2nd Handout for 2nd Quarter – Entrepreneurship

(Development of Business Plan)

Business Plan
 it is a written document prepared by the entrepreneur that describes all the relevant external and internal
elements involved in starting a new venture.
 It is a sort of a business blueprint and it keeps the entrepreneur on the right track. It gives sense of purpose
to the business. It also provides guidance, influence, and leadership, as well as communicating ideas about
goals and the means of achieving them to partners, associates, employees, and others.

A Need for Business Plan according to Berry (n.d.)

1. Start-up Businesses – the most classic business planning scenario is for a start-up, for which the plan
helps the founders break uncertainty down into meaningful pieces, like the sales projection, expense
budget, milestones, and tasks. In this case, the business plan is focused on explaining what the new
company is going to do, how it is going to accomplish its goals, and – most importantly – why the founders
are the right people to do the job. A start-up business plan also details the amount of money needed to get
the business off the ground, and through the initial growth phases that will lead to profitability.
2. Existing Businesses – existing businesses use business plans to strategically manage and steer the
business, not just to address changes in their markets and to take advantage of new opportunities. They use
a plan to reinforce strategy, establish metrics, manage responsibilities and goals, track results, and manage
and plan resources including critical cash flow. They use plan also to get the schedule for regular review
and revision. Instead of a static document, business plans in existing businesses become dynamic tools that
are used to track growth and spot potential problems before they derail the business.

Purpose of a Business Plan

1. To serve as management’s guide during the lifetime of the business; and
2. To fulfil the requirement for securing lenders and investors.

Parts of the Business Plan

The contents of the business plan will depend upon the purpose. Usually, however, they contain the
following:

I. Title Page and Contents

II. Executive Summary
III. Description of the Business
The Product or Services
IV. MARKETING PLAN
Analysis of the competition
V. OPERATION and MANAGEMENT PLAN
VI. PRODUCTION PLAN
VII. FINANCIAL DATA
Supporting Documents

Title Page and Contents

The business plan must be easily identifiable through a cover page with a listing of the following:
a. The name of the business
b. The name/s of the proponents
c. Address
d. Telephone number
e. E-mail and website address
f. The date
g. The name of the person who prepare the business plan

The next page should provide a table of contents so the readers can easily find the information they need.

The Executive Summary

 A portion of the business plan that summarizes the plan and states the objectives of the business. It is
prepared after the business plan is written.
Purpose: The purpose of the executive summary is to get the readers attention summarizing the key elements of
the business plan. It must be short, to the point and very well written.
This is arguably the most important part of the business plan. The Introduction must make your reader
want to keep reading. It is a good idea to write as much of the following:
 Business Concept
 Describe what your business does in general terms.
 Include your mission or vision statement.
  Describe what differentiates your business from others. This is important to the reader, as they
want to know how your business will be able to create new customers. What do you offer that will
take customers away from competitors.
 Briefly describe your business history if applicable.
 Provide any other information that will excite the reader about your business.
 Goals and Objectives
 Tell the reader what you want (example: a business loan for a specific amount to purchase
equipment).
 State your sales, production and profit goals. Be specific in amount and time line.
 If this is for a bank loan, comment on goals such as anticipated time to achieve a positive cash flow
and the ability to service debt. (Note you cannot complete this section until the rest of the plan is
complete.)

Description of the Business

This is divided into 2 parts:
a. A short explanation of the industry
b. A description of the business

In describing the industry, it is important to present the current situation and outlook for the future.
Information must be provided regarding the various markets within the industry as well as new products or
developments that could affect the business.
 Content:
1. The industry sector where the business falls into (examples are retail, manufacturing, industry, service and
others)

Kinds of Business
1. Commerce/Merchandising – business firms, which are engaged in buying and selling of goods and services,
are classified as commerce. That includes trading, merchandising and marketing.
Examples: Supermarket, dry goods stores, peddlers, sari-sari stores, importers
2. Industry/Manufacturing – mainly engaged in production. Goods produced, which are intended for ultimate
consumption, are called consumer goods, while goods intended for use of business and industry are called
producer’s goods.
Examples: Genetic Industry, Manufacturing Industry, Extractive Industry, Construction Industry
3. Service – provides intangible products (products with no physical form). A service type firms offer
professional skills, expertise, advice, and other similar products.
Example: Recreational Services, Personal Services Finance Services

2. Whether the business is new or established

3. The form of ownership
4. Customer information
5. Market share and market size
6. Distribution of products or services

Description of the Product or Service

The objective of product or service description is to show that the firm has a competitive edge over the
others. If the business plan is able to show that edge, lenders and investors may just respond favorably. It is very
important to explain that the business will be profitable.
Duermyer (2021) explained that the products and services section of your business plan is more than just a
list of what your business is going to provide. Specially, if you intend to use your business plan to get funding or
find partners, your products and services section needs to showcase the quality, value, and benefits your business
offers. The products and services section of your business plan outline your product or service, why it’s needed by
your market, and how it will compete with other businesses selling the same or similar products and services.

