Tsh Tutorial Series - The Winning Business Plan - David Adeoye
Want to Win with a Business Plan?
Address the Right Questions
At the start of most new businesses, a business plan is a standard requirement. The entrepreneur, financial investor, or strategic partner wants assurance that expected returns are realistic and sufficient, relative to the venture’s risks profile. Lenders seek the comfort that cash flows will be sufficient and can be realized in good time.
For large ventures, a business plan is required to attract top talent into key positions. In such regulated industries as airlines, pharmaceuticals, and financial services, regulators require a business plan as a pre-condition for a license. It serves as an evidence of the promoters' readiness to operate in line with industry standards.
The needs of each group can be addressed by a plan that addresses the important questions in five different aspects of a venture: market opportunity, offerings, organization, operating plan, and financial forecasts. A careful consideration of key issues in each of these domains will allow a meaningful discussion of the key risks that the new venture may encounter during the plan’s relevant time horizon.
No. 1: Product/Service Offering
Most businesses start with an idea of what product or service to offer. One approach is to find a product in a market that is both attractive and 'contestable'. Another approach is to seek out under-served markets or segments and plan to deliver a superior service, a higher quality product, or a superior distribution model. Most successful product-oriented new ventures target specific buyer-needs, and build an offering to meet that need at a profit. Important questions to address here include: what buyer-needs do you seek to satisfy? What products or service would you offer? How will your product(s) create value for each buyer? Are you going to make or buy the product or service?
No. 2: Market Opportunity
With your initial product choices made, it is important to subject those choices to the market test. Given your intended product or service, what is the size and structure of market demand? What is the existing supply capacity? What are the deficiencies in the current value chain? Are buyers sufficiently dissatisfied? What are the pain points in existing business models? What is the minimum scale at which you can start? At what rate does your target market grow? Are there alternative, or new emerging needs you can serve? Each question requires answers that must be supported with facts. During the planning process, there is a continual interaction between product choices and market opportunity.
No. 3: Operating Plan
Armed with a clear view of the market opportunity and the offerings required to serve that opportunity, you need to demonstrate how ‘supply-side’ resources will be mobilized to deliver user benefits on the 'demand-side'. What primary and secondary inputs do you require? How will you source them? What will your typical delivery cycle (from raw materials to cash collection) look like? Will the business be short-cycle, high velocity (e.g. retail of groceries) or will it involve long-term contracting (e.g. power generation) or is it a one-off project (development of low-cost residential housing for sale)?
The operating plan should show how you will source, transform, and sell or deliver. Unit costs, quantities, and totals per period (monthly, quarterly, or annually) needs to be included in the operating plan as well. The required investment (what, when, and where) also need to be outlined.
No. 4: Business Organization
In all but the most rudimentary and low-scale businesses, it's usually necessary that a management team be put in place to translate the plans into reality. You need to be clear on the structure of the organization. What roles are required? Who will fill each of these roles. For large ventures, many financiers consider this section to be most important. Having experienced, credible people on your team is important for effective execution of any business plan.
No. 5: Financial Projections
If the product choices, market opportunity, operating plan and organization have been carefully considered, then your financial projections come down to translating your prior decisions and forward expectations into forecast financial statements. Key forecast items include revenues, operating expenses, non-operating expenses (including financing costs), and asset needs. Usually you will need a forecast of the following for five-year period: Income statement (or profit & loss account), balance sheet (showing the expected assets and liabilities of the business) and cash-flow statement which is of particular interest to bankers. From these, you can compute the relevant ratios, e.g. profit margins, return on assets, and sales velocity over relevant period.
No. 6: Risk Analysis
The most astute investors are conscious of the fact that reality hardly turns out in perfect harmony with laid-down plans. Hence it is important to itemize clearly what could go wrong in each of the primary areas and which may affect your financial forecasts. Key questions are: What can possibly go wrong? How could the business be affected? What do you have in place to prevent the risk or deal with its effect on your business? Closely related to risk analysis is an evaluation of key sensitivities. For example, if market growth rates drop by half, how will your own sales be affected? What if prices of inputs rise by a quarter, would you still realize decent margins?
Beyond writing a plan, it is important for an entrepreneur to go through a structured planning process to address key questions in each major domain discussed. These same questions will be of interest to your key stakeholders especially financiers, regulators, and business partners. In the words of former US President, Dwight D. Eisenhower, "plans are worthless but planning is everything". Your business plan is most valuable when it shows you have thought, and indeed worked, through the key aspects of the new venture that are truly important to its economic success.
Get The Street Hawker App Experience.