Chapter 2   The structure of
Chapter 2   the business
Chapter 2   plan

In Chapter 1 we examined the reasons and justification for preparing and using business plans, both for new and established enterprises. This chapter examines the ways in which business plans are presented, and suggests a basic structure which would be acceptable to most potential banks or financiers, in order to give the proposer of the plan plenty of flexibility in its content and presentation. This basic structure will also facilitate an efficient way of meeting the evidence requirements of the National Vocational Qualification (NVQ) Level 3 Business Planning qualification.

What format should the business plan take?

There are a multitude of ‘ideal’ business plans around, any or all of which will do the job for which they were designed, some better than others. Each of the major clearing banks have their own version available to potential business customers in disk or paper format, along with explanatory notes to assist completion. Other formats are available from Training and Enterprise Councils (TECs), Local Enterprise Agencies (LEAs) or from the plethora of ‘Start your own business’ books which abound on the shelves of most town-centre bookshops. Most of these business plans ask a range of specific questions, provide a specific amount of space for the specific answers required and specific pro forma spreadsheets with specific headings – this is where the problems start!

Probably the most common single feature that most new startup businesses share is the very fact that they are all different from each other; and the one feature which standardized business plans with their specific questions cannot accommodate is that same disparity and uniqueness that pervades those new firms.

One of the biggest problems of standardized business plans is that they tend to restrict individual expression because they focus on factors of commonality between firms, rather than encouraging them to focus on the factors which make them different or unique from their rivals. No one should doubt or underestimate the value and use of a good budgetary plan and cash flow forecast to monitor the progress of a business, but even the finest of these will not help to sell the firm's products or services.

Not only do standardized business plan formats tend to restrict the expression of individual flair and ingenuity, by virtue of the fact that they must also accommodate a range of differing business structures they inevitably prove onerous for some business prospects and inadequate for others. For the individual who simply wants to operate, for example, as a self-employed window cleaner with a regular round and whose customers tend to pay cash on the spot, the contents of the average standardized business plan are largely superfluous as the range of business skills and the start-up capital needed to operate the business are quite modest. In comparison, in order to set up a limited company operating a chain of cyber-cafes, most standardized business plan formats would probably be inadequate. Such an enterprise would need to consider preparing budgets on a multiple location basis, and consolidating these into an overall working budget and cash flow forecast. The range of technological, management and staff supervision skills needed by the proprietors would be more extensive than in the one-man-band situation, and the finance and resources required to establish the business would equally, be much more substantial.

The layout of the business plan

The following proposed layout for the business plan has been designed to cover the assessment and underpinning knowledge requirements of the NVQ 3 Business Planning, and the Institute of Management (IoM) Certificate in Management (Business Start-up) programmes, At the same time, it has also been designed to be sufficiently flexible to accommodate the comprehensive range of aspects which have to be addressed when approaching a bank or other financial institution for funding for the business proposal. It is by no means intended as being the one and only suitable layout to meet these purposes, but should be seen as a framework around which potential owner-managers can construct their own individual business plans by adding further material, or by omitting certain sections as may be appropriate to the size and type of business which they are planning to operate.

Section 1 The business idea

1.1 The type of business proposed and services to be offered

This consists of a simple statement that acts as an introduction to the business plan. For example: ‘I am proposing to work as a self-employed complementary therapist providing a range of treatments to my clients including aromatherapy, reflexology, reiki and holistic massage. I am qualified as a practitioner, and experienced in each of these areas, and having worked in a health clinic for the past two years, I am ready now to branch out on my own.’ This statement shows in clear and simple terms, the type of work envisaged, the employment status of the owner, the range of services that will be offered and why the owner has chosen to do it.

1.2 Method of operation

This section describes briefly the way in which the business will be operated, to provide the reader (or potential financier) with an overview of how the business will operate. Taking up the previous example: ‘I shall be operating as a sole-trader, working primarily from a dedicated treatment room in my home, which has been converted from a spare downstairs study. In the case of a few of my clients who are less mobile than others, I shall be visiting them in their homes to carry out their treatments.’

At this stage it is not necessary to go into great detail as the method of operation, and the reasons for its selection, will be considered later in the business plan. Again, the idea is to provide the potential financier with a preliminary insight into how the business will operate, and to describe the framework or structure of the proposed business in order to create an overall picture in the reader's mind. Once the reader has a basic understanding of your proposal, you can progress to add the details at a later stage, by which time the reader will have formed questions in his or her mind that those details will answer.

1.3 Location and operating area

You will need to explain the geographical base and catchment area from which you expect your customers to come. For some businesses, such as a mail order outlet, this is a simple matter: ‘I shall be based in Rotherham, but my mail order customers will be spread throughout the United Kingdom’ or, in the case of our complementary therapist, ‘I shall be based in my hometown of Maidstone, and most of my customers will come from the surrounding towns and villages within a ten-mile radius of the town. The clients whom I visit will mostly live within five miles of my home’.

