THE FULL BUSINESS PLAN: STRATEGY AND STRUCTURE

The following tasks are a guide to the founding team in preparing to write a business plan:
 Identify who is responsible for what. Make a list of everything that must be collected and
how it needs to be collected (secondary research, talking to customers, etc.). Decide who
will do what and by when it must be accomplished.
 Develop a timeline based on tasks identified. It is important to be realistic about how
much time it will take to complete all tasks associated with the business plan. The
timeline is very likely to be too long, especially if the work is being done on evenings and
weekends, so the next job will be to determine whether all of the tasks are critical to the
business plan and to prune any that are not.
 Hold the team to the timeline and work diligently to get the plan done. Once the business
plan is complete, it’s a good idea to get a trusted third party to review the plan to catch
anything the team may have missed.

Components of the Business Plan

 Operations Plan – this section of the business plan contains a detailed description of the
business operations, including those processes that the new venture will own and
undertake in-house, such as assembly, and those that will be outsourced to a strategic
partner, such as manufacturing. A major portion of this section explains how the business
will operate, where it will get its raw materials, how a product will be manufactured
and/or assembled, and what type and quantity of labor will be required to operate the
business. The location strategy for the business is also included in this section.
 Organization Plan – this section discusses the legal form of organization that the venture
will take, whether that be sole proprietorship, partnership, LLC, or corporation. It also
deals with the entrepreneur’s philosophy of management and company culture as these
are significant competitive advantages if developed well. The section will include an
organization chart showing key management, talk about personnel required for specific
duties, employee incentives, and discuss the use of strategic partners.
 Marketing Plan – the marketing plan is something quite distinct from market analysis.
Market analysis gives the entrepreneur the information about the customer and market
that will be used to create a marketing plan. The marketing plan, by contrast, is the
strategy for communicating the company’s message, developing awareness of the product
or service (brand equity), and enticing the customer to purchase. The marketing plan
includes a discussion of the plan’s purpose, the market niche, the business’s identity,
tools that will be used to reach the customer, a media plan for specific marketing tools,
and a marketing budget.
 Financial Plan – this section demonstrates the financial viability of the venture and
explains the assumptions made by the entrepreneur in doing the forecasts. It is designed
to show that all the claims about the product, sales, marketing strategy, and operational
strategy can work financially to create a business that can survive and grow over the long
term. The financial plan begins with a summary of the key metrics for the business: time
to positive cash flow, break-even, sales volume, and capital requirements to launch the
business. Fundamentally, it presents a snapshot of the entrepreneur’s predictions for the
immediate future of the business. Generally, these forecasts are in the form of a complete
set of pro forma financial statements broken out by month in the first year or two, and
then annually for the next two to three years.
 Statement of Cash Flows. Many CEOs use a statement of cash flows from
operations, which is a bit more complex that the simple direct cash flow statement
used for feasibility analysis. It provides information on changes in the company’s
cash account through inflows and outflows of cash and cash equivalents
associated with the daily operations of the business. Operating cash inflows
include sales and accounts receivable that have been collected, whereas non-
operating cash inflows are comprised of loans, investments, or the sale of assets.
Cash outflows consist of inventory payments, accounts payable payments, and
payments associated with payroll taxes, rent, utilities, and so forth. Non-operating
cash outflows include such items as payments of principal or interest on debt,
dividend distribution, and asset purchase. A financially healthy company will see
its major source of cash inflows coming from operating sources, such as sales. In
preparing this type of cash flow statement, the income statement items are linked
with changes from normal operations in the balance sheet from one period to the
next. These include sales, cost of sales, and operating expenses.
 Income Statement. Also known as a profit or loss statement, income statement
gives information about the projected profit or loss status of the business for a
specified period of time. It depicts when the new venture will cover its costs and
begin to make a profit. It is important to note that revenues and expenses are
recorded in the income statement when a transaction occurs in the case of sales, or
