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CHAPTER 8

Preparing a business plan Learning objectives After reading this chapter, you should be able to:

• explain what a business plan is and the advantages and disadvantages of using one

• state the major elements of a business plan

• explain how plans may differ in a number of variables

• explain the business planning process.

Shaper, Michael, et al. Entrepreneurship and Small Business 4th Edition Asia Pacific, Wiley, 2013. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/kingsowninst-ebooks/detail.action?docID=4802118. Created from kingsowninst-ebooks on 2018-12-07 14:50:00.

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178 PART 2 Getting into business

Starting and organising a business venture is a demanding task. Whether one is buying an existing business or beginning a brand-new enterprise, there are always many tasks to do and issues to deal with. One way is simply to deal with each question or problem as it arises. The other strategy, long favoured by business advisers and commentators, is to carefully plan the business venture at the start.

In this chapter the notion of business planning is defined and explained. We also compare the benefits and disadvantages of planning. The major elements of a plan are discussed, as is the process by which an effective plan is prepared and implemented.

The concept of a business plan A business plan is a written document that explains and analyses an existing or proposed business venture. It spells out in some detail the business owner’s intentions for the future of the firm. As such, it is a forecast or forward projec- tion of a business idea. It explains the goals of the firm, how it will operate and the likely outcomes of the business venture.

In some respects, a business plan can be likened to a ‘blueprint’ that an archi- tect prepares for a new building, or that an engineer drafts for a new piece of machinery. In each case a document is prepared that gives the reader an overview of what the intended project will look like, how it will work and what activities must take place to reach the final goals.

Business plans can be applied to any type of enterprise, small or large, and can be equally useful to existing firms as well as new businesses. A business plan has three main functions: to communicate the future of the business, to convey the credibility of the business to the reader and, finally, to act as an organising tool that can help to sell the owner’s idea and convert it into reality.1

Although some research has shown that successful businesses are more likely to use plans than their unsuccessful competitors, the level of business planning undertaken by firms remains stubbornly low2 — even in recent studies of devel- oped economies such as the UK, typically less than half of businesses have a formal written business plan.3 In Australia, a comprehensive survey of several thousand enterprises revealed that only 16 per cent of businesses had a formal plan, and that most of these tended to be large, well-established businesses.4 A detailed analysis of this study, along with similar research conducted in sub- sequent years, revealed that large firms tended to plan more than their smaller counterparts.5 A more recent study of Australian small business reveals that only about 40 per cent possess a current business plan document.6 A large-scale study of New Zealand business practices and performance found that although most firms in that country did indeed undertake some sort of planning, most of it was relatively short-term in focus, with the most successful firms tending to be the ones more likely to adopt a formal plan.7 The need for local SMEs to adopt a business plan has also been recognised by a variety of other organisations across the Asia–Pacific region, including the Malaysian Institute of Accountants (MIA) and the World Bank. MIA recognises that more Malaysian SMEs need to possess and use a business plan, so it has developed an extensive business planning guide to facilitate this.8

Business plan A written document that outlines the future activity for an existing or proposed business venture.

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CHAPTER 8 Preparing a business plan 179

The advantages and disadvantages of planning A number of benefits can accrue from the development of a business plan.9 A well-prepared business plan provides a clear statement of direction and purpose for a firm. It allows management and employees of the firm to work towards a set of clearly defined goals, thus enhancing the likelihood of the goals being reached. This allows the organisation to take the initiative in determining its fate, rather than just reacting to events that occur in the outside environment.

Planning also provides a suitable means of periodically evaluating the perfor- mance of the firm. Different quantifiable targets, such as sales revenue, the number of items sold, market share and profitability, can be compared with the actual results at the end of the plan period.10 Entrepreneurs need to assess the reasons for substantial discrepancies between the forecast and the actual results, and initiate action to overcome the gaps.

Because it is a comprehensive document, a business plan encourages man- agers and entrepreneurs to effectively review all aspects of their operations.11 The review and decision-making processes involved in business plan con- struction foster the more effective use of scarce resources, such as staff, time and money; and improve coordination and internal communication. An effec- tive plan demarcates responsibilities — spelling out the roles of key personnel; it helps clarify job expectations and improves the accountability of staff to the owner–manager.

In addition, the very process of collecting information, analysing it and inte- grating it into a written document can help ensure that the entrepreneur or small business owner has adequately researched the business idea. If properly done, preparation of a business plan will foster skill development in the process of bal- anced and objective data collection, systematic analysis of the positive and nega- tive results revealed by the research and the development of a comprehensive business response strategy that integrates all activities of the proposed venture with its internal and external environment. This developmental effect has been shown to be particularly important for improving the growth prospects of less experienced entrepreneurs and for starting a new venture from scratch.12

However, it is also important to bear in mind that business plans, in them- selves, are not a guarantee of success. Although some research does indicate that failed firms are less likely to have a business plan than other businesses, the mere existence of a plan does not ensure survival.13 Business plans do not eliminate uncertainty, because no organisation exists in a completely predictable environ- ment. In addition, many entrepreneurs express the view that a high level of planning will reduce their flexibility and room to move, rather than enhance it.14 In some cases an inflexible over-reliance on a predetermined plan, even in the face of overwhelming evidence of significant changes taking place in the busi- ness environment, can do more damage to the business than might otherwise be the case. There is also evidence emerging that the process and focus of plans (on marketing, operations or finance) should change in response to the prevailing environmental circumstances.15

There are several other pitfalls that may reduce the effectiveness of a plan. Common failings can include a lack of sufficient detail in explaining the inten- tions of the entrepreneur or small business owner; relying on outdated, limited or biased information; failure to undertake detailed market research to validate

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180 PART 2 Getting into business

the sales forecasts, expense estimates and marketing plans of the enterprise; and preparing a document that appears self-evident to the writer, but cannot be understood by other readers.16

Just how effective are plans to the overall success of a business? For many years, researchers have tried to quantifiably measure the impact of a business plan on a firm’s performance. Until recently, studies into this question have failed to conclusively show that planning is beneficial.17 Although many reports show a link between business planning and firm survival or growth, other studies have produced contradictory results.18 However, a recent extensive meta- analysis (a powerful technique for comparing and aggregating the find- ings of many studies) of business planning undertaken in the period 2007–2010 provides perhaps the strongest evidence yet of the value of business planning. This research aggregated the results of 47 separate studies that investigate the link between planning and performance. The aggregated analysis shows that there is indeed a significant positive relationship between planning and perfor- mance. Whilst planning was shown to be important for new firm performance, this relationship is identified as even stronger for existing firms who can draw upon internal knowledge and data to aid in their future forecasting and planning. We can then, with some degree of confidence, proceed to develop a business plan, safe in the knowledge that the right kind, timing and intensity of planning will probably have a positive impact upon small business performance and survival.19

Elements of a business plan There is no universal format for a business plan; the structure of individual documents can vary from one writer to another. Despite this, most documents include a common mix of items, since there are universal issues that are dealt with by all business enterprises.20 The main issues dealt with in all business plans can be broadly grouped into those relating to marketing, operations and finance (see figure 8.1).

Operations Marketing

Finance

BUSINESS PLAN

FIGURE 8.1 Central components of a business plan

These three elements — marketing, operations and finance — are universal. All business owners and entrepreneurs need to research their market, know

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CHAPTER 8 Preparing a business plan 181

their customers, understand the state of the industry they operate in and have a comprehensive knowledge of the products or services they sell. They must also be able to structure, manage and operate the business in a logical manner, so that it can work effectively on a day-to-day basis. Finally, they must know how much money is required to start the business, its prospective sales turnover and what returns they are likely to receive from it. One possible format of a plan is discussed below. It covers the three core elements of marketing, operations and finances, and considers additional issues that help round out the business idea and explain it comprehensively. At the end of this chapter, there is an example business plan for a small personal consulting business based in Sydney that follows the same plan structure that guides the rest of this book.

Title page The title page normally shows the name of the business and that of the owner or owners, and provides contact details (addresses, phone and fax numbers, web- site URL and email addresses).

Executive summary An executive summary is an introductory segment, briefly summarising the key features that are explained in more detail later in the plan. It is a quick ‘snapshot’ of the idea, and is often critical in influencing a reader’s judgement of the whole document. Typically, it discusses the following items. • Business ideas and goals. This section provides an overview of the business

project, what product or service is being sold and what the entrepreneur’s goals are. It also indicates where the business expects to be in a year’s time and later.

• Marketing. How will the products or services of the business be sold? Who will be the main target markets (customer groups), and what are the main elements of the proposed advertising and promotional strategy for the firm?

• Operations. Where will the business be located? How many staff will there be, and how will they be organised? What is the legal structure of the business? How will it be managed?

• Finances. What profit is the firm expected to make by the end of the busi- ness plan time period? What finance is required and what will it be used for? Where will such capital be obtained from, and what will the repayments be? If at all possible, it is advisable to keep the executive summary to one page

and certainly no more than two pages in length. It is, after all, the quick teaser designed to make the potential buyer want to read on.