1.4 Outline of market and customers

This is where you provide a general outline of the type of customers who will be interested in your goods or services. Remember, at this stage an outline is all that is needed, as a more detailed analysis of your marketplace will be given in the marketing section of the business plan. For our mail order supplier: ‘The customers will comprise mainly male teenagers and single adults who either belong to model aircraft clubs, or who build model aircraft as a hobby.’ For our therapist they might consist of: ‘Affluent middle-aged housewives, prosperous businesswomen or wealthy widows who feel the need relaxation to relieve stress and tension’, or perhaps ‘A cross-section of people with physical or muscular problems for which the more conventional methods of treatments have proved inadequate.’

1.5 Statement of viability

This is the initial assertion of the proposer's belief in the viability of the business, giving a summary explanation of why he or she thinks that the business will succeed. For our mail order supplier this might be the fact that ‘There is currently no other supplier in the UK who is importing and distributing this particular brand of model aircraft from Japan’. For our therapist it might be that ‘I already have a regular customer base on which to build, which keeps me occupied for three days per week, and I have a waiting list of twenty other clients as a result of word-of-mouth recommendation’.

Section 2 The proprietors of the business

In this section we name and describe the proprietors or the key people who will be involved in setting up and running the business, along with their respective skills and abilities which will contribute towards its success. These people may not be one and the same, as the owners may have identified others who have key skills or abilities necessary to the business but who will be employees of those owners; however, they will still be important, if not essential, to the potential success of the business.

2.1 Details of key personnel

In the case of a one-person business, this could comprise a quite simple curriculum vitae and personal profile of the business operator. However, in the case of a partnership or limited company there may be a number of key personnel involved and the role and background of each of which will need to be described in detail.

At the same time, in the case of business proposals involving a number of partners, directors or key personnel, this is the stage at which the management structure of the organization can be outlined in the form of an organization chart that specifies the respective positions and responsibilities of the key staff.

Having presented an organization chart, for each of the proprietors or key personnel shown on the chart you should then provide:

1  A curriculum vitae (ideally one page only) detailing your personal information, i.e. nationality, date and place of birth, marital status, family details, etc. It should also list your current and any ongoing qualifications or professional memberships which you expect to complete in the near future. It should summarize your career history, starting with your latest employment and working backwards, and identifying any training or experience relevant to the current business proposal. Finally, it should mention any hobbies or non-working activities or interests which may enhance your personal profile, e.g. school governor, club secretary or treasurer, charitable activities, publications, etc.

2  A personal profile in which you describe yourself, your motivations, any past experiences which have had a major influence on your lifestyle or your career, and your personal ambitions and plans or long-term objectives for the future. It may also contain reference to any personal circumstances or family or social commitments which may influence or be of relevance to your business proposal. For example, you may have a family to support, or perhaps children with special educational needs. Alternatively, you may be in the fortunate position where you already have some alternative form of income, such as a working partner or a pension, so that you do not have to rely only on the income from your proposed business.

2.3 Your reasons for the choice of business

In this section you should explain in more detail the various occurrences or motivating factors which have caused you to develop your plans to run your own business. In some cases this may be the result of redundancy forcing a change of direction – some people yearn for years to be their own boss, but it is only the shock and the insecurity of unemployment which forces them to take the risk. In other cases it may be as a result of an opportunity which has presented itself, offering the chance to fulfil a long-standing personal ideal or ambition, e.g. a lucrative hobby gradually expands to the extent that it finally becomes viable as a full-time business. Here the primary motivation is often one of personal satisfaction rather than financial security.

2.4 Personal skills and experience relevant to the proposed business

This is where you can describe the various skills that you already possess or that you are currently working towards, and which you would typically evidence by certificates of qualification or references from previous employers. The important thing to remember is that it is not just certificated skills that are important. To a bank manager or prospective financier it is not only the academic (or vocational) qualifications that are taken into consideration, it is relevant previous experience that also counts. Very often, previous experience, e.g. in book-keeping, cash-management, credit-control, budgetary planning etc., is as important to a potential financier as the technical knowledge of the potential entrepreneur. This is why it is important to dredge your memory, to think back across your past working life to identify all possible experience which might be relevant to the business proposal. It is amazing how many people assume they have no prior knowledge or experience of business and yet, when asked, can describe previous jobs which involved the development and use of business skills (such as cash handling or stock control) without actually realizing that this knowledge, acquired by experience, is now relevant to their prospective business.