 Duermyer (2021) suggested ways for writing about your product or service
1. Indicate why your product or service is needed.
2. Highlight the features of your product or service.
3. Focus on benefits.
4. Be clear and concise.
5. Show off your expertise, experience, and accolades.
6. Be the expert, but talk in layman’s terms.
7. Indicate anything extra special about what or how you’ll provide your products or services.
8. Write as if you’re talking to your customer.

 Content:
1. The important features of the product or service, such as the maintenance-free feature of the product, or
the home delivery service for products ordered through the phone.
 2. A detailed description of how the product is used.
3. What makes the product or service different from others available in the market. Example: Availability of
products 24/7, or the water-based feature of perfume.

 Purpose: The purpose of the product/service section is to detail exactly what your business does for the
customer and what makes these offerings desirable.

 Product Oriented Businesses

 Describe each product you sell. The combination of products is your product mix.
 If you cannot list each product, break the business down into logical categories.
 Describe the key product features, and how your products are different from those of your
competition. (Functionality, durability, ease of use, etc.)
 Describe product protection such as patents, copyrights and trademarks.
 Service Businesses
 Describe each type of service you offer (be specific).
 Describe the service features in terms important to the customer.
 Describe any service protection such as copyrights or trademarks.

 Product Risks : If there are any risks associated with your product or service such as product liability,
professional liability, or ease of duplication by competition, state them and describe how you will mitigate
these risks.

Marketing Plan
 The process of creating strategies which seeks to find attractive opportunities and develop profitable
marketing activities.
 The strength and weaknesses of the firm are recognized in this strategy planning. This is followed by and
analysis of the external environment which is useful in identifying attractive market opportunities.

Planning Process for Market Strategy

Identify strengths and weaknesses of the firm

Analyze external environment

Identify market opportunities

Identify target market

Determine applicable marketing mix

Determine size of market area

 Definition of the Market – the objective of market definition is to determine which part of the total
potential market will be served by the firm. Hence, the market must be defined in term of size,
demographics, structure, growth prospects, trends and sales potential.
 Determination of the Market Share – market share is a measure of the consumers’ preference for a
product over other similar products. A higher market share usually means greater sales, lesser effort to sell
more and a strong barrier to entry for other competitors. A higher market share also means that if the
market expands the leader gains more than the others. By the same token, a market leader – as defined by
its market share – also has to expand the market, for its own growth.

 PRODUCT
 a good or service that most closely meets the requirements of a particular market and yields
enough profit to justify its continued existence.
 Most important element of Marketing Mix. Product is the heart and core of the marketing mix. It is
the strategic element of the marketing mix. Without the product, it is rather challenging for the
marketers to plan a place approach, choose an advertising movement or fix the value in absence of
the knowledge of the product to be promoted.

 PRODUCT DIFFERENTIATION STRATEGIES:

1. Product Differentiation
2. Service Differentiation
3. Personal Differentiation
4. Channel Differentiation
5. Image Differentiation

 PRODUCT LIFE-CYCLE
 The Stages of Product Life-Cycle

a. Introduction Stage – profits are negative or low in the introduction stage because of low sales and heavy
distribution and promotion expenses. Much money is needed to attract distributors. Promotional expenditures are
high because of the need to:
• Inform potential consumers
• Induce product trial
• Secure distribution
b. Growth Stage – the product gains tremendous improvement in terms of sales as the product becomes popular
and widely accepted. The use of the following strategies is immensely important to continue the growth of the
product:
• Improving product quality and adding new product features and improved styling
• Adding new models and flanker products
• Entering new market segments
• Increasing distribution coverage and entering new distribution channels
• Shifting from product-awareness advertising to product-preference advertising
• Lowering prices to attract the next layer of price-sensitive buyers
c. Maturity Stage – there is stability of sales and growth of the product, since the product has been in the market
for a longer time.
Strategies for Maturity Stage

1. MARKET MODIFICATION 2. PRODUCT MODIFICATION

converting nonusers quality improvement
entering new market segments feature improvement or style
winning competitors' customers improvement

