There are no shortcuts to writing a winning Business Plan for a project that needs external funding. Business plans are critical to the success of any new venture. It’s important to outline a business plan carefully. All the variables need to be considered carefully. While creating a Business Plan it is important to get an element of objectivity in.
The size and scope of a business plan depends on the specific goals. If drafting it for investors, the plan needs to be more detailed. Potential investors might not be as familiar with the proposed industry so one has to clearly explain the concept and where it fits in.
A business plan can take many forms, depending on the venture. But most plans will include the following main sections:
Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what the project promoter wants. There must be a ONE LINE defining statement included in the summary that clearly states what the project promoter is asking for.
The summary should be kept short, probably no more than a couple of pages. Within that space, one needs to provide a synopsis of his/her entire business plan. It should provide a short, concise and optimistic overview of the planned business that captures the reader's attention and gives them an interest in learning more about it.This is the five-minute elevator pitch. It may include:
Business Description and Structure
The business description usually begins with a short description of the industry. When describing the industry, it discusses the present outlook as well as future possibilities. Information is provided on all the various markets within the industry, including any new products or developments that will benefit or adversely affect the proposed project. All observations must be based on reliable data. The investor wants to know just how dependable the information is, and won't risk money on assumptions or conjecture.
Emphasis is to concentrate on its business structure. By structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or service-oriented. Also whether the business is new or already established.
In addition, the legal structure must be reiterated in regard to whether the business is a sole proprietorship, partnership or corporation, who its principals are (Ownership Structure), and what they will bring to the business (Management Structure). The Financial Structure, the Governing Structure, the Procurement Structure, the Marketing Structure, and the Risk Structure must be emphasized as well.
Once the project has been described, the products or services need to be described as well. The product description statement should be complete enough to give the reader a clear idea of the promoter's intentions. Unique features or variations from concepts that can typically be found in the industry are always helpful. Giving the project a competitive edge is critical to positive assessment.
Market Research and Strategies
Target Market needs to be defined. Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and promotional strategies that will allow the company to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this allows the promoter to develop his own estimates for the future of his business. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market--the total number of users within the sphere of the business's influence. The segmentation factors can be geographic, customer attributes or product-oriented.
Once the target market has been detailed, it needs to be further defined to determine the total feasible market. This can be done in several ways, but most professional planners will delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market.
The total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.
Spelling out the market analysis and describe the marketing strategy, including sales forecasts, deadlines and milestones, advertising, public relations decides how the proposed project stacks up against competition.
Management and Personnel
Providing bios of the project promoter's company executives and managers and explaining how their expertise will help the promoter meet business goals is another important aspect. Investors need to evaluate risk, and often, a management team with lots of experience may lower perceived risk.
This is where the numbers are provided that back up everything that has been described in the organizational and marketing sections. Conservative projections of profit and loss statements, balance sheet, and cash flow statements for the next five to ten years. These are forward-looking projections, not the current accounting outputs.
The factors that will make the project successful needs to be emphasized and listed here so a definite pattern of revenue generation emerges. This is the most important as well as crucial part of the Business Plan that overwhelmingly influence investor decisions. It must be explained why the added equity or debt money is going to make the project viable and more profitable. A potential lender is going to want to know how successful the project is going to be. Factors that support promoter's claims for success must be mentioned briefly. This gives the reader an idea of the experience of the other key people in the business. They'll want to know what suppliers or experts the promoter has spoken to about his business and their response to his/her idea. They may even ask the promoter to clarify your choice of location or reasons for selling a particular product.
Projecting Market Share
Arriving at a projection of the market share for a business plan is very much a subjective estimate. It's based on not only an analysis of the market but on highly targeted and competitive distribution, pricing and promotional strategies. Even though there may be a sizable number of customers to form the total feasible market, the project promoter needs to be able to reach them through his distribution network at a price point that's competitive, and then he has to let them know it's available and where they can buy it. achieving effective distribution, pricing and promotional goals determines the extent to which the project owner will be able to garner market share.
For a business plan, our experts estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, our experts consider two factors:
1. Industry growth which will increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
2. Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where there are five distinct stages:
Using conversion rates, market growth will continue to increase the market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.
Defining the market is but one step in the analysis. With the information gained through market research, our experts develop strategies that will allow the promoter to fulfill the project objectives.
Positioning The Proposed Business
When discussing market strategy, it's inevitable that positioning will be brought up. A company's positioning strategy is affected by a number of variables that are closely tied to the motivations and requirements of target customers within as well as the actions of primary competitors.