Background In this section, the business owner or entrepreneur sets down the issues driving the business project. These include: • Mission statement. What is the philosophy and overall vision that the owners

have for the business? Why do they want to start and run such a venture? • Company history. Many existing businesses already have well-established

systems, products and operating processes and a customer base. It is important to briefly outline these before discussing the changes planned for the

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182 PART 2 Getting into business

future. This segment typically explains how long the enterprise has been in existence, what products or services it sells and its achievements (and prob- lems) to date.

• Business goals. What are the goals of this business? It is useful to provide both short-term goals (those for the next 12 months) and long-term ones (those covering the next 2 or 3 years, or perhaps even longer). It is always desirable to provide some specific, measurable targets (such as net profit sought, antici- pated sales revenue, number of staff employed, product range offered and market share to be held), rather than vague or ambiguous statements (such as ‘to be the best business in our field’) that cannot be evaluated or used as a yardstick for subsequent performance appraisal. An important but often overlooked aspect of goal setting is the development

of an exit strategy — what the entrepreneur needs to do to get out of the busi- ness. Many entrepreneurs hope to build their wealth by eventually selling their business. A proposed exit strategy is also important for venture capitalists and other investors who usually want to know how their investment will be returned to them.21 This segment should cover the method of exiting, the timeline for such events and the steps needed to bring the business to this point.

Marketing The marketing segment provides the rationale for the existence of the business. Among other things, it gives the entrepreneur the opportunity to show what market research has been done, the likely level of demand for the firm’s prod- ucts, what exactly will be sold by the firm and the intended customer base. • Market research. What research has been done to prepare the plan? It is a good

idea to list the primary and secondary sources consulted, including any per- sonal communication with experts and their credentials to speak as experts.22 If appropriate, attach the results of any surveys, or other particularly relevant data, as an appendix.

• Market analysis. What is the result of the research? It is especially important to cover the following issues: – Industry: What are the characteristics of the industry in which the firm will operate? This section is especially concerned with providing an over- view of the industry as a whole, rather than the individual business. What is the current state of that industry, and what are the likely prospects for future growth? A common tool used in such analyses is Porter’s five forces model, or its less common extension, the six forces model. The six forces model also considers the impact of customers, government, shareholders, the general public and employees collectively as ‘other’ stakeholders.23 If deemed appropriate, either of these or other models can be used at this point.

– Seasonality: Are sales in this industry likely to be affected by changes at different times of the year, or is the business cyclical in some other way — perhaps peaking at different times of the day or week?

– Competitors: How many competitors are there, both direct and indirect? Who are the main players and what is known about them, such as where they are located, what they sell, what prices they charge, how long they have been in the industry, their after-sales service, staffing and customers’ views of them?

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CHAPTER 8 Preparing a business plan 183

– Potential strategic allies: Are there other firms that the business can work with on joint projects, such as cross-referral of work or other ways that pro- vide mutual benefits?

– SWOT analysis: Using the data acquired, as well as one’s own under- standing of the business idea, it should be possible to construct a table or list that identifies the various strengths and weaknesses of the business, as well as the opportunities and threats that it faces.

• Marketing plan. In this section, the marketing mix is dealt with. – Products/services and target market: Describe or list the main product(s) and/or service(s) to be sold by the business. If making a product, how will it be packaged? What is the target market (who are the main groups of cus- tomers for the product/service mix)? Describe the main characteristics of each customer group, such as their age, sex, income level, locality and family structure, their motives for buying this product and the likely number of purchasers in each group. Does one target market have priority over others?

– Placement (distribution channel): How will goods be distributed to cus- tomers? What costs and legal issues may be involved?

– Promotions and advertising: How will the venture’s goods and services be advertised and promoted to consumers? What media will be used? Who is responsible for promotions, and what is the cost of each method? It is advis- able in this section to map out the advertising and promotions schedule for the course of the whole year.

– ICT marketing strategy: With the widespread adoption of internet-based technologies by small business, there is a need to focus upon information and communication technology (ICT) strategy, from both marketing and operations perspectives. This should include a discussion on the use of emerging communications platforms such as Facebook, LinkedIn, Twitter and others (which this text refers to collectively as social media).

– Pricing policy: What prices will be set? What sort of pricing strategy will be used? Will there be any discounts for bulk purchases or special customer groups? Will credit terms be offered to any clients?

• Evaluation of marketing. How will the effectiveness of the marketing program be assessed? What performance indicators will be used to measure success, and how often will this be done? Some marketers employ the seven Ps of the extended marketing mix to take

particular account of service based businesses.24 In this business plan format, the additional three Ps of people, process and physical evidence are dealt with as functions of operations and production management. However, for clarity, the additional three P’s are briefly explained below: • People. The staff, family members and contractors that are required to deliver

the service must be considered in terms of skills required, the total price that will be paid for their labour, the availability of this labour and the manner in which workers will be motivated to perform and behave.

• Process. The delivery of a service requires careful planning of the timing and staging of the service encounter. This includes planning the support activities and technologies required to ensure that service failures are avoided and wait periods are acceptable. The processes must also be designed in such a way as to ensure the safety and wellbeing of the human actors involved.

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184 PART 2 Getting into business

• Physical evidence. Layout and design of the physical infrastructure, artwork and logos; website design; certificates of competency; accreditations for quality; awards for excellence and the demeanour of other customers are all elements that help define customer expectations and satisfaction levels when they are consuming an intangible service.

Operations and production Organisational details, day-to-day operating processes and other issues that do not have a clear marketing or financial role are usually discussed here. • Legal and licensing requirements. Include the business name, the legal structure

of the business and the laws and licences that the business operates under or must obtain.

• Management details. Provide background details about the owners and/or managers, including full name, residential address, phone number, email address, date of birth, qualifications, special skills and job history. Is there any other information about the proprietors that could be important? Do the pro- prietors have any outstanding loans, guarantees or other financial exposure? Have they ever been bankrupt or charged with an offence that could affect their ability to operate the business? What previous business experience do they have?

• Organisational structure and staffing. Who will do which jobs in the busi- ness? If there will be more staff than just the owner–operator, who else will be employed? What skills and qualifications do they need? How will the firm recruit staff and at what rate of pay? What further training will staff need? If possible, include an organisational chart for the firm.

• Professional advisers. Provide the names and contact details of all the out- side business and technical advisers the business expects to use. This may include an accountant, a bank manager, an insurance broker and management consultants.

• Insurance and security needs. What insurance will be required for the business and how much will it cost? Are there any special security precautions that need to be considered for the business’s property and equipment?

• Business premises. Discuss and explain all the issues related to location. Where will the business be based? How accessible is this to customers? Is it convenient to local roads and transport services? If the proposed site is to be leased, what rent, lease period, payments and conditions apply? Are any special facilities required (that is, does the business need a certain building size, specialised customer access, special lighting, air-conditioning or rest rooms)?

• Plant and equipment required. What equipment does the business need? Provide a list of likely needs, along with the type and make, cost, life expec- tancy, running costs and service and maintenance requirements.

• Production processes. Briefly explain how the product is made, including the supply of any raw materials or trading stock, production processes in the premises and any related issues. In the case of service-based businesses it can be useful to pictorially display the process using what are known as service blueprints, something of a hybrid storyboard and flow chart that communi- cates the essence of an intangible service act.25

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CHAPTER 8 Preparing a business plan 185

• Information and communication technologies. Describe the extent to which ICT will support people and processes within the business from an operational standpoint. This typically focuses on technologies that will be used to enhance productivity and/or enable consistency and quality.

• Critical risks and contingency plans. All businesses face potential problems and threats that can derail the goals outlined in the business plan, or poss- ibly even destroy the organisation. Although not all of these can be identi- fied in advance, major ones should be discussed here, along with strategies for dealing with such issues if they arise.

Financial projections In this section, the financial documents are presented, along with background notes and information that help a reader make sense of the financial forecasts. • Basic assumptions and information

– Explain the assumptions made in estimating income and expenses, and in calculating the various documents. Justify any unusual items, significant omissions or unusual variations in the figures. What estimates have been made about inflation or increases in costs, wages and interest rates?

– It may be useful to provide details about the bank accounts that the business operates. What financial institution are these with, what type of account is it (savings, cheque or cash management), and what fees are charged? Does the financial institution have the facilities that the business might need e.g. credit card access, mobile credit card scanners and online banking?

– Does the business currently have any loans or overdrafts outstanding? Provide details about the lender, the amount borrowed, the current balance still outstanding and the terms of the loan.

– If additional funds are needed by the business, how much and how are they to be raised? If this money is to be borrowed, provide information about the proposed lender, total amount sought, date required, monthly repayments due, interest rate, loan conditions and term (duration) of the loan.

• Financial forecasts – Sales mix forecast: Use market research and/or past performance to deter- mine likely sales revenue for the first 12 months. Estimate the number of items sold each month, sales income from these and cost of goods sold. Because the estimates in the marketing analysis are linked to and supported by the sales mix forecast, these integral parts of the plan are sometimes referred to as the ‘backbone’ of the plan.26

– Cash flow forecast: A cash flow statement summarises the monthly amount of cash movements (cash inflows and cash outflows) and the resulting cash balance for a year.

– Projected profit and loss statement: Also known as a ‘statement of financial performance’, this shows business revenues, expenses and net profit for the forthcoming year.

