MODULE: 3
BUSINESS PLANNING PROCESS
Meaning of business plan
- Written document prepared by the entrepreneur that describes all the relevant external and internal elements involved in starting a new venture.
- Integration of functional plans like marketing, finance, manufacturing, HRD, etc
- Addresses short/term decision making
- Integration and coordination of effective business objectives and strategies.
- Road map that addresses 'where am I now, where am I going? And how will I reach
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Scope of Business Plan depends on Interested parties like
- Entrepreneur
- Investor
- Suppliers
- Buyers
- Other stakeholders like employees, consumers, regulatory bodies
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Objective/importance of
- *To give direction to the vision formulated by the entrepreneur
- *To objectively evaluate the prospects of business
- *To monitor the progress after implementing business plan
- *To persuade others to join business
- *To seek loans from financial institutions
- *To visualize concept in terms of market availability, organizational, operational, and financial feasibility
- *To guide entrepreneur in actual implementation of plan
- *To identify actual strength and weakness of plan
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Elements/Components of
- Introduction
- Executive summary
- Market/industry/environmental analysis
- Description of venture
- Production plan
- Operations plan
- Technical plan
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Elements/Components of
- Marketing plan
- Organisational plan
- Human resource plan
- Social plan
- Assessment of risk
- Financial plan
- Schedule/milestones
- Appendix/annexures/bibliography
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Requirements/guidelines for developing a Business Plan
- Keep it short and sweet
- Focus
- People and Roles
- Avoid jargon
- Information based on study
- Realistic and objective
- Proper mission statement
- LT & ST goals
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Advantages of BP
- Analysis of ideas on paper
- Help in convincing others
- Reduction in emotional bias
- Provides SWOT analysis
- Justifies one's ideas/plans
- Develops consistent strategy
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Advantage of BP
- Achieve one's commitment
- Feasibility study
- Action plan
- Selling tool
- Fundraising
- Evaluating progress
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Disadvantages of BP
- Discouragement
- Cutting corners/short cuts
- Takes Time
- Tunnel vision
- Expense
- Inflexibility
- Obsolete
- Lack of accountability
- Poor implementation
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Why do business plans fail
- Improperly described plan
- Poorly defined strategies
- Lack of details on job responsibilities and operations schedules
- Unprofessional goals and objectives
- Incomplete plan
- Not measurable
- Inadequate commitment
- Lack of experience
- No sense of threats and weaknesses
- No proper customer base
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BUSINESS PLANNING PROCESS
BUSINESS PLANNING PROCESS
Idea generation
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Environmental scanning
Feasibility analysis
Project report preparation
Evaluation, control and review
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1. IDEA GENERATION
It is the first step in the business plan process. This step differentiates the entrepreneur from usual business. The entrepreneur may come up with a business idea or may bring in addition to existing product in the market.
Sources of new idea for entrepreneurs
- Consumers/customers
- Existing companies
- Research and development
- Employees
- Dealers, retailers
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2. Environmental scanning :
Environmental scanning which includes analysis of external and internal environment that affects business idea.
- External environment comprises of
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Socio cultural appraisal : culture and tradition existing in society. It is comprised of values and beliefs of people which determines the acceptance of product by customer in the market.
Technological appraisal : it assess what technological options available to convert an idea to product. It also provides an brief overview of technological aspects.
- Economic appraisal : it assess the status of society in terms of economic development, per capita income, national income, consumer pattern in the business.
- Demographic appraisal : it assess the population pattern of given geographic area. Which includes sex, age profile, distribution etc.
- Government appraisal : it assess the various legislation, policies, incentives formulated for particular industry. Flexibility of these determine ease for entrepreneur in terms of opening venture in particular area.
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- Internal environment :
- Raw material : it refers to in terms of availability of material required for the process of production. If material availability is at distance place and expensive then entrepreneur should give thought to the same.
- Production/ operation : it assess the availability of various machineries, equipments, tools and technology that would be required for production.
- Finance : it studies total requirement of finance in terms of start up expenses, fixed expenses, recurring expenses etc.
- Market : refers to study on potential customers and target customers in market.
- Human resource : refers to demand and supply of required human resource in market and estimated expenses to be incurred on human resource.
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3. FEASIBILITY ANALYSIS
- Marketing plan : lays down the strategies of marketing which can lead to success of business plan. Strategies in terms of marketing mix which includes (product, place, promotion) which determines the potential customers for product in the market.