3. MARKETING-MIX
MODIFICATION
prices
distribution
advertising
sales promotion
personal setting
services

d. Decline Stage – is where profit continuously declines. At this stage, company decides whether to phase out the
product, maintain producing it, and reintroduce the product, or sell the brand. In a study of company strategies in
declining industries, Harrigan identified 5 possible decline strategies:
• Increasing the firm’s investment;
• Maintaining the firm’s investment level until the uncertainties about the industry are resolved;
• Decreasing the firm’s investment level selectively, by dropping unprofitable customer groups, while
simultaneously strengthening the firm’s investment in lucrative niches;
• Harvesting “milking” the firm’s investment to recover cash quickly; and
• Divesting the business quickly by disposing of its assets as advantageously as possible.

 PRICING STRATEGY
How the firm prices its products or service is a very important component of the business plan. If the firm
wants to achieve its objectives, the right price for its product or service must be maintained.
  Factors in Determining the Right Price:
1. The customers’ perception of value in the firm’s kind of business.
2. The cost involved such as, overhead, storage, financing, production, and distribution.
3. The profit objective of the firm.

 Pricing Methods:
1. Cost plus pricing/Cost based pricing – this method covers all cost, variable and fixed, plus an extra
increment to deliver profit.
2. Demand Pricing – this is a method of pricing where the firm sets prices based on buyer desires. The range
of price acceptable to the target market is determined.
3. Competitive Pricing – this method of pricing calls for price-setting on the basis of prices charged by
competitors.
4. Price Penetration – a pricing of products or services where prices are set to be low. It aims to penetrate
and cover large market share.
5. Price Skimming – setting price of product or services at a high price. The primary purpose of setting the
price high is to cover the incurred expenses during the production or operation of the firm.

 DISTRIBUTION STRATEGY (PLACE)

 Refers to the process of moving goods and services from the firm to the buyers.

 Distribution Channels:
1. Direct Sales – the plan is to move goods directly to the ultimate users.
2. Middleman – they are wholesalers employed by one or more several producers paid on commission
according to quantity sold.
3. Wholesalers – are channel members that sell to retailers or other agents for further distribution through
the channel until they reach the final users.
4. Retailers – they sell directly to consumers.
The Cycle of the Distribution Channel

 PROMOTION STRATEGY

The promotion strategy must include the following:

1. Advertising Aspects
a. Advertising tools
b. Positioning message
c. Promotional activity schedule
d. Advertising budget
2. Packaging which describes how the company’s products will be packaged
3. Public Relations – this will be a detailed presentation of the public strategy of the firm. This will include a list
of media that will be tapped to convey the firm’s message to the target market. The schedule of special events
like product launching will also be included.
4. Sales Promotions – these are used to support the sales messages like special sales, coupons, contents,
premium awards, trade-in, among others.
5. Personal Sales – unlike advertising, personal selling is a promotional method where face-to-face interaction
between the seller and the buyer is seen.

EXTENDED P’s OF MARKETING MIX (7P’s)

1. Product
2. Price
3. Place
4. Promotion
5. People – the reputation of your brand rests in the hands of your staff. They must be appropriately trained, well-
motivated and have the right attitude. Everyone who comes into contact with your customers will make an
impression. Many customers cannot separate the product or service from the staff member who provides it, so
your people will have a profound effect – positive or negative – on customer satisfaction.
6. Process – many customers no longer simply buy a product or service – they invest in an entire experience that
starts from the moment they discover your company and lasts through to purchase and beyond. That means the
process of delivering the product or service, and the behavior of those who deliver it, are crucial to customer
satisfaction. A user-friendly internet experience, waiting times, the information given to customers and the
helpfulness of staff are vital to keep customers happy.
7. Physical Evidence – choosing an unfamiliar product or service is risky for the consumer, because they don’t
know how good it will be until after purchase. You can reduce this uncertainty by helping potential customers ‘see’
what they are buying. The physical evidence demonstrated by an organization must confirm the assumptions of
the customer – a financial services product will need to be delivered in a formal setting, while a children’s birthday
entertainment company should adopt a more relaxed approach. A clean, tidy and well-decorated reception area –
or homepage – is reassuring. If your digital or physical premises aren’t up to scratch, why would the customer
think your service is?

STP (SEGMENTATION, TARGETING, POSITIONING) MARKETING MODEL – a familiar strategic approach

in modern marketing. It focuses on commercial effectiveness, selecting the most valuable segments for a
business and then developing a marketing mix and product positioning strategy for each segment.

