Planning: content of a business plan
Planning a business and raising finance is the first of the five topics on Unit 2, Managing business activities, the paper coded WBS12.
It opens with the document that comes before almost every other decision in this unit: the business plan.
The first thing to learn is "Content of a business plan."
This section teaches what goes into a plan and, more importantly, why each part is there; the next section covers what the plan is used for.
(this applies to every section of this unit)
- Define (2): the two halves of one definition earn a mark each. An example earns nothing.
- Calculate or Construct (4): Knowledge 1 for the formula written down, Application 2 for the two figures placed correctly, Analysis 1 for the answer with its unit, rounded exactly as the question asks.
- Analyse (6): two points, each stated (K), tied to a fact about the business (A) and developed into a consequence (An). No judgement is credited.
- Discuss (8): two developed sides in context. No conclusion is needed.
- Assess (10): two developed sides and a supported judgement, "Overall ... because ...".
- Evaluate (20): competing arguments weighed for significance, then a conclusion that judges or recommends, says what it depends on and what would change it.
- First step every time: who and what is the question about? Underline the business, the person (owner, lender, investor, partner) and the outcome named in the stem.
The idea: thinking the business through before spending money
Sefa Mensah wants to brew kombucha, a lightly fizzy fermented tea, and sell it in glass bottles to cafés and gyms.
He has a recipe that friends love and $8,000 of savings.
Before he signs a lease on a kitchen unit, he has to answer some hard questions.
Who exactly will buy it, and how many bottles a month?
What will it cost to make one bottle?
How much money does he need before the first sale, and where will it come from?
When will the business make a profit, and will he run out of cash before then?
A business plan is the written answer to those questions.
Writing it forces the entrepreneur to turn an idea into numbers and decisions, and it gives outsiders (a bank, an investor, a landlord, a partner) a way to judge whether the idea is sound.
Sefa's business will be called Brinewell Kombucha.
- Business plan: a written document setting out what a business intends to do and how it will achieve its objectives (K1), including its market, marketing, operations, people and financial forecasts (K1).
- Executive summary: a short overview at the start of a business plan that gives the main points of the whole plan, including how much finance is needed and what for.
- Start-up costs: the one-off costs of setting up a business before it begins trading, such as equipment, fitting out premises, deposits and first inventory.
- Financial forecasts: estimates of a business's future sales, costs, cash flows and profit, usually month by month for the first year.
What a business plan contains
There is no single legal layout, but almost every plan a bank or investor would accept covers the same ground.
The table shows each part, what it holds and the question it answers for the reader.
Part of the plan
What it contains
The reader's question it answers
Executive summary
the idea, the market, the finance needed and the expected return, on one page
"Is this worth reading on?"
The business and its owners
the name, the form of business (sole trader, partnership, Ltd), the owners' skills and experience
"Can these people run it?"
Aims and objectives
what the business wants to achieve, ideally as SMART objectives (sales, market share, profit by a date)
"What counts as success?"
Product or service
what is sold, its unique selling point, prices
"Why will anyone buy it?"
Market research and analysis
market size and growth, target segments, competitors and their prices, research findings
"Is there real demand?"
Marketing plan
the marketing mix: product, price, promotion, place
"How will customers find out and buy?"
Operations plan
premises, equipment, suppliers, production method, capacity, quality checks
"Can it actually be made and delivered?"
People
staff needed, roles, wages, who manages what
"Who does the work, at what cost?"
Financial plan
start-up costs, sources of finance, sales forecast, cash-flow forecast, break-even, forecast statement of comprehensive income
"Will it make money, and will it run out of cash first?"
Risks and contingencies
what could go wrong and what the owner would do
"Has the owner thought about failure?"
Why the parts must connect
A plan is not a pile of separate chapters.
Each part feeds the next, and a reader tests whether the chain holds.
The diagram below shows the chain at the heart of every plan.
The chain explains why lenders read a plan from the back as well as the front.
