1. Copyright Atomic Dog Publishing, 2005 Small Business Management: A Planning Approach Joel Corman Suffolk University, Emeritus Robert Lussier Springfield College Lori Pennel Bunker Hill Community College

2. Copyright Atomic Dog Publishing, 2005 CHAPTER 5 The Business Plan PART 2 Business Planning

3. Copyright Atomic Dog Publishing, 2005 5-1 Why the Business Plan Is Important Reason to develop a formal business plan  40.1% of all new businesses fail in the first five years.  90% of the business failures are due to poor management decisions. Business plan is a written description of the firm, its objectives, and the steps necessary to achieve them. Planning is fundamental to all endeavors, and indicates what you are going to do and how you are going to do it. A business plan enables you to predict your firm’ profits.

4. Copyright Atomic Dog Publishing, 2005 5-1 Why the Business Plan Is Important (contd.) For an ongoing concern, a business plan can be used as a forecasting tool for future expansion and development. A business plan includes:  A thorough explanation of the product or service that the business will provide  What market will be served  Where the business will be located  How the business will be organized  Why this product or service will satisfy customer needs  Why this business will be successful  The potential revenue, expenses, and profits  The possible expansion of the business in the future

5. Copyright Atomic Dog Publishing, 2005 5-1 Why the Business Plan Is Important (contd.) Thoroughly analyzes the business as a whole and present potential problem areas Provides an analysis of each aspect of the business Reveals preciously concealed problems as well as potential profit areas Provides projections of costs, market share, production, and profits

6. Copyright Atomic Dog Publishing, 2005 5-2 Developing the Business Plan A business plan consists of:  Introduction  Strategy formation  The accounting function  The marketing function  Location and layout  The production/operations function  The human resources function  The financing function  Controls  The executive summary

7. Copyright Atomic Dog Publishing, 2005 5-2a Introduction Describes the type of business that you intend to conduct. Plan should indicate whether it is a start-up or an expansion plan. The legal form of the business must also be described. Management is the ability to accomplish objectives through the efficient use of people, capital, and equipment:  Include the organization chart with resumes of the management team  Detail all the primary operations, production, accounting, etc.

8. Copyright Atomic Dog Publishing, 2005 5-2a Introduction (contd.) Sample organization chart

9. Copyright Atomic Dog Publishing, 2005 5-2b Strategy Formation Strategy is your design to cope with adversities. Strategy is the managerial game plan for directing and running the business. Recognizes your strengths and weaknesses Present your goals  Helps determine the growth rate to expect which should be in line with the industry standards

10. Copyright Atomic Dog Publishing, 2005 5-2b Strategy Formation (contd.) Sample non-corporate organization chart

11. Copyright Atomic Dog Publishing, 2005 5-2c Accounting The primary function of accounting is to determine where your business is at any point of time and to determine the profitability. Accounting is the systematic recording of the firm’s income and expenditures in order to determine its financial position. Balance sheet is a snapshot view of the financial value of the firm’s assets, liabilities, and net worth at a particular point in time. Income statements show, over a specific time period, all the revenues and expenses that result in the profit or loss from business transactions.

12. Copyright Atomic Dog Publishing, 2005 5-2c Accounting (contd.) Cash flow statement shows the flow of dollars from receipts into the business and expenditures that the business made. Capital asset list is a statement that includes the operating equipment of a firm ad its corresponding dollar value.

13. Copyright Atomic Dog Publishing, 2005 5-2d Marketing Involves business activities that relate directly to determining the target market and services to those markets The target market is the percentage of the total market to which the firm plans to sell its product:  Market analysis should be conducted.  Demographics play a key role.  Determine the overall size of the market.  Define the target market and consumer characteristics.  Determine the market growth and potential.  Test the target market.  Describe the method of attracting customers.

14. Copyright Atomic Dog Publishing, 2005 5-2d Marketing (contd.) Pricing is the determination of how much the firm will change customers for its products.  Should cover cost of producing or buying plus a margin  Demand and competitor’s pricing determines pricing policies Competition is those firms selling a similar or substitute product to your target market.  Be aware of the competition.  Identify the market niche that can be exploited.  Study the competition to know what others are doing successfully.  Evaluate strengths and weaknesses.  Differentiate yourself from the competition.

15. Copyright Atomic Dog Publishing, 2005 5-2e Location/Layout Location is the physical site and geographic area of the firm’s facilities. After deciding the location, decide on the drawbacks of buying or leasing the building. Renovations are also an important consideration. Layout is the arrangement of the fixtures, equipment, and machinery in the business. Once the layout is determined, attention should be given to use space efficiently and effectively.

16. Copyright Atomic Dog Publishing, 2005 5-2f The Production/Operations Function Productions/operations is the system for transforming inputs into outputs. To maximize profit, firms try to produce output in the most efficient manner and at the lowest possible cost. Critical and crucial questions involving capital expenditures regarding:  The size of the physical facility and the volume it will produce  The layout design to optimize material handling and workers’ productivity  The kind and size of the equipment to be bought  Quality control, inventory control, waste management

17. Copyright Atomic Dog Publishing, 2005 5-2g The Human Resources Function Involves recruiting, selecting, evaluating, and training of the individuals who are employed by and necessary for the functioning of the firm, like  People are the most important component of a business.  Determine the qualifications of the people needed and the number required.  Develop the organization chart and job descriptions.  Determine and resolve issues of the salary, benefits, work hours, and promotions.

18. Copyright Atomic Dog Publishing, 2005 5-2h The Financing Function Financing is the process of obtaining the necessary money to operate the business, which is necessary for any business to begin and to keep operating. Lack of clear understanding of how much money is needed to run their business causes failures due to shortage of cash. A business plan should have the answers to:  How much money do you need?  Where will you get this money?  How will it be spent? In the case of a borrower, questions relevant are:  How soon must the money be paid back?  What will be left?

19. Copyright Atomic Dog Publishing, 2005 5-2i Controls Methods used to ensure that business achieves its objectives Must know your achievements and analyze what the shortfall is and then plan the corrective action Topics that come under control are:  Sources of application of cash  Application and expected effect of loan or investment  Breakeven Analysis -The point at which revenues equal total cost  Areas to Control  Financial Ratios -The percentage relationships of the firm that can be compared to industry average

20. Copyright Atomic Dog Publishing, 2005 5-2j Executive Summary A brief synopsis of all the key elements incorporated in the business plan Executive summaries includes a description of potential problems in the business and the plans to solve them. Identify potential problems and propose cost- effective recommendations to increase sales. Provides the lender or investor with an analysis and working knowledge of the business. This being a summary, it must be at the end after you have defined all the necessary parameters in the business plan.

21. Copyright Atomic Dog Publishing, 2005 5-3 The Completed Business Plan Business plan outline