Before a product can be positioned, several strategic questions need to be answered such as:
Once these strategic questions have been answered based on research of the market, our experts develop the positioning strategy and illustrate that in the business plan. A positioning statement for a business plan doesn't have to be long or elaborate. It spells out exactly how the promoter wants his product perceived by both customers and the competition.
How the product is priced is important because it will have a direct effect on the success of the project. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward:
There are many methods of establishing prices:
Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose will depend upon the industry and the size of the market. Our experts analyze the competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide the promoter with a strategic advantage.
As we've mentioned already, the distribution strategy the promoter chooses for his product will be based on several factors that include the channels being used by the competition, pricing strategy and own internal resources.
With a distribution strategy formed, promoter must develop a promotion plan. The promotion strategy in its most basic form is the controlled distribution of communication designed to sell the product or service. In order to accomplish this, the promotion strategy encompasses every marketing tool utilized in the communication effort.
Once the market has been researched and analyzed, conclusions need to be developed that will supply a quantitative outlook concerning the potential of the business. The first financial projection within the business plan must be formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time. Most business plans will project revenue for up to three years, although five-year projections are becoming increasingly popular among lenders.
Identify and Analyze the Competition : The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within the market, strategies that will provide the project promoter with a distinct advantage, the barriers that can be developed in order to prevent competition from entering one's own market, and any weaknesses that can be exploited within the product development cycle.
Design and Development Plan
The purpose of the design and development plan is to provide investors with a description of the product's design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.
There are generally three areas you'll cover in the development plan section:
Each of these elements needs to be examined from the funding of the plan to the point where the business begins to experience a continuous income. Although these elements will differ in nature concerning their content, each will be based on structure and goals.
Goals For Product Development
Goals for product development should center on the technical as well as the marketing aspects of the product so that there is a focused outline from which the development team can work. Organizational goals would center on the acquisition of expertise in order to attain product and market-development goals. This expertise usually needs to be present in areas of key assets that provide a competitive advantage. Without the necessary expertise, the chances of bringing a product successfully to market diminish.
With goals set and expertise in place, set of procedural tasks or work assignments for each area of the development plan is put in place. Procedures will have to be developed for product development, market development, and organization development. In some cases, product and organization can be combined if the list of procedures is short enough.
The development of procedures provides a list of work assignments that need to be accomplished, but one thing it doesn't provide are the stages of development that coordinate the work assignments within the overall development plan. Our experts suggest means to amend the work assignments created in the procedures section so that all the individual work elements are accounted for in the development plan. The next stage involves setting deliverable dates for components as well as the finished product for testing purposes. There are primarily three steps you need to go through before the product is ready for final delivery:
This is one of the most important elements in the development plan. Scheduling includes all of the key work elements as well as the stages the product must pass through before customer delivery. It should also be tied to the development budget so that expenses can be tracked. But its main purpose is to establish time frames for completion of all work assignments and juxtapose them within the stages through which the product must pass.
That leads us into a discussion of the development budget. When formulating the development budget, our experts take into account all the expenses required to design the product and to take it from prototype to production.
Costs that should be included in the development budget include:
Project Risk Identification, Analysis, Mitigation, and Allocation
The core of Project Finance is the analysis of project risks, namely construction risk, operating risk, market risk, regulatory risk, insurance risk, and currency risk. There are risks related to the pre-completion phase such as activity planning risk, technological risk, and construction risk or completion risk. Then there are risks related to the post-completion phase such as supply risk, operating risk, and demand risk. And then there are risks related to both phases such as interest rate risk, exchange risk, inflation risk, environmental risk, regulatory risk, political risk, country risk, legal risk, and credit risk or counterparty risk. These risks are allocated contractually to the parties best able to manage them. The process of risk management is usually based on the following interrelated steps:
Essential to structuring a project finance package are the crucial elements of successful identification, analysis, mitigation and allocation of project risks. These risks are related to events that could endanger the project during development, construction and operation.
During the development stage the main risk is rejection by the host government or by the financiers – for reasons including commercial weakness, failure to obtain licenses, permissions and clearance. Sponsors can hedge their risks by obtaining technical assistance grants for project preparation and planning.
During the construction stage the main risk is failure to complete the project with acceptable performance levels and within an acceptable time frame and budget. Sponsors can hedge construction risks by purchasing various forms of insurance and obtaining guarantees from contractors with regard to costs, completion schedule and operational performance.
