Chapters

Credits

Utilities

Chapter IX

HOW TO PREPARE A BUSINESS PLAN

Juan A. Moriano and Francisco J. Palací

1. INTRODUCTION

“An idea without a plan is only a dream”. W.J.Reddin

When the entrepreneurial fever empowers our spirit, it is difficult and tedious to stop thinking about every little detail of the starting and the management of our future business. However, this task is very important because it allows us to understand the steps we should follow in order to achieve our goals and understand the feasibility of our business idea. After having studied every aspect of the business plan, we are not going to be the first in throwing away the idea we thought was brilliant.

On the other hand, just as the «Curriculum Vitae» is an essential document when we apply for a job, the business plan is a requirement when we create a new company. A precise and realistic business plan is the best presentation for the entrepreneur and the best guarantee for our future success.

The purpose of this chapter is to guide people with entrepreneurship who must express their business idea on written document.

1.1. OBJECTIVES

To teach the student how to set up a business plan to reduce the failure risks.

2. WHAT IS A BUSINESS PLAN?

The business plan is like a «navigation map» for the entrepreneur, where the business idea is given a shape and the possible routes are drawn to achieve the business adventure.

According to Herrero’s definition (2002), a business plan, also known as business project or feasibility study is a written document that identifies, describes and analyses a business opportunity, examines its technical, economical and financial viability and develops all the procedures to change this business opportunity into a concrete plan for a company.

Therefore, the business plan is a document developed by the project entrepreneurs, where they analyse all the different factors and objectives, in all the areas where the business will be developed. According to Almoguera (2003), it should be a design tool to create a virtual company before making it real. With the business plan, the pioneer gives a shape to all the ideas and details he has for the development of his business.

In conclusion, the business plan is an important instrument for every project of a new company whatever the professional experience of the pioneer or pioneers is and the project dimension. Even for already established companies, a well-designed business plan has to be the basis to begin new growth and diversification projects of the main activity.

3. OBJECTIVES OF THE BUSINESS PLAN

The business plan is a very useful tool that allows the entrepreneur to achieve multiple objectives. The following is a description and differentiation of its external and internal uses, the main goals you could reach thanks to this document.

3.1. Internal level

When you use the business plan on an internal level, it has the following purposes:

1. To prove the project coherence: tion of the business plan forces the entrepreneurs to adopt a thoughtful position in order to connect the perceived opportunity with the reality. This process lets us reach a wide, deep and objective knowledge of the company we want to start up. Therefore, the business plan is like a tool to evaluate the project feasibility and to considerably reduce the risks of starting a business.
2. To establish objectives and plan their achievement: In the preparation of this document, we do not only describe all the areas of the new business, but we also learn how to pay attention to the goals and to plan them in order to reach them. Therefore, the entrepreneur should measure his or her expectations and try to hold on to the goals he or she can achieve. Moreover, this process has to be used as a condition pattern which allows the individuals to develop a capacity to generate useful information and apply it to their company (Castillo, 1999).
3. Evaluate the progress of the business plan: When the new business starts to operate, the business plan serves as an internal instrument to evaluate the progress of the company and its deviations from the planned scenario.

3.2. External level

The external face of the business plan constitutes the best «business card» and it turns out to be useful on different levels:

1. To obtain the necessary financing to launch the business.
2. To choose the possible subsidies from the public administration.
3. To find partners or to convince them of the project value.

Sahlman (1999) criticizes many entrepreneurs for creating their business plans with the only purpose of receiving resources, generally capital. According to this author, this is a waste of ink, excellent graphs, spreadsheets and a decade of financial forecasts, broken down month after month. However, any investment expert knows that month after month financial expectations that cover more that one-year period are simply an act of imagination. An entrepreneurial company always involves certain risks and faces too many unknown aspects to predict its revenue and much less its profits. Therefore, the business project must include from the beginning a business model that shows how the entrepreneurs have thought over the driving forces of success and of failure for their new company.

In conclusion, the business plan helps the entrepreneur focus on future, widen his mentality, analyse the potential market, the competition and its goals, and obtain external financing (Marcito, 1999). Consequently, the plan is an important instrument on internal and external levels. Nevertheless, the business project should not be created and then forgotten in a drawer; it will be useful in many ways: for the maturation and starting up of the new business as well as managing the new company.