when a debt is incurred in the case of expenses, whether or not money has been
received or expended. The income statement is also important in determining the
tax liability the company will have.
 Balance Sheet. The balance sheet, called a “statement of financial position,” is
different from other financial statements in that it looks at the financial health of
the business at a single point in time – a given date – whereas the cash flow and
income statements review a period of time: month, quarter, or year. The balance
sheet is divided into two parts that must be balance; that is, be equal to each other
based on the formula: Assets = Liabilities + Shareholders’ Equity
Decisions made by the entrepreneur have a direct effect on the balance sheet. For
example, an increase in sales typically results in an increase on the asset side of
the balance sheet because the entrepreneur has had to increase inventory or
purchase equipment to meet demand. Likewise, an entrepreneur’s decision to
retain earnings for growth will increase the equity portion of the balance sheet.
The balance sheet is an important tool for answering questions about the health of
the business. For example: Did debt financing increase or decrease from period to
period? Did the amounts of the accounts receivable and inventory increase or
decrease relative to sales in the same period?
Examining changes from period to period on the balance sheet is one way to
gauge business performance. Ratios are another.
Ratios. Entrepreneurs have a number of ratios that can be used as gauges to
analyse a company’s performance. Ratios compare items in the financial
statements and convert them to relative terms so they can be compared to ratios in
other periods or in other companies.
 Current Ratio – provides information on the company’s ability to meet
short-term obligations. It is found by
Current Ratio = Total Current Assets/Total Current Liabilities
The higher the number, the more liquid the company is and the more
easily these assets can be converted to cash to pay off short-term
obligations.
 Profit Margin – this is a profitability ratio that uses net income and net
sales from the income statement to give the percentage of each dollar of
sales remaining after all costs of normal operations are accounted for. It is
found by
Profit Margin = Net Income/Net Sales
The inverse of this percentage equals the expense ratio, that is, the
percentage of each sales dollar accounted for by operating expenses.
 Return on Investment – this ratio provides a measure of the amount of
return on shareholders’ investment based on the earnings of the company.
It is found by
Return on Investment = Net Income/Shareholders’ Equity
 Inventory Turnover – this ratio is a measure of the liquidity of inventory or
the number of times it turns over in a year. It is found by
Inventory Turnover = Cost of Goods Sold/Average Inventory
This ratio helps the entrepreneur judge whether the business has too much
capital tied up in inventory.
One other tool that is valuable to know is break-even analysis, which tells an
entrepreneur how many units must be sold before the company can achieve a
profit or the sales volume required to be profitable. The break-even point is that
point at which the total variable and fixed expenses are covered and beyond
which the company makes a profit. The formula to calculate breakeven is as
follows:
𝑇𝐹𝐶
𝐵𝐸𝑄 =
𝑆𝑃 − 𝑉𝐶 (𝑢𝑛𝑖𝑡)
 Where
TFC = total fixed costs
SP = selling price
VC = variable costs
The dynamic nature of markets today makes it almost impossible to
project out three to five years with any degree of certainty – hence, the need and
importance of having detailed financial assumptions that explain the rationale for
the numbers. Also important is sensitivity analysis to identify triggers that may
change the financial forecasts and affect the business negatively. Finally, the
financial plan includes a funding plan with a timeline and milestone to indicate
when the new venture will need an infusion of investor or other capital.
 Growth Plan – it discusses how the entrepreneur plans to take the business from start-up
through various stages of growth and outlines the strategy that will be used to ensure that
the business model is sustainable and continues to scale over its life. This may mean
looking at new products and services or acquiring other businesses. It is important that
this section reassure an investor or lender that the company has a future.
 Contingency Plan and Harvest Strategy – the contingency plan is simply a way of
recognizing that sometimes, even “the best laid plans” don’t work the way they were
intended to work. It presents potential risk scenarios, usually dealing with situations such
as unexpected high or low growth or changing economic conditions, and then, for each
situation, suggests a plan to minimize the impact on the new business. By contrast, the
harvest or exit strategy is the plan for capturing the wealth of the business for the
entrepreneur and any investors. It typically involves a liquidity event, such as an initial
public offering, a merger, or a sale, among other options.