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How to Write a Business Plan in 9 Steps (+ Template and Examples)

Every successful business has one thing in common, a good and well-executed business plan. A business plan is more than a document, it is a complete guide that outlines the goals your business wants to achieve, including its financial goals . It helps you analyze results, make strategic decisions, show your business operations and growth.

If you want to start a business or already have one and need to pitch it to investors for funding, writing a good business plan improves your chances of attracting financiers. As a startup, if you want to secure loans from financial institutions, part of the requirements involve submitting your business plan.

Writing a business plan does not have to be a complicated or time-consuming process. In this article, you will learn the step-by-step process for writing a successful business plan.

You will also learn what you need a business plan for, tips and strategies for writing a convincing business plan, business plan examples and templates that will save you tons of time, and the alternatives to the traditional business plan.

Let’s get started.

What Do You Need A Business Plan For?

Businesses create business plans for different purposes such as to secure funds, monitor business growth, measure your marketing strategies, and measure your business success.

1. Secure Funds

One of the primary reasons for writing a business plan is to secure funds, either from financial institutions/agencies or investors.

For you to effectively acquire funds, your business plan must contain the key elements of your business plan . For example, your business plan should include your growth plans, goals you want to achieve, and milestones you have recorded.

A business plan can also attract new business partners that are willing to contribute financially and intellectually. If you are writing a business plan to a bank, your project must show your traction , that is, the proof that you can pay back any loan borrowed.

Also, if you are writing to an investor, your plan must contain evidence that you can effectively utilize the funds you want them to invest in your business. Here, you are using your business plan to persuade a group or an individual that your business is a source of a good investment.

2. Monitor Business Growth

A business plan can help you track cash flows in your business. It steers your business to greater heights. A business plan capable of tracking business growth should contain:

• The business goals
• Methods to achieve the goals
• Time-frame for attaining those goals

A good business plan should guide you through every step in achieving your goals. It can also track the allocation of assets to every aspect of the business. You can tell when you are spending more than you should on a project.

You can compare a business plan to a written GPS. It helps you manage your business and hints at the right time to expand your business.

3. Measure Business Success

A business plan can help you measure your business success rate. Some small-scale businesses are thriving better than more prominent companies because of their track record of success.

Right from the onset of your business operation, set goals and work towards them. Write a plan to guide you through your procedures. Use your plan to measure how much you have achieved and how much is left to attain.

You can also weigh your success by monitoring the position of your brand relative to competitors. On the other hand, a business plan can also show you why you have not achieved a goal. It can tell if you have elapsed the time frame you set to attain a goal.

4. Document Your Marketing Strategies

You can use a business plan to document your marketing plans. Every business should have an effective marketing plan.

Competition mandates every business owner to go the extraordinary mile to remain relevant in the market. Your business plan should contain your marketing strategies that work. You can measure the success rate of your marketing plans.

In your business plan, your marketing strategy must answer the questions:

• How do you want to reach your target audience?
• How do you plan to retain your customers?
• What is/are your pricing plans?
• What is your budget for marketing?

How to Write a Business Plan Step-by-Step

1. create your executive summary.

The executive summary is a snapshot of your business or a high-level overview of your business purposes and plans . Although the executive summary is the first section in your business plan, most people write it last. The length of the executive summary is not more than two pages.

Generally, there are nine sections in a business plan, the executive summary should condense essential ideas from the other eight sections.

A good executive summary should do the following:

• A Snapshot of Growth Potential. Briefly inform the reader about your company and why it will be successful)
• Contain your Mission Statement which explains what the main objective or focus of your business is.
• Product Description and Differentiation. Brief description of your products or services and why it is different from other solutions in the market.
• The Team. Basic information about your company’s leadership team and employees
• Business Concept. A solid description of what your business does.
• Target Market. The customers you plan to sell to.
• Marketing Strategy. Your plans on reaching and selling to your customers
• Current Financial State. Brief information about what revenue your business currently generates.
• Projected Financial State. Brief information about what you foresee your business revenue to be in the future.

The executive summary is the make-or-break section of your business plan. If your summary cannot in less than two pages cannot clearly describe how your business will solve a particular problem of your target audience and make a profit, your business plan is set on a faulty foundation.

Avoid using the executive summary to hype your business, instead, focus on helping the reader understand the what and how of your plan.

View the executive summary as an opportunity to introduce your vision for your company. You know your executive summary is powerful when it can answer these key questions:

• Who is your target audience?
• What sector or industry are you in?
• What are your products and services?
• What is the future of your industry?
• Is your company scaleable?
• Who are the owners and leaders of your company? What are their backgrounds and experience levels?
• What is the motivation for starting your company?
• What are the next steps?

Writing the executive summary last although it is the most important section of your business plan is an excellent idea. The reason why is because it is a high-level overview of your business plan. It is the section that determines whether potential investors and lenders will read further or not.

The executive summary can be a stand-alone document that covers everything in your business plan. It is not uncommon for investors to request only the executive summary when evaluating your business. If the information in the executive summary impresses them, they will ask for the complete business plan.

If you are writing your business plan for your planning purposes, you do not need to write the executive summary.

2. Add Your Company Overview

The company overview or description is the next section in your business plan after the executive summary. It describes what your business does.

Adding your company overview can be tricky especially when your business is still in the planning stages. Existing businesses can easily summarize their current operations but may encounter difficulties trying to explain what they plan to become.

Your company overview should contain the following:

• What products and services you will provide
• Geographical markets and locations your company have a presence
• What you need to run your business
• Who your target audience or customers are
• Who will service your customers
• Your company’s purpose, mission, and vision
• Information about your company’s founders
• Who the founders are
• Notable achievements of your company so far

When creating a company overview, you have to focus on three basics: identifying your industry, identifying your customer, and explaining the problem you solve.

If you are stuck when creating your company overview, try to answer some of these questions that pertain to you.

• Who are you targeting? (The answer is not everyone)
• What pain point does your product or service solve for your customers that they will be willing to spend money on resolving?
• How does your product or service overcome that pain point?
• Where is the location of your business?
• What products, equipment, and services do you need to run your business?
• How is your company’s product or service different from your competition in the eyes of your customers?
• How many employees do you need and what skills do you require them to have?

After answering some or all of these questions, you will get more than enough information you need to write your company overview or description section. When writing this section, describe what your company does for your customers.

The company description or overview section contains three elements: mission statement, history, and objectives.

• Mission Statement

The mission statement refers to the reason why your business or company is existing. It goes beyond what you do or sell, it is about the ‘why’. A good mission statement should be emotional and inspirational.

Your mission statement should follow the KISS rule (Keep It Simple, Stupid). For example, Shopify’s mission statement is “Make commerce better for everyone.”

When describing your company’s history, make it simple and avoid the temptation of tying it to a defensive narrative. Write it in the manner you would a profile. Your company’s history should include the following information:

• Founding Date
• Major Milestones
• Location(s)
• Flagship Products or Services
• Number of Employees
• Executive Leadership Roles

When you fill in this information, you use it to write one or two paragraphs about your company’s history.

