Topic 3 Business Plan

Introduction
The success of any new business depends on how well it has been planned and how
much thought has gone into the venture. In this unit you will learn more about how
entrepreneurs plan a business venture. You will learn about the importance of planning
and the concept of a business plan.
What is a Business Plan?
Before starting a new business venture, entrepreneurs usually draw up a detailed
business plan. A business plan is a document that sets out all the details and
arrangements for a new business venture. It is a structured guideline of what needs to be
done to achieve business goals. A business plan is a description of the following:
 What you intend doing?
 How you intend doing it and when you intend doing it?
 Why you believe your idea is worthwhile and profitable
A business plan prompts the entrepreneur to think about and answer the following
questions:
 Where am I going, and how will I get there?
 What problems am I likely to run into along the way?
 How will I deal with these problems?

The importance of Planning

Generally, people plan for two reasons: Learn 1
 To identify what action needs to be taken to reach a particular objective or goal
 To anticipate potential problems and identify ways around them to make it easier
to take quick action when opportunities present themselves.
There are two reasons you need to have a business plan: Learn 1
 Preparing a business plan can eliminate potential fatal flaws in your idea. Some
business ideas can look great in the beginning but once they are examined
more closely, the problems are clearly visible. Preparing a business plan helps
you to identify potential problems which will prevent you from succeeding. If
these fatal flaws exist in your idea, it is better to identify them before you invest
money in and start the business.
 A business plan is an essential aid when applying for financial assistance.
Most people who want to go into business for themselves need to borrow money. No
bank or investor will lend you money without first seeing a detailed business plan that
shows what the business is going to do, its project, expenses and earnings, and its
plans for repaying the loan.
Essentials of a business plan Learn 3
Your business plan must be written down on paper and should be:
 Neat
 Free of errors
 Comprehensive
 Logical
 Simple and easy to read
 Based on irrefutable facts or evidence as far as possible
 Concise

Components and format of a business plan

There are no absolute rules about what a business plan should look like. All
experienced entrepreneurs have their own opinions and ideas about the ideal format
of a business plan. Although there are no rigid rules, there are guidelines that can be
followed to ensure that the business plan is detailed and complete.
In this unit you will learn about the format of a business plan, which is generally
considered to be important in ensuring the success of your venture and attracting
investors.
The focus of this unit will be on preparing an actual business plan for an idea which
you could put into action.

Production Plan Understand

A business plan should include a detailed description of your product(s) or service(s)
and how you plan to produce or provide them. If you intend manufacturing a product,
you must explain the manufacturing process in detail and describe the machines that
you intend using. Include a technical outline Containing details and capabilities of the
machinery and equipment. If you are starting a service business, describe in detail
what you will have to do in order to offer the service and what equipment and
resources you will need.
Include a description of your business location, floor layout, and how near or far you
are from other businesses. Explain whether you will be buying or renting the
equipment and property you need to run your business.
If possible, include diagrams or photographs to illustrate this section of your business
plan. This will help to give your reader a clear picture of how you intend to produce
your goods or services.

Management Plan Learn 2

Give an outline of the business structure and staffing needs. The following
information should be included in this section of the business plan:
 Give a description of how many people you intend employing and where and
how you intend recruiting them.
  A description of your management and staff – their qualifications, experience,
job descriptions and remuneration.
 Give a description of your administration and record-keeping system.
 A description of your staff policy regarding working hours, fringe benefits,
overtime, sick leave, medical aid and so on.
Cover page and table of contents Learn 2
Your business plan should include a professional, eye-catching front page and table
of contents. Ensure that the front page is neat and business like. Include the following
information on your cover:
 The name of the business.
 The type of business.
 The name(s) of the owner(s).
 Your address and telephone number.
 Your logo (if you have one).
Description of the product or service Learn 2*
Include an interesting introduction that describes your business. It should contain the
following information:
 A description of the service or product that you plan to sell or make.
 Why you believe your venture is viable
 What makes your venture unique or different from other existing
businesses.
Goals of the business
Include a list of the business goals, identifying exactly what you would like to achieve
in the short, medium and long term. Give details of what you hope to achieve in the
next 12 months, the next three years and the next five years. This will help to give
the reader a sense of what your long-term goals are for the business and where you
intend taking this idea. These objectives should be realistic, specific and measurable.
Include a vision and mission statement for your business. These should be short and
realistic, but motivating. A vision is a clear and inspirational statement of what you
are trying to create or achieve. A mission statement outlines the core purpose of a
business and explains why the business exists. Mission statements indicate the key
values of the organisation.