- Production plan/operational plan : production plan is drafted for manufacturing sector where as operational plan is designed for business into service sector. It comprises strategies on parameters such as location layout, availability of material, human resource etc.
- Organizational plan : defines type of ownership partnership company, sole trading concern, family business, private public limited company etc.
- Financial plan : financial plan indicates the requirement of funds for proposed business enterprise which includes fund flow, cash flow statement, break even point, projected balance sheet, profit-loss statement.
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4. Project report preparation :
Project report is a written document that describes step by step strategies involved in starting and running business.
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5. Evaluation, control and review :
As company operates in dynamic environment, company has to monitor and review strategies and policies to stay in line with competitors existing in market.
MARKETING PLAN
MARKETING PLAN
- Marketing plan refers to plan that describes market condition and strategy related to how product services will be distributed, priced and promoted in market.
- INDUSTRY ANALYSIS : prior to preparation of market plan entrepreneur are required to conduct industry analysis section of the business plan. Industry analysis provides information on national and local market that affects market operation of company. Industry analysis involves collecting information about competitors which is available in form of secondary data newspapers, article, websites, catalogs, promotion interview with distributors, customers etc.
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STEPS INVOLVED IN MARKETING RESEARCH
1. Define purpose and objective
2. Gathering data from secondary sources
3. Gathering data from primary sources
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STEPS IN MARKETING RESEARCH
- Defining the purpose or objective entrepreneur should be clear about the requirement of information required by the business sources through which required data will be collected, whether required data will be primary or secondary source of information.
- Gathering data from secondary sources Secondary source of information is available through magazines, new papers, libraries etc. It usually refers to data available about competitors strategy and their position in the market.
- Gathering information from primary sources primary data required for market research collected from people directly through methods such as observation, networking, interview, focus group, exhibition etc.
- Analyzing and interpreting results : results should be evaluated and interpreted depending on the objective of research process. Summarizing results will provide preliminary insights about competitors market position and their image in competitive environment.
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CHARACTERISTICS/IMPORTANCE OF MARKETING PLAN
- it should provide strategy for accomplishing company mission and goal.
- It must provide for the use of existing resources and allocation of all equipment , financial resources, human resources in company.
- It should provide for continuity so that each and every marketing plan can successfully meet long term goals and objectives of company.
- It should be simple and specific in nature so as to provide appropriate roadmap in terms of plan market strategy for company.
- It should focus on criteria to be evaluated to assess marketing success of the company.
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MARKETING PLAN- STEPS
DEFINING THE BUSINESS SITUATION
DEFINING THE TARGET MARKET (OPPORTUNITIES AND THREATS)
CONSIDERING STRENGHTS AND WEAKNESS
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ESTABLISHING GOALS AND OBJECTIVES
DEFINING MARKETING STRATEGY AND ACTION PROGRAM
PRODUCT PRICING DISTRIBUTION PROMOTION
BUDGETING MARKET STRATEGY
IMPLEMENTATION OF MARKET PLAN
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MONITORING PROGRESS OF MARKETING ACTIONS
STEPS IN PREPARING MARKETING PLAN
- Defining business situation refers to understanding past and present business achievements of venture. It give basic insight about scenario persisting in market, response of customers towards venture in market, and helps in predicting customer acceptance of company product in market.
- Defining target market : target market refers to group of potential customers towards which venture aims its market plan. Knowledge of market will provide basis for determining appropriate market action strategy to meet needs of customers. Target market also includes market segmentation which involves process of dividing market into definable and measurable groups for purpose of targeting market strategy.
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- Considering strength and weakness : strength of business refers to core areas which company is specialized in which may be abundant experience of company in similar area of business and weakness may be in terms of production capability, or layout which permits limited space for equipment and operation.
- Establishing goals and objectives : marketing goals of the company should be clearly specific in nature as it has to clearly indicate about nature of product, target customers, promotion , advertising support etc.
- Defining marketing strategy and action program refers to specific activities outlined to meet the various business plan objectives and goals.
- Product and service : indicates description of product or service to be marketed in the new venture.
- Pricing : refers to price to be charged for product in market before which company is required to consider various aspects such as cost, margin, competition.
- Distribution : refers to means through which product will be made available to customer in market which involves decision relating to nature of product distribution channel, middlemen etc.
- Promotion : refers to various channels through which entrepreneur will advertise company product to customers in market.
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- Budgeting marketing strategy : After drafting marketing plan entrepreneur is required to estimate total expenses to be incurred in process of implementing market plan. Expenses of marketing plan should be in line with planned expense of entrepreneur.