– Balance sheet: Also known as a ‘statement of financial position’, the balance sheet reports a business’s financial position at a specific time. It provides details about the assets (financial resources owned by the firm), liabilities (claims against these resources) and net worth of the business. A balance sheet is usually not provided for a new business. (There is no balance

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186 PART 2 Getting into business

sheet in the sample plan in the appendix to this chapter because Blueprints Business Planning Pty Ltd is a new business. However, a sample balance sheet can be found in figure 15.2.)

– Personal expenses, assets and liabilities: Since much of the capital funding for a new or small business venture is provided by the owner, it is often recom- mended that the business plan contain details about the owner– manager’s personal assets and liabilities. In addition, since the owner usually draws income from the business, it is a good idea to include an estimate of likely personal expenses that will need to be drawn from the business. It is impor- tant to build in some degree of variation in these estimates since, just like the business, individuals owners will have high expense and low expense months.

• Analysis of financial forecasts – From the data provided, it may be desirable to conduct ratio analysis or other pertinent calculations. These could include (but are not necessarily limited to) an estimation of break-even point, fixed and variable costs, con- tribution margins, mark-ups and margins, projected impact upon the value of the business and return on investment (ROI) consequences.

Implementation timetable This section provides a schedule of the activities needed to set up and run the business. It is usually organised on a monthly basis, providing a set of mile- stones for the owner–manager to work by. In certain circumstances, depending on project complexity, it may be appropriate to use Gantt charts, timelines and other graphic tools to display multiple tasks or pathways.

Appendixes This section includes any extra useful information such as résumés of the entrepreneur and key management personnel, credit information, quotes for major capital purchases, leases or buy/sell agreements, other legal documents, competitors’ promotional material, maps of the business site, floor plans of the business premises, service blueprints, process flowcharts and reference sources and key statistics collected during the market research process.

Different types of plans Not all plans follow a common template. There are many different structures and sometimes also a difference in the emphasis that entrepreneurs/owner– managers put on particular issues.27 One of the key features of a business plan must be its flexibility — that is, its ability to accommodate the changing needs of the business and its owner, and to be adjusted as circumstances dictate. In this section, we briefly examine some of the major causes of variations among dif- ferent plans.

Specificity In some enterprises, business plans are highly specific and detailed. This is often the case, for example, in a very small micro-enterprise, where there may be only an owner–operator involved in the firm. When a firm is new, small and focused

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on a limited target market with a constricted product range, it is relatively easy to prepare a business plan that covers all details. In contrast, larger firms may find that their plans are more generalised, owing to the diverse range of their business operations and product range, and the high staff numbers they must take into consideration. There are also local political and cultural contexts to be considered. For example, suggesting that all businesses need particular banking facilities overlooks the reality that many business operations may be based in developing countries and regions that have a predominantly cash economy.28

Length There is no one ‘ideal’ length for a business plan. Some are simple documents with no more than 10 pages, and others can be several hundred pages long. For some organisations (especially smaller ones), a short plan is a good plan. A document that is too long is unlikely to be regularly consulted and may be left in a desk drawer where it is soon forgotten. Other business ideas, however, may require much more elaborate explanation and detail. This is especially likely where very large sums of money are being committed, there are numerous par- ties involved in the business venture, the product or service offering is complex or the organisational requirements are substantial.

Audience To whom is the business plan addressed? Is it written mainly for the benefit of the organisation’s owners and employees, or is it geared towards convincing out- siders (such as financiers) that the firm is a worthwhile venture to invest in? This will affect the level of detail and tone of the finished document, as well as the amount of confidential or commercially sensitive material disclosed.

In some cases, external factors will be the driving force behind the decision to prepare such a blueprint. This can occur, for example, when finance is being sought for a business project. Banks, venture capitalists, other financial insti- tutions and private investors will want to know a great deal of detailed infor- mation before committing themselves to a new business venture or to the expansion of an existing one.29 Government assistance to small business also often depends on the presentation of a suitable business plan. In such cases, it is important to ensure that the completed document is well written, logically argued and puts forward a clear case for support from external parties. However, it is often very difficult for entrepreneurs and business owners to determine how much confidential or commercially sensitive information should be released to outsiders.

In other cases, internal factors will be the main reason for developing a plan. For example, an entrepreneur may wish to draw together all his or her thoughts into a cohesive whole and ensure that no important details have been omitted in the development of the business project. Another reason may be to improve coordination of existing activities within the firm or to clarify the production targets the business is expected to reach.30 When the document is being prepared largely for use ‘in house,’ it may be easier to commit confidential information to paper. In some cases, the business plan can also identify future staffing needs of the business and help to ‘map out’ how current or future staffing arrangements

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188 PART 2 Getting into business

will operate. It may also be possible to omit some details that are well known to everyone, since all likely readers of the plan are already involved in the project.

Time frame A business plan can be geared for a short time period (anything up to a year) or it may have a longer perspective. Short-term plans can afford to be more detailed, whereas a long-term orientation means that the plan must be more generalised in its contents. Many researchers argue that business planning in small firms tends to be overwhelmingly short-term in orientation, and that it is unusual to find a small business with plans that extend beyond a two-year time horizon.31 Of course, there are always some exceptions to this rule — some firms have been able to successfully use a very long-term time scale to help turn their business around. In general, however, a shorter term focus is used by most small organisations.

What would you do?

Robin the Hood, superheroes online and on demand Robin and his band of merry friends are starting a social enterprise that supplies a large self-sustaining pool of volunteers for worthwhile local causes. These typically comprise one- off events that need a lot of helping hands — be it planting trees, finding lost cats, raising awareness of a cause, simply picking up rubbish or anything that needs a large, mobile and willing crowd. Robin identifies that even volunteers are time poor these days. He proposes that if the act of volunteering is made simple, fun and quick he can ‘steal from the time rich and give to the time poor’. The aim is to build a ‘five-hundred strong permanent group of volunteers always ready, willing and able to tackle labour intensive projects in the local community, a kind of rotating roster superhero crowd’. Tim wants the idea to outlast his tenure so he needs to create a business model where the structures, ideas, processes and strategies are passed to the next leader as a complete system. In many ways, what he is doing is developing a marketing, financial and operational plan for a social business franchise. In order to automate as much of the process as possible, he has decided to create a social media platform and mobile application to allow the volunteers to make suggestions for jobs they think should be done. Once enough volunteers have registered their interest, the bid goes ‘live’ and the gang swings into action. If anyone outside of the gang of volunteers wants to make a suggestion, they need to make a small donation to ‘the hood’; the motto being ‘surrender your money or your time’. Donations help cover the cost of feeding and transporting the gang and pay a basic living wage to the leader of the gang of course.

This story is loosely based upon the Big Help Mob concept (see www.bighelpmob.org).

Questions 1. Evaluate and discuss Robin’s idea. What are the major strengths and flaws of this

social business model? 2. Do you think that a somewhat anarchic business like this will benefit from creating a

formal business plan? Why?

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Strategic or operational orientation Business plans should not be mistaken for another common business tool, the strategic plan. A strategic plan sets out the long-term focus of the business, its mission and vision, and attempts to understand the environment in which the business operates.32 In contrast, business plans tend to be more focused on oper- ational issues. As the contents of a typical business plan reveal, such documents focus on putting an idea into action, and cover most of the practical day-to-day issues involved in business creation, growth and management. In reality, there is often some overlap between the two. There is also evidence suggesting that the size of an organisation affects the degree of strategic planning. Typically, smaller firms (often recently established) think no more than one or two years ahead. Only when firms grow in size do they start to have a long term focus.33

Preparing the document: the business-planning process Few business plans are written at one sitting. More typically, a plan is the result of a series of logical steps that most entrepreneurs work through, regardless of whether or not they are conscious of the process involved (see figure 8.2). These steps are often iterative; a person may go through some of them several times before finally developing a plan that all parties feel comfortable with. The following sections briefly describe the critical steps in the business-planning process.

FIGURE 8.2 The planning process

1 Set preliminary

goals

2 Conduct initial research using secondary data

3 Confirm goals

4 Conduct subsequent

detailed research

5 Write the

business plan

6 Critically assess the

proposed plan

7 Implement

8 Evaluate the plan

1. Set preliminary goals All prospective business operators have a vision of what they want to achieve, what business they want to be in and what they want to sell. A useful first point in planning, therefore, is to commit these initial (often vague) goals to paper.34

Strategic plan A plan that sets out the long-term focus of the business, its mission and its vision, and attempts to understand the environment in which the business operates.

Business-planning process A series of logical steps governing the creation, implementation and revision of a business plan.

will operate. It may also be possible to omit some details that are well known to everyone, since all likely readers of the plan are already involved in the project.

What would you do?

This story is loosely based upon the Big Help Mob concept (see www.bighelpmob.org).

Questions 1. Evaluate and discuss Robin’s idea. What are the major strengths and flaws of this

social business model? 2. Do you think that a somewhat anarchic business like this will benefit from creating a

formal business plan? Why?

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190 PART 2 Getting into business

2. Conduct initial research using secondary data Using the preliminary goals, the entrepreneur/small business owner must now collect information from existing data sources that can provide more details on the current state of the industry, and the prospective viability of another entry into the field. At this point, rather than undertaking potentially expensive and time-consuming primary data collection, the entrepreneur may find that secon- dary data are more useful and easier to gather.