4. MAKING OF THE BUSINESS PLAN

Writing a business project is a tedious, but fascinating task. Certain aspects of the final document can be improved with the collaboration of an expert in the particular area (accounting, marketing, human resources, etc.). But the principal elements should be written by the entrepreneur himself. The person on who will depend the future realization of the company has to be the owner of all the ideas for the company (Finch, 2002). Therefore, it is very important that all the promoters participate in the preparation of this document so that they get involved with the established goals in order to achieve them.

Next, we present some suggestions about different aspects to be considered if we want to impress other people with our business plan.

4.1. Writing recommendations

At this point, we can follow the famous advice by Herrero (2002) so that the company plan is useful:

1. Clarity: The presented information must be written in a clear, brief, truthful and verifiable way.
2. Actuality: The plan should be a document that presents current and relevant information. This is especially important to projects with a technical content, because one difference could be fatal and fail a successful company.
3. Totality: The business plan embraces all the areas of the entrepreneurial activity in order to be completed.
4. Comprehensible language: The language used in writing the plan should be intelligible for different types of readers (investors, bankers, suppliers, technicians, etc.). Make a special effort to make terminology a comprehensible language for all the interested groups.

On the other hand, the writing style of the business plan will depend on its purpose, on the people it is aimed at, and on the sector and the activity that are being described.

The first step consists in deciding what is the purpose of the plan and who will read it. A great exercise, to determine exactly who is the recipient, and what reactions we are looking for, is the following: write down a description of the people who will read the plan, who they are and what questions are important to them. Then try to give the answers in the plan.

Next, we present some specific recommendations about the writing style, depending on the business plan purpose.

4.1.1. Getting financing

If the purpose of our plan is to obtain an investment, we should convince the investor of the excellent profitability of our business with a very small risk (Finch, 2002). Therefore, we have to collect all the available economic information and detail the benefits that the potential investor could get for the invested capital.

The investors who read a business plan want to see a proof, look for information to get convinced that what they are reading is true. As a result, we need to provide facts and information that may support our assumptions. According to Finch (2002): «everything you say should be supported by facts» (p.21).

On the other hand, we must show that the promoters are able to achieve what they have planed. Therefore, it is helpful to include the curriculum of the entrepreneur or the curricula of the people that initiate the new venture.

4.1.2. Getting subsidies

If you want to get public subsidy, you previously need to look for the conditions you have to complete in order to get a financial help for the business plan. Therefore, you have to collect all the information that proves that your project can receive this subsidy and explain in the business plan how you will satisfy the requisite conditions.

The public organizations do not concentrate on studying the project feasibility, but they pay more attention on aspects such as the creation of new jobs, the use of new technologies or the social benefits derived from the business creation.

It is necessary to adapt the business plan to the people it aims at. However, it is not a good idea to write plans depending only on the people it aims at, because it would generate a lot of work and there may be looseness between the different versions. (Finch, 2002).

4.2. Recommendations for its presentation

The content of the business plan and its presentation are very important. It will be difficult to attract partners and investors, or win credibility if our plan has poor writing and organization. The impression that a reader could get if we make these mistakes is that we are unable to complete it or that we have not thought over it well.

According to Finch (2002), if we want a plan to have a good aspect, we should:

• Type the original, nothing should be handwritten.
• Use a legible typeface and separate the paragraphs with spaces.
• Use a good quality of paper.
• Include a title page.
• Number the pages and the different parts.
• Include an index page that refers correctly to all the numbered pages.
• Articulate the document in an easy way for reading. Divide it into epigraphs. Use appendixes or annexes for details.
• Use charts, graphs, and images to facilitate comprehension.
• Include diagrams, images or photographs (for example of the products, fittings, processes, logotypes, etc.).
• Make sure the grammar and spelling are correct.
• Make sure there are no mistakes in the calculations.
• Put a date on the document to avoid any confusion with previous or later versions.

According to Nueno (2001), the talent showed in making a business plan is perceived as an indicator of the entrepreneurial character of the entrepreneur.

5. THE STRUCTURE OF THE BUSINESS PLAN

At this point, we must emphasise on the importance of organizing the information we have in the plan, in order to assure its coherence and integrity. In this respect, Finch (2002) shows that the business plan has to be structured like a story:

1. Beginning. The plan has to start with the definition of the goals of our company, explaining its brief history and how we came to the idea of the business.
2. Development. Here you have to explain in detail your main idea and how you want to develop it.
3. Outcome. As a conclusion you have to say what you need in order to start your company, talk about the possible risks, how to avoid them and mention the expected profits.