Business Objectives

Your business objective must be SMART (specific, measurable, achievable, realistic, and time-bound.) Failure to clearly identify your business objectives does not inspire confidence and makes it hard for your team members to work towards a common purpose.

3. Perform Market and Competitive Analyses to Proof a Big Enough Business Opportunity

The third step in writing a business plan is the market and competitive analysis section. Every business, no matter the size, needs to perform comprehensive market and competitive analyses before it enters into a market.

Performing market and competitive analyses are critical for the success of your business. It helps you avoid entering the right market with the wrong product, or vice versa. Anyone reading your business plans, especially financiers and financial institutions will want to see proof that there is a big enough business opportunity you are targeting.

This section is where you describe the market and industry you want to operate in and show the big opportunities in the market that your business can leverage to make a profit. If you noticed any unique trends when doing your research, show them in this section.

Market analysis alone is not enough, you have to add competitive analysis to strengthen this section. There are already businesses in the industry or market, how do you plan to take a share of the market from them?

You have to clearly illustrate the competitive landscape in your business plan. Are there areas your competitors are doing well? Are there areas where they are not doing so well? Show it.

Make it clear in this section why you are moving into the industry and what weaknesses are present there that you plan to explain. How are your competitors going to react to your market entry? How do you plan to get customers? Do you plan on taking your competitors' competitors, tap into other sources for customers, or both?

Illustrate the competitive landscape as well. What are your competitors doing well and not so well?

Answering these questions and thoughts will aid your market and competitive analysis of the opportunities in your space. Depending on how sophisticated your industry is, or the expectations of your financiers, you may need to carry out a more comprehensive market and competitive analysis to prove that big business opportunity.

Instead of looking at the market and competitive analyses as one entity, separating them will make the research even more comprehensive.

Market Analysis

Market analysis, boarding speaking, refers to research a business carried out on its industry, market, and competitors. It helps businesses gain a good understanding of their target market and the outlook of their industry. Before starting a company, it is vital to carry out market research to find out if the market is viable.

The market analysis section is a key part of the business plan. It is the section where you identify who your best clients or customers are. You cannot omit this section, without it your business plan is incomplete.

A good market analysis will tell your readers how you fit into the existing market and what makes you stand out. This section requires in-depth research, it will probably be the most time-consuming part of the business plan to write.

• Market Research

To create a compelling market analysis that will win over investors and financial institutions, you have to carry out thorough market research . Your market research should be targeted at your primary target market for your products or services. Here is what you want to find out about your target market.

• Your target market’s needs or pain points
• The existing solutions for their pain points
• Geographic Location
• Demographics

The purpose of carrying out a marketing analysis is to get all the information you need to show that you have a solid and thorough understanding of your target audience.

Only after you have fully understood the people you plan to sell your products or services to, can you evaluate correctly if your target market will be interested in your products or services.

You can easily convince interested parties to invest in your business if you can show them you thoroughly understand the market and show them that there is a market for your products or services.

How to Quantify Your Target Market

One of the goals of your marketing research is to understand who your ideal customers are and their purchasing power. To quantify your target market, you have to determine the following:

• Your Potential Customers: They are the people you plan to target. For example, if you sell accounting software for small businesses , then anyone who runs an enterprise or large business is unlikely to be your customers. Also, individuals who do not have a business will most likely not be interested in your product.
• Total Households: If you are selling household products such as heating and air conditioning systems, determining the number of total households is more important than finding out the total population in the area you want to sell to. The logic is simple, people buy the product but it is the household that uses it.
• Median Income: You need to know the median income of your target market. If you target a market that cannot afford to buy your products and services, your business will not last long.
• Income by Demographics: If your potential customers belong to a certain age group or gender, determining income levels by demographics is necessary. For example, if you sell men's clothes, your target audience is men.

What Does a Good Market Analysis Entail?

Your business does not exist on its own, it can only flourish within an industry and alongside competitors. Market analysis takes into consideration your industry, target market, and competitors. Understanding these three entities will drastically improve your company’s chances of success.

You can view your market analysis as an examination of the market you want to break into and an education on the emerging trends and themes in that market. Good market analyses include the following:

• Industry Description. You find out about the history of your industry, the current and future market size, and who the largest players/companies are in your industry.
• Overview of Target Market. You research your target market and its characteristics. Who are you targeting? Note, it cannot be everyone, it has to be a specific group. You also have to find out all information possible about your customers that can help you understand how and why they make buying decisions.
• Size of Target Market: You need to know the size of your target market, how frequently they buy, and the expected quantity they buy so you do not risk overproducing and having lots of bad inventory. Researching the size of your target market will help you determine if it is big enough for sustained business or not.
• Growth Potential: Before picking a target market, you want to be sure there are lots of potential for future growth. You want to avoid going for an industry that is declining slowly or rapidly with almost zero growth potential.
• Market Share Potential: Does your business stand a good chance of taking a good share of the market?
• Market Pricing and Promotional Strategies: Your market analysis should give you an idea of the price point you can expect to charge for your products and services. Researching your target market will also give you ideas of pricing strategies you can implement to break into the market or to enjoy maximum profits.
• Potential Barriers to Entry: One of the biggest benefits of conducting market analysis is that it shows you every potential barrier to entry your business will likely encounter. It is a good idea to discuss potential barriers to entry such as changing technology. It informs readers of your business plan that you understand the market.
• Research on Competitors: You need to know the strengths and weaknesses of your competitors and how you can exploit them for the benefit of your business. Find patterns and trends among your competitors that make them successful, discover what works and what doesn’t, and see what you can do better.

The market analysis section is not just for talking about your target market, industry, and competitors. You also have to explain how your company can fill the hole you have identified in the market.

Here are some questions you can answer that can help you position your product or service in a positive light to your readers.

• Is your product or service of superior quality?
• What additional features do you offer that your competitors do not offer?
• Are you targeting a ‘new’ market?

Basically, your market analysis should include an analysis of what already exists in the market and an explanation of how your company fits into the market.

Competitive Analysis

In the competitive analysis section, y ou have to understand who your direct and indirect competitions are, and how successful they are in the marketplace. It is the section where you assess the strengths and weaknesses of your competitors, the advantage(s) they possess in the market and show the unique features or qualities that make you different from your competitors.

Many businesses do market analysis and competitive analysis together. However, to fully understand what the competitive analysis entails, it is essential to separate it from the market analysis.

Competitive analysis for your business can also include analysis on how to overcome barriers to entry in your target market.

The primary goal of conducting a competitive analysis is to distinguish your business from your competitors. A strong competitive analysis is essential if you want to convince potential funding sources to invest in your business. You have to show potential investors and lenders that your business has what it takes to compete in the marketplace successfully.

Competitive analysis will s how you what the strengths of your competition are and what they are doing to maintain that advantage.

When doing your competitive research, you first have to identify your competitor and then get all the information you can about them. The idea of spending time to identify your competitor and learn everything about them may seem daunting but it is well worth it.

Find answers to the following questions after you have identified who your competitors are.

