By Goke Ilesanmi
A business plan is a formal document that communicates the direction of a business in a bid to accomplish its most important goal, that is, profitability. Profit does not come by accident. So by writing and following a business plan, you can definitely increase the possibility of achieving profitability. Whether you want to start a business or grow one, attract investors or obtain a loan, attempting to do it without a well-composed business plan is like a stranger going to a place without prior direction. Or better still, it is like a ship without a rudder (which controls its direction). Let me also illustrate it as a motivational speaker. It is like having a dream without an action plan. The dream cannot become a goal that can be achieved.
To be successful in business, you need to research and write your business plan; master the key components of a successful plan; understand all your financing options; and streamline the process using easy-to-use templates.
A business plan is used for many purposes, that is, as a development tool, a management and planning guide, a mission statement, a sales document, etc., and is read by several different audiences. Therefore, you need to structure the components of your business plan for the greatest impact; anticipate all questions that business plan reviewers will ask; and critique and package your business plan for winning results.
Balanko-Dickson, a third-generation entrepreneur, Licensed Professional Business Coach and founding member of the Professional Business Coaches Alliance, who has clients throughout Canada, the United States, South Africa and the United Kingdom says a business plan has an equation structure of Goals + Research+ Strategy. Developing a detailed business plan will provide you with an opportunity to shape a powerful business development strategy.
The major sections of a business plan are industry analysis; market analysis; products and services; business description; and marketing strategy. Others are operations and management; financial plan; implementation plan; contingency plan; and executive summary.
Too often, people invest money in a business only to find out later that there is insufficient demand for the product or that it is not the type that customers want to buy. To reduce this risk of failure and losing money, potential entrepreneurs need to go through the different aspects of running their business in discussions with friends and advisers before they commit funds or try to obtain a loan. This process is known as feasibility study and when the results are written down, the document is known as a business plan. A feasibility study is the preliminary appraisal of the opportunities and risks that abound in a target area of business. In other words, it is about trying to discover if the target business is profitable or not. For instance, prospective entrepreneurs may have an idea about the type of fruit or vegetable product that they would like to make. This may be as a result of seeing others successfully producing it and therefore wanting to copy them. It may also be as a result of talking to friends and family members about the product they think they can make.
However, having a business idea is not a sufficient reason to begin production straight away, without conducting research into different aspects involved in actually running the business. Conducting a feasibility study requires that the most important aspects of the business be taken into consideration to ensure that potential problems are addressed. Among the necessary questions that can be asked and answered during the feasibility study are: Is there a demand for the product? (find out the characteristics required of the product and the size and value of the market); Who else is producing similar products? (determine the number and type of competitors); What is needed to make the product? (find the availability and cost of staff, equipment, services, raw materials, ingredients and packaging); What is the cost of producing the product? (Calculate the capital costs of getting started and the operating costs of production); What is the likely profit? (Calculate the difference between the expected income from sales to an estimated share of the market and the costs of production).
Each of these aspects should be examined in turn. When all the information has been gathered and analysed, it would be possible to make a decision on whether the proposed investment in the business is worthwhile or whether the producer’s money could be better spent doing something else. It is also important to remember that the business plan is a working document that should be used as a framework to guide the development of a business. To do this, it should be regularly updated. However, it often happens that once an entrepreneur pays a consultant to prepare a business plan, he or she will just read it once, then keep it somewhere without reviewing it from time to time.
Here, we look at the sub-concepts of product quality survey; survey of market size and value; and market share and competition
Once a producer has decided that he or she wants to start the business, the first thing to do is to find out the likely demand for the fruit or vegetable product that he or she wants to make, by conducting a short market survey. Although there are market research agencies that are able to do this type of work in many developing countries, it is better for the prospective producers to be involved because they will then properly understand their (prospective) customers’ needs and how their business should operate. If an idea is found to be feasible, this knowledge will in turn give them the confidence to go ahead when they encounter challenges, knowing that their product is in demand. Although telephone or posted questionnaires are possible, in most developing countries, it is better to conduct a market survey by going out into areas where the producers expect to find consumers and asking people for their views. There are two types of information that are needed as regards market analysis: (a) information about the product and its quality; and (b) information about how much people will buy, how often and for what price.
It is important to think in advance about the type of information you need to ask and ask people the same questions each time, so that their answers can be compared and summarised. A convenient way of doing this is to prepare simple questionnaires, which can be used by entrepreneurs to remind themselves of the questions to ask.
