Writing a Business Plan Source: Evans, Vaughan (2011). The Financial Times Essential Guides to Writing a Business Plan: How to win backing to start up or grow your business Chapter 1: Executive summary Chapter 2: The business Chapter 3: Market demand Chapter 4: Competition Chapter 5: Strategy Chapter 6: Resources Chapter 7: Financials and forecasts Chapter 8: Risk, opportunity and sensitivity Chapter 9: Conclusion Appendices • Appendix A: Market data • Appendix B: Competition data • Appendix C: Competitive position data • Appendix D: Management CVs • Appendix E: Marketing plan • Appendix F: Operations data • Appendix G: Environment, health and safety data • Appendix H: Financial data I. Executive Summary • One paragraph summary for each segment of the business plan. • What makes a good business plan? – It is clear and concise – It is orderly and consistent – It tackles risks • What is the difference between a start-up business plan and one for an established business? Nothing much except that the structure plan is set largely in the future tense. – What changes most is the level of uncertainty throughout. In a startup, this market reception is largely unknown. However, it can be researched, assessed and estimated in advance. • Need: What’s the purpose of the business plan? – For start up, for raising equity finance, for raising debt finance, for board approval, for a joint venture partner, for the sale of the business, a plan versus a project plan and business planning as a managerial tool. I. Executive Summary • Preparation – Research: the business plan has to be CREDIBLE and CONVINCING. How you arrived at the market growth estimates and other details on your paper should be properly supported. – Organization: organize the team, set timetable, determine the tools you are going to need, what contents are important for the reader, what appendices to include, set maximum length to 35 pages, excluding the appendices. – Main chapters on market demand, competition and strategy should be 3-4 pages each; those on resources and forecasts can be a bit longer at 4-6 pages each. The rest (other than the conclusion) should be just 2 pages each. The conclusion, in just half a page, should be well written and upbeat. – The appendices can be the same numbers of pages, depending on what further information or evidence is necessary to include to convince your reader. The business • The plan starts here. • This is where you introduce more detail on the background to your business. Don’t put too much detail, though. • You brief your reader on the bare essentials of the business – what it does, for whom, why, where, with whom, with what and how it got to where it is. • If established business, how well the business has done so far. • If start-up, briefly discuss why the business is set to enjoy a sustainable competitive advantage. • The rest of the chapter will be about segmentation. Introduce to the reader the segments that matter in your business. Each segment will be analyzed in some depth in the coming chapters. II. The business • Background – The opener • • • • • • The essential bits of information will be in this first paragraph. Who are you (the name of your company) What products or services it focuses on Its main customer groups Where it is based, where else it has operations and where it sells to. With what success, in terms of revenues and operating margin and by which year. – Goals and objectives • Goals are directional and objectives are specific. • A goal (i.e. mission and vision statements) is something your business aims to be, as described in words. • An objective is a TARGET that helps to MEASURE whether that goal has been achieved, and is typically set out in NUMBERS – – – – – Specific (a market share target in that segment) Measurable Attainable or rational Relevant (market share is a good indicator of corporate progress) Time-limited or time-bounded II. The business • Background – Strategy • This is a ‘summary’ of your company’s competitive advantage and what strategy you deploy to maintain and enhance it; including in response to any adverse circumstances. – Resources • In 3 or 4 paragraphs, describe in detail how resources increased or grew over time. The use of timeline chart can be most useful to the reader (i.e. location and scale of main business infrastructure such as headquarters, manufacturing facilities), acquisitions (of key people and companies). • This is where you add a sentence of two on how the ownership and governance of the business has evolved. – Basic financials • Summarize recent financial history, showing financial impact of key deployment at the company or in its markets over time. • At this stage, aggregate numbers of sales and operating margin, are the only level of detail needed. Balance sheets and cash flows can be left for the detail of Chapter 7. • However, if a significant item of capital expenditure has influenced performance in recent years, it should be highlighted here. • For start ups: no history of sales but surely have incurred some costs (i.e. self financed , time and money invested by the partners). II. The business • Business mix by segment – Crucial questions that need answers are: • What is your business mix? • What products or services does your business offer and to which customer groups? • Which count for most in your business? – Focus on the segments that make the greatest contribution to your operating profit forecasts over the plan period. – Number of possible segments that you serve: • Number of products (or services) x Number of customer groups • For instance, if your hotel has function rooms, overnight rooms, and spa as your products, which you sell to three markets, vacationers, business travelers and honeymooners, in both the local and foreign tourists, THEN you operate in a 3 x 3 x 2 = 18 product/market segments – Question: which segments contribute 80% of your sales? Focus on the 20% that account for the 80% of sales. – For start-ups: who is the target customer and in which way will the customers benefit from your offering? II. The business • • • • • The opener Goals and objectives