3. Confirm goals Initial, general research should allow an entrepreneur/small business owner to either confirm or cancel the original goals. Does the business idea now seem viable? If the preliminary research does not clearly indicate that there is room for another market entrant, it may be advisable to abort the business idea at this stage, unless, of course, the intention is to create an entirely new product or ser- vice. If the initial idea does seem viable, attention should be turned to devel- oping specific goals and action plans. Where the product or service is entirely new to the market, more emphasis will be necessary on goals related to increasing awareness in the marketplace.

4. Conduct subsequent detailed research Now is the time to collect detailed information from as many different and specific sources as possible. This is the stage at which all the detailed elements of the business plan (such as marketing, operations and finance) must be investigated.

5. Write the business plan Once market research results have been obtained and analysed, the entre- preneur/small business owner must prepare a first version of the proposed business plan, covering all the subject matter suggested in the business plan outline.

6. Critically assess the proposed plan Once a first draft is completed, the entrepreneur/small business owner should set the plan aside for a brief period of time. They should then return to it with a critical and editorial perspective. Does the document read well? Are all elements integrated? Are there any weaknesses in the argument that must be revised? At this stage, it is often useful to have an outsider evaluate the plan to obtain some unbiased feedback.

7. Implement Once devised, the business plan must, of course, be put into action. As time unfolds, the entrepreneur/small business owner must adhere to the processes and goals outlined in the original business plan, unless there are strong reasons to do otherwise. If a plan is not implemented, the value of preparing the docu- ment in the first place is highly questionable.

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CHAPTER 8 Preparing a business plan 191

8. Evaluate the plan At the end of a year, or another given time frame, it is necessary to review and evaluate the plan and draw up a new set of forecasts for the future. This is also a useful opportunity to reassess the venture’s stated goals to see if they are still realistic or whether some modification is warranted.

When business planning is seen by an entrepreneur or small business owner as an event that occurs only once a year, it can produce an inflexible perspective. On the other hand, those owner–managers and entrepreneurs who treat busi- ness planning as an ongoing process are more likely to build firms that are highly responsive to their environment. This latter group regard the business plan as a tool that is constantly reviewed; this allows them to respond quickly to any dramatic or rapid changes in their operating environment. Such responsiveness is especially important for new and small firms that operate in highly dynamic conditions.

SUMMARY A business plan is a written outline of a business. It may be devised for an existing firm or for a new venture that has not yet been launched. The main advantages of business planning include more complete information gathering, balanced decision making and assistance in raising finance. Disadvantages of a plan can include skewed information seeking, incorrect assumptions, inflex- ibility and unrealistic expectations.

All business plans, whatever their structure, should cover the key issues of marketing, operations and financing. The major elements of a typical plan can include an executive summary, background on the firm (if an existing enter- prise), marketing details, operational arrangements, financial projections, a timetable for implementation and other relevant details.

Plans vary from one business to another. Formats and sequence are often quite different, although all of them should cover the basic issues. In addition, written business plans may have different levels of specificity, be written for dif- ferent audiences, and cover short-term or long-term time frames.

The business-planning process is an ongoing process by which plans are con- structed, implemented and evaluated. It includes the steps of preliminary goal setting, initial information gathering, formulation of set goals, detailed research, plan preparation, critical analysis of the proposed plan, implementation and subsequent evaluation and revision.

REVIEW QUESTIONS 1. List and describe the different types of potential audience for a firm’s business

plan. 2. Define (in the correct order that they appear) the seven major elements of a

business plan. 3. What are the main differences between a strategic plan and a business plan? 4. ‘The disadvantages of preparing a business plan outweigh the advantages.’

Do you agree with this statement? Explain your reasons. 5. Outline and briefly describe (in the correct sequence) the eight steps involved

in the business-planning process.

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Case study

From Howling Wolves to howling success The Howling Wolves Wine Group is a story of innovation, marketing prowess and good strategic and tactical business planning. Allan Waters is the original owner of Harmans Ridge Estate, a 17 hectare property located in the world-famous, premium wine region of Margaret River, Western Australia. Commencing in 1998, he established a hi-tech winery to produce a range of quality wines, using a contract winemaking business model. In 2002, after establishing and refining this business model, Waters joined forces with friends, Vaughan Sutherland, a successful and innovative advertising professional and Damian Knowles, an experienced fine wine retailer, to create the Howling Wolves Wine Group (HWWG). This powerful combination of production, marketing, distribution, wholesale and retail sales expertise is a key factor in the rapid, yet planned, growth of HWWG into some of the most promising markets for premium wines worldwide. The corporate team has grown and changed somewhat over the ensuing decade to reflect the growing needs of the business, as has the winemaking personnel roster.

Throughout this decade of growth, the company has maintained a clear strategy to focus on innovation in branding and winemaking technologies to project their premium products and winemaking skills into diverse international and domestic markets. By 2012, the Wilyabrup winery had grown in capacity to produce and store over 1.5 million litres of premium wine each year. Looking beyond this impressive volume of wine production, at the core of any good business model is a quality product that will satisfy customer needs. To ensure the quality of the wines is maintained at these high production volumes, HWWG has historically employed the skills of some of Australia’s most respected winemakers. These skilled people include Chief Winemaker Dave Longden. Prior to his

DISCUSSION QUESTIONS 1. If you were the owner of a business but employed a full-time manager to run

your firm, who would be best placed to write up the plan? 2. What do you consider the most important part of a business plan for a new

venture — the financial forecasts or the marketing plan. Why? 3. What do you think are the major pieces of information that an investor would

look for first in a business plan, and why would an investor look for these items?

4. ‘Writing the background business goals should also include the short-term and long-term personal goals of the owner(s).’ Do you agree with this state- ment? Explain your reasons.

SUGGESTED READING Bangs, D. & Schaper, M., The Australian Business Planning Guide, 2nd edn, Allen &

Unwin, Sydney, 2003. Barringer, B., Preparing Effective Business Plans, Pearson Education, New Jersey, 2009. Humphrey, N., The Penguin Small Business Guide, Penguin Australia, Camberwell, 2007. Oliver, L. & English, J. The Small Business Book: a New Zealand guide for the 21st century,

6th edn, Allen & Unwin, Crows Nest, 2012.

192 PART 2 Getting into businessShaper, Michael, et al. Entrepreneurship and Small Business 4th Edition Asia Pacific, Wiley, 2013. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/kingsowninst-ebooks/detail.action?docID=4802118. Created from kingsowninst-ebooks on 2018-12-07 14:50:00.

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CHAPTER 8 Preparing a business plan 193

appointment at HWWG, Dave was a key player in developing the quality and volumes of wine produced at Evans & Tate Winery, a pioneering premium brand in the Margaret River region. Together with the 15-member plus vintage international winemaking team, Dave oversees the production of award-winning wines for a diverse range of domestic and export markets.

The business plan for HWWG has a geographically segmented strategy operating at multiple price points, with products, brands and entry strategies to suit local markets in Australia, Switzerland, Singapore, Indonesia, the US, India and China. The wines produced range from quality entry-level wines of the Eight Vineyards brand, and several styles of white, red and sparkling wines sold under the Howling Wolves Claw banner, to the super- premium quality Small Batch™ range. Each wine aims to represent exceptional value within its price range, and is designed with global wine markets and trends in mind. The group has some salient stories to tell about when a plan needs to be changed for strategic, tactical or practical reasons. For example, in 2003 the original brand Howling ‘Wolf’ was identified by the Australian Wine & Brandy Corporation (export regulator) as contravening the International Geographic Index because there was already a commune in Germany named ‘Wolfe’, hence the name-change to the plural Howling Wolves. This change of branding was slight but still entailed a great deal of unplanned expense in changing signage, bottle labels, packaging, marketing material, websites and all manner of corporate livery.

Because the development of brand names and products linked with innovation and quality is a key strategic direction for HWWG, clear ownership of trademarks was considered a critical success factor. Registered trademarks have been filed, and the business rigourously defends any identified breaches of their intellectual property. In 2007, the group successfully brought legal action against a new start-up California-based business calling itself Howling Wolf Wines, which was forced to cease trading under that name in US markets.

Another strategic marketing and distribution plan was to create the brand 8 Vineyards for the Asian market. The strategy here was to back up a good entry-level product with a brand name that resonates in Asian cultures. The number 8 is considered a particularly lucky number by the Chinese community. To capitalise on this, the product was placed in the mainland Chinese market prior to the 2008 Olympic Games.

A further change of operational and financial plans was required to enter the Indian market. Because India imposes up to 250% tax on imported wines, a strategic decision was taken to produce the wine in India, to avoid this tax impost. A hi-tech winery modelled around what had been learned at the Australian winery is planned in a 50/50 joint venture with Birhans PL, a well-known Indian distiller and distributor. Premium Margaret River cuttings were grafted to root stock planted on a 100 acre property in Shreepur, a region with a suitable climate and soil profile located about 300 km south of Mumbai. HWWG have enlisted experienced Margaret River region viticulture consultant, Tim Quinlan, to oversee the transport, planting and cultivation in Shreepur. According to the director of the JV company Harshawardhan Apte, the long-term plan is to transfer the entire production and distribution of the 8 Vineyards range to the Indian joint venture. In early 2010, the first vintage was harvested from the vineyard in India.

