The Basics of a Business Plan for Development Professionals

Nick Fante, Daniele Giovannucci, Cheryl Edelson Hanway

Contents:

• Development Importance of the "Business Plan"
• Key Principles and Guidelines
• The Basic Roadmap

Abstract: A business plan is not only for private sector companies that seek financing. It's rigor encourages a thorough assessment of every important aspect related to the feasibility and sustainability of a project or enterprise. It covers topics that are sometimes overlooked or insufficiently addressed in development projects such as: market orientation; market analyses; detailed operational procedures; intangible assets; and realistic financial projections. Therein lies its value to development initiatives: providing a thorough, private-sector style strategy to help ensure a well-planned and viable project.

I. Developmental Importance of the 'Business Plan'

While a business plan is best-known as the blueprint for starting a business or seeking financing for a business, its usefulness as a tool for project planning in the development field should not be underestimated. Such a document clearly and concisely defines the status, operations, and objectives of a project or a business, and it outlines the methods for achieving its goals by elaborating on the nature of the operation, its management, technical feasibility, profitability and returns on investment.

The plan is an essential tool for starting or expanding an enterprise whether public or private. By exploring the key components that make a project or business viable it encourages a thorough questioning of assumptions and an objective assessment of potential and economic feasibility. That same thoroughness can serve as an excellent barometer of how well the plan's authors know the business, project, or sector.

Because of its importance for private sector development and its usefulness to projects and public institutions, the business plan and its basic elements ought to be familiar to development professionals. This document will explain its elements and uses in a straightforward manner that can be readily adapted for both project planning and business use.

II. Key Principles and Guidelines

The business plan first describes what the project or business is, what it will do (output or outcome), how it will be managed, how and where it will operate, and how all of this will be funded.
It must always include:

1. A brief description of the project or business
2. A profile of its management and key personnel
3. The operational or production processes
4. A list of tangible and intangible assets
5. The market analysis and strategy
6. The financial plan and document
7. References and supporting documents
8. An executive summary

III. The Basic Roadmap

1. The Project or Business Description

The project or business description should:

1. Clearly identify the primary goals and objectives of the project or business and the reasons for doing it. Identify why your products or services are necessary. Who will benefit from your product or service?
   
2. Describe the (business) project and its principal activities or product/service. In other words, what business are you really in? What channel or niche do you intend to fill?
   
3. Describe the form of the organization: corporation, partnership, not-for-profit or other and clarify its tax status.
   
4. Describe the project time-table including the current status of the project and the amount of work that has been done thus far. Explain when commercial operations will commence.
   
5. Identify the location of the operational and the local availability of resources, utilities, manpower and public transportation and transport infrastructure, such as roads, rail, and shipping facilities.
   
6. Set out what licenses and government approvals are required and which have already been obtained.

2. A Profile of Management and Key Personnel

This section should provide detailed information about sponsors, partners, and key management staff. Why are they the best people for the job? Include age, education, current occupation, and relevant business and management experience. Outline the duties and pay scale of each individual. Describe the plan for hiring and training other personnel including wage and benefit structures.

3. The Operational or Production Processes

Describe how the products and services will be produced.

1. Cover the sources and procurement methods for all necessary raw materials, inputs, and equipment. Include contingency plans.
   
2. Identify quality control measures.
   
3. Calculate operational flows, production schedules and physical layouts.
   
4. Determine inventory levels and inventory control methods.
   

4. A List of Tangible and Intangible Assets

This category includes technology, buildings, equipment, contracts and key industry "partners" or suppliers.

1. Describe any proprietary technology or process and technical support arrangements for adapting to the local environment and needs.

2. Describe and value the land and civil works, buildings and equipment or determine how to build or procure them (leasing, buying, importing).
   
3. Mention valuable contracts or "partnerships" with suppliers, vendors, or buyers.

5. The Market Analysis and Strategy

As competition increases marketing becomes a critical aspect of success. This caveat applies equally to development projects: if your clients are not aware of you, your services, or the value you can provide then your work is seriously hampered. Nevertheless, marketing is often overlooked especially in countries without the experience of a market economy.

People, product, price, path, promotion

The key element of successful marketing is to know your clients -- their likes, dislikes, expectations, and trends. Doing a thorough analysis of your market is therefore essential for developing a marketing strategy.

1. The features and benefits of the products or services must be thoroughly explained. How does the product or service satisfied client needs? What comparative advantage does it have?
   
2. What path or channel of distribution will be utilized? Are you a wholesaler, exporter, retailer? Describe the supply channel and your contingency plans for any reasonably foreseeable failures within it.
   
3. What is your pricing strategy for the product or service and what does your market research information say the market will pay? How does this compare with the competition? What will your terms of sale be: cash, credit, LC, etc.?
   
4. What is going to be the promotional strategy? Determine your market position: follower versus leader; quality versus price; client oriented; etc. and the methods for conveying it effectively.
   