 MARKET SEGMENTATION – refers to the process of dividing the market into distinct groups where
each group has common characteristics.
a. Demographic Segmentation – the market is divided based on variable such as age, gender, income,
education, nationality, and family life cycle.
b. Geographic Segmentation – divided or segmented based on territory or geographical units such as
regions and cities (rural or urban).
c. Psychographic Segmentation – groups the market according to lifestyle, personality, or social class.
There are a few different ways you can gather data to help form psychographic profiles for your typical
customers such as:
• Interviews
• Surveys
• Customer Data
d. Behavioral Segmentation – divides the market based on knowledge, attitudes, or the market’s
response to product.

 MARKET TARGETING – it is the process of looking into the most attractive market that a company is
capable of serving. The process of evaluating the segments and focusing marketing efforts on a country,
region, or group of people that has significant potential to respond. It reflects the reality that a company
should identify those consumers it can reach most effectively, efficiently and profitability.

The listed below refers to what is needed to evaluate the potential and commercial
attractiveness of each segment.
• Criteria Size – the market must be large enough to justify segmenting. If the market is small, it
may make it smaller.
• Difference – measurable differences must exist between segments.
• Money – anticipated profits must exceed the costs of additional marketing plans and other
changes.
• Accessible – each segment must be accessible to your tem and the segment must be able to
receive your marketing messages.
• Focus on different benefits – different segments must need different benefits.

 PRODUCT POSITIONING – the process of emphasizing a product’s best feature. One of the features can
be the product’s price, which can the most reasonably priced products among varied competitors.
Sometimes, companies position their product or brand by emphasizing its benefits of effectiveness or
its accessibility to the market.

 MARKET POSITIONING refers to the ability to influence consumer perception regarding a

brand or product relative to competitors. The objective of market positioning is to establish the
image or identity of a brand or product so that consumers perceive it in a certain way (CFI
Education Inc., 2021)

• Types of Positioning Strategies

There are several types of positioning strategies. A few examples are positioning by:
 Product attributes and benefits: associating your brand/product with certain characteristics
or with certain beneficial value
 Product price: associating your brand/product with competitive pricing
 Product quality: associating your brand/product with high quality
 Product use and application: associating your brand/product with a specific use
 Competitors: making consumers think that your brand/product is better than that of your
competitors
 Illustrated Phase of STP

Management and Operational Plan

Investors often assert that there are 3 attributes important for a successful start-up business namely:
management, management and management. Many claim they will invest in a strong management team with a
mediocre idea, but will decline to fund a weak management team with a great idea. The purpose of the
Management section therefore is to convince the reader that you have a great management team to complement a
great business concept.

 Preparing VMO

 VISION – your vision communicates what your organization believes which are the ideal conditions for
your community – how things would look if the issue important to you were perfectly addressed. This
ideal dream is generally described by one or more phrases or vision statements, which are brief
proclamations that convey the community’s dreams for the future. By developing a vision statement,
your organization makes the beliefs and governing principles of your organization clear to the greater
community (as well as to your own staff, participants, and volunteers).

There are certain characteristics that most vision statements have in common. In general, vision statements
should be:
1. Understood and shared by members of the community.
2. Broad enough to encompass a variety of local perspectives.
3. Inspiring and uplifting to everyone involved in your effort.
4. Easy to communicate.

 MISSION – an organization’s mission statement describes what the group is going to do, and why it is
going to do that. Mission statements are similar to vision statements, but they are more concrete, and
they are definitely more “action-oriented” than vision statements. The mission might refer to a
problem, such as an inadequate supply of goods, or a goal, such as providing access to business
opportunities for everyone. While they don’t go into a lot of detail, they start to hint – very broadly – at
how your organization might go about fixing the problems it has noted.

Some general guiding principles about mission statements are that they are:
1. Concise – although not as short a phrase as a vision statement, a mission statement should still get its point
across in one sentence.
2. Outcome-oriented – mission statements explain the overarching outcomes your organization is working to
achieve.
3. Inclusive – while mission statements do make statements about your group’s overarching goals, it’s very
important that they do so very broadly. Good mission statements are not limiting in the strategies or sectors of the
community that may become involved in the project.

 OBJECTIVES – refer to specific measurable results for the initiative’s broad goals. An organization’s
objectives generally lay out how much of what will be accomplished by when. The most effective
objectives are those that are Specific, Measurable, Achievable, Realistic, and Time-bound (SMART).
 SMART Objectives of WestJet

♠ Organizational Structure – the framework of the relations on jobs, systems, operating process, people and
groups making efforts to achieve the goals. The relationship between main principles or organization and
coordination between its activities and internal organizational relations in terms of reporting and getting
report are duties of organization structure.