Strategy Resources Basic financials Market Demand • The analysis of market demand is the most important point of the business plan (OPPORTUNITIES). • Your reader wants to know: – – – – – – – Who are your buyers? How much are they buying? How much are they paying? Why are they buying? What has been influencing them? How those influences may change? How much they are likely to buy in the future? • This chapter considers demand NOT only for your product or service, but for all providers of products or services with whom you compete. It looks at the overall demand in the marketplace. III. Market Demand • Market size – You have to make an estimate of the market size. Reader would be interested to know if you’re a big fish in small pond or a tiny fish in a large pond. – How did the market size change over the last few years? Construct a market estimate about the past (last 3 years), today, and the future (next 3 years). – Make sure to identify the RELEVANT market size. • Market growth – Check websites that show market trends (without having to subscribe) – www.entreprenuer.com.ph ; www.dti.gov.ph; www.nscb.gov.ph ; search Google 4 Stage process for demand forecasting 1. 2. 3. 4. Assess past growth – how the market demand has grown in the past. Get annual growth rate over a number of recent years, preferably the last three or four years! Assess past drivers of growth – identify what has been driving that growth in the past. Typical factors that influence demand are per capita income growth, population growth in general and in specific to a market, government policy, changing awareness, business structural shifts (i.e. outsourcing), price change, fad, weather (seasonal variations, climate changes) Assess changes in drivers – assess whether there will be any change in influence of these and other drivers in the future. How each of these drivers going to develop over the next few years? Are things going to carry on more or less as before for a particular driver? Forecast future growth – forecast market demand growth, based on the influence of future drivers. Sample of forecasting future growth The business offers a relatively new service to the elderly. • Step 1: you find that the market has been growing at 5-10% per year over the last few years. • Step 2: you identify the main drivers as (a) per capita income growth, (b) growth in the elderly population, (3) growing awareness of the service by elderly people. • Step 3: you believe income growth will continue as before, the elderly population will grow even faster in the future and that awareness can only get more widespread. • Step 4: you conclude that growth in your market will accelerate and could reach over 10% per year over the next few years. • Make sure that ALL drivers are taken into account, irrespective of whether hard data can be found on them. Use your judgment. III. Market Demand • Market demand for a start-up – For instance, if your product or service is something that has not existed before, you have to do some test marketing (talk to people). Collate the responses, analyze them, draw firm conclusions, support them with quotes and data, and stick the market research report in your Appendix A. Based on those response, make an estimate of your potential market size. – If your start-up is serving an existing market, use the four-stage process for demand forecasting. • Market demand risks and opportunities – Identify the risks and opportunities that might affect your market demand forecast. – Assess from two perspectives: How likely are they are to take place and if they do occur, how big an impact will they have? III. Market demand • • • • • Market size Market demand growth in recent years Demand drivers and how these are changing Forecasts of future market demand Market demand risks and opportunities. Competition • Respect the competition. Give competitors the space they merit in your plan. Dismiss them and your reader will dismiss you. (THREATS) • With whom do you compete? – Variation by segment – Indirect competition IV. Competition • • Assess how competitive competitive the supply is to that demand in general, and your market segments. Prepare summary profiles of your competitors for an Appendix B, to be summarized here in Chapter 4. The profiles should include: – – – – – – – – – • • Sales (preferably by main segment) Sales growth over the last three years Operating and/or net profit margin Ownership (and an assessment of financial depth and backing) Segments addressed (now and plans for the future; new product in the pipeline or new segment being targeted) Location of facilities and sales/service teams Physical assets deployed (i.e. number and type of machinery) Strategy – main focus, recent investments, growth plans (i.e. trade shows) Position in market (unique sales pitch, pricing policy) Only KEY extracts and conclusions from this Appendix B analysis should go into the Chapter 4. Use of pie charts showing each competitor’s pie slice of market share in your main business segments for the past three years would be helpful. IV. Competition • Competitive Intensity – How intense is competition in your main business segments? Is it going to intensify? Why? – To assess the competitiveness of an industry, use Professor Michael Porter’s five forces model. Five forces shaping competition Threat of new entrants Supplier power Internal rivalry Ease of substitution Customer power • Internal rivalry – The number of players (the more the numerous the players, the tougher typically the competition) – Market demand growth relative to supply (the slower the market is growing, the tougher typically the competition. If D = S, internal rivalry may be moderate; if D < S, internal rivalry is intensified) – External pressure (government [regulation, taxes and subsidies] and trade unions have great power to influence the nature of competition) • Threat of new entrants – The lower the barriers to entry to a market, the tougher typically the competition. Barriers to entry can be technology, operations, people or cost related and investment (capital). – Barriers are also high, the higher the costs of the customer of switching from one supplier to another. • Ease of substitution – The easier it is for customer to use a substitute product or service, the tougher typically the competition. • Customer power – The more bargaining power your customer have over you, the tougher typically the competition. – The more choice of provider the customer has, the tougher the competition. – Customer power is also influenced by switching costs. • Supplier power – The more bargaining power suppliers have over producers or service providers, the tougher typically the competition. – Again it can often be just a function of numbers. 