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- Implementation of marketing plan : marketing plan should be implemented in the company should be informed to the workforce involved in marketing activity, it acts as guiding element to direct on strategies which will make marketing process effective.
- Monitoring progress of marketing actions : marketing of plan involves tracking specific results of marketing effort. Sales data of product, data gathered by market survey are few methods of monitoring progress of marketing plan.
Elements of Marketing Plan
- Executive summary
- Business overview
- Target market
- Goals
- Pricing, positioning and branding
- Market strategies
- Implementation tactics
- Budget
- Evaluation of results
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Importance of MP
MP leads other plans because:
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- Overall direction
- Marketing goals
- Business environment
- Target and tactics
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PRODUCTION PLAN
PRODUCTION PLAN
- Production plan is the process of converting input into output through a conversion process.
- The inputs are in the form of land, labour, material, machinery, capital and information.
- Transformation takes place through machinery in manufacturing unit and through employee skills in service sector
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Importance of production plan
- Better service to customers
- Fewer rush orders
- Better inventory control
- Effective use of equipment
- Reduced idle time
- Better morale
- Lower capital requirement
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Dimension of production plan
Plant location Plant layout Inventory management Monitoring stock turn and coverage Quality management Total quality management
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DIMENSION TO BE COVERED FOR PRODUCTION OR OPERATION PLAN
- Plant location : refers to geographic location where the infrastructure of company will be built and operations of the company will take place. Following aspects should be taken care of while choosing plant location :
- Vicinity to raw materials
- Availability of raw materials
- Availability of labour
- Proximity to market
- Climate condition
- Cost of location
- Tax, subsidies and loans
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- Plant layout : is pattern in which space was arranged in order to utilize the machinery, equipment, and manpower. Effective design of plant layout reduces unnecessary movement of employees and helps in effective utilization of time and resources in company. Variables considered while planning plan layout :
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- Proper utilisation of space
- Proper light & ventilation in all areas of premises
- Ensure smooth flow of operation
- Supervision can be carried out in smooth manner
- There are provision for emergency exit
- There is flexibility to introduce changes in future
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- Inventory management : inventory management refers to maintaining inventory in form of raw materials, packing materials, WIP, adequate order to meet business requirements.
- Monitoring stock turn and coverage : monitoring individual stock items to identify fast and slow movers depending on the industry.
- Quality management system : quality management refers to maintaining quality in terms of product produced in company. As customers these days are getting conscious about quality, day by day maintaining quality standards in product will help in building company image and build customer loyalty to company/products.
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- Total quality management : management focuses on quality improvement through prevention of problems and errors. It requires continuous monitoring and control of product performance and quality etc.
- Budgeting production plan : depending on COGS per quantity, projected cost of production at any stage can be estimated and amount of production and budget depends upon the capacity of production unit.
Factors for production plan
- Market forecast
- Inventory control
- Availability of resources
- Standard operating procedures
- Risk factors
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ORGANISATION PLAN
ORGANIZATIONAL PLAN
- Organizational plan involves deciding the type of ownership that entrepreneur intends to form. Nature of planning , organizing, leading and controlling will be determined by nature of business or form of ownership
- Process by which an organisation creates procedures and actions to achieve stated objectives
- List of work plan, structures, responsibilities, relationships, responsibilities, accountabilities etc
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Aspects of org plan
Focus/important areas:
Forms of ownership
Designing org structure
Job design
Manpower planning
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Importance of org plan
- Gives Focus to work and resources
- Identifies real needs of clients
- Reveals what should no longer to be delivered
- Legitimises work of organisation
- Provides roadmap to organisation's growth
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STEPS IN ORGANIZATIONAL PLAN
- Developing management team : refers to set of employees employed in the company who are in charge of managing the activities on the operating part of organization.
- Legal form of organization : refers to composition and existence of business. Business may be proprietorship, partnership or corporation form of business. Three forms of business are :
- Corporation is legal entity that is run by stock holders having limited liability. It is regulated by the statute and treated as separate legal entity for liability and tax purpose.
- Proprietorship : is form of business with single owner has unlimited liability, controls all decisions, and profit.
- Partnership : two or more individuals having unlimited liability who have pooled resources to own a business
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- Ownership : it refers to pattern of investment and control of owners in company, which includes conditions relating to sharing of profit and business
- Liability of owners : of business covers two aspects either members of business will have limited or unlimited liability depending on legal form of business agreed by partners.