There are many ways of structuring the information in the plan. It all depends on who is the audience of the plan. For example, it is not the same to present it to a financial institution, ready to verify and examine the numbers given in the plan than to a potential industrial partner who will be more interested in the operative aspects of the plan.

6. GENERAL SUMMARY

The business plan has to start with a short and attractive presentation of the project, capturing the readers’ attention and inviting them to read the whole document. This summary should not be more than one page long and should be the last thing you write although in the plan it appears in the first place.

In this page, we have to sell our business idea. We can start with an attractive introduction so that the reader immediately pictures our business. Besides, we have to write briefly about the birth of the project, the motivation and the main goals we are trying to achieve. Therefore, the most essential parts of our plan should be mentioned in the general summary.

According to Finch (2002), the only significant difference between the summary and a newspaper article is that the former should include the main numbers of our business, such as the market size or the financing needed. We may not use decimal numbers, but instead we can use round figures, which are easier.

Another important point is that we need to emphasize the positive and the optimistic side of our plan, instead of talking in the summary about its risks and difficulties. The reader may want to go on with the reading.

7. BUSINESS PLAN DESCRIPTION

The purpose of this part is to show briefly the main figures and to outline a general outlook of the parts that will be described in detail further. Therefore, we state in three paragraphs what are the goals of our project, who is going to be the staff and what is our business idea.

7.1. Objectives of the business plan

In this part, we describe the objectives of the business plan and briefly, what the entrepreneurs must do in order to start up the new company. You could also mention what is the current state of the project and what are the activities you have already done or the objectives you have already achieved.

7.2. Description of the entrepreneurs

The purpose of this part is to describe one by one the entrepreneurs who have created the business idea and what is their specific contribution to the business scenario. It is good to make a «Curriculum vitae» of each entrepreneur with regard to the project (professional experience, specialized business training related to the project, etc.).

«When I get a business plan, the first thing I always read is the section about the personal history of the entrepreneurs. Not because they are the most important, but because without a good professional team, the rest is nonsense.» (Sahlman, 1999; p.36)

In other words, when the experts analyse a business plan, they think it is important that the entrepreneurs combine in their curricula technical knowledge related to the business idea, business management knowledge and experience in the sector in which they are going to work.

According to Arthur Rock, the legendary US investor who participated in the creation of companies like Apple and Intel: «I invest in people not in ideas…if you find valuable people, it doesn’t matter if they are wrong about a product or service, because they will change it». (Salhman, 1999).

With regard to the other people of the company (human resources you are planning to hire), it is usually better to mention it in the chapter «Organization and Human Resources».

7.3. The business idea

According to Herrero (2002), you have to explain briefly (the details must only be mentioned further) the activity you want to set up, the product or service characteristics you offer, the business necessities it will supply, the product advantages and the possible problems you expect.

At this point, the reader begins to have an idea of if our product or service can have success in the chosen market.

8. PRODUCT OR SERVICE DESCRIPTION

We think that the next chapter can be divided into the following parts.

8.1. Definition of the product or service characteristics

This part will focus on the product or service detailed description, emphasizing: the characteristics of the product, the market it will aim at, the necessities it supplies, the market positioning, the differences with the competing products and prices.

According to Nueno (2001) it is helpful to think about what other aspects will allow us to expand the product or the service:

• Possibilities to modify it so it can be introduced in other markets.
• Possibilities to find complementary products and services in order to increase sales.
• Possibilities to extend the product concept towards a family of products.
• Possibilities to find advances that will allow thinking about a second or third generation of products.

Once the company has been successfully created, it is imperative to guarantee its development and this is only possible through a product or service offer always renewed. (Nueno, 2001).

8.2. Rules for the product or service.

In this part, we will mention if there is any right over the product or the service that will be performed, commercialised or borrowed (patents, trademarks, anagrams, etc.). We will also talk about special rules, the business registration required to develop our business activity.

If we need to get patents or other legal protection on our product or service, we must mention the measures needed.

9. MARKET STUDY

The market study is one of the most important parts of the business plan. According to Herrero (2002) you cannot consider the effort and the expenses to do a market study ” (p.30).