   A market analysis must go beyond the potential clients. Make a realistic assessment of both existing and expected competition. Supply reasonable information about competitors' market share, cost margins, quality levels, special niches, and future potential. Clearly define what your competitive strategy will be.

6. The Financial Plan and Documents

The bottom line is, will the project be financially sustainable or will the business make a profit? This is where you tell the financial story and show evidence of your plan. It should be complete and accurate and the revenues and expenses in your documents must agree with the statements and projections made in the rest of the business plan.

The first step is a financial plan. To support your basic financial plan you will need three separate documents:

1. an income (profit and loss) statement
2. a balance sheet
3. a statement of cash-flows

1. Estimate projected start-up budget (costs incurred prior to operation) including:
   legal costs;
   government permits and licensing fees;
   consultant's fees;
   engineering design and planning fees;
   equipment;
   insurance;
   accounting;
   utilities set-up and deposits;
   costs of hiring and training personnel
   advertising and promotion
   
2. Calculate the operating budget allowing enough money to cover the first six months of operation since it will probably be unprofitable at first. Include the relevant items from the list above plus the following:

3. Estimate total investment including land, buildings, equipment, utilities, working capital, and interest.

4. List the sources of financial support and contributions that you can expect.
   
   Each area of the financial plan should be keyed or referenced to a separate list that explains all projections and assumptions should any point require a detailed explanation.

Financial Statements

You should understand and prepare projections for three basic financial statements. These projections should be for at least three and generally five years:

1. The income (sometimes called the P&L or profit and loss) statement that projects and allows you to track your income, expenses, and profits (or losses).
   
2. The balance sheet, which is a snapshot record of assets, liabilities, and capital.
   
3. The statement of cash flows, which provides information about the business's ability to generate cash, as well as monthly projections of the sources and uses of cash for the business. These should be detailed for at least the first 12 months.

Each area of the financial statements should be keyed or footnoted to a list that explains the detailed basis for the projections and assumptions that are listed on the statements.

Some Useful Financial Calculations

The breakeven analysis can be a very useful calculation to illustrate the required minimum level of performance as measured by revenue or sales. To quickly calculate a basic breakeven point simply divide your fixed or unavoidable expenses by your gross profit margin which is gross profit divided by sales.

There are several methods that can be used to evaluate the financial feasibility of an investment project. One method is payback. This method is used to calculate how quickly a project or enterprise will pay back the initial investment and then determine if this is an acceptable period of time to wait. To apply this method, first calculate projected future income from the project and then count the number of periods before the cumulative forecasted cash flow equals the initial investment.

Another method for evaluating project investments is to calculate the net present value of the project by discounting the forecasted future cash flows using the opportunity cost of capital, or the rate of return offered by 'alternative investment alternatives. Approximate options of this rate of return could be the rate of interest paid on bank deposits or the return offered on investment securities. The formula to calculate the net present value is somewhat complicated and can best be illustrated using an example. The present value of a project is equal to the sum of each future annual cash flow divided by the sum of one plus the rate of return raised to an exponential power equal to the number of years the cash flow must be discounted back. Then, the net present value is this present value minus the initial investment required. For example, the net present value of a two-year project with a cost of 1,000 and expected income of 500 in the first year and 700 in the second year, assuming a discount rate of 10%, is equal to 500 divided by 1.10 plus 700 divided by 1.10 squared, or 1.21, minus the initial investment of 1,000. Using this formula, the net present value of this project is equal to 33. Any project with a positive net present value is considered viable from a financial point of view.

A similar method to analyze the feasibility of an investment opportunity is internal rate of return. Under this method, theinternal rate of return is the discount rate that sets the net present value equal to zero. Using the example presented above, the internal rate of return, or IRR, can be derived by using the equation net present value of zero equals 500 divided by 1 plus the IRR, plus 700 divided by the sum of 1 plus the IRR, squared, minus the initial investment of 1,000. In this case, the IRR is equal to 12.3%. Actual calculation of the internal rate of return is somewhat tedious and time consuming and is usually performed on a computer or programmable calculator. Projects that have an internal rate of return greater than the opportunity cost of capital can be considered financially viable.

7. References and supporting documents

Provide reference letters, Curriculum Vitae for key personnel, credit reports and any other supporting documents (i.e. contracts with buyers, patent documentation, letter of intent from additional lender or landlord, etc.) as appendices.

8. Executive Summary

Although this is written last it is often the part that is read first. A summary should cover the main points in approximately one-page without delving into the details of the document except perhaps to mention the supporting details contained within the business plan. A test of its success is if it makes the reader want to know more about the project or business.

It should include:

1. a short history identifying the business or project
   
2. a clear statement of both its short term and long-term goals and how these will be achieved
   
3. the identity of the main protagonists
   
4. the amount of money already invested, the amount needed and the security offered
   
5. expected return
   
6. the primary reasons why the project or business will succeed

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