4 levels of Competitors • A company can view its competitors as other companies that offer similar products and services to the same customers at a similar price. (Jollibee vs McDo) • A company can see its competitors as all companies making the same product or class of products. (Jollibee vs all fast foods) • A company can see its competitors more broadly as all companies supplying the same services. (Jollibee vs ALL restaurants and other suppliers of prepared foodsupermarket) • A company can see its competitors even more broadly as all companies that compete for the same customer pesos. (Jollibee vs grocery stores and home cooked meals) Source: Marketing for Hospitality and Tourism, 3rd Edition Philip Kotler, John Bowen and James Makens IV. Competition • Overall competitive intensity – Put the five forces of Porter together to measure how competitive your industry is (i.e. high, medium, low). – What about the future? Is industry competition set to intensify? – What will be the effect of competitive dynamics on pricing in your industry over the next few years? • Competition in a start-up – Whatever your solution to the perceived needs of the customers, someone else somewhere else has another solution; or will have. – Three aspects of competition in a start-up: • Direct competition (identify existing competitors in the market) • Indirect competition (identify those providing and alternative solution yet competing for a similar share of the customer’s wallet) • Competitive response (reaction of competitors if your venture turns out to be a success. Assume that your competitor will respond to your market entry) IV. Competition • Industry competition risks and opportunities – After assessing the competitive intensity in your industry, what are the risks to that assessment? What could happen to intensify competition further? – What could happen to internal rivalry, to customer bargaining power or to any of the other forces to intensify competition? – What is the likelihood of those risks occurring? And what would be the impact if they did? And how will you lessen these big risks should they occur? – What are the big opportunities perhaps to balance these risks? And how will you exploit them should they occur? – One or two paragraphs will suffice. Strategy • • • • How competitive is your business in each of its main segments? What is your strategy for strengthening competitiveness in key segments? What risks may you face and what opportunities can you exploit? In Chapter 6, we will look at the resources you’ll need to deploy to put that strategy into effect. • The conclusion of Chapter 5 will form an essential component of the justification of your sales and operating profit forecasts in Chapter 7 of your plan. • This Chapter discusses your competitive position and strategy; however, only CONCLUSIONS go into the plan. Any further detail on competitive position can be placed in Appendix C. Again, this entails solid research and analysis. • Do not over exaggerate your strong points, nor gloss over your weak points. Place your firm’s strengths and weaknesses in context – in terms of both the customer’s buying decision and the capabilities of the competition. V. Strategy • Competitive position 1. Identify and weight customer purchasing criteria (CPCs) – what customers need from you (and your competitors) in each segment 2. Identify and weigh key success factors (KSFs) – what you and your competitors need to do to satisfy these customer purchasing criteria and run a successful business 3. Assess your competitive position – how you rate against those key success factors to your competitors. – The summary of findings will be part of the business plan and further detail will be in Appendix C to your plan. Do this for each of your main business segment FIRST STEP: Customer purchasing criteria (E2 – R2 – P2) How important are these criteria to your customers, relative to other purchasing criteria? Is it high, low or medium importance? • Effectiveness of the product of service – Job gets done. Customer has specific requirements on the features, performance and reliability of the product or service they need. • Efficiency of the service – Job gets done on time. • Range of products or services provided • Relationship with the producer or service provider • Premises (only applicable if the customer needs to visit the producer or service provider’s premises) • Price • To find out the CPC, use survey to interview the customers. One customer group might find one need ‘very important’ others just ‘important’. It’s unlikely that another will say it’s ‘unimportant.’ Customers tend to have similar needs. • Need to know how likely the importance of these criteria will change in time. Do this for each of your main business segment FIRST STEP: KEY SUCCESS FACTORS • What producers or service providers need to do right to satisfy the customer purchasing criteria AND run a sound business. • Typical KSFs for products (or service) – Quality, consistency, availability, range and product development (R&D). • On the service side, KSFs can include – Distribution capability, sales and marketing effectiveness, customer service and post-sale technical support. • Other KSFs relate to the cost side of things – such as location of premises, scale of operations, state of the art, cost effective equipment and operational process efficiency. To identify which are the most important KSFs for each of your main business segments, you need to undertake the following steps. 