should include in their costs and expenses waste disposal system so as not
t have problems with the government agencies.
MANAGEMENT TEAM
The management team is vital to the company’s success and
business continuity. Lack of expertise in each of the functional areas
in the organization may limit the company’s goals to achieve greater
heights. Business plans highlight the team and the officers’
credentials in order to convince creditors and investors alike to
extend loans or invest in the company. The entrepreneur, while s/he
may not have all the qualities needed, should somehow have a
working knowledge of the functional areas of the organizations. S/he should be joined
by knowledgeable people in their own fields so that her/his ideas can be explored or
implemented to the fullest.
REGISTRATION, LICENSES, BUSINESS
PERMITS, TAXES
The business permit is the one of the most crucial documents for the
company to start operating. Prior to its issuance, the usual documents
should be submitted to the local government:
➢ Building permit and building plan
➢ Electrical and plumbing plans
➢ Fire plan and fire safety permit
➢ BIR documents
➢ Licenses of personnel (for service companies like pharmaceutical companies
should have a resident licensed pharmacist)
SUPPLIERS’ AND BUYERS’
INFLUENCE, TRANSPORT AND
INFRASTRUCTURE
Their influence can greatly affect the sales level of the firm. The
influence can even affect business continuity. Consideration should
be given to the following:
➢ Availability of suppliers
➢ Location of buyers
➢ Customer relations and feedback
➢ Methods of transportation
➢ Infrastructure
➢ Delivery time
ADDITIONAL CAPITAL
REQUIREMENTS
Access to funds is critical for the company as it operates. Credit
should be readily available especially in the short term so that the
company can immediately respond to increases in demand.
Presence of banks and the cost of credits are very important
especially for your firms.
Additional equity or standby investments are also important as these
will not cost as much as the interest payments from borrowed funds.
However, increasing equity through allowing an investor or
partner to come in may reduce company ownership and decision making of the
entrepreneur, thereby, not being able to fully implement his plans.
LABOR AVAILABILITY AND
WAGES
Where will the workers come from? Wages are a major factor in
the profitability and survival of the firm. The choice of company
location may also be based on availability and daily wage scale.
Some companies could not continue because of increasing
wages, bringing down the profitability of the firm. The presence of
skilled laborers allows the company to access them and
bring down the costs because of their proven efficiency.
SUCCESSION PLANS AND EXIT
STRATEGY
Unlike corporations, business continuity depends on the
entrepreneur running the business. The problem lies, however,
when the owner dies or simply discontinues the firm. A succession
plan therefore is needed or business continuity. Among the usual
exit strategies include:
✓ Appointment or succession of a member of the family
Small companies normally have members of the family involved in the operations. As
the owner gets to move out o the business, the relative may continue the operations.
✓ Sale of the company
When the entrepreneur is convinced that her/his company is already profitable,
sometime s/he takes the opportunity for encashment of all of the value of the firm
through sale of the entity. Part of the sale may include a goodwill amount for setting
up the business, and a value of future income which the company may obtain in
addition to the book value of the company.
✓ Incorporation (creation of a corporation)
When the entrepreneur feels that the company should have additional equity in
order to implement growth strategies, s/he might invite investors/partners in his
company. In doing so, the partnership may become a partnership or a corporation.
MIND CHALLENGE
1. How does sensitivity analysis affect the decisions of top
management with regard to business operations?
2. Is inflation good or bad for business operators? What is
your perspective on this?
3. Identify and discuss the common environmental
issues/problems that a business needs to address to
ensure sustainability and long-term viability.
4. With a number of exit and succession strategies that you
can deliberate, what do you think are the things that you
need to consider before deciding on which one is best for
you? Discuss your answer.
Emerging businesses hoping to gain momentum in their industry and eventually become
long-standing competitors in the market are set-up for an enormous task. Identifying and
understanding the key success factors of business is the best way to establish a
foundation of knowledge about a company and its customers
A succession plan is a course of action that your organization would take if an unexpected
event or situation occurs. This will help you ensure you are prepared for what may come;
a crisis. This will empower you to manage the response after the incident occurs. Many
circumstances have the potential to disrupt your business, or worse, shut your business
down. BY having a succession plan, this can save the day, and be prepared for the worst.
Santoyo, Alfredo M., ENTREPRENEURSHIP. MaxCor Publishing House, Inc.
McKeever, Mike. How to Write a Business Plan, 10th Edition
https://smallbusiness.chron.com/key-business-success-factors-2787.html