Almoguera (2003) believes that a market study should have the following objectives:

1. To demonstrate the project feasibility.
2. To present enough information to prove that there is a market niche for our product or service.

9.1. Market situation

The market can be defined as a package of sales and purchases of some given goods in one place and time, a diversity of subjects who want to sell and buy (Córdoba y Torres, 1995). Therefore, the market consists of the following participants: the consumer, who is the most important market component and the competitors (Almoguera, 2003).

The following is an outline of the market analysis we are looking for:

• Estimated size.
• Evolution and growth rate.
• Market type (fragmented, where many companies compete, or concentrated if there are few companies with a leading position)
• Sector: for example, if our service is the envelopes design for mail, then the sector will be this of stationery.

We must be objective when we present the market segmentation and niche ( the potential clients and competitors). If from the beginning our market niche is insufficient, we have to give up the business idea or change it. (Herrero, 2002).

9.2. Public targets

We will define who are the potential clients we will aim at, making a difference between those who make the decision for the purchase and those who consume the product.

It is interesting to classify the potential consumer in standardized groups (age, sex, region, economic or social status). We must study every group and analyse how they make the purchase decision, what are their motivation and the changes in their habits.

9.3. Competition

Finch (2002) says that it is surprising to read so many business plans without any description of their competitors. Other business projects describe the competitors’ product but insinuating its inferiority. It is very important to be objective when we talk about our competitors even if their products or services are not as good as ours. Remember that many people thought the recording video system «BETA» was technically superior, but finally, «VHS» prevailed. Therefore, we must analyse competition in the most detailed and objective way we can.

In the competition study, we should introduce all these previous factors that make our company different from those that already exist. According to Almoguera (2003), the objective is to attract an investor to the new project and assure there will be no other company with a similar business.

9.4. Planned market participation

In this part, we will show our desired market position and the steps of development of our company. For a new company, the market could be during a few years only one city, then it could be a region, then a country and finally the whole world. (Nueno, 2001).

9.5. Entrance barriers

We think it is important to talk about the possible difficulties when entering a market; in other words, we want to know if there are mechanisms that make the new competitors incorporation difficult.

According to Almoguera (2003), the most common barriers may be:

• Scale economy. The fabrication costs decrease as the production grows due to fixed high costs, which is a significant advantage for the already established companies in the sector.
• Advantage of the competition prices.
• Differentiation of one product with patent and trademark.
• Difficulties to establish channels of distribution.

It is fundamental to know these barriers in order to create an appropriate and successful market strategy.

9.6. Legislation applied to the market

In this section, we need to include information about any legislation applicable to our activity, for example authorizations for buildings, environmental policies, and waste policy.

In conclusion, the market study allows us to understand better the market situation and the sector where we are about to sell our product or service. In order to obtain this information, you need to speak to official institutions, employer’s associations, suppliers and distributors, or if you have enough resources you can always go to a consulting agency that will do the market study for you. Nevertheless, this option is usually too expensive when it is for a new venture, and the entrepreneurs do not have enough capital.

10. MARKETING PLAN

Marketing is a group of activities to satisfy the consumer needs with a product or a service, and the marketing plan is the document that runs all this. (Almoguera, 2003).

The marketing plan has to be based on the market study and its elaboration needs to answer to: how are we going to sell our product? We have to describe commercial strategies for our product, paying attention to the four classic variables, also called “the four P’s”, of the marketing-mix: Product, Price, Place and Promotion.

According to Almoguera (2003), when we write the marketing plan, we need to consider the following advice:

• It must be adequate to the global company strategy.
• It must be measurable, revisable, and especially practical, that can be real.
• It has to include achievable goals.

10.1. SWOT Analysis

As previously mentioned the commercial strategies of a company can be defined through an exercise that allows us to understand the position of the company in the market. We use an analysis called SWOT “Strengths, Weaknesses, Opportunities and Threats”.

For its presentation, we use the following chart:

Once we have analysed the company situation with regard to the market, it is possible to establish a strategy through strengths reinforcements and/or taking advantage of the opportunities, correction of weaknesses and /or avoiding threats.

10.2. Product policy

A product is a material good, a service or an idea that has a value for a consumer and may satisfy a necessity. Therefore, it is a means to satisfy this necessity.

