A Quarterly Newsletter from the UAE and Oman member firms of the PKF International Ltd.

VOL 16, Issue 4 October 2014

BUSINESS PLANS

You have an idea! You’ve got the risk-taking potential! Together, it serves a perfect recipe for innovation and enormous ways to generate new business opportunities. Innovation thrives on a diet of new ideas. It needs paradigm shifts, fresh thinking, and a different perspective. But when it comes to getting the idea down on a paper, it may be hard for you to set aside time to put together your thoughts into a concrete “Business Plan”.

Considering “a business plan is a written description of your business’s future”, “a document that describes what you plan to do and how you plan to do it, if you jot down a paragraph on the back of an envelope describing your business strategy, you’ve written a plan, or at least a gist of an idea. That doesn’t sound so hard, although for funding a loan or convincing strategic investors and partners, realistically you’re going to need more than ideas on the back of an envelope.

Essentials of a Business Plan
A business plan should provide you with a map to your business success. It is a guide to operating your business efficiently. Most importantly, a well-developed business plan helps you to anticipate any changes in your market and develop alternative solutions to help your company take advantage of those changes.

You will benefit greatly from having a written business plan. It will assist you in internal planning, and it is also an essential document when approaching lenders and investors.

Deliverables of a Business Plan
Business plan documents, or outlines, are similar across the spectrum of business plan writing. This means that the requested information relating to the different sections of a business plan are similar but may differ in presentation and/or layout. The content of these deliverables are explained in the following section.

The Promoters’ background:
This part of the plan shares the history of promoters, their background, key strengths, past achievements and most importantly, their vision and mission, i.e. the purpose for starting the business.

Proposed Management Structure:
This portion of the plan outlines the organizational structure of the business and provides profiles of the company’s management. This section touts the skills and experience of each member of the management team. Since it is this management team which will make or break the business, it is important to highlight their individual successes.

Industry Overview:
This section gives an overview of the industry in which the proposed business will be operating. It may summarize the business model, products/services and their distinctiveness along with the major industry trends. The typical aspects covered in this section, about the market are size, growth rate, maturity, sensitivity to economic cycles, regulatory requirements, seasonality, supply/distribution channels, financial characteristics, etc., of the industry.

Market Analysis:
This analysis summarizes the study of the primary target market(s) for the proposed products and services. It provides details about the target market’s needs, as well as how these needs are currently being met. The industry estimates researched/ formulated in the “industry overview” section are used further to derive the turnover estimates for the project in this section. This section may also include sales strategy, pricing plan, distribution program, and proposed advertising and promotional activities.

Competitor Analysis:
This component is a study of your direct and indirect competitors. It should state your competitive advantage and provide an analysis of how you will overcome any entry barriers in your chosen market. The section should specifically describe how your products and services provide a better solution than the competition.

Proposed Business Structure:
The structure of your business is important in order to address legal, regulatory, and accounting considerations. A simple business structure in the beginning may become a difficult issue to transcend as the business grows, especially when crossing countries and regional borders. It is highly recommended to seek legal and accounting expertise to assist with legal, accounting and tax related issues.

SWOT Analysis:
A SWOT analysis (alternatively SWOT matrix) is a structured planning method used to evaluate the strengths, weaknesses of (internal factors), and the opportunities available, and threats to (external factors) the project or business venture. It involves specifying the objective of the business venture or project and identifying the factors (in the form of above matrix) that are favorable and unfavorable to achieve that objective.

Financial Model:
Generally, it is observed that businesses spend a lot of time explaining the story (i.e. history and concept of the project), but not sufficient time on the financial projections and the assumptions behind those projections. The most frequent complaint among financing sources is about promoters who provide unrealistic or “hockey stick” projections based upon weak assumptions, which are not supported by the economic realities of the marketplace, or which may be too simplistic. Promoters/management should therefore spend sufficient time to develop a comprehensive financial model having detailed well-thought-out assumptions. It will speak more of the management capabilities of the business owner(s) than a descriptive resume ever could. A Financial Plan, which generally covers a 3 to 5 year period, and its assumptions should include the following:

Assumptions
Project Costs

  • Detailed asset-wise project cost estimates along-with the expected life of the assets and their replacement schedule;
  • Funding requirements (i.e. financing of project cost with debt and/or equity);
  • Terms of funding such as loan repayment period, interest rate, moratorium period, loan processing charges, etc.

Revenue and Direct Costs

  • Different revenue streams expected to generate revenue along with year-wise estimates of their “volume and price” factors;
  • Direct (mostly variable) costs attached to those revenue streams.

Staff and Overhead Costs

  • Year-wise and category-wise staffing requirement along with details of their expected remuneration (salaries, allowances and other benefits);
  • Year-wise and category-wise overhead costs.

Working Capital
These mainly detail the factors affecting the working capital cycle, such as credit period for customers and by suppliers, inventory carrying period, etc.

Financial Projections
The financial projections will include (and will be based on the above assumptions) in the main:

  • Income statement;
  • Statement of Financial Position (Balance sheet);
  • Cash flow forecast;
  • Direct and indirect costs;
  • Finance cost and loan repayment schedule;
  • Fixed (and intangible) assets and depreciation (and amortization);
  • Project evaluation parameters such as Return on Investment (ROI), Net Present Value/ Internal Rate of Return (IRR), Break-even Analysis, Debt Service Coverage Ratio (DSCR), Sensitivity Analysis and Pay-back period.

All of the above information is generally presented year-wise.

In addition to the above, the business plan may contain additional appendices of explanatory materials which add richness to the plan. These can include research reports, articles of interest, product and service materials, promotional materials, contracts and other pertinent legal agreements, etc.

Conclusion
A business plan is at the heart of every proposed new venture, captures the journey from a core innovative idea to concrete steps for its implementation and is a key factor in making the idea successful. That is why it is imperative that the business plan is well thought out and understood. Your business plan must establish that you have a sustainable competitive advantage, which is backed by thorough comprehensive research.

(This article is compiled by Mr. Amit Athalye, a Director in PKF L.L.C., Muscat, the PKF member firm in the Sultanate of Oman.)