• What are your successful competitors doing?
• Why is what they are doing working?
• Can your business do it better?
• What are the weaknesses of your successful competitors?
• What are they not doing well?
• Can your business turn its weaknesses into strengths?
• How good is your competitors’ customer service?
• Where do your competitors invest in advertising?
• What sales and pricing strategies are they using?
• What marketing strategies are they using?
• What kind of press coverage do they get?
• What are their customers saying about your competitors (both the positive and negative)?

If your competitors have a website, it is a good idea to visit their websites for more competitors’ research. Check their “About Us” page for more information.

If you are presenting your business plan to investors, you need to clearly distinguish yourself from your competitors. Investors can easily tell when you have not properly researched your competitors.

Take time to think about what unique qualities or features set you apart from your competitors. If you do not have any direct competition offering your product to the market, it does not mean you leave out the competitor analysis section blank. Instead research on other companies that are providing a similar product, or whose product is solving the problem your product solves.

The next step is to create a table listing the top competitors you want to include in your business plan. Ensure you list your business as the last and on the right. What you just created is known as the competitor analysis table.

Direct vs Indirect Competition

You cannot know if your product or service will be a fit for your target market if you have not understood your business and the competitive landscape.

There is no market you want to target where you will not encounter competition, even if your product is innovative. Including competitive analysis in your business plan is essential.

If you are entering an established market, you need to explain how you plan to differentiate your products from the available options in the market. Also, include a list of few companies that you view as your direct competitors The competition you face in an established market is your direct competition.

In situations where you are entering a market with no direct competition, it does not mean there is no competition there. Consider your indirect competition that offers substitutes for the products or services you offer.

For example, if you sell an innovative SaaS product, let us say a project management software , a company offering time management software is your indirect competition.

There is an easy way to find out who your indirect competitors are in the absence of no direct competitors. You simply have to research how your potential customers are solving the problems that your product or service seeks to solve. That is your direct competition.

Factors that Differentiate Your Business from the Competition

There are three main factors that any business can use to differentiate itself from its competition. They are cost leadership, product differentiation, and market segmentation.

1. Cost Leadership

A strategy you can impose to maximize your profits and gain an edge over your competitors. It involves offering lower prices than what the majority of your competitors are offering.

A common practice among businesses looking to enter into a market where there are dominant players is to use free trials or pricing to attract as many customers as possible to their offer.

2. Product Differentiation

Your product or service should have a unique selling proposition (USP) that your competitors do not have or do not stress in their marketing.

Part of the marketing strategy should involve making your products unique and different from your competitors. It does not have to be different from your competitors, it can be the addition to a feature or benefit that your competitors do not currently have.

3. Market Segmentation

As a new business seeking to break into an industry, you will gain more success from focusing on a specific niche or target market, and not the whole industry.

If your competitors are focused on a general need or target market, you can differentiate yourself from them by having a small and hyper-targeted audience. For example, if your competitors are selling men’s clothes in their online stores , you can sell hoodies for men.

4. Define Your Business and Management Structure

The next step in your business plan is your business and management structure. It is the section where you describe the legal structure of your business and the team running it.

Your business is only as good as the management team that runs it, while the management team can only strive when there is a proper business and management structure in place.

If your company is a sole proprietor or a limited liability company (LLC), a general or limited partnership, or a C or an S corporation, state it clearly in this section.

Use an organizational chart to show the management structure in your business. Clearly show who is in charge of what area in your company. It is where you show how each key manager or team leader’s unique experience can contribute immensely to the success of your company. You can also opt to add the resumes and CVs of the key players in your company.

The business and management structure section should show who the owner is, and other owners of the businesses (if the business has other owners). For businesses or companies with multiple owners, include the percent ownership of the various owners and clearly show the extent of each others’ involvement in the company.

Investors want to know who is behind the company and the team running it to determine if it has the right management to achieve its set goals.

Management Team

The management team section is where you show that you have the right team in place to successfully execute the business operations and ideas. Take time to create the management structure for your business. Think about all the important roles and responsibilities that you need managers for to grow your business.

Include brief bios of each key team member and ensure you highlight only the relevant information that is needed. If your team members have background industry experience or have held top positions for other companies and achieved success while filling that role, highlight it in this section.

A common mistake that many startups make is assigning C-level titles such as (CMO and CEO) to everyone on their team. It is unrealistic for a small business to have those titles. While it may look good on paper for the ego of your team members, it can prevent investors from investing in your business.

Instead of building an unrealistic management structure that does not fit your business reality, it is best to allow business titles to grow as the business grows. Starting everyone at the top leaves no room for future change or growth, which is bad for productivity.

Your management team does not have to be complete before you start writing your business plan. You can have a complete business plan even when there are managerial positions that are empty and need filling.

If you have management gaps in your team, simply show the gaps and indicate you are searching for the right candidates for the role(s). Investors do not expect you to have a full management team when you are just starting your business.

Key Questions to Answer When Structuring Your Management Team

• Who are the key leaders?
• What experiences, skills, and educational backgrounds do you expect your key leaders to have?
• Do your key leaders have industry experience?
• What positions will they fill and what duties will they perform in those positions?
• What level of authority do the key leaders have and what are their responsibilities?
• What is the salary for the various management positions that will attract the ideal candidates?

Additional Tips for Writing the Management Structure Section

1. Avoid Adding ‘Ghost’ Names to Your Management Team

There is always that temptation to include a ‘ghost’ name to your management team to attract and influence investors to invest in your business. Although the presence of these celebrity management team members may attract the attention of investors, it can cause your business to lose any credibility if you get found out.

Seasoned investors will investigate further the members of your management team before committing fully to your business If they find out that the celebrity name used does not play any actual role in your business, they will not invest and may write you off as dishonest.

2. Focus on Credentials But Pay Extra Attention to the Roles

Investors want to know the experience that your key team members have to determine if they can successfully reach the company’s growth and financial goals.

While it is an excellent boost for your key management team to have the right credentials, you also want to pay extra attention to the roles they will play in your company.

Organizational Chart

Adding an organizational chart in this section of your business plan is not necessary, you can do it in your business plan’s appendix.

If you are exploring funding options, it is not uncommon to get asked for your organizational chart. The function of an organizational chart goes beyond raising money, you can also use it as a useful planning tool for your business.

An organizational chart can help you identify how best to structure your management team for maximum productivity and point you towards key roles you need to fill in the future.

You can use the organizational chart to show your company’s internal management structure such as the roles and responsibilities of your management team, and relationships that exist between them.

5. Describe Your Product and Service Offering

In your business plan, you have to describe what you sell or the service you plan to offer. It is the next step after defining your business and management structure. The products and services section is where you sell the benefits of your business.

Here you have to explain how your product or service will benefit your customers and describe your product lifecycle. It is also the section where you write down your plans for intellectual property like patent filings and copyrighting.

The research and development that you are undertaking for your product or service need to be explained in detail in this section. However, do not get too technical, sell the general idea and its benefits.

If you have any diagrams or intricate designs of your product or service, do not include them in the products and services section. Instead, leave them for the addendum page. Also, if you are leaving out diagrams or designs for the addendum, ensure you add this phrase “For more detail, visit the addendum Page #.”