2.5 Appraisal of available skills, and identified development needs

This subsection of the business plan constitutes the skills audit and skills gap analysis, and asks four key questions:

1  What skills are needed in order to achieve efficient and profitable operation of the new business? These may be technical skills or expertise such as trade or professional qualifications, business skills such as book-keeping or credit control expertise, or management experience such as staff supervision or production planning. The important thing is to list the full range of potential skills that will certainly or might possibly be needed. Ideally this should be carried out in conjunction with someone who has experience either of the type of business activity that you are proposing and who, preferably, has past experience of running such a business. An objective opinion can be a most valuable asset, particularly if that opinion can help you to take a realistic view of your own capabilities.

2  What skills or experience have I (or my staff) accrued to date or am in the process of developing? The key to answering this question is total honesty and objectivity. Since the mid-1990s the lending banks have increasingly acknowledged the importance of self-assessment within their own standardized business plans by questioning the potential borrower's capacity for the demands of self-employment. There are various methods and techniques of self-assessment, some of which will be considered in more detail in Chapter 4.

3  What gaps or differences currently exist between the skills needed and the skills available? Having assessed the skills requirements of the business, and those available from existing or potential staff, it is necessary to define the gaps. This is the process of skills gap analysis which is designed to identify potential development areas for existing staff or other areas where new staff skills may need to be brought in or recruited. Again it is important to be totally honest and objective in identifying any gaps in skills and experience. In the face of financial or operational pressures of running a small business it is all too easy to overestimate your own capabilities, or those of your staff, or to underestimate the full range of skills which might be required in order for the business to succeed and grow.

4  How will we bridge the gap? There are two main options here: either to train and develop your own skills and/or those of existing staff, or to import (i.e. recruit) new staff who possess those essential skills, assuming, of course, that such staff are available locally. When working capital is tight, the reaction of most small businesses is to make do and mend, i.e. to do nothing. If the business cannot afford new staff, then ideally it should provide training for current staff, but with a vast majority of small firms the tendency is to skimp on investment in training. Training is often regarded as a luxury which cannot be afforded. Small firms have a fundamentally different attitude to training compared with their larger counterparts which treat training as a long-term investment. In contrast, small firms look for short-term benefits that will offer immediate measurable returns on their investment. Such training needs to be provided at low cost and convenient times so as not to lose productive working time. For most small firms, unless staff training can meet these short-term needs, it is unlikely to take place at all.

Section 3 The resources required

Before any attempt can be made at financial planning, it is essential to identify the capital investment requirements of the business (premises, transport, plant and equipment), other resources required (personnel, raw materials, consumables etc.) and the reasons why they are all needed. The process of identifying and listing them will also assist the potential owner-manager to distinguish between those resources which are desirable and those which are essential. It is surprising how many resources initially perceived as being ‘essential’ suddenly become regarded as luxury items when the full cost is identified, especially if the money needed to buy them has to be borrowed at high interest rates.

3.1 Inventory of required plant, equipment and materials

This is a list of all the necessary machinery, equipment and materials which might be needed to start up the business, including not just essential production equipment, but also the administrative systems (computers, office furniture), ancillary furniture and fittings (burglar alarms, safes, chairs, tables, toilets, fire extinguishers), raw materials, consumables, etc. It is only when the list is complete, and costs have started to be allocated to the various items on the list, that questions start to be asked about the necessity for individual items: ‘Do I really need a Rembrandt on the wall of the executive toilet?’ or, on a more practical level, ‘Does the business really need two computers, or can I make do with one for the first few months?’

Once the list has been compiled costs can be allocated to each item, and a differentiation made between essential items and those that are nice to have if we can afford them. These costs need to be carefully researched with potential suppliers as they must be realistic and accurate in order to feed into the budgetary planning process. Without an accurate basis for calculating expenditure, the whole budgeting process becomes a waste of time as there is no credible or realistic basis against which subsequent expenditure and performance can be measured.

3.2 Schedule of available resources

Many people who are starting a new business have already had some partial involvement in their trade or activity, and may perhaps possess some of the resources needed to start the business. For example, if equipment has been progressively acquired whilst working on a part-time basis, the additional resources needed to turn the business into a full-time activity may not be too great. It is important, therefore, to be able to list any resources which are already available, and to put a value on these, as they will constitute part of the business owner's capital. Bank managers are always reluctant to lend money unless they can see a corresponding investment on the part of the borrower. Whilst the person setting up the business may not have a lot of spare cash to invest, the possession of equipment, materials, a car or van, or the goodwill of an existing customer base, can form part of their equity in the business, and often a very significant part. Again, it is important for the purpose of the budgetary plan to identify just how much of the cost of necessary equipment is already available, as this will reduce the net outflow of cash in the early stages.