Details of who owns the business Understand

A business plan should include a description of the form of ownership and why it has
been chosen for the business. It is helpful to explain why this particular form of
ownership is most suitable for the business.
It is also important to include the names and credentials of all the owners of the
business. Indicate who the owners are and provide information about their educational
qualifications, work experience, and training courses attended. These details should
convince the reader that the owners of the business have the ability to gain success
in the venture.

Marketing Plan
Entrepreneurs need to market their business. You can have a brilliant business idea
but if nobody knows about your business, it will fail.

Market Research
It is important that an entrepreneur does market research to see if there are people
who are interested in buying the product. Market research can answer the following
questions of an entrepreneur:
 Who is willing to buy my product?
 Who is my target market?
 What price will they be willing to pay?
 Where is the best place to sell my product?
 What quantity will we be able to sell?

Marketing mix
Based on your market research, you have to decide on the marketing mix for your
business. To plan the marketing mix, you should think about and decide on the
following:
 What need does this product satisfy? Give details about the need for your
product and why consumers are willing to purchase it.
  How much will you charge for this product? Give details about the prices
you intend to charge, indicating how you arrived at the decision to charge
these prices.
 How will you promote your product and persuade customers to purchase
your goods or services? Give details of your promotion strategies and a
marketing you plan to use to convince customers to buy the product. In this
section also give details about the packaging and presentation of your
product
 How will you distribute your products and services and how you reach
customer? Give a description of the place where you in tend to sell your
goods.

These four factors (product, price, promotion, places) make up the marketing mix
and are sometimes called the 4 Ps of marketing.

Competition Understand
A business plan should include a description of your competitors and their products.
Include details about the competitors' marketing strategy and the potential effect on
your business. Describe your competitive edge (that is, what it is that you intend to do
to attract customers from your competition).

SWOT Analysis
Include a SWOT analysis of your business idea. A SWOT analysis is a technique that
is often used in business to evaluate a situation from different perspectives.
This technique is used to identify the strengths, weaknesses, opportunities and threats
of a particular situation, product or service. A SWOT analysis can be done for any
situation, but it is particularly useful in evaluating a new potential business idea.

In order to do a SWOT analysis of a business, you need to identify:

 Possible internal weaknesses
 External opportunities
 External threats.

It is best to begin by brainstorming to identify the factors in each of these categories.

When brainstorming, thoughts and perceptions are merely listed and suggestions are
written down without stopping to discuss them. Once an extensive list of strengths,
weaknesses, opportunities, and threats has been created. The factors can be
discussed, evaluated and refined. At this stage, factors that are not applicable can be
deleted from the list.
Conclusion in a Business Plan
Finish your business plan off with a positive and motivational conclusion. Your
conclusion should be a summary of the following:
 Why you believe your business will succeed
 Why you believe finance should be granted

Financial Plan
Poor financial planning is one of the most common reasons why businesses fail.
Inadequate financial planning will lead to cash flow problems which have the potential
to kill any new business. For this reason, you need to give adequate attention to
preparing a financial plan to include in your business plan. In this unit you will learn
more about the components and format of a financial plan.

What is a financial plan?

A financial plan is a detailed document that sets out what it will cost to set up a new
business venture and what income will be earned. The financial plan includes:

 Details of the cost of all equipment and other resources that need to be
purchased or hired (start-up costs).
 Calculations showing the costs of producing each unit (fixed and variable
costs).
 Calculations showing how many units need to be sold in order to make a profit
(break-even point).
 Forecasts showing how much profit can be made (mark-up on sales and
projected profit).
 Documents showing the cash flow and projected income and expenses for the
business (financial statements).