TYPES OF ORGANIZATIONAL STRUCTURE:

1. Specialization – the first task of the owner is to determine the total function of the organization. Then he
divides the total work into small, specialized tasks and assigns employees to specific task.

2. Departmentalization – the departments may be organized according to function such as finance, marketing,
and human resource development, or product such as cabinet, table, and bed, or territory such as Northern Luzon,
Central Luzon, and Southern Luzon or customers such as consumers, private institutions, and government.
a. Functional Departmentalization

b. Product Departmentalization
c. Territorial Departmentalization

d. Customer Departmentalization

♠ Formal Organizational Structure – clearly defines relationships, channels of communication, and

responsibilities resulting from the delegation of authority from one level of organization to another.

Types of Formal Organization:

1. Line Type – this organization structure is based on the direct flow of authority from the top management to the
subordinates.
2. Functional Type – is one which there is a number of functional specialists supervising the activities of a single
subordinate.
3. Committee Type – a committee is a formal organization group created to carry out specific organizational task.
Consists of group of individuals vested with authority and responsibility that performs a specific task which the
individual manager cannot complete.

Example Charts:

Line Type Functional Type

Committee Type

 People Management
  Human Capital – refers to the attributes gained by a worker through education and experience. These can
help the worker develop competencies, knowledge, and personality attributes that in turn could help
him/her perform and produce economic value for his/her employer.

Content of People Management:

1. Position – consists of the responsibility and duties performed by an individual.
2. Job Description – organized, factual statements of the duties and responsibilities of a specific job. It tells what is
to be done, how it is done, and why. It is the list of job duties, reporting relationship, working conditions, and
supervisory responsibilities.
Suggested content of Job Description:
a. Job Status – full-time/part-time including salary
b. Job Identification – include such information as job title, department, division, plant and code number of the job
c. Job Summary – a brief one or two-sentence statement describing the purpose of the job and what outputs are
expected from job incumbents.
d. Working relationship, responsibilities, and duties performed
e. Authority of Incumbent – defines the limit of the jobholder’s authority, including his/her decision-making
authority, direct supervision of other personnel, and budgetary limitation.
f. Competency Requirement – education and experience including special skills required to perform a given job.
g. Working Conditions – a list of the general working conditions involved with the job, location of the job, and other
relevant characteristics of the job.
3. Job Specifications – a written explanation of the minimum acceptable human qualities necessary for effective
performance of a given job.
Necessary content of Job Specification:
a. Knowledge – body of information one needs to perform the job;
b. Skills – the capability to perform a learned motor task such as word processing skills;
c. Ability – the capability needed to perform non-motor task such as communication abilities;
d. Personal Characteristics – an individual’s traits such as tact, assertiveness, concern for others, etc.;
e. Credentials – proof of education that an individual possesses certain competencies;
f. Technical Requirements – include criteria such as educational background, related work experience, and training.

 Operating Expenses
 Projections of operating expenses are important aspects in the preparation of a business plan. This is a
pre-requisite in projecting financial statements. Lenders and investors are specially interested in
scrutinizing such statements. In determining operation expenses, labor and overhead must be
considered. The organizational structure is useful in providing information in the determination of
labor expenses.
 Operating expense is an expense that a business incurs through its normal business operations. Often
abbreviated as OPEX, include rent, equipment, inventory costs, marketing, payroll, insurance, step
costs, and funds allocated for research and development.

 Sources of Funds
 Funds refer to money, or its equivalent, which is used in obtaining and bringing together resources for
the attainment of the business objectives. Funds are used to obtain resources, which are referred to as
assets. Assets can be classified as current or working capital, which are used in the day-to-day
operations of the business, or fixed assets, which will be used by the business for a long time, usually
for more than one year.
Three Types of Capital:
a. Fixed – used to purchase the permanent or fixed assets of the business (e.g. buildings, land, equipment, etc.)
b. Working – used to support the small company’s normal short-term operations (e.g. buy inventory, pay bills,
wages, salaries, etc.)
c. Growth – used to help the small business expand or change its primary direction.

 Equity Financing – represents the personal investment of the owner(s) in the business. It is called risk
capital because investors assume the risk of losing the money if the business fails.
 Debt Financing – must be repaid with interest. It is carried as a liability on the company’s balance sheet. It
can be just as difficult to secure as equity financing, even though sources of debt financing are more
numerous.