If the sales forecast promises 1,400 bottles a month but the research section shows only a handful of cafés asked, the forecast is a hope, so the cash-flow forecast and the finance request built on it are hopes too.
A plan is believable when every number can be traced back to evidence.
The market research section uses the primary and secondary research methods and sampling from Unit 1 (Meeting customer needs), and the "owners" section is where the entrepreneur's skills and motives from Unit 1 (Entrepreneurs and leaders) are shown.
Use them as evidence in a plan question; do not re-teach them.
The financial plan uses the tools of the next topic, Financial planning: sales revenue, costs, contribution, break-even, margin of safety and the cash-flow forecast.
The worked examples below use them in their simplest form.
Sefa's plan lists these start-up costs: brewing vessels and bottling equipment $14,500; first month's ingredients and bottles $2,300; rent deposit on the kitchen unit $3,600; branding and a website $1,800. He will put in his savings of $8,000.
Calculate the external finance Brinewell Kombucha needs.
1. Total start-up costs = sum of the one-off costs = $14,500 + $2,300 + $3,600 + $1,800 = $22,200 (Knowledge: the method; Application: the four figures)
2. Finance gap = total start-up costs − owner's capital = $22,200 − $8,000
Answer: $14,200 of external finance.
What it means: the plan must now say where $14,200 will come from (a bank, family, a grant) and show from the cash-flow forecast that it can be repaid.
A plan that leaves the gap unfunded is incomplete.
Using worked example 1, calculate, to two decimal places, the percentage of Brinewell's start-up costs financed by Sefa himself.
1. Percentage = owner's capital ÷ total start-up costs × 100 (Knowledge 1)
2. $8,000 (Application 1) ÷ $22,200 (Application 1) × 100 = 36.036...
Answer: 36.04% (Analysis 1).
What it means: a lender sees that the owner has more than a third of his own money at stake, which shows commitment and means the bank is not carrying all the risk.
Lenders often want to see a significant owner's stake before they lend.
Brinewell plans to sell each bottle to cafés for $4.50. Ingredients, bottle and label cost $1.70 a bottle. Monthly fixed costs (rent, insurance, loan repayment, Sefa's drawings) are $2,800.
The sales forecast is 1,400 bottles a month.
Calculate the monthly break-even output and the margin of safety.
1. Contribution per bottle = selling price − variable cost per unit = $4.50 − $1.70 = $2.80
2. Break-even output = total fixed costs ÷ contribution per unit = $2,800 ÷ $2.80 = 1,000 bottles
3. Margin of safety = forecast output − break-even output = 1,400 − 1,000 = 400 bottles
Answer: break-even at 1,000 bottles a month; margin of safety 400 bottles.
What it means: sales could fall about 29% short of the forecast before Brinewell makes a loss.
A reader will ask how confident the 1,400 forecast is, which takes them straight back to the market research section.
Analyse two reasons why a bank would expect Brinewell Kombucha's business plan to include market research.
(6)
Top answer (6 of 6): Market research shows whether there is real demand (K).
Sefa plans to sell to cafés and gyms, so evidence such as orders promised by named cafés (A) tells the bank the forecast of 1,400 bottles a month is based on customers, not hope, so the bank can judge whether the $14,200 loan is likely to be repaid from sales (An). Research also shows the competition (K). Kombucha is already sold in some supermarkets (A), so the bank wants to see that Brinewell's price of $4.50 and its local, fresh product can win sales against bigger brands; without this, the bank cannot tell whether the margin of safety of 400 bottles is realistic (An).
Weaker answer (2 of 6): Market research is important because it finds out what customers want.
Banks like to see research because it reduces risk.
It also shows competitors.
What it lacks: reasons are named (K, K) but nothing about Brinewell's cafés, gyms, price or loan is used, so there is no application, and no chain reaches a consequence for the bank's decision.
The business plan was not examined in the three most recent series, but the examiners warn that any part of the syllabus can be set.