With regard to the product policy that should show a marketing plan, it would be a coherent part of concrete decisions with references to (when it is necessary for the product in itself):

• Packaging or packing (if needed) that will define the product
• Design
• Label
• Quality
• Trademark

10.2.1. Life cycle

From the moment a product enters the market until it disappears, it goes through various phases: creation, introduction, growth, maturity, slump, re-launching, hyper maturity, etc. The life phase where the product is can determine the product policy of the new company.

10.2.2. Product levels

Another important concept is the concept of the expanded product (that includes the additional services like after-sales service, maintenance, guarantee, delivery, customer service, etc.), the formal product one (that incorporates to the basic product the aspects of presentation: packaging, trademark, design, physical shape, company’s identity, quality, etc.)

10.2.3. Product qualities

We can talk about some sensory qualities (colour, smell, taste, etc.), all the products offered by a company and the range of those of similar characteristics (we can mention here: spaciousness, depth, consistency, congruity, length).

10.2.4. Product position

This is the position of the product in the correspondent market sector and the evaluation of the product made by the potential consumers.

10.3. Price policy

The marketing plan should contain a definitive price strategy and planned actions in order to develop this strategy.

Generally and without detriment to mix them, there are two possible statistic directions the new companies could adopt to enter in the new market:

1. Reduced prices: it is an initial sacrifice of profitability to get a bigger market share.
2. High prices: for a selected market share where people think quality is more important than other considerations.

10.3.1. Costs

If you calculate a price according to the costs, you will assure profitability and the survival of the company.

10.3.2. Competitors prices

They will allow us to know the potential competitiveness of our prices. The competitors’ prices need to be studied in the market study. A simple and efficient way to find about the competitors prices is to perform a pseudopurchase: you say you are a customer and ask directly about the prices of your competitors.

10.3.3. Demand sensitivity

When we define the price of the product or service, we should keep in mind what is the relationship between price and demand. It is studied in the concept of the price elasticity of demand. This allows us to know the relative variation of demand when there is a price variation; then, we talk about:

1. Rigid or inelastic demand: when there are quite no changes in demand when price changes. (It allows the prices to increase)
2. Elastic demand: when any price variation makes significant changes in the demand (The advice is to keep prices up or lower them).

Another important aspect that should be included in the marketing plan is the possible discount policy and its consequences.

Moreover, any decision on prices will influence and be influenced by the following: consumers, mediators, competitors, suppliers, government services, etc.

10.4. Distribution policy

The function of distribution is to give or deliver the product or service developed by a company to its clients.

10.4.1. Distribution channels

In the products distribution, we need to have different agents that act as mediators between the producer and the consumer. These agents are the following:

1. The retailer. He has a decisive influence on the results of our marketing actions. Traditionally, the role of the retailer was positive for convincing the potential buyer in the quality of a given product. However, in the modern current establishments, the only important thing is to avoid the negative influence of the retailer and it leads to an inadequate situation of the product or a space too small for it.
2. Wholesaler. The wholesaler is a mediator who buys products in big quantities to supply the retailers, offering them with other services. Therefore, he or she is a great ally able to expand the product very fast.
3. Broker. Self-employed, he has the freedom with regard to prices, he receives and delivers the products and he can work with competing companies at the same time.
4. Distributor. Technically, this term refers to the big wholesaler at the manufacturer level, the person who sells and distributes all or most of the production. The distributor commercialises a small number of products and usually works for only one producer.

You can find in the following chart the links where we may find the product, from the manufacturer to the consumer.

10.4.2. Distribution modalities

It is convenient to remember the different distribution modalities to choose the one that best fits the characteristics and needs of our market:

• Exclusive distribution: you give the exclusivity of a product in a given geographical area.
• Selective distribution: the manufacturer chooses some distribution places according to its characteristics (geographical location, types of clients...)
• Intensive distribution: the distribution of a product concentrates on the establishment of the same commercial sector.
• General distribution or extensive distribution: the product is distributed in all sorts of establishment, no matter in which sector they work.

In conclusion, the choice of the distribution system is an important marketing decision, with advantages and disadvantages in each case, which must be studied to make the right choice.

10.5. Communication policy

The communication of a company consists in a series of tools which goal is to send a message to the client and establish a contact with him or her.

In the marketing plan, there should be a description of the main elements of a company’s communication policy. The election of one or other means will mainly depend on the economic availabilities for it or on the predictable efficiency of the different means used.