1. Convert CPCs into KSFs – The CPCs that are related to how competitors differentiate their product or service from others are called differentiation-related KSFs. • What are the main differentiation-related KSFs in your business? How important are they? Of high, low, medium, medium/high, low/medium importance? – Customers of most services expect a ‘fair’ price. Producers need to keep their costs down. This are cost-related concerns. Price is a CPC, cost competitiveness is a KSF. • What are the main cost-related KSFs in your business? Cost of materials? Use of subcontractors? Premises? Overhead control? Economies of scale? How important are they? Of high, low, medium, medium/high, low/medium importance? Examples Customer Purchasing Criteria The associated key success factors: In a salon, there are customers who need your salon to be good at coloring Stylist need to be skilled at coloring. If there the internet is not working, customers need technical help desk to understand and fix the problem. The technician should have an appropriate technical qualification, subsequent completion of relevant training and experience of handling this and similar problems. In joining a tour group, customer needs clarity of communication from the tour guide. Customer needs the guide to have good rapport. The tour guide needs to be proficient in the language delivery and clear communication skills Price Cost competitiveness (location, labor, materials, outsourcing, IT systems, size and economies of scale) Customer purchasing criteria and key success factors from spa services, 2010 Spa customer purchasing criteria Effectivenes s Therapist capabilities Benefit awareness Confidence in process Efficiency Effort Timeliness Importance High Change Associated KSFs Therapist skills Low/med Qualification Med Track record Low/med Availability Low Work ethic Delivery Relationship Range Premises Rapport Med People skills (communication) Enthusiasm Med/high Positive, upbeat culture Facilities Med/high Range of facilities Treatments Low/med Range of treatments High Spa quality premises Med/high Cost competitiveness Cleanliness, hygiene Space, decor Price To identify which are the most important KSFs for each of your main business segments, you need to undertake the following steps. 2. Assess two more KSFs – Management • How important is management in your business? Need to identify how important management is in general in your industry such as how important sales and marketing reinforced by an efficient operations team? – Market share • The larger the market share, the stronger should be the provider. • This is an indicator of the breadth and depth of your customer relationships and your business reputation. It’s less costly to maintain a customer than to attract new ones, the provider with the larger market share typically has a competitive advantage – the power of the incumbent (customers don’t like switching unless they are sorely tempted (the pull factor) or forced to move through deficient quality of product or service (the push factor). It can be even costly to switch (lost of discount, time, hassle). • How important is the power of the incumbent in your business? How important is market share as a KSF? To identify which are the most important KSFs for each of your main business segments, you need to undertake the following steps. 3. Apply weights to the KSFs – – – After working out which are the most important KSFs in your business and after ranking in order of importance, now you need to weight them. Either methodically or systematically (p. 210). Or eyeballing (setting relative market share at 20%, cost factors at 30%, management and differentiation factors at 50%). Adjust them to what you have found to be critical to success in your business. • • 4. Identify any must-have KSFs – – 5. Assess to what extent weightings differ for each of your business segments. Different customer groups can often place a different emphasis on price, so cost competitiveness may be more of an issue in one segment than in others Is any one of the KSFs so important in your business that if you don’t rank highly against it you shouldn’t even be in the business? This is a must-have KSF, rather than a mere shouldhave. For instance, must have ISO classification, latest equipment, a product feature? Rate performance for competitive position (rating system of 0 – 5) – – – – Decide who to compare yourself with? How do you compare with your peers? Are you more or less competitive than them? How does your company rate in different customer group segment? What’s your position? How likely is your competitive position to change over time? And for your competitors? Competitive position in spa services Weighti ng Dart Valley Palace Fit4U Smug ly DV II 15% 2 4 3 2 3 25% 3 4 4 1 3.5 10% 2 5 4 4 4 Effectiveness – standard of therapists 10% 5 4 4 5 5 Efficiency – work ethic, delivery 5% 5 3 4 5 5 Relationship – communication, attitude 10% 5 4 4 5 5 Range – facilities, treatment 10% 2 5 4 1 4 Premises – hygiene, décor, space 15% 5 3 4 5 5 100% 3.5 4.0 3.9 3.1 4.1 Key Success Factors Relative market share Cost factors Overhead control, scale economies Management Factors Marketing Differentiation factors Competitive position V. Strategy • Strategy – How the company distributes its scarce resources to gain a sustainable advantage over the competition. – How you plan to allocate your company’s resources (i.e. people, physical assets, cash) over the business plan period to meet your goals, enhance firm’s competitive position in key business segments. – In this section, show how you can proactively improve that position through your strategy. – Demonstrate how your firm’s strategy will improve performance over the next few years: • Which generic strategies you will pursue • What steps will be taken to strengthen competitive position in key segments, by building on strengths and or working on weaknesses • How your firm will boost its strategic position by optimizing its portfolio of business segments. V. Strategy • What is your generic strategies? – Low cost or differentiation: either strategy