Another recent chapter in the HWWG story sees the group producing ‘The Lone Wolf’ range, exclusively for the Coles Liquor Group. This action is opening up yet another opportunity for expansion of this entrepreneurial forward-thinking wine production and marketing business.

Like any strategically oriented business, HWWG will no doubt continue to revise and evolve their strategies and tactics to suit the external environment and respond to

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Case study

Business plan scenario — a blueprint for success? This scenario should be read in concert with the sample business plan that follows. For several months, three friends had been thinking about starting their own business. Stephen Molloy, Jessie Jones and Andrew St John had talked about running their own business for a long time, but nothing had gone much further than a talk over coffee now and then.

Finally, in May 2014, Jessie Jones rang her two friends and decided to take action. ‘I have an idea for a business,’ she told them. ‘We’ll call it Blueprints Business Planning.

Since I have a lot of business experience, I will run it and I will be the starting point for the venture. If you are prepared to put in some money and a little bit of time serving as directors, I think we can eventually grow this into something bigger.’

Andrew and Stephen were intrigued. ‘What do we have to do?’, they asked. ‘Not much at present,’ Jessie said. ‘Let me do a draft proposal and then we can meet to

discuss it.’ Two weeks later, they met to discuss the results so far. Jessie had exhausted herself

preparing an initial business plan for the other two to read, and was quite proud of what she had done in such a short time.

Andrew said, ‘I have a few problems with your business plan.’ Stephen nodded in agreement.

Jessie was quite hurt. She had put a lot of work into the idea. What should she do now?

Questions 1. Review the sample business plan prepared by Jessie in the appendix to this chapter.

What are the strengths and weaknesses of the plan as it currently stands? 2. Should the directors proceed with the project as outlined in the business plan? Why

or why not? 3. Why do you think Andrew and Stephen have reservations about the plan? What

alternative strategies could Jessie adopt for going into business?

opportunities; but it is clear that the central tenet of a strong focus on planned innovation and branding will form the basis of the growth strategy of this local and global success story.

Questions 1. What do you think are the potential problems for HWWG arising from not having any

exit strategy for the directors? 2. What financial and operational risks may the business face in a global market that

do not exist in the Australian domestic market? 3. Should HWWG create a separate but jointly prepared business plan with Birhans for

the Indian operation? Explain your reasoning. 4. How do you think entering a partnership to supply the large national liquor

retailer Coles Liquor Group might change the business?

194 PART 2 Getting into businessShaper, Michael, et al. Entrepreneurship and Small Business 4th Edition Asia Pacific, Wiley, 2013. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/kingsowninst-ebooks/detail.action?docID=4802118. Created from kingsowninst-ebooks on 2018-12-07 14:50:00.

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CHAPTER 8 Preparing a business plan 195

ENDNOTES 1. B. Mainprize & K. Hindle, ‘The benefit: a well written entrepreneurial business plan

is to an entrepreneur what a midwife is to an expecting mother’ The Journal of Private Equity, vol. 11, no. 1, 2007, pp. 40–52.

2. S. Kraus, R. Harms & E.J. Schwarz, ‘Strategic planning in smaller enterprises — new empirical findings’, Management Research News vol. 29, no. 6, 2006, pp. 334–44; J.A. Pearce, D.K. Robbins & R.B. Robinson, ‘The impact of grand strategy and planning formality on financial performance’, Strategic Management Journal, vol. 8, no. 2, 1987, pp. 125–34.

3. S.M. Richbell, H.D.Watts & P. Wardle, ‘Owner-managers and business plan- ning in the small firm’, International Small Business Journal, vol. 24, no. 5, 2006, pp. 496–514.

4. Department of Industry, Science and Tourism, The 1995 Business Longitudinal Survey, AGPS, Canberra, 1997.

5. B. Gibson & G. Cassar, ‘Planning behavior variables in small firms’, Journal of Small Business Management, vol. 40, no. 3, 2002, pp. 171–86.

6. P. Weber, L. Geneste, M. Schaper & W. Soontiens, 2009, Western Australian Small Business Benchmarks 2008 [main report], Perth, Curtin University of Technology.

7. S. Knuckey, H. Johnston, C. Campbell-Hunt, K. Carlew, L. Corbett & C. Massey, Firm Foundations: A Study of New Zealand Business Practices and Performance, Ministry of Economic Development, Wellington, 2002, p. 45.

8. Professional Accountants in Business (PAIB) & The Malaysian Institute of Accountants (MIA), Business planning guide: practice application for SMEs, 2006, mia.org.my.

9. M. Schaper, ‘Writing the perfect business plan’, My Business, October, 1996, pp. 26–7. 10. T.W. Zimmerer, N.M. Scarborough & D. Wilson, Essentials of Entrepreneurship and

Small Business Management, 5th edn, 2008, Pearson Education Inc, Upper Saddle, New Jersey, pp. 1346.

11. A.M. Hormozi, G.S. Sutton, R.D. McMinn & W Lucio, ‘Business plans for new or small businesses: Paving the path to success’, Management Decision, vol. 40, no. 7–8, 2002, pp. 755–64.

12. A. Burke, S. Fraser & F.J. Greene, ‘The multiple effects of business planning on new venture performance’, Journal of Management Studies vol. 47, no. 3, 2010, pp. 391–415.

13. S.C. Perry, ‘The relationship between written business plans and the failure of small businesses in the US’, Journal of Small Business Management, vol. 39, no. 3, 2001, pp. 301–9.

14. A. Gibb & L. Davies, ‘In support of frameworks for the development of growth models of the small business’, International Small Business Journal, vol. 9, no. 1, 1990, pp. 15–31.

15. M. Gruber, ‘Uncovering the value of planning in new venture creation: a process and contingency perspective’, Journal of Business Venturing, vol. 22, no. 6, 2007, pp. 782–807.

16. ‘New study shows six critical business plan mistakes,’ Business Horizons, vol. 46, no. 4, 2003, p. 83.

17. T. Mazzarol, ‘Do formal business plans really matter? An exploratory study of small business owners in Australia’, Small Enterprise Research, vol. 9, no. 1, 2001, pp. 32–45; B. Honig & T. Karlsson, ‘Institutional forces and the written business plan’, Journal of Management, vol. 30, no. 1, 2004, p. 29.

18. C.R. Schwenk & C.B. Schrader, ‘Effects of formal strategic planning on financial performance in small firms: A meta-analysis’, Entrepreneurship Theory and Practice, vol. 17, no. 3 (Spring), 1993, pp. 53–63.

19. J. Brinckmann, D. Grichnik & D. Kapsa, ‘Should entrepreneurs plan or just storm the castle? A meta-analysis on contextual factors impacting the business planning– performance relationship in small firms’, Journal of Business Venturing, vol. 25, no. 1, 2010, pp. 24–40.

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20. S.R. Rich & D.E. Gumpert, ‘How to write a winning business plan’, Harvard Business Review, vol. 63, no. 3, May–June, 1985, pp. 156–66; W.A. Sahlman, ‘How to write a great business plan’, Harvard Business Review, vol. 75, no. 4, July–August, 1997, pp. 98–108.

21. T. McKaskill, Finding The Money: How To Raise Venture Capital, Wilkinson Publishing, Melbourne, 2006, p. 71.

22. B. Barringer, Preparing Effective Business Plans, Pearson Education, New Jersey, 2009, p. 108.

23. M.E. Porter, The Competitive Advantage of Nations, 2nd edn, Free Press, New York, 1998.

24. A. Kotler & D. Armstrong, Principles of Marketing 4th edn, Pearson Education, French’s Forrest, NSW, 2009, p. 21

25. C. Lovelock, J. Wirtz & P. Chew, ‘Designing and managing service processes’, In Essentials of Services Marketing, Prentice Hall, Singapore, 2009, pp. 198–233.

26. J.R. Cornwall, D.O. Vang & J.M. Hartman, Entrepreneurial Financial Management: An Applied Approach, Pearson Prentice Hall, New Jersey, 2004.

27. P.D. O’Hara, The Total Business Plan, 2nd edn, John Wiley, New York, 1995. 28. A Kambil, V. Wei-teh Long & C. Kwan, ‘The seven disciplines for venturing in

China’, MIT Sloan Management Review, Winter 2006, vol. 47, no. 2, pp. 85–9. 29. C. Mason & M. Stark, ‘What do investors look for in a business plan? A com-

parison of the investment criteria of bankers, venture capitalists and business angels’, International Small Business Journal, vol. 22, no. 3, 2004, p. 227.

30. How to Prepare, Present and Negotiate a Business Plan, EPB Publishers, Singapore, 1994.

31. W. Glen & J. Weerawardena, ‘Strategic planning practices in small enterprises in Queensland’, Small Enterprise Research, vol. 4, no. 3, 1996, pp. 5–16.

32. C. Sutton, Strategic Concepts, Macmillan, London, 1998, p. 16. 33. S. Maguire, S.C.L. Koh & A. Magrys, ‘The adoption of e-business and knowledge

management in SMEs’, Benchmarking: An International Journal, vol. 14, no. 1, 2007. 34. A.M. Hormozi, G.S. Sutton, R.D. McMinn, & W. Lucio, see note 11.

