The article is devoted to the methods and technologies of business planning, consideration of the possibilities and boundaries of the use of information technologies in the development and analysis of business plans.
Entrepreneurship springs from a business idea. Such an idea may be the idea of creating a new product, or modifying an existing product or offering it to new groups of consumers. In any case, a business idea contains a definition of a product, future consumers, and their needs such as best end tables, as well as more or less reasonable assumptions about the expected income and costs associated with the implementation of the entrepreneurial plan.
From the moment the business idea is completed, the business planning process begins. The main stages of this process are market research, analysis of the current state of the enterprise and its possibilities for project implementation, development of an investment plan, production and sales plans. To implement a new project, financial resources are needed, therefore, it will be necessary to prepare a well-designed financing scheme and justify the effectiveness of the investment. The initiator of the project, who is often the developer of the business plan, must clearly understand who this document is addressed to.
After all, the main purpose of its creation is to convince the investor of the advisability of participating in the project. If the investor is an external person in relation to the enterprise intending to implement the project, then the business plan serves as the basis for concluding an investment transaction. However, often a business plan is created to substantiate the decisions of the management of the enterprise itself regarding the investment of profits in the development of new business areas or the modernization of certain business processes. In this case, it is used as a document,
In any case, the first step in preparing a business plan is to test the business idea that launched the project development process. Who can be the consumer of the products that are supposed to be put on the market? What are the consumer requirements for such products? How large is the market capacity? How mature is the need for this product, and what is the solvency of consumers? Only market research can provide answers to these questions. Unfortunately, not many business project developers pay serious attention to this stage. On average, out of ten business plans of domestic enterprises, only one contains a sufficiently convincing marketing rationale.
In most cases, however, such documents are full of technical details and financial calculations, of no value in the absence of assumptions about the business environment that are determined by the market environment. An important task of this stage is the analysis of the competitive environment, during which it is necessary to find out with which opponents in this market the enterprise will have to deal, and which competitive strategy can be most effective.
After examining the opportunities and threats associated with the external environment, it is necessary to analyze the state of the enterprise itself. At the same time, answers should be obtained to questions about what technological, production, financial, human resources the enterprise has to implement its plans. A real plan is always based on the technological and production experience acquired by the enterprise, which can be applied in new areas of business.
The current practice allows us to talk about the standard requirements for business plans. Consider the contents of the main sections of this document.
The executive summary is a quick overview of the business plan and is the most important of the sections. This is due to the fact that bankers or other financiers are very busy people and prefer not to spend more than 5 or 10 minutes getting to know your plan, and most of them are often limited to reading only the title page and resume. Thus, the resume should be short, no more than three pages. It is the first acquaintance of the potential investor with the plan that is decisive for the fate of the project and therefore the resume should be worked out in such a way as to arouse interest in it. The resume is written last, and you should choose the most intelligible expressions, maintaining a business style and not using jargon phrases.
The resume must contain the following information:
- Description of the enterprise, its specific features, what path of development the enterprise has gone through to date;
- Brief information about the qualifications of management personnel, what abilities, in relation to this project, the management personnel has, what are the shares of the management personnel in the capital of the enterprise;
- Description of the situation on the market and in the industry;
- The advantage of the company’s products or services, the company’s resources, and its current financial condition;
- Long-term and short-term goals of the project, what growth can be expected, what income is expected to be received, over what period of time;
- Tactical plan, a summary of how the goals will be achieved;
- The need for investments, how they will be used, the proposed sources of financing, how they will be returned (repaid) to investors;
- Key economic performance indicators of the project;
- What risks and what rewards can investors expect
Description of the Enterprise
It is necessary to briefly characterize the enterprise, paying particular attention to its differences from existing companies. Indicate how long it has been working or when it will start working. Tell us about the existing market, how it is attractive for the company and future investors. Pay attention to the strengths and weaknesses of the enterprise, make it clear that you are aware of what improvements are needed, but without overemphasizing the shortcomings. The description should include the following information:
- History of the enterprise, information about the development over the past time;
- A list of the main owners, the role of each of them in the foundation and activities of the enterprise;
- Events that influenced the development of the enterprise;
- The original or present goals of the company;
- What are the secrets of success;
- Main financial indicators for the last three years;
- How the financing of the enterprise was carried out and is being carried out now;
- Modern organizational structure and core staff;
- What the company sells;
- What customer needs are met by the company;
- The volume of the market for products or services;
- What is the company’s share in the market and what are the trends;
- When customers buy products in the best way;
- Where the clients are located;
- Historical and current trends in sales;
- Main competitors and their strengths;
- What are the competitive advantages of the enterprise;
- What needs to be done to increase market share;
- What are the possibilities of advertising;
- Seasonality of sales and production;
- Technology level;
- Cost analysis;
- What problems the company faces;
- What should be improved in the work of the enterprise? Analysis of the strengths and weaknesses of the enterprise (quality of products or services, sales opportunities, level of production costs, qualifications, experience of personnel, level of technology, terms of supply of materials or components, level of management).