If asked about a plan's content, never list all ten parts: pick the parts that matter for the reader and the business in the stem (a bank cares about the cash-flow forecast and security; an investor about growth and return), and chain each to a consequence.
- Treating the plan as a list of chapters. Its value lies in the links: research supports the forecast, the forecast drives the cash flow, the cash flow shows the finance needed.
- Confusing start-up costs with running costs. Start-up costs are one-off (equipment, deposits); running costs recur every month (rent, wages, ingredients) and belong in the cash-flow forecast.
- Forgetting the owners' section. A lender is lending to people as much as to an idea; experience and skills are part of the content.
- Defining a business plan with an example ("for example, it has a cash-flow forecast"). The two marks are for what it is and what it covers; an example earns nothing.
Check your understanding
1. Define the term 'business plan'. (2) Total [2]
2. Jonah Ferreira plans to open a phone-repair kiosk in a shopping centre. His start-up costs are: kiosk fit-out $9,600; tools and testing equipment $3,150; first inventory of spare parts $4,250; licence and deposit $1,000. He will use $5,400 of his savings and borrow the rest from a bank. Using this data, calculate, to two decimal places, the percentage of his start-up costs that will be financed by the bank loan. You are advised to show your working. (4) Total [4]
3. Analyse two reasons why the operations section of a business plan matters to a person starting a food truck business. (6) Total [6]
4. A student writes: "A business plan only needs the financial forecasts, because the numbers are all a bank really reads." Discuss whether the student is right. (8) Total [8]
5. Brinewell Kombucha's cash-flow forecast shows a negative closing balance in its first three months. Assess the importance of the cash-flow forecast in Brinewell's business plan. (10) Total [10]
Answers
1. A written document that sets out a business's objectives and how it plans to achieve them (K1), covering areas such as its market, marketing, operations and financial forecasts (K1). An example of a plan's contents alone earns nothing.
2. Percentage = bank loan ÷ total start-up costs × 100 (K1). Total start-up costs = $9,600 + $3,150 + $4,250 + $1,000 = $18,000; loan = $18,000 − $5,400 = $12,600 (A1). $12,600 ÷ $18,000 × 100 (A1) = 70.00% (An1). Keep the trailing zeros: the question asks for two decimal places.
3. Two reasons, each K, A, An, for example:
- It shows the business can actually produce what it plans to sell (K): a food truck has a tiny kitchen and one or two staff (A), so working out how many meals can be cooked in a lunchtime rush shows whether the sales forecast is even possible; if it is not, revenue and the ability to repay finance are overstated (An).
- It identifies the permits, suppliers and pitches needed (K): a truck needs a trading licence, a food-hygiene inspection and a reliable place to park at busy times (A), so planning these early prevents weeks of lost trading after the truck has been bought, when loan repayments have already started (An).
4. Level 3, two sides:
- Partly right: the financial plan answers the bank's main question, whether the loan can be repaid, through the cash-flow forecast, break-even and the forecast profit; a plan with weak numbers will be refused however good the idea sounds.
- But wrong overall: the numbers are only as good as what lies behind them. The sales forecast rests on market research; costs rest on the operations plan; the ability to deliver rests on the owners' experience. A bank reads these sections to test whether the forecasts are believable, and it also wants to know about security and the owner's own stake, which sit outside the forecasts.
5. Level 4:
- Very important: the forecast shows Brinewell will be short of cash for three months, so it tells Sefa how large an overdraft or loan to arrange, and when; without it he could be unable to pay suppliers or rent even while sales grow. The bank will expect it before lending the $14,200.
- Limits: the forecast is only as accurate as the sales forecast of 1,400 bottles a month, which has no trading history behind it; a cash-flow forecast says nothing about profitability, so the plan also needs break-even and the forecast statement of comprehensive income.
- Judgement: "Overall the cash-flow forecast is one of the most important parts of Brinewell's plan, because the business will run short of cash in its first three months and a new business that cannot pay its bills fails even if it would later be profitable; its value depends on how well the sales forecast is supported by research."