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Chapter 8 Appendix

Sample business plan Note: The business plan in this appendix is hypothetical, and is provided solely for the purposes of illustrating the nature and content of a completed plan. The business name, personal details, statistical data and references are fictional; no link with any actual person or organisation is intended.

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198 PART 2 Getting into business

Blueprints Business Planning Pty Ltd

Business plan for the period July 2014 to June 2015

Blueprints Business Planning Pty Ltd Australian Business Number (ABN) 99 999 999 999

135 Central Boulevard Sydney New South Wales, 2000 Australia

Telephone: +61 2 9999 9999 Facsimile: +61 2 9999 9998

Email: [email protected] Internet: www.blueprintsbusinessplanning.com.au

Prepared June 2014

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CHAPTER 8 APPENDIx Sample business plan 199

Contents

Section 1. Executive summary 1.1 Business idea and goals 1.2 Marketing 1.3 Operations 1.4 Finance

Section 2. Background 2.1 Mission statement 2.2 Company history 2.3 Business goals

Section 3. Marketing 3.1 Market research 3.2 Market analysis 3.3 Marketing plan

3.3.1 Products/services and target market 3.3.2 Placement 3.3.3 Promotions and advertising 3.3.4 ICT marketing strategy 3.3.5 Pricing policy

3.4 Evaluation of marketing Section 4. Operations

4.1 Legal and licensing requirements 4.2 Management details 4.3 Organisational structure and staffing 4.4 Professional advisers 4.5 Insurance and security issues 4.6 Business premises 4.7 Equipment required 4.8 Production processes 4.9 Information and communication technologies 4.10 Critical risks/contingency plans

Section 5. Financial projections 5.1 Basic assumptions and information 5.2 Analysis of financial forecasts

5.2.1 Sales mix forecast 5.2.2 Cash flow forecast 5.2.3 Projected profit and loss statement 5.2.4 Owner’s personal expenses 5.2.5 Owner’s personal assets and liabilities

Section 6. Implementation timetable 2014–15 Section 7. Appendix — Research reference sources

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200 PART 2 Getting into business

Section 1: Executive summary 1.1 Business idea and goals The main goal is to establish a small, private (proprietary limited) company that specialises in management consulting services for the small and medium- sized enterprise (SME) sector in Sydney and other cities within the state of New South Wales, Australia. The services to be provided will include prep- aration of business plans, training in small business management skills, and book sales.

The owners plan to begin by employing one person full time (Jessie Jones, a major shareholder) and gradually grow to the point where the business employs three or four people within two to three years of inception. The business intends to generate sales revenue of about A$100 000 and to make a A$2000 profit by the end of its first year of trading.

1.2 Marketing Blueprints Business Planning Pty Ltd will have two key target markets: small business managers (for whom it will prepare business plans, feasibility studies and associated services) and SME support agencies (for whom it will provide contract services, principally training in small business management skills). There are approximately 200 000 SMEs in the Sydney metropolitan area. Market research indicates that there is currently unmet demand for the products we plan to offer. We will promote the business using a variety of methods, including direct mail, telephone canvassing, a Yellow Pages listing, networking, a website and testimonials.

1.3 Operations The business will operate with one employee (Jessie Jones, managing director) at start-up and be based from an office at her home. A minimal outlay of equip- ment and expenses is envisaged at this stage, as most necessary equipment has already been obtained.

1.4 Finance The business will be self-funding. The directors will provide an initial capital injection of A$10 000, and it is envisaged that the company will generate enough funds from subsequent operations to allow it to operate on a ‘no borrowing’ policy unless there is a major change in focus.

Section 2: Background 2.1 Mission statement Blueprints Business Planning Pty Ltd exists to provide business planning ser- vices, business education (training) programs and management advice to small and medium-sized organisations.

The company intends to become known as one of the best business planners and advisers in the Sydney marketplace. We want to be known as an organ- isation that emphasises honesty, accuracy and objectivity in the information we provide to clients; that values confidentiality and sensitivity in all its relations

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CHAPTER 8 APPENDIx Sample business plan 201

with other parties; and that gives tailor-made responses to individual client needs.

In this way, Blueprints Business Planning Pty Ltd seeks to promote the inter- ests of the following. • Clients. By providing these services, we can help our clients achieve success in

the marketplace and realise their own business goals. • The wider community. Helping businesses become more successful ulti-

mately stimulates local economic development, job creation and wealth distribution.

• Our employees. A well-paid, motivated and well-educated staff is essential to ongoing success. In return, employees should expect to receive secure employ ment, to continually expand and improve their business skills, to be encouraged to try new ideas and approaches and to work in a comfortable, encouraging environment.

• The owners of the company. Successful achievement of the company mission should allow the company to operate profitably and to provide a fair return on effort and investment by the owners on a long-term basis.

2.2 Company history This is a new business that springs from the existing work of Jessie Jones as a management consultant (operating as a sole trader) from August 2001 to June 2014. During this time, Jessie provided training programs, mentoring services and a limited amount of business planning to a range of clients.

2.3 Business goals The business’s goals for the short term (next 12 months) are to employ at least one person full-time on a salary of approximately A$42 000 p.a. (gross), to meet all operating expenses and to generate a net profit of at least A$2000 for future investment. The long-term (next two or three years) goals are to establish a viable consultancy service employing up to five people based in Sydney, deliv- ering services in business planning with its own purchased building.

A future exit strategy has been agreed to by the three foundation share- holders/directors, should any of them wish to liquidate their interest in the busi- ness at a later stage. The directors have agreed that, after the end of the third year of trading, any shareholder will have the right to ask for the business to be independently valued; the remaining directors will then have first option to buy out that person’s interest. If they do not wish to exercise this right, the share- holder may sell to an outside party.

Section 3: Marketing 3.1 Market research The following sources were used to prepare this business plan: • Australian Bureau of Statistics • NSW Small Business Advisory Network • personal interviews with several business enterprise centres in and around

Sydney

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202 PART 2 Getting into business

• Institute of Management Consultants, Australia • a brief survey of SMEs that already use outside consultants • other existing management consultancies • a search of the relevant management literature • conversations with several business brokers servicing greater Sydney to estab-

lish valuation methods and benchmarks.

3.2 Market analysis After a review of the industry, the following conclusions were drawn. (a) Industry analysis There is a definite demand for generic management consulting services,

although the industry is still unregulated and ill-defined (Brown 2008, p. 48). Most services provided are aimed at larger corporations since, at the ‘bottom end’, micro-enterprises are too small to afford business plan- ning services. Accordingly, niche opportunities to provide these services best exist among small to medium-sized (mid-range) businesses (Ziericki 2007). A study of Australian SMEs recently showed that most need more training but are unsure where to find this (Australian Bureau of Statistics 2009, pp. 23–4). This need is especially evident among the 200 000 known SMEs in the Sydney metropolitan region (Sydney Chamber of Commerce 2009).

(b) Seasonality It is estimated that business declines in December and January, which rep-

resents the Christmas break and summer holiday period in Australia. (c) Competitors The business’s competitors are very similar to its potential strategic allies.

They include: • other management consultants (especially those who focus on SME

training) • accountancy practices (which also act as advisers to many small firms) • publicly funded business support agencies (such as business enterprise

centres) • commercial training providers.

The Sydney Yellow Pages lists 123 management consultancies, 3000 account- ancy practices, 20 public agencies and 34 commercial training providers in the city. This does not include non-Sydney advisers who are contracted on an ‘as needed’ basis by firms who wish to use their services.

(d) Potential strategic alliances Potential exists to subcontract work from:

• accountants (that is, those who don’t want to do business plans themselves but who do want to offer it as a service to their clients)

• business enterprise centres (such as those who want training courses pro- vided or business plans assessed)

• other management consultants (who may need someone to help if their workload becomes too great).

We intend to focus our efforts on finding a small number of strategic allies (about six) with whom we can form long-term relationships.

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CHAPTER 8 APPENDIx Sample business plan 203

(e) SWOT analysis The information on the previous page was used to develop a list of potential

strengths, weaknesses, opportunities and threats.

Potential strengths Jessie’s substantial SMEs advisory experience Links to NSW Small Business Advisory Network

Potential weaknesses One-person operation at present Minimal track record in external consultancies Little skill in preparing tenders

Potential opportunities Growth in external training programs Growth of ongoing mentoring services Good placement to qualify if sector becomes regulated

Potential threats Competitors Sensitivity of SMEs to economic downturns

3.3 Marketing plan 3.3.1 Products/services and target market (a) Business planning Preparation of detailed business plans, covering all parts of a firm’s activities Target markets:

• Small to medium-sized firms (10 to 100 employees). • Sydney metropolitan area. • Established companies (preferably two years or older). • Approximately 200 000 such firms.

Customer buying motives: • SMEs often need specialist expertise to help in running their firms. • It is often too difficult to do themselves. • Such advice is often needed for organisational survival or repositioning.

(b) Training Short, intensive (one- or two-day) courses on marketing, human resources,

business planning, basic financial management and record-keeping for SMEs Target markets:

• New small business owners and existing owners keen to increase their knowledge.

• Central Sydney metropolitan area. • Sufficient business income (A$200 000+) to be willing to pay for services. • An estimated 5000 new businesses that start trading each year.