Product quality survey
As regards the choice of fruit or vegetable product business mentioned last week, consumers are familiar with the types of fruit or vegetable products that are already on sale and surveys on these products are therefore easier than those for a completely new food. Questions can therefore focus on the things that consumers like or dislike about existing competitors’ products.
However, if prospective producers want to produce products that are new to an area, they need to have samples for potential consumers to taste and give their opinion on whether or not they like the products and would be willing to buy them. For the purpose of hygiene, when asking people to taste a product, a supply of spoons should be provided so that each person interviewed can use a clean one.
Although initially, new products have the advantage of not having competitors, the process of assessing demand is longer and costlier than that for products that are already in existence. Additionally, because about 80 per cent of new products fail, the risks are higher. When you want to go to a new area of business and want to do your feasibility study, explain to each person you interview that you want to start a new business, and that you have prepared a sample for people to try. Ask them if they would like to taste the sample and give you their opinion on what it is like.
Market size and value survey
A different set of questions are needed when assessing the size of the market for a particular type of food (the total volume bought per month or year) and the value of the market (the amount of money spent on the products each month or year). At the same time, it is possible to gather information about the type of people that buy a particular type of food and where they buy it from. The information gathered from potential consumers, using appropriate questionnaires can be analysed by the entrepreneur to get a good idea of the quality characteristics of the product that consumers prefer, the total demand for the product and the total value of the market.
Market size and value questions
These are some of the questions you can ask regarding different segments of the market size and value:
About the market size: How often do you buy this product? Do you buy different amounts at different times of the year? When do you buy most? How much do you buy each time? When do you buy the least? How much do you buy each time? What is the amount of food in the pack?
About the market value: How much do you pay for a pack of the food? What is the price difference for larger or smaller packs? Does the price change at different times of the year? When is the price highest? When is the price lowest?
About the customer: Would you say that you have a low, medium or high income in your family? In which age group do you belong?
About sales outlets: Where do you usually buy this food? (Market stall?; Supermarket? etc.). However, this process involves making a number of assumptions and it is important to consider the following: (1) are the people interviewed really representative of all potential consumers? (2) were enough people interviewed? (3) were people giving accurate information?
If a producer is unsure of the quality of information that has been given, he or she should ask more people the same questions to check the answers obtained. Clearly, the more people that are interviewed, the more accurately the information will reflect the real situation. However, a balance has to be drawn between the time and cost of interviewing a large number of people and the accuracy of the data obtained. As a guide, 50 to 75 interviews should result in a good idea about the market for a product in a particular area.
When analysing data collected about market size and value, it is often helpful to find official statistics about the people who are expected to be the customers for a new product. Similar information is sometimes available from local government offices, tax authorities and chambers of commerce, although it may not always be up to date.
Market share and competition
Market surveys and calculation of market size and value are important to finding out whether the demand for a product really exists. But the figures should not be assumed to represent the scale of production that could be expected. Even if nobody is currently producing a product locally, it is likely that once a new business begins production and is successful, competition will start. It is therefore important from the outset to estimate the proportion of the total market that a new business could reasonably expect to have. This is known as the market share. It is often difficult to estimate a realistic market share and the figure depends on a large number of variables. In many cases, new entrepreneurs over-estimate the share that they could expect.
Competitors are very important to the success or failure of a new business and the entrepreneur should recognise that there are different types of competitors. Using the example of someone wishing to make fruit juices, it is helpful to think how the consumers might view the available products: for example when they are thirsty, they have a choice of hot drinks (tea, coffee, etc.); cold soft drinks, such as milk, juices, squashes, etc. These are all general competitors that are able to satisfy the consumers’ thirst. Assuming the consumers choose cold soft drinks that can be drunk straight from the bottle, they then have a choice between carbonated soft drinks and juices. These are known as type competitors or different kinds of soft drinks. Finally, on choosing juices, there are different juices and different brands of the same type of juice, which are brand competitors.
More on market share and competition (SWOT)
Although the appearance and quality of food are important, competitors do not only compete with their products but also compete with the profit margin, level of service they offer retailers, special offers or incentives to customers, etc. New entrepreneurs must therefore assess each of these factors when deciding what the competition is and how to deal with it. This is conveniently done using a SWOT analysis, an acronym which its “S” stands for “Strengths”; “W” stands for “Weaknesses”; “O” stands for “Opportunities” and “T” stands for “Threats”.