can yield a sustainable competitive advantage. Either the company supplies a product that is at lower cost to its competitors or it supplies a product that is sufficiently differentiated from its competitors that customers are prepared to pay a premium price (Cebupac vs. Singapore Airline) – Focus strategy (Porter): focus NOT on the whole industry but only in a single segment (i.e. Honda motorcycles focus on product reliability has yielded the global scale to enable its quality products to remain cost competitive) V. Strategy • Strengthening competitive position – If your generic strategy is one of low cost, what investments or programs are you planning to reduce costs even further and so stay ahead of competition? What major investments in plant, equipment, training and partnering are you planning? What performance improvement programs are underway or planned? – If you generic strategy is one of differentiation, what investments or programs are you planning to reinforce that differentiation and make you stand out even more clearly that you competition? What major investments are you planning? What strategic marketing programs are underway or planned? – If your generic strategy is one of focus, what investments or programs are you planning to reduce costs and/or reinforce your differentiation? – This section focuses on strengthening your competitive position in your key product/market segments over the next few years (usually 3 years) V. Strategy • Boosting strategic position – Invest ideally in segments where you are strongest and/or which are the most attractive. – Consider withdrawal from segments where you are weaker and/or where your competitive position is not that good. – Should you be looking at entering another business segment/s that is in more attractive markets than the ones you currently address? • The larger the MARKET SIZE and the faster it is growing (MARKET DEMAND GROWTH), the MORE attractive the market is, other things being equal. • However, the greater the COMPETITIVE INDUSTRY in a market and the greater its risk (MARKET RISK), the LESS attractive it is. • Use judgment on weighing each of the four factors. High Strategic position: an example Invest? C 3 Invest in segment D D A Exit from segment B 2 Low Market attractiveness 4 Exit? 1 Weak 2 Continue development with segments A and C B 3 4 Strong Firm’s competitive position Note: Diameter of bubble roughly proportional to scale of current revenues (except for E) V. Strategy This segment should include: • Firm’s competitive position – Your understanding of customer purchasing criteria in key business segments. Important summary in this segment is included, with further detail in Appendix C of your plan. – Your understanding of key success factors – Your assessment of competitive position • Demonstrate how your firm’s strategy will improve performance over the new few years – Which of the generic strategies you will deploy – What steps will be taken to strengthen competitive position in key segments, by building on strength and/or working on weaknesses – How your firm will boost its strategic position by optimizing its portfolio of business segments. • • For start-ups, set out why you have a sufficiently distinctive angle to survive in the early stages. Convince reader that you will find ready buyers for your new product or service. Finally, alert reader to the key strategic risks your firm may face and how you intend to mitigate them. Conversely, high light strategic opportunities that may be there for the taking, which will represent upside to your plan’s forecasts. VI. Resources • In strategies, you explained WHAT your firm plan to do to achieve the goals set in Chapter 2. In this chapter, you will set out HOW. • In 3 – 4 pages, summarize the main findings and further detail as Appendix D of your plan. • Order of priority as follows: – Management – Marketing – Operations • Start Chapter 6 with how your management resources are up to the task of delivering your plan then move on to your marketing resources and then address the rest of the value chain. VI. Resources Management (Investors would say that they back people, not products of services) Marketing (Investors would think no matter how good the product is if customers are unaware of how good it is, it will not be sold. This include product development and R&D program. ) Management and marketing must permeate every link in the value chain. Managerial capability must be as evident in the inbound logistic as in the service ends of the business. Inbound logistics Manufacturing of service ops Outbound logistics Purchasing Systems and IT Sales Service VI. Resources • In this section, you’ll set out why you have the right management team to ensure delivery of the plan. • In an established business – A one-page curriculum vitae, specifying roles held, with which firm and how long, and highlighting major achievements against specific objectives within these roles – for Appendix D to your plan – A one paragraph summary, with a sentence or two on relevant experience, including length of service at the firm, and selecting one example of how the manager delivered in a relevant role or against a relevant project – for this section of Chapter 6. – One paragraph for EVERY key manager (such as managing director, sales and marketing, finance and operations, technology, human resources and IT. Show organization –> can include an organizational chart, which is kept simple and showing in particular who reports to whom in the top management team. – One or two paragraphs on governance should suffice. VI. Resources • In a start-up – Investors look for entrepreneurs and not for managers. If the entrepreneur is the right person, then the venture capitalist will get excited. – Investors are looking for a visionary, a leader, a person who believes wholly in the product or service, who will inspire and motivate through passion, energy and hard work. – Passion won’t be everything. You must also be able to deliver. And in this section of your business plan, you must set out briefly how you have delivered in the past. How you met the objectives