The industry description should include the following information:
- Definition of the economic sector of the industry (science, production, distribution, services, etc.);
- A list of the main products and services offered by this industry;
- The geographical position of the industry market (local, regional, national, international);
- Description of the market segment in which the company operates or intends to operate;
- Characteristics of existing major customers;
- Characteristics of potential customers;
- The most promising clients (indicate in descending order);
- Total sales by industry and market trends;
- List of main competitors;
- Market share owned by competitors;
- Strengths and weaknesses of competitors;
- The capabilities of competitors (their tactics, products, prices, advertising package, image, location, personal sales, connections with individuals and organizations).
This section provides a detailed description of the products or services produced by the enterprise, compares it with competitors’ products, and analyzes production development plans.
1. Product characteristics:
- The functional purpose of the product, for what purposes it is intended;
- Characteristic properties of the product that make it one of a kind;
- Compliance with the most generally accepted standards;
- The share of the product in the total production of the industry;
- Stage of product development (idea, draft design, detailed design, prototype, pilot batch, current serial production);
- Quality control requirements;
- User training requirements;
- Requirements for warranty and post-warranty service;
- Are there opportunities for further product development;
- Patent and license protection;
2. Analysis of competitors’ products on the market:
- Description of functional and consumer properties of competing products;
- Why competitors’ products are in demand;
- Competitor pricing principles;
- Sales promotion methods used by competitors;
3. Research and development:
- A description of the planned R&D, and for what purposes they will be carried out;
- Existing technological risks;
- The technological state of competing firms, how their technological advances affect or will affect the activities of the enterprise in the future;
- Description of the concept of product development for the next generations.
4. Pricing and procurement:
- Describe the pricing concept of your company;
- Optimal order sizes and forms of payment;
- The effectiveness of the distribution system;
- Conditions of purchase and stocks of raw materials, materials, and components.
This section should be developed primarily in the same way as other sections, for example: “production activities”, “finance” are based on the information presented in the “market” section.
It must show convincingly that the product or service has a market. At the same time, from this section, the investor should receive comprehensive information about what is the basis of confidence in the success of the project on the market, what actions are planned to be taken to promote products, whether the company has sufficient resources and capabilities to implement the project. You shouldn’t underestimate the capabilities of your competitors. Investors expect from you a deep understanding of the reasons why you can succeed despite the influence of competing firms.
In this section, attention should be paid to the following issues:
1. Market characteristics:
- Market size;
- Level and trends of market development, history of its origin;
- The expected level of market growth in the future;
- Specific features of the market, for example, difficulties in accessing market transactions;
- Forecasts for the future development of the market;
- Market share of the enterprise;
- Plans for foreign markets, export potential.
2. Characteristics of product consumers:
- Type of consumer (buyers, producers, individual independent consumers);
- Their geographic location;
- Their opinion about the product;
3. Sales strategy for promoting products to the market:
- Calculation and justification of prices, pricing policy;
- Distribution system;
- Sales promotion;
- Service maintenance;
- Public relations.
4. Enterprise competitiveness:
- List of enterprises – main competitors;
- Their strengths and weaknesses;
- Their financial situation;
- Technology level;
- Share in the market turnover;
- Similarity to your company;
- Marketing strategies used by competitors;
- Their reaction to your products;
- Appreciate the competition abroad.
This clause should detail the way in which the product or service is planned to be produced and delivered to the customer. It is necessary to provide as detailed a description of the production process of the enterprise as possible, indicating the bottlenecks, from the technological and organizational points of view, places, and ways to overcome them. It makes sense to note the advantages of the enterprise, which contribute to increasing its competitiveness.
1. Description of the technological process:
- Required production capacity;
- The need and conditions for the acquisition of technological and other equipment;
- The need for plots of land, buildings, and structures, communications;
- The need and conditions for the supply of raw materials, materials and components, quality control and delivery discipline;
- Requirements for energy sources and their availability;
- Preparation of production;
- Product quality control.