Your product and service section in your business plan should include the following:

• A detailed explanation that clearly shows how your product or service works.
• The pricing model for your product or service.
• Your business’ sales and distribution strategy.
• The ideal customers that want your product or service.
• The benefits of your products and services.
• Reason(s) why your product or service is a better alternative to what your competitors are currently offering in the market.
• Plans for filling the orders you receive
• If you have current or pending patents, copyrights, and trademarks for your product or service, you can also discuss them in this section.

What to Focus On When Describing the Benefits, Lifecycle, and Production Process of Your Products or Services

In the products and services section, you have to distill the benefits, lifecycle, and production process of your products and services.

When describing the benefits of your products or services, here are some key factors to focus on.

• Unique features
• Translating the unique features into benefits
• The emotional, psychological, and practical payoffs to attract customers
• Intellectual property rights or any patents

When describing the product life cycle of your products or services, here are some key factors to focus on.

• Upsells, cross-sells, and down-sells
• Time between purchases
• Plans for research and development.

When describing the production process for your products or services, you need to think about the following:

• The creation of new or existing products and services.
• The sources for the raw materials or components you need for production.
• Assembling the products
• Maintaining quality control
• Supply-chain logistics (receiving the raw materials and delivering the finished products)
• The day-to-day management of the production processes, bookkeeping, and inventory.

Tips for Writing the Products or Services Section of Your Business Plan

1. Avoid Technical Descriptions and Industry Buzzwords

The products and services section of your business plan should clearly describe the products and services that your company provides. However, it is not a section to include technical jargons that anyone outside your industry will not understand.

A good practice is to remove highly detailed or technical descriptions in favor of simple terms. Industry buzzwords are not necessary, if there are simpler terms you can use, then use them. If you plan to use your business plan to source funds, making the product or service section so technical will do you no favors.

2. Describe How Your Products or Services Differ from Your Competitors

When potential investors look at your business plan, they want to know how the products and services you are offering differ from that of your competition. Differentiating your products or services from your competition in a way that makes your solution more attractive is critical.

If you are going the innovative path and there is no market currently for your product or service, you need to describe in this section why the market needs your product or service.

For example, overnight delivery was a niche business that only a few companies were participating in. Federal Express (FedEx) had to show in its business plan that there was a large opportunity for that service and they justified why the market needed that service.

3. Long or Short Products or Services Section

Should your products or services section be short? Does the long products or services section attract more investors?

There are no straightforward answers to these questions. Whether your products or services section should be long or relatively short depends on the nature of your business.

If your business is product-focused, then automatically you need to use more space to describe the details of your products. However, if the product your business sells is a commodity item that relies on competitive pricing or other pricing strategies, you do not have to use up so much space to provide significant details about the product.

Likewise, if you are selling a commodity that is available in numerous outlets, then you do not have to spend time on writing a long products or services section.

The key to the success of your business is most likely the effectiveness of your marketing strategies compared to your competitors. Use more space to address that section.

If you are creating a new product or service that the market does not know about, your products or services section can be lengthy. The reason why is because you need to explain everything about the product or service such as the nature of the product, its use case, and values.

A short products or services section for an innovative product or service will not give the readers enough information to properly evaluate your business.

4. Describe Your Relationships with Vendors or Suppliers

Your business will rely on vendors or suppliers to supply raw materials or the components needed to make your products. In your products and services section, describe your relationships with your vendors and suppliers fully.

Avoid the mistake of relying on only one supplier or vendor. If that supplier or vendor fails to supply or goes out of business, you can easily face supply problems and struggle to meet your demands. Plan to set up multiple vendor or supplier relationships for better business stability.

5. Your Primary Goal Is to Convince Your Readers

The primary goal of your business plan is to convince your readers that your business is viable and to create a guide for your business to follow. It applies to the products and services section.

When drafting this section, think like the reader. See your reader as someone who has no idea about your products and services. You are using the products and services section to provide the needed information to help your reader understand your products and services. As a result, you have to be clear and to the point.

While you want to educate your readers about your products or services, you also do not want to bore them with lots of technical details. Show your products and services and not your fancy choice of words.

Your products and services section should provide the answer to the “what” question for your business. You and your management team may run the business, but it is your products and services that are the lifeblood of the business.

Key Questions to Answer When Writing your Products and Services Section

Answering these questions can help you write your products and services section quickly and in a way that will appeal to your readers.

• Are your products existing on the market or are they still in the development stage?
• What is your timeline for adding new products and services to the market?
• What are the positives that make your products and services different from your competitors?
• Do your products and services have any competitive advantage that your competitors’ products and services do not currently have?
• Do your products or services have any competitive disadvantages that you need to overcome to compete with your competitors? If your answer is yes, state how you plan to overcome them,
• How much does it cost to produce your products or services? How much do you plan to sell it for?
• What is the price for your products and services compared to your competitors? Is pricing an issue?
• What are your operating costs and will it be low enough for you to compete with your competitors and still take home a reasonable profit margin?
• What is your plan for acquiring your products? Are you involved in the production of your products or services?
• Are you the manufacturer and produce all the components you need to create your products? Do you assemble your products by using components supplied by other manufacturers? Do you purchase your products directly from suppliers or wholesalers?
• Do you have a steady supply of products that you need to start your business? (If your business is yet to kick-off)
• How do you plan to distribute your products or services to the market?

You can also hint at the marketing or promotion plans you have for your products or services such as how you plan to build awareness or retain customers. The next section is where you can go fully into details about your business’s marketing and sales plan.

6. Show and Explain Your Marketing and Sales Plan

Providing great products and services is wonderful, but it means nothing if you do not have a marketing and sales plan to inform your customers about them. Your marketing and sales plan is critical to the success of your business.

The sales and marketing section is where you show and offer a detailed explanation of your marketing and sales plan and how you plan to execute it. It covers your pricing plan, proposed advertising and promotion activities, activities and partnerships you need to make your business a success, and the benefits of your products and services.

There are several ways you can approach your marketing and sales strategy. Ideally, your marketing and sales strategy has to fit the unique needs of your business.

In this section, you describe how the plans your business has for attracting and retaining customers, and the exact process for making a sale happen. It is essential to thoroughly describe your complete marketing and sales plans because you are still going to reference this section when you are making financial projections for your business.

Outline Your Business’ Unique Selling Proposition (USP)

The sales and marketing section is where you outline your business’s unique selling proposition (USP). When you are developing your unique selling proposition, think about the strongest reasons why people should buy from you over your competition. That reason(s) is most likely a good fit to serve as your unique selling proposition (USP).

Target Market and Target Audience

Plans on how to get your products or services to your target market and how to get your target audience to buy them go into this section. You also highlight the strengths of your business here, particularly what sets them apart from your competition.

Before you start writing your marketing and sales plan, you need to have properly defined your target audience and fleshed out your buyer persona. If you do not first understand the individual you are marketing to, your marketing and sales plan will lack any substance and easily fall.

Creating a Smart Marketing and Sales Plan

Marketing your products and services is an investment that requires you to spend money. Like any other investment, you have to generate a good return on investment (ROI) to justify using that marketing and sales plan. Good marketing and sales plans bring in high sales and profits to your company.