Customer buying motives: • Owner–managers of SMEs want short, focused courses that develop their

own knowledge base and competencies. • Such courses allow them to acquire useful skills in different aspects of

management. • The increased knowledge helps them to grow their own business.

(that is, sell books at the end of a particular course).

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Target markets: • Participants in training courses as previously discussed. • Central Sydney metropolitan areas. • Sufficient business income (A$200 000+) to be willing to pay for services.

Customer buying motives: • These books provide more information about materials initially covered in

our training courses.

3.3.2 Placement Since this is a home-based business dealing directly with clients at their prem- ises, no particular distribution arrangements are envisaged as necessary.

3.3.3 Promotions and advertising To start trading, the business already has a number of secure contracts in place. As such, it is not necessary to actively promote the enterprise to the general community. However, it would be useful to alert other potential clients to its existence, with a view to seeking work from them at a later stage. To this end, the following promotional tools will be used by the business: • business cards and letterheads • direct mail followed up by telephone contacts • listing in the next edition of the Sydney Yellow Pages under ‘Management

Consultants’ • promotional literature — a series of A4 sheets about the company covering

staff of the organisation, services provided, the benefits of using the company and a listing of previous clients

• networking — links to other practising professionals through membership of the Institute of Management Consultants and other local business bodies

• testimonials — a file of positive testimonials from clients that can be used as references for future marketing

• public relations — as a start-up, we do not have the luxury of a significant focus on many public relations initiatives. However, we will do what we can to ensure we are good corporate citizens and as such will have a triple bottom line perspective to external communications. This will need to be backed up with action on the ground (operations and finance).

3.3.4 ICT marketing strategy There are few serious start-up businesses these days who achieve sustained suc- cess without having an effective ICT strategy. We are talking here about some- thing broader than just our e-commerce strategy or our website content; there is a need to include other forms of ICT that inform, service, retain, develop and generally communicate with a range of stakeholders. The range of tools used includes: • internet — a website will be created, displaying inbound links from other

referring entities (such as government information agencies and online direc- tories) as well as resources for other online information for customers. We will seek expertise to ensure the website is search engine optimised so that small businesses seeking advice in Sydney can find us online easily. Once built, the website will be designed so that the content can be quickly updated by the

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owners or approved employees without need to rely on the developer to effect minor changes.

• social media — the business will employ some select social media tools to engage in a two-way conversation with key clients as a way of generating referral business and reinforcing existing relationships.

• software — the business will use video streaming software (and associated hardware) to develop and disseminate information in-house that educates the market about what we offer. We will also use customer relationship manage- ment software which will help us maximise client value and repeat business (providers yet to be determined). Because our business places us on the road (mobile) a great deal of the time we will also utilise basic blogs and wikis for internal marketing-related communication purposes.

• hardware — we will utilise smart phones and tablet PCs as sales and marketing tools for conveying concepts to clients in the field and for internal communi- cations whilst out of the office.

3.3.5 Pricing policy Charge-out rates for tendered or casual consulting and training services will be A$120 per hour, which is the current market rate (Jones 2012 p. 1). The stan- dard price of preparing a basic 10-page business plan will be A$2000; this figure is comparable to prices charged by other private sector business planners (both fees exclude GST). Any specific costs (such as travel and accommodation) will be additional. These prices are set towards the higher end of those charged within the commercial training sector, but well within the acceptable price range for management consulting services. Terms of payment will be 10 working days (two calendar weeks) and accounts will be tendered on the day that the services are provided.

3.4 Evaluation of marketing The effectiveness of our marketing strategy will be assessed on a six-monthly basis by analysing sales data to see what draws the company’s work. For example, if most work is coming from the distribution of promotional brochures, then this source of promotion will be seen to be effective.

Section 4: Operations 4.1 Legal and licensing requirements (a) Business name and legal structure Blueprints Business Planning Pty Ltd (Australian Business Number

99 999 999 999) is a proprietary limited company. The company structure has already been registered and established with three shareholders:

Stephen Molloy (40% shareholding) Jessie Jones (40% shareholding) Andrew St John (20% shareholding)

who also serve as the directors of the entity.

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(b) Operating laws and licences After checking with the Small Business Development Corporation’s

Business Licence Centre, it appears that no specific licences are needed to operate this business, except for a home-based business permit from the City of Sydney.

4.2 Management details The managing director of the company will be:

Jessie Jones Home address: 135 Central Blvd, Sydney NSW 2000 Ph: (02) 9999 9999 Fax: (02) 9999 9998 Date of birth: 14 August 1970 Qualifications: Bachelor of Business (distinction) Experience: Owner of café, 1992–2001 Management consultant and owner of Jones

Consultancies, 2001–14

4.3 Organisational structure and staffing Initially, the following tasks of the business will be done by the managing director: • consulting • training • servicing board of directors • marketing and public enquiries • bookkeeping and administration of the enterprise.

Two casual trainers will be employed to help deliver the training programs, and to help conduct research and write business plans for clients. Both will report directly to the managing director.

The following is an intended final staffing structure as part of the business’s long-term (two to three years) goals: • Managing director — business consultancy Duties: Provide business planning, mentoring and occasional training to

clients; undertake marketing of the business; provide administrative services and strategic development of the firm

Salary: Set at approximately A$42 000 per annum in Year 1, rising to A$50 000 by the end of Year 2

This role will be filled by Jessie Jones. • Consultant — general business planning Duties: Conduct business planning and general management consultancy

work for clients; undertake office management Salary: A$45 000 per annum Qualifications required: Aptitude for dealing with the public; small business

background; experience in preparing and evaluating business plans; business degree useful, but not essential.

• Consultant — training activities Duties: Prepare and deliver training courses Salary: A$45 000 per annum

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Qualifications required: Aptitude for dealing with the public; small busi- ness background; training qualifications (or willingness to obtain); proven ability to deliver effective training sessions; formal educational qualifications preferred.

More detailed job descriptions, employment contracts and ongoing perfor- mance appraisal mechanisms will be needed during the second year of oper- ations, or when the employment of full-time staff other than Jessie is necessary (Anderson & James 2008, p. 2). This information must be compiled and entered into that year’s business plan. When the business does reach the stage of employing more than one full-time person, it will also use a team-based approach in dealing with specific projects, with different staff members leading the rest of the team on particular assignments.

Training A minimum of 20 hours professional development must be undertaken by each employee each year, as such training is needed to keep abreast of general devel- opments in the field. One area where specific knowledge is needed is in the prep- aration of tender submissions.

Professional associations The managing director will seek to join the Institute of Management Consultants of Australia (IMCA).

4.4 Professional advisers Accountant Sunshine Street Accountants 4 Sunshine Street, Midland NSW 2050 Ph: (02) 7999 9999 Fax: (02) 2222 9999 Email: [email protected] Lawyer Moot & Moot Partners Suite 1, 1 Main St, Sydney NSW 2002 (Postal address: PO Box 1, Sydney NSW 2045) Ph: (02) 8999 9999 Fax: (02) 3999 9999 Email: [email protected] Insurance broker To be determined Bank account MegaBank Australia 5 St Gregory Tce, Sydney NSW 2000 Manager: Janine Gregory Ph: (02) 2222 3333 Fax: (02) 2222 3334 Email: [email protected] Bookkeeper To be determined. This will not be sought unless the managing director can no longer provide this service.

4.5 Insurance and security issues The following insurance will be required for the business: • professional indemnity • public liability

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• workers compensation • director’s liability (possibly).

It is estimated that the combined cost for these insurances will be approxi- mately A$2500 in Year 1 of trading.

Necessary security precautions for the business property and equipment include the provision of a locked filing cabinet for client records. Online security for the website will be needed, and electronic data will be backed up regularly and stored off-site.

4.6 Business premises (a) Location

The business will be based at Jessie’s home at 135 Central Boulevard, Sydney NSW 2000. A separate room that can be used as a dedicated office is available, with all required furniture and equipment. The property con- cerned is owned by Jessie and her husband, so it has security of tenure indefinitely. No rent is payable and no special equipment or fixtures are required.

Training courses will be conducted at specialised venues that can be hired on a daily basis.

(b) Council and government rules A home-based business licence will have to be obtained from the City of Sydney. No other licences apply to the project. Trainers and business plan- ners do not need to be licensed.

(c) Ability to access target market Since most services will be provided on-site at the customer’s premises, the office will easily allow the business to access its target markets. The office is located close to most major roads and freeways. Clients will be scattered throughout the metropolitan area, therefore, the firm will need to travel to the client’s preferred locations.

4.7 Equipment required The equipment required for the business will be: • answering machine • telephone line • mobile phone • computer, printer and scanner • high-speed internet access • filing cabinet • table • ergonomic office chair.

Quotes from suppliers indicate that the total cost of these items will be approximately A$11 500. All materials required for the proposed training pro- grams (such as TV, video and whiteboard) are provided by commercial training venues. Likely future needs If future growth necessitates the use of a fax/modem, the existing home phone line will need to be replaced with a business phone line. Future computing needs will probably include an upgraded system with wireless internet.

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4.8 Production processes An operations manual, updated every six months, will explain procedures and processes within the office. It will also allow the company to apply for quality assurance certification at a later stage, if it wishes to do so.