10.5.1. Image of the company

It is divided to an objective identity (name of the company, activity, etc.), a visual identity (logotype, symbols, colours, taste, personal music tune, etc.), corporate identity (personal treatment, public attention, etc. ). All these elements should differentiate the company from its competitors.

10.5.2 Advertising

It refers to all the persuasive communication actions that introduce the product, increase the consumption and create the company’s image.

We must differentiate between some basic concepts:

• Medias: press, radio, television, the Internet, public-advertising spaces in public places, etc.
• Medium: all the newspapers or magazines where your ad is published, every TV or radio channel, etc.
• Messages: direct and efficient - describing the advantages of the product and the derived benefits; they make people associate the ad and the product so that they remember it.

10.5.3 Sales promotion

It refers to all the commercial acts designed to stimulate the buying efficiency of the consumer and/or distributor or to improve the purchase conditions of the product.

Methods: sales with a present, drawing lots, games, gift vouchers, samples, tasting, demonstrations, rebates, fairs, exhibitions, company’s presents, etc.

Within this category, we have to include the Merchandising. It includes all the actions that increase the visibility and appeal of a good or product in the establishment where it is offered to the public (illumination, music, disposition, displays, etc). They pretend to influence the impulsive or non-reflexive sale.

10.5.4 Public relations

When a company carries out communication actions that are not directly related to the economic activity they carry out (they are not trying to convince), but they pretend to improve the company’s image and to create favourable atmosphere for the potential client and for the relation with the public, we are talking about public relations activity.

Among the methods that are usually used, we could mention: sponsorship, organization and participation in public events, games organization and rewards, donation of a part of the gross operating profit, etc.

10.5.5 Personal sale

The sales also belong to the communication policy of a company, and it has a added value because it is the most adequate formula to bring a product to its consumer, especially in service companies.

However, it is convenient to remember that a company supplies the unsatisfied needs of its clients, it does not create them. That is why it is important, especially at the beginning, to adhere to the results of the market study to know which are the demands of the clients and to focus the sales strategy on it in order to satisfy these needs.

11. PRODUCTION AND TECHNICAL MEANS

Now we know how we are going to sell our product and its price. It is then important to think about the production process (if it is a product) or the technical description (if it is a service). It refers to what material or human means we will need in order to manufacture the product or to carry out our service, how much we want to produce and what are our time limits. (Ballesteros, Guillamón, Manzano, Moriano and Palací, 2001).

11.1. Geographic location of the establishment.

We need to indicate the exact location and the industrial structure, centre of the company: industrial land, industrial estate, industrial park, etc. We also need to describe the viewpoints to choose this location.

It is also important to mention the main communication networks, infrastructures, services we have, and finally the proximity of clients and suppliers.

11. 2. Description of the production process

This part will only be necessary when the production process is complex. The main aspects that should be considered are the following:

• Necessary equipments for the production or for the service we are offering: characteristics and models, costs, means of payment and financing, possible subsidies, amortization schedule.
• Strategies of the production process: decisions of the subcontracting of components or services, characteristics of the subcontracted companies.
• Description of the control processes: quality, environment, inventory, risks and security.

11. 3. Logistic procedure

In our business plan, we need to consider how we will manage our stocks. Therefore, we need to design a stock plan that minimizes the costs and guarantees the functioning of the company.

Other aspects of the logistic procedures: maintenance of the materials and finished products, packaging, transport and delivery.

12. ORGANIZATION AND HUMAN RESOURCES (HR)

Once we have determined the company’s activity, the location and the technical means, we have to think about organization and human resources. We must not forget that the human factor is critical for the success of every company and it does not depend on the brilliant business idea.

12.1. Organization chart of the company.

Here we are going to define the job positions, their functions, the activities and the specific tasks. Here is the following organizational chart to visualize the different responsibilities in a company.

12.2. Internal Human resources

We need to describe the type of employees we need in order to start up the company and their required profile (experience, knowledge, abilities and motivations) .

Once you have selected the candidate, ask the correspondent organisms for advice about the most convenient way of hiring him or her, about the collective bargains, the laws, get information about Social Security, help provided for new employers, etc.

12.3. External Human Resources.

It is normal to subcontract other companies for some functions (outsourcing) like for example a legal or fiscal consultancy; you contract an external company and mark all the costs and conditions of its services.