Production Plan
 Production planning is the administrative process that takes place within a manufacturing business and
that involves making sure that raw materials, staff and other necessary items are procured and ready to
create finished products according to the schedule specified.
 It serves as a guide for your company’s production activities, it establishes and sequences activities
which must be carried out to achieve a production target, so that all staff involved are aware of who
needs to do what, when, where, and how.
  Facility Location – of all the pieces of the planning puzzle, facility location is the most strategic and critical.
Once you build a new business facility, you have made a substantial investment of time, resources, and
capital that can’t be changed for a long time. Selecting the wrong location can be disastrous.

Some of the key factors that influence facility location are the following:
a. Proximity to customers, suppliers, and skilled labor
b. Environmental regulations
c. Financial incentives offered by state and local development authorities
d. Quality-of-life considerations
e. Potential for future expansion

 Facility Layout – the primary aim is to design a workflow that maximizes worker and production
efficiency. It is complex because it must take into account the available space, the work processes, the
delivery of components and parts, the final product, worker safety, and operational efficiency. A poorly
laid-out production facility creates inefficiencies, increases costs, and leads to employee frustration and
confusion.
Most Common Types of Facility Layout
1. Process Layout – aims to improve efficiency by arranging equipment according to its function. In process
layout, the work stations and machinery are not arranged according to the production sequence. Instead, there is
an assembly of similar operations or similar machinery in each department (for example, a drill department, a
paint department, etc.)
2. Product Layout – high volume goods are produced efficiently by people, equipment, or departments arranged
in an assembly line – that is, a series of workstations at which already-made parts are assembled.
3. Cellular Layout – a lean method of producing similar products using cells, or groups of team members,
workstations, or equipment, to facilitate operations by eliminating set-up and unnecessary costs between
operations.
4. Fixed Position – for the production of large items, manufacturers use fixed-position layout in which the product
stays in one place and the workers (and equipment) go to the product.

♠ Layout Design

 Blueprint – a design or a technical drawing which explains the overall details of the component. It is a
softcopy of imagining the values of the project. It can be used to understand and explain the detailed plan of
work with the help of design mode. Drawbacks of the design can be identified and improved instantly.
Blueprint of Floor Layout of a Restaurant

 Bubble Diagram – are circles or ovals drawn on a sheet of paper. It is a freehand diagrammatic drawing
made by architects and interior designers to be used for space planning and organization at the
preliminary phase of the design process.
 Bubble Diagram of a Restaurant

 Gantt Chart – or harmonogram, is a type of bar chart that illustrates a project schedule. It illustrates the
start and finish dates of the terminal elements and summary elements of a project. Terminal elements and
summary elements constitute the work breakdown structure of the project.
Gantt Chart of Restaurant Remodeling

 IPO (INPUT-PROCESS-OUTPUT) Model – a functional graph that inputs, outputs, and required processing
tasks required to transform inputs into outputs. The model is sometimes configured to include any storage
that might happen in the process as well. The inputs represent the flow of data and materials into the
process form the outside. The processing step includes all tasks required to effect a transformation of the
inputs. The outputs are the data and materials flowing out of the transformation process.
  Suppliers – a person or business that provides a product or service to another entity. The role of a supplier
in a business is to provide high-quality products from a manufacturer at a good price to produce new
goods.
Process in Searching for Suppliers:
1. Identifying the Set of Business Goals and Objectives – before you get on-board with your supplier
management process, it is important to identify the set of business goals and objectives for which suppliers are
required.
2. Identifying Relevant Selection Criteria for Choosing Suppliers – define the selection criteria for choosing
suppliers that will provide maximum value for the requirement.
3. Evaluating and Selecting Suppliers – evaluate all relevant suppliers based on the selection criteria you have
identified. Majority of the organizations evaluate the suppliers based on the pricing they have quoted. However, it
is equally important to factor in the other criteria that you have identified.
4. Negotiating and Contracting with the Selected Supplier(s) – ensure that you involve all relevant
stakeholders in the contracting process to gain valuable insights on how the contract can ensure maximum
delivery of value. Collaborate with the suppliers to ensure that the negotiation process runs smoothly with minimal
roadblocks.
5. Evaluating Supplier Performance – after their selection and onboarding, you need to periodically evaluate
their performance to see how well they are fulfilling the set objectives and requirements. To ensure practical
evaluation, make sure you have established KPIs (Key Performance Indicator) to measure performance. This will
also provide insights into areas for improvement to maximize supplier performance.