Avoid spending money on unproductive marketing channels. Do your research and find out the best marketing and sales plan that works best for your company.

Your marketing and sales plan can be broken into different parts: your positioning statement, pricing, promotion, packaging, advertising, public relations, content marketing, social media, and strategic alliances.

Your Positioning Statement

Your positioning statement is the first part of your marketing and sales plan. It refers to the way you present your company to your customers.

Are you the premium solution, the low-price solution, or are you the intermediary between the two extremes in the market? What do you offer that your competitors do not that can give you leverage in the market?

Before you start writing your positioning statement, you need to spend some time evaluating the current market conditions. Here are some questions that can help you to evaluate the market

• What are the unique features or benefits that you offer that your competitors lack?
• What are your customers’ primary needs and wants?
• Why should a customer choose you over your competition? How do you plan to differentiate yourself from the competition?
• How does your company’s solution compare with other solutions in the market?

After answering these questions, then you can start writing your positioning statement. Your positioning statement does not have to be in-depth or too long.

All you need to explain with your positioning statement are two focus areas. The first is the position of your company within the competitive landscape. The other focus area is the core value proposition that sets your company apart from other alternatives that your ideal customer might consider.

Here is a simple template you can use to develop a positioning statement.

For [description of target market] who [need of target market], [product or service] [how it meets the need]. Unlike [top competition], it [most essential distinguishing feature].

For example, let’s create the positioning statement for fictional accounting software and QuickBooks alternative , TBooks.

“For small business owners who need accounting services, TBooks is an accounting software that helps small businesses handle their small business bookkeeping basics quickly and easily. Unlike Wave, TBooks gives small businesses access to live sessions with top accountants.”

You can edit this positioning statement sample and fill it with your business details.

After writing your positioning statement, the next step is the pricing of your offerings. The overall positioning strategy you set in your positioning statement will often determine how you price your products or services.

Pricing is a powerful tool that sends a strong message to your customers. Failure to get your pricing strategy right can make or mar your business. If you are targeting a low-income audience, setting a premium price can result in low sales.

You can use pricing to communicate your positioning to your customers. For example, if you are offering a product at a premium price, you are sending a message to your customers that the product belongs to the premium category.

Basic Rules to Follow When Pricing Your Offering

Setting a price for your offering involves more than just putting a price tag on it. Deciding on the right pricing for your offering requires following some basic rules. They include covering your costs, primary and secondary profit center pricing, and matching the market rate.

• Covering Your Costs: The price you set for your products or service should be more than it costs you to produce and deliver them. Every business has the same goal, to make a profit. Depending on the strategy you want to use, there are exceptions to this rule. However, the vast majority of businesses follow this rule.
• Primary and Secondary Profit Center Pricing: When a company sets its price above the cost of production, it is making that product its primary profit center. A company can also decide not to make its initial price its primary profit center by selling below or at even with its production cost. It rather depends on the support product or even maintenance that is associated with the initial purchase to make its profit. The initial price thus became its secondary profit center.
• Matching the Market Rate: A good rule to follow when pricing your products or services is to match your pricing with consumer demand and expectations. If you price your products or services beyond the price your customer perceives as the ideal price range, you may end up with no customers. Pricing your products too low below what your customer perceives as the ideal price range may lead to them undervaluing your offering.

Pricing Strategy

Your pricing strategy influences the price of your offering. There are several pricing strategies available for you to choose from when examining the right pricing strategy for your business. They include cost-plus pricing, market-based pricing, value pricing, and more.

• Cost-plus Pricing: This strategy is one of the simplest and oldest pricing strategies. Here you consider the cost of producing a unit of your product and then add a profit to it to arrive at your market price. It is an effective pricing strategy for manufacturers because it helps them cover their initial costs. Another name for the cost-plus pricing strategy is the markup pricing strategy.
• Market-based Pricing: This pricing strategy analyses the market including competitors’ pricing and then sets a price based on what the market is expecting. With this pricing strategy, you can either set your price at the low-end or high-end of the market.
• Value Pricing: This pricing strategy involves setting a price based on the value you are providing to your customer. When adopting a value-based pricing strategy, you have to set a price that your customers are willing to pay. Service-based businesses such as small business insurance providers , luxury goods sellers, and the fashion industry use this pricing strategy.

After carefully sorting out your positioning statement and pricing, the next item to look at is your promotional strategy. Your promotional strategy explains how you plan on communicating with your customers and prospects.

As a business, you must measure all your costs, including the cost of your promotions. You also want to measure how much sales your promotions bring for your business to determine its usefulness. Promotional strategies or programs that do not lead to profit need to be removed.

There are different types of promotional strategies you can adopt for your business, they include advertising, public relations, and content marketing.

Advertising

Your business plan should include your advertising plan which can be found in the marketing and sales plan section. You need to include an overview of your advertising plans such as the areas you plan to spend money on to advertise your business and offers.

Ensure that you make it clear in this section if your business will be advertising online or using the more traditional offline media, or the combination of both online and offline media. You can also include the advertising medium you want to use to raise awareness about your business and offers.

Some common online advertising mediums you can use include social media ads, landing pages, sales pages, SEO, Pay-Per-Click, emails, Google Ads, and others. Some common traditional and offline advertising mediums include word of mouth, radios, direct mail, televisions, flyers, billboards, posters, and others.

A key component of your advertising strategy is how you plan to measure the effectiveness and success of your advertising campaign. There is no point in sticking with an advertising plan or medium that does not produce results for your business in the long run.

Public Relations

A great way to reach your customers is to get the media to cover your business or product. Publicity, especially good ones, should be a part of your marketing and sales plan. In this section, show your plans for getting prominent reviews of your product from reputable publications and sources.

Your business needs that exposure to grow. If public relations is a crucial part of your promotional strategy, provide details about your public relations plan here.

Content Marketing

Content marketing is a popular promotional strategy used by businesses to inform and attract their customers. It is about teaching and educating your prospects on various topics of interest in your niche, it does not just involve informing them about the benefits and features of the products and services you have,

Businesses publish content usually for free where they provide useful information, tips, and advice so that their target market can be made aware of the importance of their products and services. Content marketing strategies seek to nurture prospects into buyers over time by simply providing value.

Your company can create a blog where it will be publishing content for its target market. You will need to use the best website builder such as Wix and Squarespace and the best web hosting services such as Bluehost, Hostinger, and other Bluehost alternatives to create a functional blog or website.

If content marketing is a crucial part of your promotional strategy (as it should be), detail your plans under promotions.

Including high-quality images of the packaging of your product in your business plan is a lovely idea. You can add the images of the packaging of that product in the marketing and sales plan section. If you are not selling a product, then you do not need to include any worry about the physical packaging of your product.

When organizing the packaging section of your business plan, you can answer the following questions to make maximum use of this section.

• Is your choice of packaging consistent with your positioning strategy?
• What key value proposition does your packaging communicate? (It should reflect the key value proposition of your business)
• How does your packaging compare to that of your competitors?

Social Media

Your 21st-century business needs to have a good social media presence. Not having one is leaving out opportunities for growth and reaching out to your prospect.

You do not have to join the thousands of social media platforms out there. What you need to do is join the ones that your customers are active on and be active there.