set, whether by you or your boss. VI. Resources Marketing • In 1 -3 paragraphs, explain your marketing strategies. – Product: if your strategy is differentiation, show how it satisfies the identified customer needs. Show too how product development and research are oriented towards meeting future customer needs. – Place: show distribution channels that are of greatest importance to your firm, now and in the next few years (i.e. direct/indirect selling, via agents, wholesalers or distributors) Why? Cost? What are competitors using? Ratio of sales to number of salespeople compare with that of the market leader? Online sales? – Price: what’s the firm’s price positioning relative to the competition? Broadly in line with the average, at a discount, at a premium? Why? How is this pricing aligned with strategy? How elastic are volumes sold in your business to price? – Promotion: what are the main ways of promoting the products in recent years? Advertising through which media – print, screen, internet? Trade promotions, PR, sponsorship, exhibitions, trade shows, seminars/conferences. Why? VI. Resources Marketing (additional P’s for services) • In 1 -3 paragraphs, explain your marketing strategies. – People: show the qualifications of servers that the firm needs and how these would bring in the customer, customer satisfaction and business. – Process: Show how the process is customer-oriented and how it satisfies specific needs of the customer. – Physical evidence: show how the tangibles helps in providing the best customer experience. • Include a paragraph or two on the results of all this marketing. How satisfied are your customers with your product or service? • Appendix E may include a one page synopsis of your surveys (if you’ve taken one) along with other marketing data you think might be useful evidence for your reader. VI. Resources • In a start-up – All of these concerns are addressed however, they are in future tense. – Marketing is the lifeblood of a start-up. – In Chapter 3, you identified promising market demand prospects. In Chapter 4, you concluded that the competitive environment was favorable. In Chapter 5, you set out why your offering enjoyed a competitive edge. – In Chapter 6, you’ll set out how customers are going to be put in touch with your offering. Include a summary in this section and a detailed marketing plan in Appendix E of your paper. VI. Resources • Operations and capital expenditure • Need to cover the issue affecting your firm through the value chain, from the sourcing of supplies through to customer service. • Reader only wants to know the general view. What resources are required to meet the plan. • For the next chapter on financial forecasts, you must set out the key items of capital expenditure needed to support the plan. State the following – in no more detail than is needed – for the major items of capital expenditure. – – – – – – – The nature of the capital project. Why it is needed. The alternatives considered and rejected. How much it will cost. How long it will take to be implemented. What impact it will have on future revenues or costs. The risks associated with the investment. VI. Resources • Operations and capital expenditure • In this section, consider the implication of your strategy over the next few years on the following aspects of operations: – Supplies (dependency on raw material sources and prices; people) – Purchasing (outsourcing [services, logistics, IT supports, maintenance]; negotiation skills) – Manufacture or service provision (facilities, equipment, process employed to provide good or service, do you make or buy) – Research and development – Distribution, storage and logistics (describe how your goods get out of the factory and into the hands of the customer) – Customer service and technical support (do you have one? Outsourced?) – Systems and IT (key systems used in manufacturing or service operation or what are the shortcomings) – Quality and financial control (controls you have in place to ensure quality of output and that collections and pay outs are on time) – Regulatory compliance (economic and social regulations) VI. Resources • In this chapter, demonstrate how your firm will distribute its scarce resources to implement the strategy of Chapter 5 to achieve the goals and objectives of Chapter 2. • Set out plans for using resources in three main fields – Management: how you will have the right team of managers with the right experience, qualifications and skills to implement strategy – Marketing: how you will create sufficient awareness of the firm’s offering over the plan period – Operations: how you will deploy your resources to ensure that supplies, … are sufficiently aligned to deliver the plan. • Finally, describe the big resource risks and opportunities that may impact on the achievability of your business plan. Chapter 6 – HOW you will assign your limited resources to achieve Chapter 2 – GOALS following your Chapter 5 – STRATEGY Chapter 7 – TRANSLATE strategy into RESULTS in terms of key measurable parameters and MONEY VII. Financials and Forecasts • Forecast sales growth that is consistent to both the trends in the market demand identified in Chapter 3 and with growth plans in Chapter 5 • Forecast profit margin that is consistent with competitive dynamics assessed in Chapter 4 and profit improvement plans of Chapter 5. • Then translate these forecasts into full financial statements VII. Financials and Forecasts First, set up your historical financials (last 3-5 years) for the reader to have a bird’s eye view of your performance. If for start-ups, no historics but only forecasts. Set out four major financial statements – for each year, the historic actual years and the budget year: • Sale and profit margins by main business segment • Profit and loss (P&L) account (overall, for all segments) • Cash flow statement • Balance sheet VII. Financials and Forecasts Then in one or two pages of narrative, describe the highlights that support these financials. • Remind reader which business segments contribute most to sales and which segments contribute most to profit. • How overall sales have changed from the previous year and are expected to change in this year’s budget • Describe the major elements of expense in the P&L and how gross and operating profits have changed from previous years and expected to change in the next year’s budget • Describe the major influences in the cash flow and balance sheet. • Look in particular anomalies (untypical change) and explain what was behind the change. VII. Financials and Forecasts Derive a market-driven sales forecasts (without sales you have no business). 