Financial Plan
 Finance is a business function that uses numbers and analytical tools to help managers make better
decisions. It helps management gain a clear understanding of the company’s current financial position,
particularly whether the business is profitable or not.
 The financial plan is critical to the success of your business plan – especially if it is for the purpose of
getting a bank loan. The Cash Flow Forecast is arguably the most important part of the plan, but each of the
other documents is important from a planning perspective.

 3 Sections in a Financial Plan:

a. The Starting Balance Sheet
b. The Pro-Forma (or Forecast) Income Statement
c. The Cash Flow Forecast (each of these sections should have notes of explanation for the reader)

 The Balance Sheet – a snap shot of the business at any point in time. In the case of a business start-up, it is
often the starting balance sheet. A balance sheet is made up of 3 parts.
 Assets – things a business owns
 Liabilities – debts a business owes
 Equity – the owners’ investment and re-investment in the business

FORMULA: ASSETS = LIABILITIES + EQUITY

 The balance sheet is extremely important as it gives the reader a picture of how the business is being
financed through the owners’ money (equity) or through the creditors’ money (liabilities).
 In a business start-up, you should look at the assets required to get the business started – and then ask
yourself how you will finance that start-up. If you do not have the money to invest into the business, you
will have to borrow the remainder.

 The Income Statement – the purpose of the Income Statement is to project the revenues and expenses of
your business over a given period of time – usually one year. Other terms for this are budgeted income
statement or pro forma income statement. There are 3 things that need to be predicted to forecast your
income statement: the sales projection, the cost of goods projection and the overhead projection.

A. The Sales Forecast – the sales forecast is probably the most difficult part of the business to forecast, especially
for a starting business. Sometimes, the break-even can provide a starting point for creating the sales forecast. A
sales forecast is not like a weather forecast.
*A weather forecast is something you try to forecast, but something over which you have no control. A
sales forecast is a goal you set for the business that you proactively try to achieve. In the case of an existing
business, you should look at the sales history. You should see if your sales are trending up or down, and then
account for new products to be added, or old products to be taken away. The sales forecast must reflect your
business strategies and objectives.

B. Forecasting using the Unit Method – list all the products or services you plan to sell. You will need to forecast
the number of units of each type you plan to sell.
  Different businesses and industries use different unit measures (e.g. for a craftsperson, a unit may be one
wooden item; for a researcher, a unit could be one hour of time). You will have to estimate the selling price
for each unit. You can then develop a sales forecast using the following equation:
Price per unit x Number of Units Sold = Revenue

C. Forecasting with the Sales Method

Sometimes a business cannot use unit sales, as it would be impossible to predict the unit sales for each of
5,000 items in a gift store. In this case, some business owners will go directly to revenue forecast. If the business is
broken down into logical departments or categories, then forecast the revenue in each are for the total sales
forecast. Try to compare this to the market size and the number of competitors in the market.

D. The Cost of Goods Forecast

The cost of goods forecast relates directly to the sales forecast. The cost of producing goods varies directly
with the level of sales. To calculate the cost of goods forecast, you may use either the unit costing method or the
percentage cost method.

E. Unit Costing Method

This method is exactly like the unit sales forecast, except instead of using price, you use cost per unit.
Cost of Goods = Number of Units Sold x Cost Per Unit
Just as in the unit forecast, you must do this for each unit sold. The sum of the cost of goods is then part of
the income statement.

F. The Percentage Cost Method

In retail businesses, where mark-ups and markdowns predominate, it is common to use the complement to
calculate the cost of goods. The cost complement is the percent of the revenue, or the selling price, which
represents the cost of goods.

For example, if an item costs $12 and is priced at $20, then the cost complement is ($12/$20) x 100 = 60%.
(If the cost complement is 60% then the Gross Profit Margin is 40%). You can use the historical cost complement
or industry standards to forecast the cost of goods and gross profit for your income statement.

G. The Overheads Forecast

The overheads forecast is an estimate of your expenses for the year. This list should be similar to the list
developed for the fixed costs of your break-even analysis. Typical overhead expenses include:
• Advertising and Promotion • Owners’ Drawing or Wage
• Automobile • Mail and Office Supplies
• Bank and Finance Charges • Professional Fees
• Communications • Professional Development
• Depreciation • Wages and Benefits
• Insurance • Travel and Accommodations
• Entertainment and Meals • Other
• Occupancy
The next step is to make cost estimates for each area. You may do them monthly, or annually, however, you
will eventually need to know your monthly expenditure in each area for your cash flow forecast. Some of your
forecasts will be a matter of calling a supplier and asking for a quote – insurance is an example of this kind of
overhead. Sometimes, you will have to make a management decision about how much you plan to spend in order to
achieve your revenue objectives.