2. Requirements for qualifications and availability of the required personnel:
- Production personnel:
- Engineering and technical personnel;
- Administrative staff:
- Terms of payment and incentives;
- Working conditions;
- Structure and composition of departments;
- Anticipated changes in the structure of personnel as the enterprise develops.
The work schedule for the project should include a forecast of the timing of actions (activities) and the need for financial resources for its implementation.
When drawing up a plan, take into account the time spent on the implementation of the following stages of the project:
- Legal registration of an enterprise;
- Receipt of funds;
- Implementation of the investment program;
- Hiring labor;
- Production of a pilot batch of products;
- Assessment and testing of manufactured products;
- Creation of a distribution network;
- Receiving orders.
In this section, along with the projected cash flows (receipts and payments), the current financial condition of the enterprise should be described in detail (provided that the project is being implemented at an operating enterprise). Usually, the financial section is represented by three main documents:
- Profit and loss statement;
- Balance sheet or simply balance sheet;
- Cash flow statement.
In addition to this, calculations of the main indicators of solvency and liquidity, as well as projected performance indicators of the project, are attached. Investors will also be interested in the ability of the company to repay the loan (asset security, their real value). It is desirable that the submitted financial documents be certified by a reputable auditing company. The need for financial resources, the proposed sources and schemes of funding, the responsibility of the sponsors of the project, and the guarantee system should be described in detail. Particular importance should be given to describing the current and projected state of the economic environment (inflation, payment terms, tax climate, etc.). Bonds Express can help you in this matter of cash flow. In this section, it is necessary to convincingly show that that the authors of the project have done a lot of analytical work to form financial forecasts and analyze financial results. Difficult predictable factors, their alternative meanings for various scenarios should be reflected. It is preferable to present the results of a sensitivity analysis of the design carried out using a computer. This is very powerful persuasion.
Business Plan Attachments
Attachments include documents that can serve as confirmation or a more detailed explanation of the information presented in the business plan. These may include the following:
- Biographies of the leaders of the enterprise or project, confirming their competence and work experience;
- Marketing research results;
- Auditors’ reports;
- Photographs or video clips of product samples;
- Detailed product specifications;
- Enterprise plan;
- Letters of guarantee or contracts with suppliers and consumers of products;
- Lease agreements, hiring, licensing agreements;
- Conclusions of state supervision services on environmental and safety issues;
- Articles from magazines and newspapers about the activities of the enterprise;
- Reviews of reputable organizations.
Application of information technology in the process of business planning
In the process of developing a business plan, it becomes necessary to model business processes in order to establish an acceptable correspondence between the parameters of the planned processes of investment activity, production, and sales and the desired results that will be obtained during the project. The complexity of developing these plans is determined by the following circumstances:
- There is a significant time gap between physical processes and their results, expressed, in particular, in the form of financial indicators; in other words, the strategic decisions taken today will only bear fruit in a few years;
- The complexity of systemic interactions between different processes does not allow directly “seeing” the cause-and-effect relationships between the parameters of the processes and the resulting indicators; for example, a decrease in profitability can be caused by many different reasons, the identification of which is difficult without a thorough analysis;
- Calculating project performance indicators and assessing risks are quite complex mathematical problems, for which a calculator is not enough.
Therefore, at this stage of developing a business plan, information models are used, with the help of which the projected processes are described with varying degrees of detail. A good model helps not only to carry out all the necessary calculations but also to carry out a comparative analysis of various scenarios for the implementation of the project and assess the risks that are associated with its implementation.
It should be noted that an in-depth analysis of risks in business plans is extremely rare. Meanwhile, risk assessment is the most important part of the decision-making process in business, the search for which is carried out in the coordinates “profitability – risk”.
Developers of business plans currently have a wide selection of domestic software products that greatly facilitate their work. These products include the analytical system Project Expert, produced by PRO-INVEST-IT, the “Analyst” program of the INEK company, and the Alt-Invest program of the Alt company. Software products help not only to perform all the necessary calculations and analyze the project but also facilitate the work on the preparation of documents that are part of the business plan. Often, the calculations required in the business planning process are performed using Excel spreadsheets. For relatively simple projects, such a toolkit is quite acceptable. However, the more complex the project, the more the work of a financial analyst becomes similar to the work of a programmer, He needs to design data structures,
It should be noted that a high-quality software product is extremely useful in the preparation of a business plan, as a tool to help check the assumptions and forecasts of project developers and formalize the results. But it should not be seen as a magic wand that can work a miracle: create the perfect business plan and attract investments for the enterprise (unfortunately, such ideas are still quite common). No tool can make up for the lack of knowledge and common sense.