Businesses use social media to provide information about their products such as promotions, discounts, the benefits of their products, and content on their blogs.

Social media is also a platform for engaging with your customers and getting feedback about your products or services. Make no mistake, more and more of your prospects are using social media channels to find more information about companies.

You need to consider the social media channels you want to prioritize your business (prioritize the ones your customers are active in) and your branding plans in this section.

Strategic Alliances

If your company plans to work closely with other companies as part of your sales and marketing plan, include it in this section. Prove details about those partnerships in your business plan if you have already established them.

Strategic alliances can be beneficial for all parties involved including your company. Working closely with another company in the form of a partnership can provide access to a different target market segment for your company.

The company you are partnering with may also gain access to your target market or simply offer a new product or service (that of your company) to its customers.

Mutually beneficial partnerships can cover the weaknesses of one company with the strength of another. You should consider strategic alliances with companies that sell complimentary products to yours. For example, if you provide printers, you can partner with a company that produces ink since the customers that buy printers from you will also need inks for printing.

Steps Involved in Creating a Marketing and Sales Plan

1. Focus on Your Target Market

Identify who your customers are, the market you want to target. Then determine the best ways to get your products or services to your potential customers.

2. Evaluate Your Competition

One of the goals of having a marketing plan is to distinguish yourself from your competition. You cannot stand out from them without first knowing them in and out.

You can know your competitors by gathering information about their products, pricing, service, and advertising campaigns.

These questions can help you know your competition.

• What makes your competition successful?
• What are their weaknesses?
• What are customers saying about your competition?

3. Consider Your Brand

Customers' perception of your brand has a strong impact on your sales. Your marketing and sales plan should seek to bolster the image of your brand. Before you start marketing your business, think about the message you want to pass across about your business and your products and services.

4. Focus on Benefits

The majority of your customers do not view your product in terms of features, what they want to know is the benefits and solutions your product offers. Think about the problems your product solves and the benefits it delivers, and use it to create the right sales and marketing message.

Your marketing plan should focus on what you want your customer to get instead of what you provide. Identify those benefits in your marketing and sales plan.

5. Focus on Differentiation

Your marketing and sales plan should look for a unique angle they can take that differentiates your business from the competition, even if the products offered are similar. Some good areas of differentiation you can use are your benefits, pricing, and features.

Key Questions to Answer When Writing Your Marketing and Sales Plan

• What is your company’s budget for sales and marketing campaigns?
• What key metrics will you use to determine if your marketing plans are successful?
• What are your alternatives if your initial marketing efforts do not succeed?
• Who are the sales representatives you need to promote your products or services?
• What are the marketing and sales channels you plan to use? How do you plan to get your products in front of your ideal customers?
• Where will you sell your products?

You may want to include samples of marketing materials you plan to use such as print ads, website descriptions, and social media ads. While it is not compulsory to include these samples, it can help you better communicate your marketing and sales plan and objectives.

The purpose of the marketing and sales section is to answer this question “How will you reach your customers?” If you cannot convincingly provide an answer to this question, you need to rework your marketing and sales section.

7. Clearly Show Your Funding Request

If you are writing your business plan to ask for funding from investors or financial institutions, the funding request section is where you will outline your funding requirements. The funding request section should answer the question ‘How much money will your business need in the near future (3 to 5 years)?’

A good funding request section will clearly outline and explain the amount of funding your business needs over the next five years. You need to know the amount of money your business needs to make an accurate funding request.

Also, when writing your funding request, provide details of how the funds will be used over the period. Specify if you want to use the funds to buy raw materials or machinery, pay salaries, pay for advertisements, and cover specific bills such as rent and electricity.

In addition to explaining what you want to use the funds requested for, you need to clearly state the projected return on investment (ROI) . Investors and creditors want to know if your business can generate profit for them if they put funds into it.

Ensure you do not inflate the figures and stay as realistic as possible. Investors and financial institutions you are seeking funds from will do their research before investing money in your business.

If you are not sure of an exact number to request from, you can use some range of numbers as rough estimates. Add a best-case scenario and a work-case scenario to your funding request. Also, include a description of your strategic future financial plans such as selling your business or paying off debts.

Funding Request: Debt or Equity?

When making your funding request, specify the type of funding you want. Do you want debt or equity? Draw out the terms that will be applicable for the funding, and the length of time the funding request will cover.

Case for Equity

If your new business has not yet started generating profits, you are most likely preparing to sell equity in your business to raise capital at the early stage. Equity here refers to ownership. In this case, you are selling a portion of your company to raise capital.

Although this method of raising capital for your business does not put your business in debt, keep in mind that an equity owner may expect to play a key role in company decisions even if he does not hold a major stake in the company.

Most equity sales for startups are usually private transactions . If you are making a funding request by offering equity in exchange for funding, let the investor know that they will be paid a dividend (a share of the company’s profit). Also, let the investor know the process for selling their equity in your business.

Case for Debt

You may decide not to offer equity in exchange for funds, instead, you make a funding request with the promise to pay back the money borrowed at the agreed time frame.

When making a funding request with an agreement to pay back, note that you will have to repay your creditors both the principal amount borrowed and the interest on it. Financial institutions offer this type of funding for businesses.

Large companies combine both equity and debt in their capital structure. When drafting your business plan, decide if you want to offer both or one over the other.

Before you sell equity in exchange for funding in your business, consider if you are willing to accept not being in total control of your business. Also, before you seek loans in your funding request section, ensure that the terms of repayment are favorable.

You should set a clear timeline in your funding request so that potential investors and creditors can know what you are expecting. Some investors and creditors may agree to your funding request and then delay payment for longer than 30 days, meanwhile, your business needs an immediate cash injection to operate efficiently.

Additional Tips for Writing the Funding Request Section of your Business Plan

The funding request section is not necessary for every business, it is only needed by businesses who plan to use their business plan to secure funding.

If you are adding the funding request section to your business plan, provide an itemized summary of how you plan to use the funds requested. Hiring a lawyer, accountant, or other professionals may be necessary for the proper development of this section.

You should also gather and use financial statements that add credibility and support to your funding requests. Ensure that the financial statements you use should include your projected financial data such as projected cash flows, forecast statements, and expenditure budgets.

If you are an existing business, include all historical financial statements such as cash flow statements, balance sheets and income statements .

Provide monthly and quarterly financial statements for a year. If your business has records that date back beyond the one-year mark, add the yearly statements of those years. These documents are for the appendix section of your business plan.

8. Detail Your Financial Plan, Metrics, and Projections

If you used the funding request section in your business plan, supplement it with a financial plan, metrics, and projections. This section paints a picture of the past performance of your business and then goes ahead to make an informed projection about its future.

The goal of this section is to convince readers that your business is going to be a financial success. It outlines your business plan to generate enough profit to repay the loan (with interest if applicable) and to generate a decent return on investment for investors.

If you have an existing business already in operation, use this section to demonstrate stability through finance. This section should include your cash flow statements, balance sheets, and income statements covering the last three to five years. If your business has some acceptable collateral that you can use to acquire loans, list it in the financial plan, metrics, and projection section.