 The Cash Flow Forecast

A Cash Flow Forecast is probably your most important financial tool. It is your cash flow that shows you if, and
when, you will run out of cash essential to run your business. It allows you to take action before problems occur
and even do “what if” calculations before taking on new projects. The cash flow is a 12-month projection that
forecasts the receipts and disbursements for your business.
In a start-up situation, it is preferable to have a start-up month to specifically show the reader the costs
incurred to start the business.
Cash flow is arguably the most important aspect of business. This is due to what is called the Current Asset
Conversion Cycle. This is the time, in days, it takes to purchase a product or materials, produce and sell an item,
and then finally collect on that item.

Current Asset Conversion Example

For example, suppose a business purchases a $1,000 worth of raw materials at the beginning of the month.
They take one month to produce the product, one month to sell the product for $2,000 and one-month to collect
their cash from their customer. If they do not receive any vendor credit for their raw materials, the process looks
like this.
 We have to put out $1,000 at the beginning, but do not collect $2,000 for 3 months. We still need to pay the
overhead expenses in the interim. Without cash, or access to credit, we can go bankrupt before collection. Then we
need to worry about selling the product in a timely manner and collecting in a timely manner. Failing to
understand this part of business is one of the reasons that many experts in entrepreneurship and small business
consider poor cash planning the single biggest cause of business failure.

Why do a Cash Flow Forecast?

Too often business owners do a cash flow forecast in their head. Putting the cash flow forecast on paper,
however, will give you the following:
• A format for planning the most effective use of your cash (cash management).
• A schedule of anticipated cash receipts – follow through to see that you achieve it!
• A schedule of priorities for the payment of accounts – stick to it!
• A measure of the significance of unexpected changes in circumstances; e.g. reduction of sales, strikes, tight
money situations, etc.
• A list, on paper, of all the bill paying details which have been running around in your head, keeping you
awake at night.
• An estimate of the amount of money you need to borrow in order to finance your day-to-day operations.
• An outline to show you and the lender that you have enough cash to make your loan payments on time.

Receipts – occur when cash enters the business for any reason. It is like making a deposit in your current account.
The main reasons for receipts are:
• Cash sales
• Collection of accounts receivable
• Loan proceeds. This includes term loans, start-up loans, line of credit and notes
• Owners’ contributions. This includes both investments and shareholders’ loans.

Disbursements – occur when cash leaves the business for any reason. The main reasons for disbursements are:
• Cash expenses or inventory purchases.
• Payments of accounts or expenses payable.
• Loan repayment (either bank or shareholders’ loans)
• Owner repayment (dividends in a corporation or drawings in a proprietorship)

In cash flow, we talk about receipts, disbursements and deficits or surpluses rather than revenue, expenses and
profits or losses.

How to do your Cash Flow

The cash flow is made up of 3 distinctive parts: the receipts, the disbursements and the cash flow
calculation. Because of the complexity of the disbursement section, this section has been broken down into a
series of smaller sections. These sections are:
1. Receipts a. Disbursements of Purchases/Sub
a. Receipts from Operations Contracting/Piecework Labour
b. Receipts from Loan Proceeds b. Disbursement of Administrative Expenses
c. Receipts from Investments c. Disbursements for Capital Purchases
2. Disbursements d. Disbursements for Debt Repayment or Dividends
3. Cash Flow Calculation

Supporting Documents
 CONTENT:
1. The owner’s resume 5. Letters of intent
2. Contract with suppliers 6. Government document
3. Contracts with clients 7. Copy of patent or copyright acquired
4. Letters of reference 8. Others
 Balance Sheet Sample

XYX COMPANY LTD.

Year Ending July 31, 2005

Assets Liabilities
Current Assets Current Liabilities
Cash P5,000 Line of Credit P2,000
Accounts Receivable P10,000 Accounts Payable P1,500
Inventory P4,000 Wages Payable P1,000
Pre-Paid Insurance P1,200 Current Portion of Term Debt P2,000
Total Current Assets P20,200 Total Current Liabilities P6,500

Capital Assets Non-Current liabilities

Macheriny & Equipment P18,000 Term Loan P20,000
Automobiles P20,000 Less Current Portion -P2,000
Leasehold Improvements P24,000 Shareholders Loan P30,000
Total Capital Assets P62,000 Total Non Current Liabilities P48,000

Equity
Initial Investment P20,000
Retained Earnings P7,700
Total Equity P27,700

Income Statement Sample