13. LEGAL FORMS OF BUSINESS

Describe in details who the partners and the shareholders of the company are and what functions they exactly have. Explain what partners will actually work in the company and who will participate in the company only with capital. Specify any other contract or agreement among all the partners.

Another important aspect is to decide the legal form of the organization. It depends on the legislation of the country where the company is located. It is very important to choose the right legal form, because it could have crucial consequences on the liability of the partners. Make sure you study all the possibilities and choose the best option for your business and your partners.

14. FINANCIAL AND ECONOMIC STUDY

The financial and economic study is prepared with all the information and data of the previous steps and its result indicate the minimum funds we will need to achieve our business idea.

According to Finch (2002), the amount of financial information depends on:

• The size and complexity of the business you have to describe. A big and complex company that needs a strong investment will need more information, more details in order to show it to the partners.
• It also depends on the audience of the business plan. For example, a finance company will ask for more details than a public entity that concedes you a grant.

Therefore, the business study is a key point in any project, it could be crucial for the decision of the potential investors and we have to be careful to make it clear, complete and with a good redaction.

14.1. Initial investment

The objective of this part is to reckon the funds and investments in fixed assets, and the circulating assets needed for starting our company. In other words, the purpose is to determine the financial need of the business at the beginning.

14.1.1. Fixed assets

It includes all the investments in fixed assets, wealth elements (for example real estate or furniture) who will stay more than one financial year in the company. These are big investments that will come back gradually with depreciation and should be financed with permanent capitals: personal resources or long-term required resources.

At the beginning of the new activity, this investment is usually very high; that is why you have to think over it well, because a capital-planning mistake could damage the further business development. In industrial companies, the initial investment is huge, while in commercial businesses the investment required is more moderate.

The fixed assets investment can be divided into the following concepts:

1. Establishment costs: creation expenses (licenses, National Insurance), loan engagements, publicity promotion of the company, etc.
2. Material fixed assets: land, buildings, fittings (electricity, gas, plumbing, networks, etc.) machinery, tools, furniture, computers, transport elements, etc.
3. Immaterial fixed assets: all the intangible elements, R+D expenses, copyright, patents, trademarks, taxes, software, etc.
4. Financial fixed assets: long-term deposits and securities, stakes in companies of the group.

In order to be used later when drawing up the provisional annual accounts, it is important to develop the depreciation accounts of the different categories of the fixed assets (through the division of the amount that corresponds to each element of the fixed assets by the supposed life cycle of each element).

14.1.2. Circulating assets

These are additional investments or investments derived from the fixed assets investments. They remain less than a year in the company, and must be financed with long-term and short-term debts.

According to Almoguera (2003), the circulating assets are:

1. Stocks: raw material, auxiliary material, almost finished products, finished products, packaging, and packing.
2. Receivable account: investments made to finance the sales of the customers who do not pay cash.
3. Expenses account: it refers to suppliers and creditors.
4. Cash resources: the available money to develop an activity

A good investment plan is not only a guarantee to obtain investments but also a security for the future business. Keep in mind that all the initial capital assistance cannot be for initial investments. You need to keep a part for late payments and other unexpected expenses.

14.2. Financing

After the initial investment, let us look at the way of financing the business idea.

There are two ways of financing a company:

1. Personal resources: capital from the partners
2. Outside resources: external financing, bank, creditors, leasing etc. Normally they are organized on short or long term.

In the financing analysis, we must include not only the personal or outside resources but also the subsidies that are considered as funds from other organizations or companies. (Almoguera, 2003).

14.3. General balance sheet

The general business balance sheet is like a snapshot of the company and shows where the money (passive) comes from and where it is being used (active). Before we calculate the balance sheet, we need to perform an investment – financing revision.

	Application of the resources		Origin of the resources
	ACTIVE		PASSIVE
	TOTAL INVESTMENT		TOTAL FINANCED RESOURCES
	Economic capital	=	Financial capital

Chart 2. Financial balance

We can talk about a financial equilibrium if the permanent resources (personal resources plus the long term debts) are sufficient to finance the investments and a variable part of the current assets.

Within the balance sheet, it is interesting to look at the operating capital (working capital) which is defined as the part of the current assets that are financed by the permanent resources.

If we want a financial equilibrium, the working capital has to be more than zero. If it is under zero we face the following situations:

• Suspension of payments: the company has problems of liquidity.
• Bankruptcy: the company cannot face the debts.