- Costs of starting business: refers to expenses incurred in starting the business and proportionate contribution from every member of business sources through which required finance for business will be raised
- Continuity of business : refers to question of who will take over business operations in future and what will be members role in coming future.
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- Transferability of interest : entrepreneur will have two options in relation to transferability of interest. Owner may transfer his interest after assessing credibility of member in business or may transfer interest with his own wish.
- Capital requirement : refers to amount of capital required to start up business venture, sources through which required finance for company will be obtained, what will be contribution of members or the owner towards business
- Management control : it refers to control of business in the hands of an individual person or several members in business. It also comprises power of members in terms of decision making and guiding business activity in company
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- Distribution of profit and loss : profit of the firm may be shared as per the terms and conditions agreed by the members of business loss or liability of individual depends on form of business agreement of partner with business
- Tax attributes for forms of business advantage and disadvantage will vary in accordance with form of business proprietorship and partnership profit and loss of business is considered same as that of individual as in corporation as business is treated as separate entity tax is laid on business and earning of individual separately.
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- Designing the organization : it comprises of clear and explicit indication to the members of organization as to what is expected from them expectation are grouped in following areas :
- Organization structure refers to task, responsibilities and accountability of every member in the business
- Planning, measurement and evaluation of set to communicate goals and strategies to attain goals in business
- Rewards : forms of rewards and yardstick basis which employees will be rewarded in company.
- Selection criteria refers to guidelines for selecting employees in company
- Training : refers to determining skill requirement of employees in company and accordingly design training program for employees in company.
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- Building the management team : this process involves to see that strategy of business should be in line with objective of the company management team of the company should be role model for employees in company accordingly plan and guide employees to organization goal attainment. Management team of the company should be flexible to new techniques and innovation in the company Management team should focus on efficient employees in company and develop core values which guide and regulate employees behavior and attitude in company
- Role of board of directors : board of directors in the company are required to review operating and capital budget, developing long term strategic plan for growth and expansion, supporting day to day activities, resolving conflicts among owners or shareholders, ensuring proper use of assets, developing new source of information for entrepreneurs
- Board of advisors and organization : board of advisors are not permanent employees of company. They are set of expertise who advise business in terms of management and technical issues in company
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Steps in preparing org plan
- Objectives
- Design team
- Current processes
- Tasks and functions
- Current structure
- Identify changes in structure
- New org chart
- Implementation plan
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FINANCIAL PLAN
FINANCIAL PLAN
- It studies total requirement of finance in terms of start up expenses, fixed expenses, recurring expenses etc.
- Financial plan indicates the requirement of funds for proposed business enterprise which includes fund flow, cash flow statement, break even point, projected ratio, projected balance sheet
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Financial Plan
- Fin plan describes activities, resources, equipment and materials needed to achieve objectives and the timeframes involved
- Can be a budget outlining future income, expenditure and investments for further expansions
OPERATING AND CAPITAL BUDGET
PRO FORMA OF INCOME STATEMENT
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PRO FORMA OF CASH FLOW
PRO FORMA BALANCE SHEET
BREAK EVEN ANALYSIS
PRO FORMA OF SOURCES AND APPLICATION OF FUND
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Operating and capital budget : entrepreneur must develop an operating and capital budget first. Capital budget refers to capital expenditure involved in the project operations budget refers to operating expenses like utilities, salary, depreciation, insurance, advertising etc. Projection is usually phased in a monthly basis
Proforma income statement : refers to projected gross profit calculated from projected revenues minus projected costs. costs should comprise of COGS, and operating expenses above. Taxes are deducted from gross profit to give net profit
Proforma cash flow : refers to projected cash available calculated from projected cash receipts minus projected cash dismemberment. It is of difference between actual cash receipts and payments. It is not the same as profits.
Often calculated from profits by adjusting depreciation, account receivables, inventory, prepaid expenses, accounts payables and activities like capex, debt and dividend payments
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Proforma of balance sheet : summarises projected assets, liabilities, and net worth of venture. Balance sheet represents the position of the business at end of year.
Break even analysis : Entrepreneur in initial stage is required to know when profit making achieved which will help him understand financial potential of a start up business. It is useful technique to analyze how many units have to be sold in order to break even. Break even is volume of sales where venture neither makes profit nor loss. BE=Overheads/margin
Proforma for sources and application of funds : summarizes projected source of fund available to the venture and how these funds will be distributed.
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