The technique involves looking at each aspect of the new business and comparing it to other producers’, particularly type and brand competitors’. Many new entrepreneurs do not appreciate the importance of finding information about competitors and even if they do, they may not know where to find it. In addition to the direct questions to consumers in market surveys, entrepreneurs can get information about competitors by: (a) Discussing with retailers, the amount of sales of different brands and any seasonality in demand; (b) Looking at competitors’ advertising and retail displays, getting a copy of their price lists; (c) Asking the local Chamber of Commerce for any information it has on the market for similar products; (d) Looking in trade journals, manufacturers’ association magazines and newspapers for information about the market and competitors’ activities, etc.
After finding as much information as possible, the entrepreneur can then start to compare the new business with those of competitors using the SWOT analysis already discussed. After the completion of comparison, the entrepreneur should be able to formulate a marketing strategy by answering the following questions: Who is producing similar products? Where are the competitors located? What can I do to make a new product that is better than those of competitors?
Technical feasibility is another segment of a feasibility study. It contains other sub-segments such as production planning; weights of raw materials and ingredients; equipment required; packaging and staffing levels, etc. Once an entrepreneur has found information about potential consumers, their requirements and the likely share of the market for a new product, it is then necessary to assess whether production at this scale is technically feasible. The following questions are helpful in deciding the technical requirements of the business: Are enough quality raw materials available for year-round production? Is the cost of the raw materials satisfactory? Is the correct size or type of equipment available for the expected production level and at a reasonable cost? Can it be made by local workshops? Are maintenance and repair costs affordable? etc.
The answers to these questions can be found by first setting down a plan of the production process. This plan should indicate how the different stages in a process are linked together, identify any challenge in the process, the equipment required for each stage and where quality assurance procedures should be used. The data found from market surveys will be added to the process chart to indicate the scale of production that is required. The chart is also used for planning a number of different aspects of the production process, including: (1) the weights of raw materials and ingredients that should be scheduled each day; (2) the number of workers and their different jobs, etc.
Weight of raw materials and ingredients
There are two stages involved in planning the amounts of materials needed to produce the required weight of a product. First, it is necessary to calculate the amount of each ingredient that will be needed to formulate a batch of the product and secondly, it is necessary to calculate the amount of losses that can be expected during preparation of the fruits and vegetables. The processor should experiment with different mixes of ingredients (the ‘formulation’ or ‘recipe’) to produce a product that has the colour, flavour, appearance, etc. that consumers prefer from market research. Skill and flair are needed to achieve this, using the combination of ingredients having the lowest cost. It is important to weigh each ingredient carefully and make sure that all weights are recorded for each formulation that is tried.
Otherwise, the inevitable result is a successful trial product, but no information is recorded to enable it to be repeated. Once a formulation has been successfully developed, great care is needed to ensure that it is made in exactly the same way on every occasion. This requires staff training, especially for those staff involved in batch preparation, the implementation of quality assurance procedures and careful production control.
Nearly all fruit or vegetable processing results in losses of material. These may arise from peeling or de-stoning, from unsatisfactory fruits and vegetables that are thrown away during sorting, from spillage during filling into packs or from food that sticks to equipment and is lost during washing. Different types of fruits and vegetables have been found in practice to have different levels of wastage. However, it is necessary for an entrepreneur to do trials to calculate the actual amount of wastage experienced with the particular varieties of fruit or vegetable and with the particular process being used.
Clearly, it is in the interest of the processor to reduce losses as much as possible.
Contracts with reliable suppliers help to ensure lower levels of poor quality raw materials and therefore reduce losses. Additionally, a well-managed processing operation, having good quality assurance procedures also reduces wastage, especially during later stages of a process when the product has a higher added value. It is necessary to calculate the amount of raw materials and ingredients needed to produce the required weight of product each day.
The weight of food that should be processed at each stage is normally calculated in kg per hour. This information then allows the processor to decide what equipment piece is required and the size (or ‘scale’ or ‘throughput’) that is needed. In doing this, decisions need to be taken on the relative benefits of employing a larger number of workers or buying machinery to do a particular job. In some enterprise development programmes, there may be wider social objectives of employment creation which may influence such decisions. The decisions on equipment requirements are also influenced by: the cost and availability of machinery; availability of people who are skilled in maintenance and repair; availability and cost of spare parts; and possibilities of local equipment fabrication.