Evaluation and Selection of Projects
Many project developers make the big mistake of thinking that with the preparation of a business plan, their problems end. If the project provides for external financing, then from the first steps you get in the person of the investor, not a partner, but an opponent who questions everything and is unable to offer constructive advice due to poor awareness of the real state of affairs. Experience shows that quite a few projects are rejected by investors for psychological reasons rather than because of their low economic efficiency.
Needless to say, the stage of assessing the attractiveness of a project is extremely important for its successful implementation. And this applies not only to cases of attracting third-party investments. Even if the project provides for some of its part self-financing, a thorough examination of the project is extremely necessary and even strongly recommended by investment advisers.
The assessment includes a detailed study of activities, costs, implementation schedule, project performance indicators. Each of the components of the project is considered both from the point of view of adequacy (that is, how realistic the assumptions and terms included in the project are), and from the point of view of the correctness of the calculations and compliance with generally accepted methods, primarily in the field of financial planning and analysis. Rigid business plan standards are designed to make project appraisal easier. From the point of view of improving the quality of management of the process of evaluating investment projects, it is difficult to overestimate the reduction of all incoming proposals to a single standard form. This allows you to systematize the process and creates a basis for comparing different projects using a single system of criteria.
The process of project evaluation itself consists of consistently conducted research (expertises). Depending on the complexity of the project, financing scheme, and other parameters, the examination can be carried out up to ten or more times. But usually, the project evaluation process is limited to three stages:
- Preliminary examination;
- Independent experts, including a detailed analysis of the project;
- Making a decision on financing (selection of projects).
The main task of the preliminary examination is the primary selection of the most interesting projects and, accordingly, screening out unpromising proposals in advance. For this purpose, the usual method of expert judgment is most often used. The analytical service of the company develops a list of criteria in the form of questionnaires for experts, assigning appropriate weight coefficients for each of the criteria, depending on their significance. All submitted applications (projects) are evaluated according to these criteria. If the results of the analysis are satisfactory, a decision is made to admit the project for an independent examination. Otherwise, the project is rejected.
Project analysis always starts with a bottleneck. Usually, the least predictable place is the sale of products or services on the market. That is why special attention at the stage of preliminary examination should be paid to aspects related to the sale of products or services, the production of which is devoted to the project. Suppose you are investing your capital in the production of a new product. In such a case, the following list of questions for preliminary examination can be proposed.
1. Aspects characterizing the product:
- How realistic is the concept of the product, and will it perform the functions that are declared by the authors of the project?
- How can functional and consumer properties, as well as product design, be assessed in comparison with competitors’ products?
- Is the product compliant with the most common international and national standards?
- To what extent does the marketing of a product depend on the sale of other related products?
- How difficult is it to prepare the consumer to use the product?
- How can you assess the potential for product development, for example, the likelihood of creating a range of other products based on it?
2. Aspects characterizing the market:
- How can you assess the potential of the market, its scale: international, state, regional, local?
- How willing is the market to accept this product?
- What is the price of the product compared to competitors’ products?
- How can you assess the competition in the market?
- How can you assess the readiness of product distribution channels?
- What is the demand trend?
- How can you assess the need for advertising?
- How long will it take to reach the planned sales volumes?
- How can you estimate the lifetime of a product on the market?
3. Aspects characterizing R&D and production:
- What stage of readiness is the product at?
- How is the required research and development evaluated?
- How is the manufacturability of the product evaluated?
- How difficult is preparation for production?
- What technological equipment is required?
- How are the availability of raw materials, materials, and energy resources for serial production assessed?
- How is the need for and the possibility of industrial cooperation assessed?
- How well does the production staff match the requirements of the project?
- What is the required service?
4. Legal aspects:
- Does the product or technology of its products comply with current and future legislation?
- What is the level of patent and licensing protection?
- Does the project comply with safety and environmental regulations?
Kazmilaw.com can help you with some of the technical legalizations.
5. Financial aspects:
- How is the need for investment assessed?
- What is the estimated profit from the project? How is the payback period of the project estimated?
As a result of the preliminary examination, an integral indicator of the effectiveness of the proposal is calculated and on its basis, a decision is made to reject the project or to continue its consideration. Having eliminated, thus, from 80 to 90% of proposals, the investor has the opportunity to focus on several projects and move on to the next stage – an independent examination or investment analysis.
Independent expertise includes financial and economic analysis of the project, scientific and technical (technological), social and environmental expertise.
