Business Plan Assignment (I want some one professional in finance to do it step by step)

Appendix A

Business Plan Assignment

The Business Plan will be about health organization thinking about buying MRI.

One of the ways that organizations prosper is through the introduction of new programs, projects, and other ventures. A business plan is a document that provides the information needed to determine whether the venture is likely to fail or to succeed. A business plan should help you assess whether the proposed venture is sensible, whether it fits the organizational mission, and whether it will be financially viable.

WHY DEVELOP A BUSINESS PLAN The more time and effort managers put into a project, the more committed they become to it, and the harder it becomes to recognize the project’s limitations. So the first and foremost reason for developing a business plan is to discover weaknesses and eliminate bad proposals at an early stage.

If the plan provides evidence that the proposed venture is a good one, then the plan becomes a vital tool in a number of ways. It provides the details of why the idea is a good one, supporting the idea with evidence instead of merely opinion. It helps to clarify what we do and don’t know about the venture. It provides a basis to identify and analyze elementary tools for convincing others (e.g., our boss or investors) that the idea is a good one, worthy of financial support.

A business plan also serves other purposes. First, it communicates the purpose of the project to everyone throughout the organization. The plan also provides a road map for the future, laying out the steps that will be needed to fully implement the new venture. It should include a formal statement of both financial and nonfinancial goals for the project, and forecasts of what resources will be needed and how they will be obtained. These resources are not only financial, but also include elements such as management talent that will be needed to implement and run the new program. Finally, we prepare a plan so that we will have a basis for assessing and controlling organizational performance once the venture is fully operational.

QUESTIONS THAT DRIVE A BUSINESS PLAN

A business plan document represents an effort to provide answers to many questions:

· What is the venture that is being proposed?

· Why would our organization want to do it?

· Who will we provide products or services for?

· How much will potential customers pay?

· How many potential customers are there?

· What will our share of the market be?

We must be as clear as possible in defining the business concept. To make an evaluation of a project, we need to know whether we are responding to an opportunity or a competitive threat, or simply following the next logical step in achieving the organization’s mission. We must clearly identify the customer for the products or services that will be provided. Understanding the likely possible pricing and demand for the product or service is critical. Similarly, we must address questions related to marketing approaches. There are also many questions about specific operating issues that need to be addressed. Where will we do it? Location may be a critical factor in the success of any venture. How will we do it? That is, we need to have some information about the specific operating elements. Who will do it? We need to know both the specific individuals and the organizational elements. Will someone try to stop us from doing it? We cannot consider only our plans without considering the likely response from our competitors.

Four final questions are critical. What resources will we need? If we cannot obtain adequate financing, it is often best not to try to undertake the project. A good idea may waste an incredible amount of time if there is no mechanism that can result in sufficient funding to get the project off the ground. Can it sustain itself? Even if the project fills a tremendous need, we must evaluate whether it can be financially viable. If it can’t be, then we need to directly address the question of where a sustaining subsidy might come from. What can go wrong and what will we do if it does? We can never anticipate all problems that may arise. However, the biggest problem with most new plans is that there are risks of failure. To the extent possible we must try to anticipate those risks so that we can evaluate whether the potential payoff justifies taking those risks. Finally, if it’s such a good idea, why isn’t someone already doing it? This is a tough question, but it is one that is worth thinking about.

THE PLANNING PROCESS

The first step in the process of developing a business plan is to define the business concept. Make it extremely clear what the project will be all about. Next, gather the data we need to answer the questions posed above. As the data is collected, focus and refine the concept. In other words, the project we wind up proposing in a finished business plan is likely to be very different from the one we started with. As we learn more about what might or might not work, the plan should evolve. If, after gathering all the data, things still look positive, put the plan in a “high-impact” format. Remember, you likely will be competing for resources.

THE ELEMENTS OF A BUSINESS PLAN

What does a business plan look like? There is no standard document that fits all projects.

Make the plan fit the project, not the reverse. Bear in mind that different projects call for different amounts of detail. Essentially, a plan should be complete enough to make a decision about whether to go forward with the project, and yet as concise and easy to read as possible. In writing a plan, try to aim its contents at the intended audience, be it a supervisor, board members, bankers, venture capitalists, etc. It may be necessary to have different versions of the plan prepared for different readers. It is quite important that we try to assess their knowledge of our project. The document should meet the reader’s information needs. The goal is not to show how much we know, but rather to provide the information the reader needs to know. For example, providing a three-page background on our organization may be useful to a venture capitalist, but is just excess baggage if we are asking our own CEO to review and approve the plan.