3.3 Premises requirements, availability, necessary modifications etc.

Identifying the required premises, and finding and preparing suitable premises, is a major and time-consuming part of setting up a new business. Chapter 12 examines the various alternative forms of acquiring a suitable site, and the various contractual and legal implications involved therein. If anything, this is the aspect of establishing a new business that can have the single biggest impact (usually in terms of delay) on the commencement of a new venture, as so many of the factors are beyond the control of the owner, particularly when solicitors and town planners become involved, and more so when they decide to go on holiday, invariably one after the other. Obtaining approval for change of use or for modifications to premises can often add months to the start-up timetable.

3.4 Transport requirements

For any new business, transport is a major item of medium to long-term investment and, so, it is of paramount importance to ensure that any transport which is used or acquired will be both suitable and adequate during the lifetime for which it has been purchased. It is no good taking out a four-year hire purchase agreement on a small van if that van is likely to be too small for the needs of the business within twelve to eighteen months. So, not only must we ask the question ‘What do I need right now?’ but also ‘Will the same thing still be suitable in a few months time?’

Finding the right vehicle will involve a number of considerations. For example:

•   Is it to be used for sales and/or deliveries?

•   What physical dimensions are needed or what payload is required?

•   Who will drive it? Does the driver need a Heavy Goods or Public Service Licence?

•   Will it incur high mileage usage and, if so, what is most economical, petrol or diesel?

•   Should I buy a new or second-hand vehicle, and can I really afford a new vehicle?

•   How easy is it to load and unload?

•   What are the expected maintenance and running costs?

•   Does it create the right image for my business?

The answers to these questions will largely determine the choice of suitable transport and the appropriate method of purchase or acquisition. Again, this information will feed into the budgetary plans and cash flow forecasts for the business.

3.5 Personnel requirements

This section will be determined to a great extent by the information gathered in the skills gap analysis in subsection 2.5 of the business plan; but the skills gap analysis will only identify the range of skills in deficit, and not the numbers of individuals needed to perform each role. Assessment of the personnel and staffing needs of the business reflects not just the range of skills needed to operate the business, but also the numbers of individuals required to work within the business. There may be a need for one person with supervisory management skills, but several with identical basic production skills to do the same job as each other, under the watchful eye of that supervisor. The numbers of each type of worker, and the associated costs of employing these must be identified in order to be fed into the budgetary plan.

3.6 Insurance requirements

The precise insurance policy requirements of the business will depend on the type of business which is proposed. As a very minimum, the owners will need to consider public liability insurance; as well as cover for theft or damage to equipment, fixtures and fittings, and possibly stock or goods in transit. If any staff are employed, albeit just a part-time cleaner, it is a legal requirement to take out employer's liability cover against accident or injury to employees. These and other insurance options are examined in more detail in Chapter 13.

Section 4 Financial plans

4.1 Budgetary plans and cash flow forecasts

For the very small business which deals largely in cash, and neither gives credit to its customers nor receives credit from its suppliers, the budgetary plan and cash flow forecast may be one and the same. For larger businesses, where credit is given or received, it will be necessary to differentiate between the two. In the eyes of the bank manager or potential financier, these are the two key documents on which much of the assessment of the viability of a potential new business are based. As such, it is important to get them right.

The budgetary plan attempts to forecast all items of income and expenditure, and details them according to when the sale is invoiced, or when the stock, goods or services are received and a financial commitment is incurred. As such it can be used to assist in the forecasting of potential sales turnover and profits, and the forecast figures can be used as a basis against which actual financial performance (income and expenditure, profit margins, etc.) can be compared.

The cash flow forecast is basically similar in structure to the budgetary plan, but is modified to take into account delays in receiving money from customers and paying money to suppliers, owing to the giving and receipt of credit. So, although the budgetary plan may show a piece of equipment as being purchased in January, payment of that invoice may not be made until a month later. Similarly, goods sold to a customer and invoiced in January may not be paid for until February or March, and in the meantime, the money due for those goods is inaccessible. A company can be making a healthy profit in budgetary terms, but can have an appalling cash flow problem due to late payment for its goods or services, which might interfere with its ability to continue trading.

4.2 Explanation of the basis for planned budgets

This section acts as a narrative explanation to the figures that appear in the budgetary plan, for example, how sales income has been forecast or why the business has used hire purchase rather than leasing to finance its vehicles. It may also outline the basis for loan interest or repayment terms, or reasons for fluctuations in levels of trading activity.

Similarly, the narrative will explain the basis for credit terms given to customers and received from its suppliers, and the impact this has on cash flow and working capital. The cash flow forecast may also indicate any overdraft requirements, or longer-term borrowing needs.