Information on the types and suppliers of equipment is often difficult to obtain, but catalogues and sometimes databases of equipment manufacturers and importers may be available at offices of national and international development agencies, chambers of commerce, university departments, food research institutes, embassies of other countries and trade or manufacturing associations. Unsatisfactory raw materials depend on source and agreements with suppliers and do not include evaporation losses. It is preferable wherever possible to buy equipment from local suppliers and fabricators because servicing and obtaining spare parts should be faster and easier.
Similar considerations apply when ordering packaging materials as there is a very wide range available and there are a number of considerations that should be taken into account by the producer. These include the technical requirements of the product for protection against light, crushing, air, moisture etc.; the promotional and marketing requirements and the relative cost and availability of different types of packaging.
Selection of packaging materials frequently causes the largest problems for small producers and is often the main cause of delay in getting a business established. Professional advice should be sought from a food technologist or in some countries, packaging specialists or agents of packaging manufacturers.
Decisions on the number and types of workers required to operate the proposed business are taken in conjunction with decisions on equipment procurement. It is possible to break down the production into different stages and then decide the number of people that will be needed for each stage of the process. It is important also to include work such as store management, quality assurance and book-keeping when planning employment levels.
In fruit and vegetable processing, for instance, each day’s work will initially involve preparation of the raw materials and then move through processing to packaging. It is possible to have all workers doing the same type of activity throughout the day, but it is often more efficient to allocate different jobs to each worker as the day progresses. A convenient way of planning this is to draw an activity chart which shows the type of work that is to be done each hour during the day, the number of people involved in each activity and the sequence of work that individuals will do.
Activity chart is useful for assessing the time required to complete each stage of the process and for thinking through the problems that are likely to occur. When production begins, it can be used as a basis for training in each job and it should be constantly reviewed to optimise production efficiency. In summary, the technical part of a feasibility study involves taking information about the expected demand from the market survey and calculating the process throughput required to meet that demand. This can then be used to decide the type of equipment, the level of staffing and the amounts of raw materials, etc.
As regards financial feasibility, financial experts say sub-concepts such as start-up costs, operating costs, income and profit, financial planning, etc. will be considered here. Having completed the study of technical feasibility, the entrepreneur should then have sufficient information to determine the costs that are likely to be involved in production. Additionally, the market survey will have supplied information about the sale price that could be achieved for the new product. The entrepreneur is therefore in a position to calculate the expected income and expenditure and hence the gross profit that can be achieved.
When a new fruit and vegetable processing business has started, it is likely that money will be required to buy or convert a building and buy equipment to start production. Additionally, it is necessary to buy a stock of packaging materials and the initial raw materials and ingredients. The start-up capital is the amount of money that is needed to buy the facilities and equipment, to register and license the business and get the necessary certificates.
Working capital includes the costs of raw materials, packaging, staff training, product promotion etc. that have to be made before the business begins to generate income from sale of the product. The requirement for working capital also continues as the business develops. Fruit and vegetable processing has relatively high requirements for working capital compared to other types of food processing. This is because of the seasonal nature of crop production and the need to buy several months of supply of crops during the season and part-process them so that production can continue for a larger part of the year. Financial experts educate that the start-up capital and initial working capital are calculated to determine whether the entrepreneur’s savings (known as the owner’s equity) will be sufficient to start the business without a loan.
There are two types of operating (or production) costs: those expenses that have to be paid even if no production takes place and those that depend on the amount of food that is produced. The first type is known as fixed costs and the second type is called variable costs. Labour is a fixed cost if workers are permanently employed as full-time staff, but it is described as a variable cost if people are only employed when production takes place.
Income and profit
From the market survey, the estimated market size and share enable the expected sales to be calculated. According to financial experts, the gross profit (or gross loss) is the difference between the expected income and the total operating costs over the first year, including any loan repayments. Income is therefore calculated as follows: Income = selling price per unit times number of units sold.
The income clearly depends on both the price of a product and the amount that is sold. Financial experts say when selecting a price for a product, two approaches can be taken: first the price can be based on production costs and it is set to ensure that income exceeds the total costs. This, however, does not take account of competitors’ prices and to be successful, the new product should be priced at or below the price of other similar products. The second approach is therefore to set the price to compare favourably with existing products and calculate the likely profit at the planned scale of production.
GOKE ILESANMI, Editor-in-Chief/CEO of https://www.gokeilesanmi.com.ng and Managing Consultant/CEO of Gokmar Communication Consulting, is a Certified Public Speaker/Emcee, (Business) Communication Specialist, Motivational Speaker, Career Management Coach, Renowned Book Reviewer, Corporate Leadership Expert and Editorial Consultant.
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