Apart from current financial statements, this section should also contain a prospective financial outlook that spans the next five years. Include forecasted income statements, cash flow statements, balance sheets, and capital expenditure budget.

If your business is new and is not yet generating profit, use clear and realistic projections to show the potentials of your business.

When drafting this section, research industry norms and the performance of comparable businesses. Your financial projections should cover at least five years. State the logic behind your financial projections. Remember you can always make adjustments to this section as the variables change.

The financial plan, metrics, and projection section create a baseline which your business can either exceed or fail to reach. If your business fails to reach your projections in this section, you need to understand why it failed.

Investors and loan managers spend a lot of time going through the financial plan, metrics, and projection section compared to other parts of the business plan. Ensure you spend time creating credible financial analyses for your business in this section.

Many entrepreneurs find this section daunting to write. You do not need a business degree to create a solid financial forecast for your business. Business finances, especially for startups, are not as complicated as they seem. There are several online tools and templates that make writing this section so much easier.

Use Graphs and Charts

The financial plan, metrics, and projection section is a great place to use graphs and charts to tell the financial story of your business. Charts and images make it easier to communicate your finances.

Accuracy in this section is key, ensure you carefully analyze your past financial statements properly before making financial projects.

Address the Risk Factors and Show Realistic Financial Projections

Keep your financial plan, metrics, and projection realistic. It is okay to be optimistic in your financial projection, however, you have to justify it.

You should also address the various risk factors associated with your business in this section. Investors want to know the potential risks involved, show them. You should also show your plans for mitigating those risks.

What You Should In The Financial Plan, Metrics, and Projection Section of Your Business Plan

The financial plan, metrics, and projection section of your business plan should have monthly sales and revenue forecasts for the first year. It should also include annual projections that cover 3 to 5 years.

A three-year projection is a basic requirement to have in your business plan. However, some investors may request a five-year forecast.

Your business plan should include the following financial statements: sales forecast, personnel plan, income statement, income statement, cash flow statement, balance sheet, and an exit strategy.

1. Sales Forecast

Sales forecast refers to your projections about the number of sales your business is going to record over the next few years. It is typically broken into several rows, with each row assigned to a core product or service that your business is offering.

One common mistake people make in their business plan is to break down the sales forecast section into long details. A sales forecast should forecast the high-level details.

For example, if you are forecasting sales for a payroll software provider, you could break down your forecast into target market segments or subscription categories.

Your sales forecast section should also have a corresponding row for each sales row to cover the direct cost or Cost of Goods Sold (COGS). The objective of these rows is to show the expenses that your business incurs in making and delivering your product or service.

Note that your Cost of Goods Sold (COGS) should only cover those direct costs incurred when making your products. Other indirect expenses such as insurance, salaries, payroll tax, and rent should not be included.

For example, the Cost of Goods Sold (COGS) for a restaurant is the cost of ingredients while for a consulting company it will be the cost of paper and other presentation materials.

2. Personnel Plan

The personnel plan section is where you provide details about the payment plan for your employees. For a small business, you can easily list every position in your company and how much you plan to pay in the personnel plan.

However, for larger businesses, you have to break the personnel plan into functional groups such as sales and marketing.

The personnel plan will also include the cost of an employee beyond salary, commonly referred to as the employee burden. These costs include insurance, payroll taxes , and other essential costs incurred monthly as a result of having employees on your payroll.

3. Income Statement

The income statement section shows if your business is making a profit or taking a loss. Another name for the income statement is the profit and loss (P&L). It takes data from your sales forecast and personnel plan and adds other ongoing expenses you incur while running your business.

Every business plan should have an income statement. It subtracts your business expenses from its earnings to show if your business is generating profit or incurring losses.

The income statement has the following items: sales, Cost of Goods Sold (COGS), gross margin, operating expenses, total operating expenses, operating income , total expenses, and net profit.

• Sales refer to the revenue your business generates from selling its products or services. Other names for sales are income or revenue.
• Cost of Goods Sold (COGS) refers to the total cost of selling your products. Other names for COGS are direct costs or cost of sales. Manufacturing businesses use the Costs of Goods Manufactured (COGM) .
• Gross Margin is the figure you get when you subtract your COGS from your sales. In your income statement, you can express it as a percentage of total sales (Gross margin / Sales = Gross Margin Percent).
• Operating Expenses refer to all the expenses you incur from running your business. It exempts the COGS because it stands alone as a core part of your income statement. You also have to exclude taxes, depreciation, and amortization. Your operating expenses include salaries, marketing expenses, research and development (R&D) expenses, and other expenses.
• Total Operating Expenses refers to the sum of all your operating expenses including those exemptions named above under operating expenses.
• Operating Income refers to earnings before interest, taxes, depreciation, and amortization. It is simply known as the acronym EBITDA (earnings before interest, taxes, depreciation, and amortization). Calculating your operating income is simple, all you need to do is to subtract your COGS and total operating expenses from your sales.
• Total Expenses refer to the sum of your operating expenses and your business’ interest, taxes, depreciation, and amortization.
• Net profit shows whether your business has made a profit or taken a loss during a given timeframe.

4. Cash Flow Statement

The cash flow statement tracks the money you have in the bank at any given point. It is often confused with the income statement or the profit and loss statement. They are both different types of financial statements. The income statement calculates your profits and losses while the cash flow statement shows you how much you have in the bank.

5. Balance Sheet

The balance sheet is a financial statement that provides an overview of the financial health of your business. It contains information about the assets and liabilities of your company, and owner’s or shareholders’ equity.

You can get the net worth of your company by subtracting your company’s liabilities from its assets.

6. Exit Strategy

The exit strategy refers to a probable plan for selling your business either to the public in an IPO or to another company. It is the last thing you include in the financial plan, metrics, and projection section.

You can choose to omit the exit strategy from your business plan if you plan to maintain full ownership of your business and do not plan on seeking angel investment or virtual capitalist (VC) funding.

Investors may want to know what your exit plan is. They invest in your business to get a good return on investment.

Your exit strategy does not have to include long and boring details. Ensure you identify some interested parties who may be interested in buying the company if it becomes a success.

Key Questions to Answer with Your Financial Plan, Metrics, and Projection

Your financial plan, metrics, and projection section helps investors, creditors, or your internal managers to understand what your expenses are, the amount of cash you need, and what it takes to make your company profitable. It also shows what you will be doing with any funding.

You do not need to show actual financial data if you do not have one. Adding forecasts and projections to your financial statements is added proof that your strategy is feasible and shows investors you have planned properly.

Here are some key questions to answer to help you develop this section.

• What is your sales forecast for the next year?
• When will your company achieve a positive cash flow?
• What are the core expenses you need to operate?
• How much money do you need upfront to operate or grow your company?
• How will you use the loans or investments?

9. Add an Appendix to Your Business Plan

Adding an appendix to your business plan is optional. It is a useful place to put any charts, tables, legal notes, definitions, permits, résumés, and other critical information that do not fit into other sections of your business plan.

The appendix section is where you would want to include details of a patent or patent-pending if you have one. You can always add illustrations or images of your products here. It is the last section of your business plan.