1. Business segments. List each main segment, which will be forecast separately 2. Revenues. What ‘normal’ revenues were achieved in this segment in the last financial year (from Chapter 2 of your plan)? 3. Market demand prospects. How do you expect the market to grow (preferably in % per year over the next few years in this segment (from Chapter 3)? 4. Competitive position. How does your firm measure up relative to the competition in this segment (from Chapter 5)? 5. Likely revenue growth. Based on future competitive position, is your firm likely to keep pace with, exceed or fall short of market demand growth in this segment? What is your likely revenue growth rate? 6. Top-down revenues. What are the resultant revenues from the market-driven forecast growth rate? 7. Bottom-up revenues. What initiatives are planned to grow sales in this segment? Such as launch of market or product development, market penetration, additional investments. What are the likely incremental revenues from such new, bottom-up initiatives in three year’s time. 8. Total revenues. Add up the market-driven and bottom-up revenues to get the total forecast revenue for each segment in three year’s time. VII. Financials and Forecasts • The process is best captured in a table. There are 8 entries in the process flow, so take eight columns. • First 4 columns are from Chapters 2, 3, and 5 of your plan. Here you just need to add columns 5-8. • Column 5 is the clincher. Your selected likely market-driven revenue growth rate must be consistent with – Market demand forecasts (Chapter 3 of your plan) – Your firm’s competitive position (Chapter 5) – Firm’s track record over the last few years • Example of consistency. If you find that the market in a business segment is set to grow steadily, and you assess your firm as having a favorable competitive position then all else being equal, you should be able to grow your business apace with the market in that segment. If, however, your plan is to grow much faster than that, you will need to convincing reasons on how. Example: How achievable are Dart Valley’s sales forecasts? Business Revenue segments (£000) Latest year Market demand growth Company competitive position (0- Likely revenue growth (%/year) 5) (%/year) Next five years Next five years Next five years Top-down revenues (£000) Bottomup revenues* Total revenues (£000) (£000) In five years In five years In five years 2010 2010-2015 2010-2015 2010-2015 2015 2015 2015 1 2 3 4 5 6 7 8 Source Chapter 2 Chapter 3 Chapter 5 Accomodation 326 3-4% 3.6 to 3.9 5% 416 217 633 Catering 82 2-3% 3.3 to 3.5 3% 95 64 159 Spa 105 4-5% 3.5 to 4.1 7.5% 151 133 284 Total 513 5.2% 662 414 1,076 Chapter 7 * Phase II construction of Dart Valley Forecast can be from the next three to five years. VII. Financials and Forecasts Derive a competition-driven margin forecasts 1. Business segments. Look at one segment at a time. CURRENT SITUATION 2. Revenues this year. 3. Profit margin (revenue-costs) this year. What % profit margin will you make in this business segment this year. 4. Profit this year. Revenue multiplied by profit margin COMPETITIVE ENVIRONMENT 5. Recent competitive intensity. How tough is competition compared to other segments – high, medium, or low (from Chapter 4 of your plan)? 6. Future competitive intensity. How tough is competition likely to be over the next few years compared to other segments – high, medium, or low (from Chapter 4)? FORECAST PROFIT 7. Planned profit margin. What % profit margin are you planning to make in this business segment in three years’ time? 8. Forecast profit. Revenues from the previous section times planned profit margin 9. Planned profit improvement measures. What measures are you planning to improve margins to support your planned profit margin of column 7 (from Chapter 5)? Example: setting the sales forecast in a competitive context Business Revenue segments (£000) Profit (£000) Profit margin (%/year) 2 Source Segment A Segment B 3 4 Chapter 2 Current revenue Current profit (Low-Med-High) Latest year Latest year 1 Competitive intensity In three years 5 6 Chapter 4 Profit/re venue Assess current: Low. Med. High Forecast, will it be low, med, high Planned Profit margin Forecast profit (£000) Planned profit improvement measures (%/year) In three years In three years 7 8 Chapter 7 Target profit margin (forecast) Revenue (based on the previous table) * profit margin % 9 Chapters 5 and 6 - State what measures you are taking to justify your forecasts VII. Financials and Forecasts • Funding the plan can come in the form of – Equity • Does not require servicing unless the board decides to pay dividends • Expensive because investor expects a rate of return commensurate with the risk they are taking on (≅3040% / annum) – Debt • Demands a fixed return, a fixed rate of return regardless the company’s performance • Cheaper but less flexible than equity finance VII. Financials and Forecasts • Full financial forecasts – Set out the current year’s budget numbers plus three-year forecasts for three different sets of accounts: • Profit and loss account, including overheads • Cash flow, including capital expenditure • Balance sheet Forecasting the profit and loss account • Dart Valley forecasts VII. Financials and Forecasts • Forecasts in a start up – No track record on which to base one’s judgment – No past, no present, only future. Business Market segments size (£000) Market demand growth Forecast Company Market size competitive (£000) position (0- (%/year) Latest year 1 Source A B C Total 2 Next three years In three years Likely market share 