In the process of financial analysis, the correctness of the data used is checked, the previously considered indicators of investment efficiency, the efficiency of the production activity of the enterprise and its financial condition are calculated, as well as the analysis of the sensitivity of the project for various scenarios. For each of the projects, several variants of calculations are performed with different sets of input data, taking into account the optimistic and pessimistic progress of the project. The results of the financial analysis, supplemented by the results of the risk analysis and the conclusion of the head of the expert department, are transferred to the company’s management for making a final decision on the financing of the project.
The content of the peer review stages will vary depending on the type of project under consideration: research, venture, or industrial.
The selection of projects is also carried out on the basis of a multi-criteria expert assessment, but with the decisive vote of managers and economists, not experts. The criteria for selecting projects depend on the type to which the project belongs.
- Compliance with the main trends in the development of science and technology;
- Scientific and technical level:
- Positive impact on the development of related scientific areas;
- Realistic task;
- The applied value of scientific research;
- The possibility of effective legal protection;
- Impact on the environment.
The decision to finance research projects should be made on the basis of the expert opinion of the most authoritative scientists and specialists who are able to determine the main trends in the development of science. The system of competitions in priority areas of science and technology is also widespread when the selection is carried out from the number of applications received for the competition.
- Availability of new, competitive products or services;
- A rate of return that is higher than the industry average;
- Availability of a business plan of adequate quality, which determines the development strategy of the project;
- Technological feasibility;
- Management team qualifications;
- Environmental criteria;
- Social criteria.
The decision to finance venture projects is carried out on the basis of professional scientific and technical expertise, confirming the reality of the project idea and a detailed financial and economic analysis.
- Availability of an enterprise-ready to implement the project;
- Financial and economic indicators (profitability index, payback period, internal rate of return);
- The quality of the business plan;
- Technological feasibility;
- Qualification of the enterprise administration;
- Environmental criteria;
- Social criteria.
Project Financing Solutions
After the managers, together with the experts, have selected the projects, it is necessary to determine the general approaches to financing, depending on the type of the selected projects.
Research projects. Due to the high degree of uncertainty in obtaining at the initial stage of the project scientific and technical and, especially, the economic effect, research projects are characterized by the highest risk. Financial institutions, and, moreover, profit-oriented banks, can rarely be interested in participating in such projects. In this regard, the only real source of funding for research projects is the state budget, and funding can be carried out only on a non-repayable basis in the form of grants. Another way (however, which is extremely rare) is to use the mechanism of “tied” financing,
Venture projects. Funding for venture projects at different stages is carried out in various forms. This is due to the fact that as the project develops, the parameters of risk and profitability change. Usually there are two stages of a venture project:
1. The initial stage, which includes:
- Creation, registration, and maintenance of a new enterprise;
- Marketing research;
- Production of prototypes or production batches;
- Development of a business plan for the development of the project.
Taking into account that venture projects, despite the high risk of the initial stage, are commercial in nature, financing of such projects is carried out by commercial organizations and enterprises on a repayable basis. Among the sources of funding for venture projects are the following:
- Individual entrepreneurs (venture capitalists);
- Specialized venture (risk) financing funds;
- State or public funds to support entrepreneurship and innovation programs;
- Enterprises conducting their own research and venture programs, or interested in using (purchasing a license) the results of work obtained at the initial stage of the project.
2. Stage of serial (small-scale, medium-scale, or mass) production, including:
- Development of a strategic plan for the development of production;
- Construction of buildings and structures;
- Purchase of equipment and manufacture of tooling;
- Purchase of raw materials, materials, and components;
- Production of goods (services);
- Creation of a product distribution system;
- Active promotion of goods on the market.
The second stage of a venture project takes place with a relative reduction in uncertainty and risk, usually requiring more significant costs. Funding for the stage of organizing serial production of a venture project is carried out from the following sources:
- Individual entrepreneurs and venture capital funds;
- Investment companies and funds;
- Issue of securities;
- National and foreign investors.
Venture funds occupy a special position among investment institutions. By financing the project, they usually become co-owners of it, which provides the possibility of subsequent control and management. In case of a decrease in the level of profit of a venture project to the level of an ordinary industrial project, the venture fund sells its share to other investors: banks, investment funds. The monetary resources received as a result of the project are reinvested in new venture projects. Individual “venture capitalists” operate in a similar way. In general, the larger the size and turnover of an enterprise, the larger the share of traditional sources in the general plan of its financing, and the less noticeable is the role of risk capital.
Financing of industrial projects is carried out from the traditional sources considered earlier: the issue of securities with subsequent private placement or public subscription, investment companies and funds, banks, national and foreign investors, etc.
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