At the start of most new businesses or turnaround of an existing venture, a business plan is usually required for various purposes. The entrepreneur, financial investor, or strategic partner wants to be assured that expected returns are both realistic and sufficient relative to the risks of the venture. Lenders seek the comfort that the cash flows will be sufficient and can be realized in line with the terms of any loan facility to be extended.
For large ventures, a business plan is required to attract top talent as new hires into key positions. In regulated industries such as airlines, pharmaceuticals, and banking, a business plan is usually required by regulators as a condition for a license. It serves one of the proofs of promoters’ intent and capacity to operate in line with industry standards.
The needs of these various groups can be addressed by a plan and supporting documents that address the important questions in four different aspects of a venture: market opportunity, service or product offering(s), operating plan and business organization. A careful consideration of key issues in each of these domains will produce a set of financial forecasts and allow a meaningful discussion of the key risks that the new business may confront during the relevant time horizon of the plan.
Product/service offering
Most businesses start with an idea of what product or service to offer for value. One approach is to find a product with a ready market that is both attractive and ‘contestable’. Another approach is to seek out under-served markets or segments and develop a plan to deliver a superior service, a higher quality product, or a superior distribution model. Most successful product-oriented new ventures target definite 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? How would you create value for each buyer? What products or service would you offer? Are you going to buy or make the product or service?
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 distribution of the market demand? What is the existing supply capacity? What deficiencies do you observe in the current value chain? Are buyers sufficiently dissatisfied? What are the pain points in the existing business? 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 of these questions requires answers that can be supported with facts. It is important to note that during the planning process, there is a continual interaction between product choices and market opportunity.
Operating plan
Having obtained a clear view of the market opportunity and the offerings required to serve that opportunity, it is important to demonstrate how supply-side resources will be mobilized to deliver user benefits on the ‘demand-side’. What primary and secondary inputs will you require? How will you source then? 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 one-off project (development of low-cost residential housing for sale)?
The operating plan needs to show how you will conduct the key activities of sourcing (or procurement), transformation (or processing) and sales /delivery (including distribution). Unit costs, quantities and aggregate per time horizon (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.
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 initial plans into reality. You need to be clear on the intended structure of the organization. What roles will be required? Who is expected to fill each of these roles. Many financiers consider this section to be the most important. Having experienced, credible people on your team is important to effective execution of any plan.
Financial projections
If the product choices, market opportunity, operating plan and organizational aspects have been carefully considered, then your financial projections come down to translating your prior decisions and forward expectations into pro-forma or forecast financial statements. Key items of the forecast include revenues, operating expenses, non-operating expenses (including financing costs), and asset needs. Usually you will need a forecast of the following for at least five years: Income statement (or profit and loss account), balance sheet (showing the expected assets and liabilities of the business) and cash-flow statement or cash budget which is of particular interest to bankers. In addition to the statements, it is important to compute the relevant ratios, e.g. profit margins, return on assets, and sales velocity over relevant time period.
Risk analysis
The most astute investors are conscious of the fact that reality hardly turns out in perfect sync with laid-down plans. Hence it is important that you itemize clearly what you expect can go wrong in each of the four primary areas and which may affect your financial forecasts. Key questions are: what can possibly go wrong? How could the business be affected? What are you putting 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 sales be affected? What if prices of inputs double, would you still realize your decent margins?
Beyond writing a plan or producing a document, it is important for a promoter or entrepreneur to go through a structured process to address the key questions in each of the four major domains and output areas discussed here. These same questions will be of interest to your key stakeholders especially financiers, regulators or 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 your venture that are truly important to its economic success.
David Adeoye
David Adeoye leads the Advisory Services team at MBC Capital Limited, Lagos. He holds the Chartered Financial Analyst (CFA) and Energy Risk Professional (ERP) designations. He advises clients in the real, estate, construction, energy and financial services sectors.