5) (%/year) Next three years In three years 3 4 Chapter 3 Chapter 5 Likely revenues (£000) In three years 5 6 Chapter 7 VII. Financials and Forecasts • For start-ups – The process of drawing up the P&L statement, cash flow and balance sheet will be the same as for an established business. • Financial risks and opportunities – So far, you’ve identified the main risks and opportunities relating to market demand (Chapter 3), industry competition (Chapter 4), strategy (Chapter 5) and resources (Chapter 6), Now you need to add the final set – those relating to specific issues. – The most obvious financial issues that could impact your business plan will be interest rates, exchange rates and tax rates. To what extent would your business plan be affected if and when a significant change in any of these rates happen. – What financial risks that are reasonably likely to occur and what would the impact be if they occur? – What are the big opportunities? How can you exploit them? VIII. Risk and opportunity and sensitivity • In this section, assemble all the risks and opportunities that you identified in – – – – – Relating to market demand (Chapter 3 of your plan) Industry competition (Chapter 4) Your firm’s competitive position (Chapter 5) Your firm’s resources (Chapter 6) Your financial forecasts (Chapter 7) • Put these together and weigh them up and address the key question: do the opportunities surpass the risks? Suns and Clouds chart pictorial presentation of risk and opportunity Risks 4 Big 1 Double-dip dents staycation trend 2 Spa fad wanes 3 A direct copy new entrant 4 Dart Valley’s concept fades 5 Phase II construction costs up 20% 6 Phase II occupancy build up slower than forecast 7 Interest rate up 3% 2 Impact Medium 6 3 5 2 5 3 4 7 1 Opportunities Small 1 Low Medium Likelihood High 1 Market demand maintains growth 2 Focused marketing of Dart Valley’s proven concept 3 Dart Valley spa profitability 4 New complementary services or products 5 A replica in e.g. the Fal Valley VIII. Risk and opportunity and sensitivity • Purpose of Suns and Clouds – To present the balance of risk and opportunity – Do the opportunities surpass the risks? – Given the overall picture, are the suns more favorably placed than the clouds? Or do the clouds overshadow the suns? – Upper diagonal is worthy of note: it’s at least reasonably likely to occur and have at least a reasonable impact. – Lower diagonal are less important: low likelihood and low to medium impact. – The y-axis in the Suns and Clouds chart specifies impact on cash flow, or impact on value. The chart is looking only for relative impact, in the sense that one risk will have a greater impact than another. VIII. Risk and opportunity and sensitivity • Sensitivity testing – Quantifying one or more risks or opportunities, putting actual figures on them. – You test the financial statements to see how they change in response to a specific risk or opportunity or a general adjustment – Pull out three or four big risks, assign specific, quantitative impacts to them and observe the effects on your P&L and cash flow forecasts. Plus add 5% operating costs, or 20% expenditure on a key capital project. Then take a look at the output and see how sensitive the financial forecasts are to these scenarios. – Use Excel – In this section, you want to show that your cash flow forecasts remain stable and able to withstand the impact of reasonable adverse assumptions derived from specified risks. Dart Valley Sensitivity Testing Profit before tax (£000) Cash flow (£000) 2013 2015 2013 2015 107 256 244 375 2012 construction costs up 20% 90 239 229 362 Occupancy rates down 15% 31 161 170 284 Both of the above 14 144 153 257 Business Plan Sensitivity tests IX. Conclusions • One general statement to answer: why is the plan worthy of backing? • One statement each (concise) in which you summarize the main findings from the headlines below. – Market demand prospects. You’re conclusion on what’s going to happen to market demand, by key business segment (Chapter 3) – Competition. Your conclusion on whether competition is intense and set to get tougher (Chapter 4) – Strategy. Your conclusion on your firm’s competitive position and its strategy for further developing competitive advantage (Chapter 5) – Resources. Your conclusions on the resources your firm will deploy to implement that strategy and meet its goals (Chapter 6) – Financial forecasts. Your conclusions on how your firm will grow revenues and operating margin over the next few years (Chapter 7) – Risk, opportunity and sensitivity. Your conclusions on why opportunities before your firm outshine risks in your plan. • Conclusion can either be a half page’s worth or normal text or as per in above format with an overall conclusion supported by six bulleted sentences. I. Executive Summary • Executive summary (Chapter 1 of your plan) is an extended version of the conclusion. • The executive summary should be 3-4 pages including tables/charts. • Two to three paragraphs to explain per bullet point. • As for the conclusion (to the executive summary), be clear, concise and convincing. • The executive summary is the most crucial part of the plan, since most senior decision makers will read nothing else. Final words, DON’T BE A: • Dreamer – forecasting without relation to the market environment (example forecasting a 14% per year sales growth in a business segment even though the market demand is shrinking). This cannot be backed up. • Loner – forecasting without regards to competitors. Assuming that competition does not exist. This cannot be backed up. • Magician – forecasting yearly sales growth without regards to capital expenditure, hence forecasting dramatic growth in operating margin. This can be not backed up. • Macho – forecasting a turn around from negative growth to high positive growth. This is the ‘hockey stick’ forecasts. Too optimistic forecasts may not be backed up. • Deluded – setting forecasted operating margin too high (i.e. at 40%) may not be backed up. The prices may be set too high. Forgetting that there are competitors who may compete for the market share. END!!!