4.3 Breakeven analysis and profit forecast

It is a fundamental requirement of any business to be able to identify its breakeven level, i.e. the point at which its sales are generating sufficient contribution (surplus income) to cover both the cost of sales and the cost of overheads of the business. It is equally important that the business should be aware of its profit margins (and mark-up) so that it is able to forecast its expected profits from its anticipated sales turnover. Like the budgetary plans, this information will be an item of key interest to any bank manager or prospective financier as, without an identified profit from its trading activities, the business will be unable to repay any money which it has borrowed from them. This is a critical aspect of the assessment of the viability of any new small business as far as the banks are concerned – it just seems a shame that they did not apply the same degree of discretion when providing multimillion pound loans to certain Third World and South American countries in the 1980s, only to have them written off as bad debt a few years later. Unfortunately, the laws of bankruptcy that apply to small firms, are not so easily applied to international governments. Overseas losses on investments by the banks have resulted in cash shortages at home, restricting the money available to the owners of small firms and making it harder to raise finance. The end result is that it is imperative for the small business owner to be able to demonstrate a potential profit to its investors or financiers.

4.4 Value of available capital and resources

The capital which the owners of a business put into their enterprise does not just have to be in the form of hard cash. It can also consist of premises, vehicles, equipment, materials, saleable stock, or even goodwill in the form of an established customer base. In some cases, the capital may comprise a second mortgage, a charge on property as security or a personal guarantee offered against a loan. The important factor is that whatever form the capital takes, it should be measurable, and have a tangible value to demonstrate what the investor is putting into the business. Not surprisingly, bank managers are reluctant to lend money to anyone who is not prepared to back the venture themselves.

4.5 Further finance required and potential sources of funds

It is rare for a new small business to have all the available finance required to start it up and survive the first few months, let alone to expand itself once established. It is usually necessary at some stage to look for some form of external finance, even if that is just a short-term overdraft. Lenders will normally expect any business borrower to be investing a similar sum to that which they are asking to borrow, in order to verify their own commitment to the venture, except of course when the loan is secured against an asset such as a house or other property. Even then, although larger sums may be available, in practice the bankers’ rule of thumb is that the value of the security should be roughly double that of the sum borrowed.

The various options for raising finance are considered in Chapters 6 and 8, and the appropriate options and sources of finance should be identified and described within the financial requirements section of the business plan.

4.6 Chosen sources of finance and reasons for choice

Having examined the various potential sources of finance, the business plan should identify the chosen sources, i.e. those that are most appropriate to both the owner-managers, and the type of business itself. Some firms may choose longer-term secured loans at lower rates of interest, to ease cash flow in the earlier years. Others may only need short-term initial financing, in which case the higher interest overdraft facility may be more suitable, where interest is only paid when the overdraft facility is in use.

Whatever the choice, it is necessary to describe the chosen option and the reasons for its selection over and above the alternatives. For the NVQ candidate who is preparing a business plan, the justified rejection of certain options is as much a demonstration of competence as making the choice and explaining the chosen option itself.

Section 5 Marketing

After the financial plans, it is the marketing aspects of the proposed new business which will be of greatest interest to any financier or potential investor. The marketing section of the business plan will analyse the market sector in which the business plans to operate, and the problems or barriers which might be encountered in trying to break into that market. It will then proceed to define a marketing policy which should facilitate entry and generate sales for the business.

5.1 Target market and operational area

It is important that the budding entrepreneur should have a clear idea of the market for his or her goods or services, and the physical or geographical areas in which the business will operate. This was briefly mentioned earlier in the introduction to the business plan (subsections 1.3 and 1.4). Using the same example of the mail order business, the overall market is in which the business plans to operate is that of model-makers or hobbyists, but within that market the owner is focusing on a particular sector, in this case model aircraft. This is in itself quite a broad sector with plenty of competition, and for that reason the owner has decided to focus on a specific subsector, i.e. the supply of a particular brand of Japanese model aircraft which is currently hard to obtain in this country. The specialized nature of the product means that there is likely to be insufficient trade within the geographical vicinity to make the business viable, so the owner has decided to extend the range of potential customers across the whole country by offering the product for sale by mail order.

5.2 Market research – completed and planned

In this section we investigate and analyse the particular market sector in which the proposed business expects to be operating. We must ask questions about the nature and size of the market, how easy is it to enter the market, who are the other operators within the market, and how do their products and prices etc. compare with our own. This is the process of market research, and any potential lender or investor will ask two key questions about this topic: ‘What market research has been carried out to date?’ and ‘What other market research must be carried out before the business can be launched?’ In order for any potential lender or investor to have confidence in the prospects of the business venture, it will be necessary to demonstrate that these questions have been addressed and answered in a competent and comprehensive manner, and to present the results of the research in a clear and comprehensible fashion. The process of market research is examined in more detail in Chapter 9.