Maintain a consistent voice and tense throughout the document. Don’t shift between the third person (the organization) and the first person (I or we) and between the present (the clinics see 1,000 clients each year) and the future (the clinics will see 1,000 clients each year). Although each business plan document will be unique, there are some elements that are typically included. The plan should have a cover memo. Next comes a title page, followed by a table of contents, executive summary, description of the initiative, proposed organizational structure, market analysis and marketing plan, financial/resource requirement plan, financial feasibility analysis, implementation and operating plan, key performance measures, and summary of strengths and weaknesses, including risks. If we need to say more—add a topic!

Cover Memo

This memo, sometimes in the form of a letter, should be a brief explanation of what the business plan document is and the specific action that is requested. That action will vary from a request for funding to simply a request for permission to move forward with implementation.

Title Page

The body of the plan should have a title page. This may seem pretty obvious, but it is a simple element that is often forgotten.

Table of Contents

A table of contents should be provided next. This table should provide page numbers for easy reference. Many readers will choose to skip around, and this table should help keep them from getting frustrated.

Executive Summary

Next comes a brief executive summary. Depending on how extensive a project is being proposed, this summary may range anywhere from one to three pages. It should not be longer. The summary is written last. Everything else in the plan should be completed before the summary is written. It should give the reader an overview of the entire project.

It is critical to make your points quickly and clearly in this summary. Pique the readers’ interest, or they may not go any further. Start quickly, with no more than one or two sentences describing the project, and immediately follow with the financial benefit. If profits are expected, tell the reader right away.

Then summarize all key points and critical numbers from the document. Provide the essence of why the project will succeed. Establish the approach to be taken, the timing, the management and structure of the project, the costs, revenues, and financial viability.

Finally, be clear about what you want from the reader. If you grab the readers’ attention, they will move into the document to get the details.

Description of the Initiative

The next section should provide a description of the initiative in some detail. The first sentence should define the business concept. The rest of that paragraph should explain the project’s importance. The remainder of the section can lay out the proposed venture in somewhat more detail, giving the project’s history, current status, and other information.

Try to explain why this is different from what others are already doing, and why it isn’t already being done by someone else.

Organizational Structure

Management and organizational structure may be critical to a venture’s success. The document must clearly explain who will manage both the initial implementation and the ongoing project once it is up and running. Brief bios should be provided for each member of the project management team.

It would be nice to be able to identify each member of the management team, but it is not uncommon for there to be positions listed as “to be announced” in the early stages of planning. Realize, however, that this weakens the plan. You must convince the reader that the management team is capable and can make the plan succeed. If there are too many gaps in the management team, it will erode the reader’s confidence.

Market Analysis

The greatest product or service will not be a financial success if no one is interested in buying it. Market analysis must be conducted to assure that there is, in fact, some demand for the product or service. We must also know if the existing or potential competition will make it too difficult to gain adequate market share. The business plan should identify the target market and its scope (local, regional, national, or worldwide).

Will potential customers pay the price we want to charge? How do we know? Is there competition now? If yes, who? What does their company look like—what products or services do they offer? Where? When? What quality? If there isn’t any current competition for the product or service, why isn’t there? Will competition arise after others see our successful venture? What are our strengths and weaknesses relative to competitors? Can the market bear both companies, or will we have to force them out of the business in order to succeed? How likely are we to be able to do that?

Marketing Plan

Assuming that our market research indicates that there is a potential market for our product at the price we want to charge, how will we gain our desired market share? We will need to inform customers of the availability of our product or service. How do we intend to do that? Will we advertise on the radio, on television, or in newspapers? Will we put flyers on car windshields? Once we let customers know about us, how will we motivate them to buy from us? It is wishful thinking to assume that “if we will build it, they will come.” A proactive marketing plan is essential.

Financial/Resource Requirement Plan

The business plan should identify all resources needed for the start-up of the venture, as well as the expected revenues and expenses related to the project. In some cases this may not be very difficult. For example, if the proposal is to replace an existing facility or expand capacity of a successful activity, we may have excellent historical information to use as a guide.

In many cases, however, the project is new, and the financial estimates are more difficult to make. The manager needs to be careful to find out as much as possible about the resources that are likely to be needed and their cost. Any assumptions made should be listed explicitly. As people read the plan, they can add their insights as to the likely accuracy of those assumptions, and help make refinements that will shape a more accurate plan. The plan should include a contingency fund. This represents an extra amount of money that will be raised in advance and will be available to meet unexpected needs during the implementation and early stages of operation.