In conclusion, the business assets should be totally financed with personal or outside resources. If something does not fit, we should begin once again and understand what has happened. On the other hand, if the entrepreneur does not have enough accounting knowledge, it is imperative to consult an expert.

14.4. Cash forecast

It is very important for a new company to have cash money for its activities. The way to manage the money is through the cash forecast, which shows us what amounts, needs the company on the short term, how much we need to pay for different activities.

According to Almoguera (2003), the calculation of the cash state permits to optimise the dimension of the project how many money is needed and when we are going to need it.

In the document, we need to describe thoroughly all the payments and bills that will take place month by month by the company. Therefore, before continuing its preparation it is important to indicate the difference between collection and receipt, expense and payment.

The collection is generated when there is a sale and payment when the money of this sale is received. For example, a company may perform its sales at the beginning of the month, but it may receive the payments three or six months after. As we could also reckon a collection but not the receipt, for example when the client is a defaulter and decides not to pay. And vice versa we can get money that is no collection for example, when a customer pays with an invoice with VAT, although we receive liquidity we cannot consider the tax as a personal collection (because it is for the Treasury)

The same analysis can be applied between the expense and the payment. The expense is produced when an obligation is fulfilled (with a supplier, with the Treasury, etc). The payment is produced when you take off money from the register or the safe. For example if we buy a new computer in February, but if we pay for it in March, in the cash forecast the payment will be noted as in March, although we paid it in February.

Here we give an example of the cash forecast month by month.

The cash forecast will be the document that will convince the banks and the creditors that the company will be able to face all the payments, expenses. Therefore, an entrepreneur must spend a lot of time doing it.

14.5. Loss and profit account

Theoretically, the loss and profit account (LPA) is very simple and intuitive and gathers the results of the company’s running. You have to add the accounting year incomes and then subtract the costs and expenses in order to deduce the net profit or loss.

Start with the fixed expenses of the company, which are independent from the turnover (rent, Social security contributions, wages, etc). Then work with the variable expenses (raw materials that will increase as the production increases). It is recommendable for a new company not to charge with too many fixed expenses, but to choose variable costs depending on the volume of business.

After determining the business costs we need to consider an income forecast (sales) combined with financial incomes, subsidies, etc.

15. PLAN EVALUATION

Once we have written the business plan, we must evaluate it to make sure it is realistic and achievable. First, the promoter or the group needs to read it critically in order to look for possible errors. Then, another person, preferably an expert who is used to writing business plans, should evaluate the plan.

To evaluate the efficacy of the plan we need to ask the following questions:

• Are the goals achievable?
• Are there enough actions to achieve these goals?
• Do the project promoters have the necessary experience and knowledge?
• Do we possess enough information about the competing companies and their different products?
• What is the added value of the company we are creating and in what is it different than other existing companies?
• Is it reasonable to expect the company to have success and be profitable?
• Have you considered potential risks?

16.- BIBLIOGRAPHY

Almoguera, J.A. (2003). Cómo hacer un plan de negocios. Madrid: HF.

Ballesteros, B., Guillamón, J.R., Manzano, N., Moriano, J.A., y Palací, F.J. (2001). Técnica de inserción laboral: guía universitaria para la búsqueda de empleo. Madrid: UNED.

Bygrave, W. (1993). Theory building in the entrepreneurial paradigm. Journal of Business Venturing, 8(3), 255-280.

Castillo, A.H. (1999). Estado del arte en la enseñanza del emprendimiento, [on line]. Chile: Intec. Available on: http://www.portalincubacion.cl/upload/Estado_del_arte.doc

Córdoba, J.L. y Torres, J.M. (1995). Teoría y aplicaciones del marketing. Bilbao: Deusto.

Finch, B. (2002). Cómo desarrollar un plan de negocios. Barcelona: Gedisa.

Herrero, S. (2002). Cómo crear una empresa. Madrid: Boletín Oficial del Estado.

Nueno, P. (2001). Emprendiendo. El arte de crear empresas y sus artistas. Bilbao: Deusto.

Sahlman, W.A. (1999). Cómo confeccionar un excelente plan de negocio. En Creando empresa: la iniciativa emprendedora (pp.31-61). Bilbao: Deusto.

How to prepare a business plan