It is important for your financial plan to provide accurate information about what it will
cost to start the business. These are known as your start-up costs. Your financial plan
should provide details of your start-up costs and should show:

 Details of how much money you need to start and run the business and a
description of how the money will be used. You should also indicate where you
plan to get this money from.
 Details about how much of your own money you are investing in the business.
Fixed versus variable costs
In your business plan you should provide details of your fixed and variable costs:

Fixed costs are those costs that are the same regardless of how many items you sell.
All start-up costs, such as rent, insurance, and computers are considered fixed costs
since you have to incur these costs before you sell your first item.
Variable costs are those costs that increase with each unit produced. For example, if
you were operating a business that sold cold drinks and you had to purchase each
cold drink you sold for R4, your variable costs would be R4 per unit.

An example of a fixed cost is the rent for the business premises.

Your bakery has to pay rent whether it produces 1 000 cakes or no cakes. An example
of variable cost is the cost of cake ingredients – 1 000 cakes need more ingredients
to make than
10 cakes. You put fixed and variable costs on the business’s Income Statement that
forms part of the financial plan. Remember, you learnt about the Income Statement in
Grade 8. These costs tell potential investors how much profit the business will need to
make to break even.

Break-even points
You already know that break-even points are the points at which a business makes
enough money to cover its production costs. This is important business plan
information because potential investors need to see that your financial targets are
realistic.

For example, if your bakery’s break-even point is 1 000 loaves of bread per month,
and you have said in your financial plan that your target is to sell 800 loaves of bread
per month, your
business will not be financially viable because it will not break even or make a profit.

Mark-up on sales
In Grade 7 you saw that a mark-up is the cost that you add to a good’s cost to make
a profit. The business plan needs to show that you have determined your fixed and
variable costs
accurately, and have then calculated how many units you will need to sell to break
even. It then needs to show that you can work with profits. Without profits, a business
will never make any money and investors will be reluctant to provide capital. The mark-
up also needs to show that you are not pricing your goods too high in an attempt to
make too much profit. A mark-up that is too high will mean that consumers may not
buy your goods because they are overpriced. Your mark-up needs to reflect a good
pricing strategy.

Profit percentage
You know that profit = total income – total cost. The financial plan requires you to show
the profit your business makes as a percentage. You calculate profit percentage using
this formula:

profit percentage = Sales (selling price) – Cost of sales (cost price) × 100
Cost of sales (cost price) 1

For example, suppose it costs your bakery R20 to produce one cake. You sell cakes
for R35. You work out what percentage profit your business is making on its sales
like this:
profit percentage = Sales (selling price) – Cost of sales (cost price) × 100
Cost of sales (cost price) 1

35 – 20 x 100

20 1

= 75%
Activity 5
1. Describe what a business plan is.
2. Explain why you think it is important for a business plan to look professional.
3. Business plans can determine whether a business idea becomes a business
reality. Discuss this statement. State why you agree or disagree. (4)
4. Design your own front cover for a business idea you have.
5. Identify what a vision statement is.
6. You are starting a business that makes fashion accessories or cell phones,
iPads and laptops, such as covers and headphones. Prepare a vision
statement for this business.

Activity 6
1. Explain why the production plan is such an important part of the business plan.
2. Assess the type of information you need to include in a production plan.
3. Define a marketing plan.
4. Discuss the type of information a marketing plan needs to contain.

Activity 7
Case Study
Whale View Restaurant and Coffee Shop is a business on the beachfront road in
Hermanus in the Western Cape. Hermanus is famous for its whales, which come in
great numbers to Walker Bay and swim close to the cliffs where many tourists can
see them. The whale season is in winter. The owner of the coffee shop has managed
a restaurant in Cape Town for ten years and has spent four years working in
restaurants in Europe.

1. Identify the strengths, weaknesses, opportunities and threats are to a coffee shop
and restaurant business in a tourist town like Hermanus.
2. Include this in the Whale View Restaurant’s business plan. Interpret your SWOT
analysis by writing a conclusion to it.