Financial Feasibility Analysis

A key element of most business plans is the determination of whether the proposed venture is expected to be financially feasible. Usually this requires forecasts of both the future profits and cash flows of the venture.

Forecasting is as much art as science. If possible, before using any method, test its forecasting accuracy over time. Look at past periods, apply the technique retrospectively, and see how well it would have predicted what we now know actually happened. Consider seasonal factors. If possible, look at industry data or comparable ventures. Forecasts used for financial feasibility are largely based on the marketing analyses and implementation plans. The manager must exercise thought and judgment to make the forecast as accurate as possible.

Financial feasibility analysis is often done with a very rough first pass, and then revised over and over as more information is incorporated. Doing all of the analysis on a computer spreadsheet program such as Excel is highly recommended.

Anticipating the revenues and expenses will be critical to the financial feasibility analysis. Revenue forecasts require that we anticipate both demand and prices. Discounts that will be offered and a likely rate of bad debts must be considered. Growth rates from month to month must also be factored in as new ventures rarely reach a steady state of sales right from the start. Revenue projections must also consider how long the business will take to get organized before it can begin to see sales. Delays in collecting payments from customers must also be anticipated.

The business plan must document the expected start-up costs, capital equipment needs, and ongoing operating costs. Managers must be careful to include both direct production costs and also indirect costs such as marketing and administration. This information should be fairly detailed. For example, the capital costs should include the amount and cost of equipment and facilities, location, timing of acquisition, and estimated useful life.

Focus on Cash Flow

Profits compare revenues and expenses. Do we sell the product or service for more than it costs us to provide it? If so, then we earn a profit. However, in a world in which we often have to buy and pay for supplies, buildings, and equipment well in advance of when our customers ultimately pay us for the goods and services that they buy from us, cash flow is as critical as profits. It is possible for a profitable venture to go out of business because it runs out of cash. In fact, the more successful the new venture is, the more likely it is to fail because of the growing needs for cash investment as expansion takes place.

Therefore, the business plan must 1) anticipate how long it will take the organization to achieve profitability, and 2) estimate how long it will take until it achieves a level of positive cash flow.

Pro Forma Financial Statements

Most business plans include a set of pro forma income and cash flow statements. Pro forma statements are financial statements that provide projections or forecasts of the future. Generally the business plan will include three years of projections, although five years of pro formas are sometimes provided. Income or cash flow statements that only project each year as a whole don’t show the tremendous variability in resource needs and in organizational results within each year. Therefore, pro forma statements often show each month, or at least each quarter, for the first year or two, and sometimes for three to five years.

If a venture is not projected to achieve a positive cash flow position within the first three years, it is unlikely to gain much support from venture capitalists or internal managers who have to make funding decisions. There is a great deal of uncertainty in the world, and it turns out that managers are better at predicting the things that might go right than they are at predicting all of the possible things that might go wrong. Given the unexpected, it is risky to commit to a project that will require cash subsidy far into the future, unless the potential rewards are truly lucrative.

Return on Investment Analysis

The pro forma income statements must also show that the venture will begin to be profitable within a reasonable period of time. But how much profitability is necessary?

Suppose that Doc in a Box Clinics (DBC) puts up $10 million for the construction of new stress/anxiety reduction clinics around the country. Assume that the pro formas show that by the second year the clinics start to turn a profit, and by the third year they become self sufficient from a cash flow basis. Is that enough to warrant going ahead? No.

The two main elements that we have not yet considered are the rate of return on the investment and the element of risk. DBC is contemplating an investment of at least the $10 million to construct the new clinics. That money is spent before the first patient is seen, but the profits earned on providing care will occur in the future. Collection of the revenues earned will occur even farther in the future. The business plan must assure DBC that it will eventually recover its up-front cash investment to build the clinics, as well as the cash subsidy to operate the clinics for the first two years, plus a return on that investment, with an adequate reward for having taken the risk that everything might go wrong and all of the investment might be lost..

Break-Even Analysis

Another tool often employed to evaluate a new project’s potential for profitability is break-even analysis. This technique evaluates the volume necessary for a venture to at least break even. At higher volumes the project will be profitable and at lower volumes losses would be incurred. The reason for this is that virtually all projects have some costs that do not vary as the activity level varies.