5.3 Identification of any special market influences

Some markets, by virtue of their nature, are subject to specific trends, patterns or influences. The majority of postcards are sold during the summer holiday season, whilst Christmas cards tend to sell at the end of the year. The cash receipts for holiday companies follow a definite pattern, with deposits for bookings taken at the beginning of the year, followed by short peaks in trade at Easter and Whitsun, and with the bulk of sales income being received during June, July and August, then tailing off in September. The pattern is well established and recognized, and cash flow can be planned accordingly. The biggest potential disruption that can occur (apart from a war) is prolonged bad weather, and that is one factor which we cannot forecast well in advance.

In a similar vein, the operators of any new business must also attempt to identify any seasonal influences or market characteristics which will influence levels of sales, income or performance. Very often this will only be achieved as a result of direct experience gained from within the particular market, and then often only in hindsight or as a result of analysis of sales and performance figures over a period of time. For example, when I was wholesaling beers and wines to the licensed trade in the 1980s, I identified over several years a sudden substantial drop in sales around the first weeks of February and October each year, irrespective of weather etc. In spite of recent end of month salary payments, the public were not spending their money in the pubs, and so the publicans were not buying my stock. Why not? Well, quite simply, the first weeks in February and October are the deadline dates for payment or settlement of credit card balances accrued during the summer holidays in August, or in the run up to Christmas, so disposable income was at a minimum at those times. Once the pattern had been identified, stock levels could be reduced for those particular weeks in future years in order to avoid cash being tied up in unsold stock.

Whilst it is imperative to be aware of seasonal and other influences on trading levels, actually identifying these as an outsider to the market can, in fact, be very difficult, so it is important to ask questions about these potential problems as part of the market research process. Better still, try to get some experience of working within the market, or talk to someone who has done so recently.

5.4 Analysis of competitors’ products and services

This analysis can be carried out by answering a series of simple questions:

•   Who are my direct competitors in the marketplace, i.e. those providing the same or very similar products or services? In the case of our complementary therapist, for example, who else is offering aromatherapy massage in the district?

•   Who might be competing indirectly with me, i.e. those providing other services which are not in direct competition with me, but which might detract from my sales? For example, those offering other forms of therapy which might compete with aromatherapy.

•   What prices are they charging? Are they lower, higher, or comparable with my own? Why should they differ?

•   How do their services differ from mine, and is this reflected in their prices?

•   What geographical areas do they cover? Do these overlap with my operating area?

•   Are they operating in the same market sector as myself, and what proportion of the market do they occupy? Is there space for me within that market sector?

Obtaining this information is part of the necessary process of market research, and the questions must be answered in order to produce a convincing and realistic marketing plan.

5.5 The marketing plan

The marketing plan constitutes the methodology statement of the business plan – ‘This is how I will sell and promote my goods or services’ – and the plan is typically presented using four key headings, usually described as the four Ps:

•   The Product is about the goods or services being offered, their purpose, quality, unique features, usefulness, appeal to the customer etc.

•   The Price of the goods or services forms the basis for comparison with competitors. Price can be a selling feature in itself, e.g. by being less than that of competitive products or, if equal, it leads the potential customer to compare quality and uniqueness with that of the competitors’ products.

•   The Place is concerned with the outlets and distribution channels through which the product will be delivered and, again, the perceptive marketing plan will look for opportunities or gaps in the marketplace, where demand is not being met.

•   Promotion is concerned with the ways in which the products or services will be promoted or advertised to potential customers, and how the effective use of promotional activities will lead to growth in sales and expansion of the business.

This topic will be considered in more detail in Chapter 9.

5.6 Unique features of your products or services

Although stated in the marketing plan, it is a good idea to emphasize to potential lenders or investors, those features of your products or services that distinguish them from the opposition. These can be expressed in terms of quality, competitive price, durability, value for money, fashion, practical usage or even sheer sex appeal. The important thing is that you can show that you have identified those key aspects which will help to sell your product or service in the open market, and that you are making use of that information.

5.7 Schedule of fees and charges

This is a simple list of the fees or prices which you will be charging for your goods or services. It serves as a reference point for comparison with the prices charged by your competitors, as a basis for calculating profit margins and to assist in the calculation of the sales revenues that are included in your budgetary plans and cash flow forecasts. It will no doubt be influenced by the prices that are being charged by your competitors, but it should also reflect the quality of your goods or services and any distinctive or unique features which differentiate them from the competition, and for which a premium price might be justified. The use of low prices to attract business in the short term might be a justifiable strategy, but in the longer term it is maintenance of profit margins that ensures survival. The golden rule when fixing prices is that if you sell yourself short, you will almost certainly be the loser in the long term. Competitors will either reduce their prices (and profit margins) to compete with you, or look to sell their goods or services on the basis of differential features such as those described above. Finally, remember to keep a copy of your old price lists, as these are a good point of reference should the Inland Revenue start to query the profit margins you have been achieving.