4.9 Information and communication technologies The business will use Microsoft Office® professional suite to manage most internal data and document handling needs and, in addition, will purchase MYOB® basics for our accounting software. We will use customer relations management tools from Salesforce.com for developing a knowledge base of our existing and future clients and an online communications and E-commerce toolset developed by Woocom.com.au. Selected ‘lead user’ clients will also be given access to a private wiki that we hope will involve them in the development of process and product improvements over time.

4.10 Critical risks/contingency plans The critical risks facing this business and contingencies to deal with them are: • liability — to be covered by professional indemnity insurance • injury to the managing director — to be covered by workers compensation • excessive workload — other directors may take on work, or it may be redi-

rected to other consultancies with whom a strategic alliance has been developed.

Section 5: Financial projections 5.1 Basic assumptions and information (a) Calculation of income and expenses

Expenses have been calculated based on market research and the manager’s own knowledge of costs. It is assumed that all accounts revenue will be paid within the month issued (so there is no delayed income on a monthly basis). No provision has been made for the impact of inflation or increases in costs. Pricing and costs for the second year of operations will be reviewed in next year’s business plan to take these factors into account. Depreciation of equipment items purchased in July 2014 is calculated using the straight-line method at 10% per annum of total initial outlay. Book sales assume a gross cost of goods of 60% (that is, a A$20 gross profit on sales price of A$50). Only one year’s forecasts have been provided due to the diffi- culty of forecasting over a longer time period.

(b) Financing of the business The directors will provide an initial capital contribution to the business according to their shareholdings — Stephen Molloy A$4000, Jessie Jones A$4000, Andrew St John A$2000. Sales income for July 2014 is based on commitments or early orders from prospective clients, thus providing initial cash flow and removing the need for short-term debt financing. The overall financing strategy is to operate, wherever possible, with a cash surplus in the bank account at all times. Bank loans will not be required. If necessary, the directors will reduce the wages paid to them during times of cash flow difficulty.

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The bank account required for the business is one that: • has mobile phone/internet banking access • pays interest on sums below A$5000 • provides monthly bank statements (for reconciliation with accounts) • has credit card and electronic funds transfer facilities. For security reasons, a minimum of two directors will be required to verify all accounts.

(c) Distribution of profits Profits in Year 1 will be retained in the business. In future years, annual net profit after tax will be divided in the following manner: three-quarters will be paid to the shareholders at the end of the financial year in accordance with their shareholdings, and the remaining quarter will be kept as retained earnings. The retained capital will be used for reinvestment in the business, mainly to upgrade equipment and to meet unforeseen contingencies. If the business is highly profitable, some of the retained capital may eventually (in two to three years’ time) be used to help fund the purchase of permanent business premises.

(d) Goods and services tax No GST figures are shown in any of the financial documents; in other words, all forecasts are net of tax.

(e) Loans The firm has no current loans or debts.

5.2 Analysis of financial forecasts (a) The owners have decided to use net profit margin and projected market and

earnings-based valuations as the main indicators of the firm’s performance. Based on the projections made in this document, it is estimated for Year 1 that this will be:

Net profit margin % Net profit before tax

Sales tur =

nnover $2330

$103 750 2.24%= =

This figure is relatively low and below industry norms, according to a recent study by Jones (2012), but is not unusual for a business in its first year of trading. We expect margins to increase substantially in Year 2 and Year 3. In future years, as more data are gathered, it will also be possible to use other ratios to help analyse the financial performance of the firm.

(b) Break-even point Assuming that cost of goods sold is the only variable cost, the contribution margin is equal to the projected gross profit margin (94%).

Projected fixed costs $95 280

Break-even point

iin dollars Fixed costs

Contribution margin =

= $$95 280

0.94 $101 362=

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(c) Applying market-based and earnings-based valuations to a start-up While we are in the start-up phase, we do not expect our returns to be competitive. However, by benchmarking against industry norms we are ensuring we are focused on what we need to do to be competitive. We understand through personal enquiry with Sydney West-Side Small Business Professional Brokers Pty Ltd that several businesses similar to ours have been offered for sale at an average industry multiplier of 0.8 times annual turnover this year in the greater Sydney area. Using this benchmark, our business may theoretically be worth as much as $85 880 at the end of the first year.

Market based selling price (revenue multiplier) = $107 350 (Sales) × 0.80 (multiplier) = $85 880.

In the medium term, revenue multipliers may be a quick, easy and useful measure. However, during the start-up phase a better measure of perfor- mance may be to calculate a price that reflects return on investment (ROI). The ROI expected in this industry is estimated (by comparison with three other similar businesses for sale) to be in the order of 75% before allowing the manager’s salary (Jessie). Using this information to calculate the theoretical sale price suggests a much lower outcome.

Earnings based selling price (ROI) = $2330/0.75 = $3106.67

This means that in year one, the business is worth as little as $3106.67, effectively making it not at all saleable. Of course, both of these valuation methods have problems when applied to the first year of a start-up business, so how will we account for this apparent problem of newness?

Over the course of the first few years we would expect the ROI-derived selling price to increase to at least on par with the revenue multiplier method once the businesses start-up costs have washed through the accounts. In today’s dollar terms, if the turnover number was not increased that would mean a target net profit of $64 410 is required.

$85 880 (required sale price) × 0.75 (expected ROI) = $64 410 net profit

When we exceed that net profit target (based on turnover of $107350) then we will be doing better than the market would require in terms of net mar- gins. Projecting out our profits beyond the first year could be done to predict when this might occur, but we do not feel this is credible given our lack of data as a start-up. In future years we will certainly look to understand the trends and forward-plan to a more strategic time frame.

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CHAPTER 8 APPENDIx Sample business plan 215

5.2.3 Projected profit and loss statement (All figures are in Australian dollars, A$)

Blueprints Business Planning Pty Ltd PROJECTED PROFIT AND LOSS STATEMENT

for the period July 2014 to June 2015

Revenues

Sales revenue 103 750

Less: Cost of goods sold 6 150

Gross profit 97 600

Expenses

Accounting/legal services 2 500

Advertising 3 180

Bank fees 180

Equipment purchases 11 500

Equipment leases 0

Insurance 2 500

Light & power 0

Loan repayments 0

Motor vehicle — fuel 600

Motor vehicle — other costs 0

Petty cash 300

Postage, printing & stationery 400

Rent 0

Repairs & maintenance 400

Staff wages 24 000

Staff superannuation 6 000

Staff director’s wages 41 320

Telephone 600

Other 650

Depreciation 1 150

Total expenses 95 280

Net profit $2 320

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216 PART 2 Getting into business

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CHAPTER 8 APPENDIx Sample business plan 217

5.2.5 Owner’s personal assets and liabilities (All figures are in Australian dollars, A$)

Blueprints Business Planning Pty Ltd OWNER’S PERSONAL ASSETS AND LIABILITIES: JESSIE JONES

as at 1 July 2014

Assets

Own house (market value) $700 000

Other real estate (market value) 0

Motor vehicle (insured value) 25 000

Cash (on hand or in bank) 6 000

Superannuation 84 000

Furniture & personal effects (insured value) 25 000

Other (list if appropriate) 0

Total assets 840 000

Liabilities

Outstanding mortgage (on home) 201 500

Outstanding mortgage (on other real estate) 0

Personal loans 0

Credit cards 100

Current bills 0

Other debts 600

Total liabilities 202 200

Personal worth (total assets minus total liabilities) $637 800

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218 PART 2 Getting into business

Section 6: Implementation timetable, 2014–15 2014

July Apply for home-based business licence Open business bank account Prepare letterheads, business cards Send copy of business plan to accountant and lawyer (for their information) Obtain all relevant insurance policies

August Start direct mail campaign Review contents of website

September Start compiling operations manual Visit accountant re: progress to date, recordkeeping Enquire re: computing equipment required

October Enquire with Institute of Management Consultants (Australia) re: membership November Prepare promotional brochure December Print promotional brochure

2015 January Staff/directors’ retreat to review progress to date

Review business plan Review effectiveness of marketing plan and analyse source of sales to date Review operations manual

February Attend Small Business Development Corporation course on managing business growth

March Implement benchmarking of advertising by outside adviser April Update website May Visit accountant re: end-of-financial-year returns June Write business plan for 2015–16

Review and write new marketing plan

Section 7: Appendix — Research reference sources Anderson, Z. & James, R., Small Business Employment Guide, Smiley & Sons, Sydney,

2008. Australian Bureau of Statistics, Training Needs in Australian SMEs, Cat. No. 2222.8,

ABS, Canberra, 2009. Brown, B., ‘Revisiting new enterprise opportunities’, Micro-Enterprise Australia, vol. 6,

no. 3, September, 2008, pp. 42–9. Jones, J., ‘Consultancy rates — an overview’, Management Techniques and Issues, no. 5,

January, 2012, pp. 1–5. Small Business Development Corporation, Opportunities for New Beginnings, SBDC,

Sydney, 2009. Sydney Chamber of Commerce, Survey of Small Organisation Professional Development

Needs, Sydney Chamber of Commerce, Sydney, 2009. Ziericki, B.B., Consulting: An Overview of the Personal Services Sector, available online at

Management Myopia website www.managementmyopia.com, 2007.

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