For example, once we acquire a machine, we can use it to make a few units each year, or many units. If the annual depreciation on the machine is $10,000 and we use it to make

500 units a year, part of the cost of each unit is a $20 pro rata share for using the equipment ($10,000 ÷ 500 units = $20). If the same equipment is used to make 1,000 units a year, the cost for the equipment is only $10 per unit. The higher the volume (within the capacity of the machine), the lower the cost per unit. Therefore we become more profitable as volume increases.

“What-If” Analysis

Finally, a “what-if” sensitivity analysis should be undertaken. This analysis assesses what would happen if the plan’s assumptions turn out to be incorrect. For example, what if the volume of sales is 10 percent below expectations? How about 20 percent? What if operating costs are 15 percent higher than planned? If such events mean the project would fail, the reader must know that. The size of the planned contingency fund may be adjusted accordingly.

The financial feasibility analysis can become quite lengthy. It is usually best to summarize all of the financial feasibility information in the body of the business plan, and put most of the detailed calculations, statements, and tables into an appendix.

Implementation/Operating Plan

The implementation plan needs to address the who, what, where, when, and how questions: Who will do the implementation? Exactly what will they do? Where will they do it? When? How? The plan needs to have timetables for hiring various personnel, buying and constructing facilities, and purchasing equipment and supplies, and a complete schedule of the start-up resources that will be needed. In many cases the plan needs to address coordination issues relative to the existing organization.

Clearly the activities that have to take place first can be predicted with a greater degree of accuracy and described in more detail. However, an overall plan is necessary. The plan should include the likely impact of delays. It should distinguish among resources needed right away, those not needed until operations begin, and those not needed until operations are well under way. It is particularly helpful to use a timeline in developing the plan, showing the various activities that will occur at different points in the timeline.

The operations portion of the plan must be as specific as possible about how this organization will operate. It must convince the reader that you have anticipated all of the elements of running the business on an on-going basis.

Key Performance Measures

The financial profitability of the venture, discussed earlier, is one of the most important performance measures. However, for most ventures it is not the only key measure. The plan should consider other outcome measures as well. Targets for sales and market share are often critical. Quality measures of the product or service are essential. Early achievement of customer satisfaction targets may also be a key to long-term success of the venture.

Summary of Strengths and Weaknesses, Including Risks

It is important to itemize not only the positive elements of the venture, but also the business risks and strategies for offsetting them. What might go wrong? What are the implications if those things do go wrong? What can we do to try to avoid those problems? What can we do to minimize the impact if they do occur anyway?

Most implementation plans at some point indicate what will happen “if everything goes according to plan.” However, it is rare that at the time operations finally commence, anyone says, “Well, everything went according to plan.” Unexpected things always seem to happen. What things? Well, if we could say, then they wouldn’t be unexpected! But we must still make our best attempt to say what will happen to the proposed venture if everything does not go according to plan.

How a Business Plan Is Read

Most readers review the executive summary first. After that, the reader will often jump to an area of concern or an area that the reader has the most familiarity with. If the reader has great expertise in marketing, then the marketing plan may be reviewed first. If the reader concludes the plan is naive with respect to market analysis or the marketing plan, that may be as far as he or she goes. Another reader might believe that, ultimately, if the management team is inadequate no idea can succeed. So the first section reviewed might be the organizational structure and management team. Others will jump to the financial statements first.

The writer of a business plan has relatively little control over the way that the reader moves through the document. Therefore the writer should just ensure that, as the readers ask the following questions, there are satisfactory answers in the plan:

• Does the business concept make sense? Can and will the market support the business?

• Can the management team do the job?

• Are the financial projections realistic?

• Has management realistically assessed the risk in the venture?

• Do the economics justify the investment?

If the document cannot provide satisfactory answers to these questions, then the person preparing the plan should be the first to argue that it doesn’t pay to proceed. If the answers to these questions indicate that the project is a good one, then the document should be designed to convince someone to provide the needed approvals and resources.

A Successful Business Plan

Many business proposals are never implemented. How many times is that because the idea just wasn’t any good, and how often because the plan document was not compelling enough? What does a successful business plan do that an unsuccessful one does not do?

First, a successful plan gets to the point quickly. Second, it brings together all data needed to make a decision in one document. However, it does not overwhelm the reader with detail. Most of the technical details can be relegated to appendices and supplements. The main document need not be more than twenty to thirty pages long. Third, it clearly defines the reason for the proposal—the business strategy. Fourth, it evaluates the strengths and weaknesses of the proposed venture or project. Fifth, it includes satisfactory consideration of implementation, operations, marketing, and financial issues. Sixth and finally, it makes a strong case that the venture is likely to be successful if implemented.

The Business Plan will be about health organization thinking about buying MRI.