Why you need a business plan!

The primary objective in preparing a business plan is to set out a convincing case to secure financing, internal or external, for the start-up or expansion of a business venture.

Many projects fail to be fully exploited because of poor communication amongst those expected to carry out that exploitation. By preparing a business plan the originators, usually the RTD or Technical Development Departments, can begin to talk the language of commercialisation. It is the use of commercial language which will help exponents of technology get their message across to non-technologists and help demonstrate the value of RTD to other parts of the business or to sell an idea to an outside backer. The business plan is effectively the first sales brochure for a new product or process and is as necessary as the need for patents or publication in a scientific journal.

With any communication instrument it is vital to project a simple message rather than a complex, correct but ultimately unwieldy technical discourse. Although the majority of business plans are prepared for presentation to an outside group of investors or bankers, in the case of high technology projects up to 60% of all presentations tend to be made to senior management or other interested departments. In other words and RTD department has to be able to communicate its ideas to an internal audience rather than outsiders.

In either case the business plan must demonstrate in a rigorous manner the commercial viability of the proposed venture. The plan should cover all aspects of the business. : from its conception, through start-up, to the management and control of the business, right up to the achievement of forecast annual sales targets. Typically the plan will cover a five year planning.

While the acquisition of the necessary funds is the initial reason for writing the business plan, it will have other valuable function. In its final form it will present a complete analysis of the business, its objectives, the market in which its operates, the competition against which it must establish itself, and the problems which must be overcome in order for the plan to be fulfilled. As such, the business plan is a comprehensive operating manual which the management will use to navigate their way to their objective.

The preparation of the business plan is also an exercise which must essentially cause the writers of the plan to examine their basic assumptions in the minutest detail since these must be justified to an impartial third party. It sometimes happens that the enthusiasm of a product champion of inventor will demand a leap of faith to be made which cannot be substantiated in the practicalities of the marketplace. Any weakness of this nature would be clearly exposed in the course of preparing a plan which must stand up to the scrutiny of sceptical financial backers. Hindsight is a quality that many of use have in abundance but a business plan is designed to eliminate the use of hindsight as much as possible.

Note that it will be necessary to update the plan on a yearly basis. Each year’s trading must be reviewed in the light of actual developments both without the business. Any discrepancies between the original assumptions and the achieved performance must be accounted for and the assumptions modified if necessary. Forecasts for the subsequent years must also be adjusted in line with the revised assumptions. In this way the company will have a rolling five year business plan which is responsive to the real environment.

In the subsequent discussion in this brochure the term "product" will be assumed to refer to both the physical products or processes and the intangible services supplies by a company to its clients.

Having discusses when a business plan is needed, it is only fair to point out that rigorous business plans are not always required. This is particularly true when and RTD department has developed a new or improved process for an existing product.

Here one may find that a simple cost benefit analysis is all that is required to convince the management of the benefits of exploitation.

By providing an exact breakdown of all the costs of the new process (including unit costs) and comparing the factory gate cost with that of the existing process it should be fairly simple to demonstrate the commercial benefits.

RTD managers should note that accountants, venture capitalists and bankers usually look for a payback within a reasonable period particularly when times are hard. Although this may seem short sighted it must be recognised that financial personnel are risk averse mostly because of external pressures. Other arguments are often needed to convince colleagues to switch to a new process, such as competitor and customer pressures, improved quality which could invoice raising prices or offering warranties or increasing market share and environmental benefits.

Timing or When Will You Need It ?

Recent history is littered with inventions which never got to the market because of faulty business plans usually prepared at the last minute and based on false assumptions, inaccurate information and misdirected research. Talk to the marketing and production staff about the need for research before the research is completed. Get a commitment to carry out a market research study for incorporation in the plan ! Get an idea of production costs ! Collect information on competitors and the product’s potential position in the market ! Find out if the customer wants this product. If he doesn’t want it, perhaps the research money should be better spent elsewhere.

Who Will Be Required To Give An Input ?

A business plan comprises information from various specialisation and it is unlikely that any one person will be able to provide all the answers to the questions posed in this booklet.

If you are an SME it will be important to obtain an input from the individuals in various departments such as finance, production, sales and personnel. A research institute may find such resources to be scarce and will need inputs from outside either through a joint-venture or by contracting a consultant.

It is important to obtain agreement from all the parties involved as to the aims and objectives of the plan and to obtain commitment to the contents of the plan. As with any project it is important to brief the project participants as to the basic requirements of the plan and to impose deadlines for the contributors. This technique known as "pre-briefing" has enormous benefits later on resulting in fewer criticisms and internal politics which might sink a project at a first presentation.

What Will You Need To Prepare The Plan ?

The recipient of the business plan will be looking to see if the writer, or writers, have demonstrated a sound mastery of the dynamics of their business and the industry in which it operates. Most importantly, the readers will want to know how this mastery can be harnessed to providing a profitable return on the funds to be invested at a minimum acceptable level of risk to the investor or parent company.

Thus, it will be essential to demonstrate that the plan is robust enough to allow a shortfall in the forecast sales levels as a result of unscheduled difficulties of trading conditions.

It can be tempting at the start of a venture to be over optimistic and assume that everything will proceed exactly as planned. This rarely happens ! There are almost always unbudgeted costs, the plan in order to indicate what is called the robustness of the plan to unforeseen events. A plan which has little sensitivity between the planned scenario and the worst case scenario is unlikely to be considered favourably.

The contents of a business plan for any particular enterprise will depend on the nature of the business and the organisation from which finance is being sought. There are, nevertheless, certain categories of information which must be included if the proposition is to be successful. The main categories on which a business plan will be appraised can be summarised as follows :

- Financial soundness of financial structure (liquidity, profitability)
- Market and products
- Physical and production resources
- Management

These categories can be further subdivided and they will discussed under the headings indicated at the end of this section.

It follows then, that the document has to be written from the point of view of the ultimate reader and not that of the writer. It is sometimes the case that the writer of a business plan is the originator of an invention and is thus a person from a scientific or engineering background. In such a situation there can be a temptation to include technical data, formulae and diagrams in order to demonstrate technical virtuosity. This must be wholly resisted ! Technical information, where included, must be simplified to make it comprehensible to non-specialist and must be used only in order to demonstrate the commercial of financial viability of the proposed venture.

The content of the business plan will be compiled by producing the information and generating the forecasts required for the following section headings. This data can only be obtained by making a detailed analysis of the whole business and its environment. The process will require many fundamental decisions to be taken. Decisions taken under one heading will inevitably affect decisions taken under other headings and this will require the earlier decision to be reconsidered. The business plan is thus written by an iterative process. The process may require many loops until consistency is achieved between all the sections. Writing of the business plan may take several weeks or months work. The following is an outline of a typical business plan :

1. Executive Summary
2. The Market
3. The Product, Process or Invention
4. The Business and its Trading Position
5. Marketing Strategy
6. Manufacturing
7. Forecasts of Sales, Cash Flow and Break-Even
8. Management and Control of the Business
9. The Required Financing Package

This guide provides a series of chapter headings for the business plan. Each Chapter has an explanation of the topic to be included in the plan followed by a check list of the main points. Note that there are some very sophisticated techniques for analysing the risks; strategies, tactics and approach to starting a new venture but the basics are always the same. It is possible to refine the basic plan and with a simple powerful message will have a greater impact than an elegant theological tract.