After construction, the main risk is ongoing operations and performance and include technical failures, availability of funds, market demand, prices, foreign exchange rates or environmental issues. The sponsors can hedge these risks through contractual and guarantee agreements that transfer some of the risk to other parties.
Operations & Management
The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. In fact, within the operations plan you'll develop the next set of financial tables that will supply the foundation for the "Financial Components" section.
The financial tables that you'll develop within the operations plan include:
There are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.
Calculate Overhead Expenses
Once the organization's operations have been planned, the expenses associated with the operation of the business can be developed. These are usually referred to as overhead expenses. Overhead expenses refer to all non-labor expenses required to operate the business. Expenses can be divided into fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and variable or semivariable (those which change according to the amount of business).
Overhead expenses usually include the following:
In order to develop the overhead expenses for the expense table used in this portion of the business plan, you need to multiply the number of employees by the expenses associated with each employee. Therefore, if NE represents the number of employees and EE is the expense per employee, the following equation can be used to calculate the sum of each overhead (OH) expense: OH = NE * EE
Developing A Capital Requirements Table (CAPEX BUDGET)
In addition to the expense table, you'll also need to develop a capital requirements table that depicts the amount of money necessary to purchase the equipment you'll use to establish and continue operations. It also illustrates the amount of depreciation your company will incur based on all equipment elements purchased with a lifetime of more than one year.
In order to generate the capital requirements table, you first have to establish the various elements within the business that will require capital investment. For service businesses, capital is usually tied to the various pieces of equipment used to service customers.
Capital for manufacturing companies, on the other hand, is based on the equipment required in order to produce the product. Manufacturing equipment usually falls into three categories: testing equipment, assembly equipment and packaging equipment.
With these capital elements in mind, you need to determine the number of units or customers, in terms of sales, that each equipment item can adequately handle. This is important because capital requirements are a product of income, which is produced through unit sales. In order to meet sales projections, a business usually has to invest money to increase production or supply better service. In the business plan, capital requirements are tied to projected sales as illustrated in the revenue model shown earlier in this chapter.
For instance, if the capital equipment required is capable of handling the needs of 10,000 customers at an average sale of $10 each, that would be $100,000 in sales, at which point additional capital will be required in order to purchase more equipment should the company grow beyond this point. This leads us to another factor within the capital requirements equation, and that is equipment cost.
If you multiply the cost of equipment by the number of customers it can support in terms of sales, it would result in the capital requirements for that particular equipment element. Therefore, you can use an equation in which capital requirements (CR) equals sales (S) divided by number of customers (NC) supported by each equipment element, multiplied by the average sale (AS), which is then multiplied by the capital cost (CC) of the equipment element. Given these parameters, your equation would look like the following: CR = [(S / NC) * AS] * CC
The capital requirements table is formed by adding all your equipment elements to generate the total new capital for that year. During the first year, total new capital is also the total capital required. For each successive year thereafter, total capital (TC) required is the sum of total new capital (NC) plus total capital (PC) from the previous year, less depreciation (D), once again, from the previous year. Therefore, your equation to arrive at total capital for each year portrayed in the capital requirements model would be: TC = NC + PC - D
Keep in mind that depreciation is an expense that shows the decrease in value of the equipment throughout its effective lifetime. For many businesses, depreciation is based upon schedules that are tied to the lifetime of the equipment. Be careful when choosing the schedule that best fits your business. Depreciation is also the basis for a tax deduction as well as the flow of money for new capital. You may need to seek consultation from an expert in this area.
Cash Flow Statement
The cash-flow statement is one of the most critical information tools for the proposed projecr, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.
Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.
The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items needed to be included in the cash-flow statement and the order in which they should appear are as follows:
As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan. Once again, the analysis statement doesn't have to be long and should cover only key points derived from the cash-flow statement.
The Balance Sheet
The last financial statement needed to be developed is the balance sheet. Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan; however, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas:
To obtain financing for a new business, promoter may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, promoter will need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.
In the business plan, the promoter will need to create an analysis statement for the balance sheet just as is needed to be done for the income and cash flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.
Now that we have explained why project needs a business plan, you should try and getting your Business Plan in place before pitching for funding / investment
OUR CHARGES FOR PREPARING PROJECT BUSINESS PLAN:
For Projects worth under US$ 5 million : US$ 10,0000
For Projects worth above US$ 5 million but less than US$ 100 million : US$ 16,000
For Project worth over US$ 100 million to US$ 500 million : US$ 40,000
For Project worth over US$ 500 million : To be decided after mutual discussion.
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