5.8 Samples of advertising materials, leaflets, business cards etc.

It is always a good idea to include some samples of advertising materials such as business cards, newspaper adverts or leaflets within the business plan, although these need to have been produced to a professional standard and quality, otherwise they could well do your case more harm than good. With the widespread availability of computers and desktop publishing programs, most people should be able to produce a basic design of advertising material to illustrate their ideas for advertising and promotion.

5.9 Statement of quality standards and policy

This is a formal statement of the quality standards for the goods and services which are being provided, as well as for the behavioural standards of the staff which are supplying them. The statements constitute a simple description of the operating standards against which the business can be visibly measured. For example, an extract from the standards used by a wedding caterer:

•   All staff will be smartly dressed at all times, and will present a friendly, smiling, and caring attitude to the customers.

•   All staff involved with the preparation of food will possess a Basic Food Hygiene Certificate, and will adhere to the standards of hygiene required to comply with environmental health legislation.

•   All food will be prepared on site no more than one hour before the time of serving, and covered to protect it from contamination. All food will be stored at the appropriate cold temperatures prior to preparation and before it is served.

These are just a few simple examples, but they demonstrate not just the need to comply with relevant legislation, but the emphasis on providing quality products and services to the customer, as well as the standards which the customers can expect to experience from the supplier.

Section 6 The implementation of the proposals

Having planned the financial and marketing aspects of the business, this section of the business plan focuses on the way in which the business will operate and the timetable for implementing the proposals.

6.1 Chosen means of operation and justification for choice

Here, we are identifying the legal status of the business, e.g. as a sole trader, a partnership or as a limited company, and the explanation and justification of that particular choice. The chosen method of operation may also be linked to any personal parameters, influences or ambitions that may have been identified in subsection 2.3 of the business plan.

6.2 Relevant legislation

It is important to identify any key areas of legislation which may have an impact on the business. This section should comprise a brief list which identifies the relevant legislation, accompanied by an explanation of its relevance to the business. NVQ candidates should also remember that where legislation is concerned, competence can equally be claimed where explanation is given for certain items of legislation which are not relevant to the business or its operating procedures. For example: ‘I do not require planning to operate my business from my premises as there is no change of use involved, as the site already has planning consent for commercial use. However, I shall need building regulations approval to carry out modifications to the external drainage system.’

6.3 Timetable and phasing of business start-up

The budgetary plans will have identified the expected start of trading, but for many new firms there may be a lead time before trading can actually commence, e.g. where planning permission is required or where premises have to be modified. This is usually a time of net expenditure which can inevitably result in a drastic drain on available cash. It is important that realistic lead times are identified, and contingency plans made if there is any possibility of prolonged delays.

6.4 Key stages of implementation

These will vary from business to business, but they might include factors such as dates for acquiring premises, delivery of stocks or raw materials, the commencement of trading, approval of available loans or finance, key review dates or the start of an advertising campaign. The question ‘What makes them key stages?’ invariably invokes the answer ‘If certain events are not completed by those key dates, then there could be subsequent delays in the overall implementation of the business proposal’. For example: in order to open a shop on a certain date, the shop-fitting must be completed at least three days before the opening and stock must be ordered at least three weeks before that date. A delay in receiving financial approval could mean that there is no money available to pay for the new stock on the date by which it must be ordered, so the opening date would need to be postponed.

Section 7 Monitoring and control systems

It is pointless setting out detailed budgetary plans and cash flow forecasts, or establishing and publishing statements of quality standards for a business, if the achievement of those financial plans and quality standards cannot be objectively assessed or measured. It is necessary, therefore, to have some mechanisms in place to carry out the monitoring process.

7.1 Plans for monitoring the quality of goods and services

Some methods of monitoring will be determined by legislation or by industry standards, e.g. the safe temperatures at which food can be stored, the types of thermometers to be used and the records which must be used to ensure safe storage. Others will need to be designed for the specific goods or services which the business is offering, such as the use of customer feedback questionnaires, the monitoring of the frequency of complaints or the return of unsatisfactory goods. Customer turnover or retention rates can also act as a yardstick to monitor levels of satisfaction. This subsection requires you to answer the question ‘How will I ensure that my goods or services meet the necessary quality standards?’ and to describe or give examples of suitable methods.

7.2 Budgetary control

Regular monitoring of planned levels of income and expenditure in comparison with the levels which are actually being achieved, is imperative if you are to keep control of the finances of the business. Any discrepancies which arise as a result of the comparison of actual and planned figures should immediately act as an alarm system, prompting questions as to the cause of the discrepancies and the actions necessary to remedy the situation. Monitoring should be carried out at least once a month, and as close as possible to the end of the previous month so that precious time is not wasted if problems do occur. It is surprising how many small firms do not realize that they have financial problems until they get their books back from their accountant three months after the end of their financial year, by which time they may already have lost too much money for the business to be able to recover or survive.

7.3 Financial control systems

Alongside the budgetary control system it is necessary to have a more basic set of day-to-day financial controls. A good double-entry book-keeping system should be maintained, using income and expenditure headings that correspond to the budget headings. The accounts should be kept up to date on a daily, or at least weekly, basis so that the cash and bank balances shown therein can be checked or reconciled against actual petty cash and bank statements. If credit is given or received it will also be necessary to maintain customer accounts and generate regular statements, particularly for money owed to the business. The aged debtors analysis will show the sums owing to the business and the length of time each has been outstanding, so that action can be taken promptly when payments are overdue.

7.4 Customer records

All businesses need to keep data and records of their customers, and if this is held on computer the information may be subject to the rules of the Data Protection Act. In addition to basic names, addresses and telephone numbers, the records may cover sales volumes of various products, financial transactions and payments, terms and conditions of contracts of supply etc. In some cases, such as the complementary therapist, the information may be much more personal, with details of medical conditions, treatments etc., and where client confidentiality is a major consideration.

A number of questions arise which will need to be answered: what records will your business need to hold and why? Are these records confidential? How will they be stored and who will be able to, access them? How often will they be updated? How secure is the method of storage?

7.5 Feedback from customers

In order to monitor the standards and quality of your goods and services, you will almost certainly have to design some means of obtaining customer feedback. The obvious way to do this is by asking your customers to complete questionnaires, or by interviewing selected samples of customers at regular intervals. Even then, it is sometimes hard to ensure that they are being totally honest and objective rather than being polite. It is often necessary, therefore, to examine other ways of assessing your performance or of verifying the usefulness of the feedback you have been given. One way is to ask new customers how they have found out about you, e.g. via sales activity or advertisements or as a result of recommendation from other existing customers. The frequency of recommendations will be a basic means of determining levels of customer satisfaction. Alternatively, if you are in the type of business which involves trading with customers on a regular basis, it may be more valuable to monitor rates of customer turnover. There will always be some degree of natural wastage as people move, retire or even die, but the retention of customers and their subsequent loyalty to your business can provide a firm indication of the quality of your goods or services or, in some cases, the apparent lack of it.

7.6 How will the success of the business will be measured?

The obvious answer to this question is simple – by how much profit the business is making. But the achievement of the business can be measured in more ways than that, for example, by:

•   Assessing the quality of goods or services as described in customer feedback, against established quality standards.

•   Measuring rates of growth of the business as a whole, or the growth of its various constituent parts, in comparison with previous years, or forecast figures.

•   Comparing actual with planned income and expenditure for each period.

•   Measuring customer retention rates with past performance.

•   Assessing growth of sales in relation to promotional activities and expenditure.

•   Comparing the relative sales levels of individual goods or services.

•   Monitoring profit margins by product or service.

•   Monitoring overall cash profit, and profit margins, to ensure solvency.

•   Analysis of aged debtors and creditors, payment terms etc., to ensure liquidity.

It is important to identify which of these alternatives, or combinations thereof, are appropriate to your type of business and to define the ways in which you will use them to measure your success.

Section 8 Summary

This is a final section in which the reasons for the belief in the viability and potential success of the business are summarized and reaffirmed. This should take the form of a list of key points, each stating a reason and a corresponding justification for the anticipated success of the business. For example, ‘I believe that the business will be profitable for the following reasons:

1  I already have a core of regular customers who are satisfied with the products and services that I offer, along with a waiting list of potential clients.

2  I currently have no direct competitors within a twenty-mile radius of my operating area, and I am not aware of any others who are planning to work in my locality.

3  I have adequate finance and working capital to buy all necessary plant and equipment, and sufficient working capital to finance the first twelve months of trading, even without expanding my current turnover.

4  I have sufficient collateral in my own home to raise any necessary finance for expansion, even though I fully expect growth of my business to be financed from its own profits.

5  I have all the necessary skills and experience to successfully operate the business, along with two experienced and reliable staff who can back me up during holidays or in the event of illness. My domestic partner is an experienced and qualified book-keeper, and my brother is a solicitor.

6  I have a low-rent, long-term lease on premises which are adequate both for current output and foreseeable growth.’ It sounds just like heaven, does it not? If only all business startups were that straightforward!

Further reading

Blackwell, E. (1998). How to Prepare a Business Plan. Kogan Page.

Burns, P. and Dewhurst, J. (1996). Small Business and Entrepreneurship. Macmillan.

Stokes, D. (1998). Small Business Management: A Case Study Approach. Letts.

Writing a Business Plan. Institute of Management Checklist No. 021.