When writing your business plan, there are details you cut short or remove to prevent the entire section from becoming too lengthy. There are also details you want to include in the business plan but are not a good fit for any of the previous sections. You can add that additional information to the appendix section.

Businesses also use the appendix section to include supporting documents or other materials specially requested by investors or lenders.

You can include just about any information that supports the assumptions and statements you made in the business plan under the appendix. It is the one place in the business plan where unrelated data and information can coexist amicably.

If your appendix section is lengthy, try organizing it by adding a table of contents at the beginning of the appendix section. It is also advisable to group similar information to make it easier for the reader to access them.

A well-organized appendix section makes it easier to share your information clearly and concisely. Add footnotes throughout the rest of the business plan or make references in the plan to the documents in the appendix.

The appendix section is usually only necessary if you are seeking funding from investors or lenders, or hoping to attract partners.

People reading business plans do not want to spend time going through a heap of backup information, numbers, and charts. Keep these documents or information in the Appendix section in case the reader wants to dig deeper.

Common Items to Include in the Appendix Section of Your Business Plan

The appendix section includes documents that supplement or support the information or claims given in other sections of the business plans. Common items you can include in the appendix section include:

• Additional data about the process of manufacturing or creation
• Additional description of products or services such as product schematics
• Additional financial documents or projections
• Articles of incorporation and status
• Backup for market research or competitive analysis
• Bank statements
• Business registries
• Client testimonials (if your business is already running)
• Copies of insurances
• Credit histories (personal or/and business)
• Deeds and permits
• Equipment leases
• Examples of marketing and advertising collateral
• Industry associations and memberships
• Images of product
• Intellectual property
• Key customer contracts
• Legal documents and other contracts
• Letters of reference
• Links to references
• Market research data
• Organizational charts
• Photographs of potential facilities
• Professional licenses pertaining to your legal structure or type of business
• Purchase orders
• Resumes of the founder(s) and key managers
• State and federal identification numbers or codes
• Trademarks or patents’ registrations

Avoid using the appendix section as a place to dump any document or information you feel like adding. Only add documents or information that you support or increase the credibility of your business plan.

Tips and Strategies for Writing a Convincing Business Plan

To achieve a perfect business plan, you need to consider some key tips and strategies. These tips will raise the efficiency of your business plan above average.

1. Know Your Audience

When writing a business plan, you need to know your audience . Business owners write business plans for different reasons. Your business plan has to be specific. For example, you can write business plans to potential investors, banks, and even fellow board members of the company.

The audience you are writing to determines the structure of the business plan. As a business owner, you have to know your audience. Not everyone will be your audience. Knowing your audience will help you to narrow the scope of your business plan.

Consider what your audience wants to see in your projects, the likely questions they might ask, and what interests them.

• A business plan used to address a company's board members will center on its employment schemes, internal affairs, projects, stakeholders, etc.
• A business plan for financial institutions will talk about the size of your market and the chances for you to pay back any loans you demand.
• A business plan for investors will show proof that you can return the investment capital within a specific time. In addition, it discusses your financial projections, tractions, and market size.

2. Get Inspiration from People

Writing a business plan from scratch as an entrepreneur can be daunting. That is why you need the right inspiration to push you to write one. You can gain inspiration from the successful business plans of other businesses. Look at their business plans, the style they use, the structure of the project, etc.

To make your business plan easier to create, search companies related to your business to get an exact copy of what you need to create an effective business plan. You can also make references while citing examples in your business plans.

When drafting your business plan, get as much help from others as you possibly can. By getting inspiration from people, you can create something better than what they have.

3. Avoid Being Over Optimistic

Many business owners make use of strong adjectives to qualify their content. One of the big mistakes entrepreneurs make when preparing a business plan is promising too much.

The use of superlatives and over-optimistic claims can prepare the audience for more than you can offer. In the end, you disappoint the confidence they have in you.

In most cases, the best option is to be realistic with your claims and statistics. Most of the investors can sense a bit of incompetency from the overuse of superlatives. As a new entrepreneur, do not be tempted to over-promise to get the interests of investors.

The concept of entrepreneurship centers on risks, nothing is certain when you make future analyses. What separates the best is the ability to do careful research and work towards achieving that, not promising more than you can achieve.

To make an excellent first impression as an entrepreneur, replace superlatives with compelling data-driven content. In this way, you are more specific than someone promising a huge ROI from an investment.

4. Keep it Simple and Short

When writing business plans, ensure you keep them simple throughout. Irrespective of the purpose of the business plan, your goal is to convince the audience.

One way to achieve this goal is to make them understand your proposal. Therefore, it would be best if you avoid the use of complex grammar to express yourself. It would be a huge turn-off if the people you want to convince are not familiar with your use of words.

Another thing to note is the length of your business plan. It would be best if you made it as brief as possible.

You hardly see investors or agencies that read through an extremely long document. In that case, if your first few pages can’t convince them, then you have lost it. The more pages you write, the higher the chances of you derailing from the essential contents.

To ensure your business plan has a high conversion rate, you need to dispose of every unnecessary information. For example, if you have a strategy that you are not sure of, it would be best to leave it out of the plan.

5. Make an Outline and Follow Through

A perfect business plan must have touched every part needed to convince the audience. Business owners get easily tempted to concentrate more on their products than on other sections. Doing this can be detrimental to the efficiency of the business plan.

For example, imagine you talking about a product but omitting or providing very little information about the target audience. You will leave your clients confused.

To ensure that your business plan communicates your full business model to readers, you have to input all the necessary information in it. One of the best ways to achieve this is to design a structure and stick to it.

This structure is what guides you throughout the writing. To make your work easier, you can assign an estimated word count or page limit to every section to avoid making it too bulky for easy reading. As a guide, the necessary things your business plan must contain are:

• Table of contents
• Introduction
• Product or service description
• Target audience
• Market size
• Competition analysis
• Financial projections

Some specific businesses can include some other essential sections, but these are the key sections that must be in every business plan.

6. Ask a Professional to Proofread

When writing a business plan, you must tie all loose ends to get a perfect result. When you are done with writing, call a professional to go through the document for you. You are bound to make mistakes, and the way to correct them is to get external help.

You should get a professional in your field who can relate to every section of your business plan. It would be easier for the professional to notice the inner flaws in the document than an editor with no knowledge of your business.

In addition to getting a professional to proofread, get an editor to proofread and edit your document. The editor will help you identify grammatical errors, spelling mistakes, and inappropriate writing styles.

Writing a business plan can be daunting, but you can surmount that obstacle and get the best out of it with these tips.

Business Plan Examples and Templates That’ll Save You Tons of Time

1. hubspot's one-page business plan.

The one-page business plan template by HubSpot is the perfect guide for businesses of any size, irrespective of their business strategy. Although the template is condensed into a page, your final business plan should not be a page long! The template is designed to ask helpful questions that can help you develop your business plan.

Hubspot’s one-page business plan template is divided into nine fields:

• Business opportunity
• Company description
• Industry analysis
• Target market
• Implementation timeline
• Marketing plan
• Financial summary
• Funding required

2. Bplan’s Free Business Plan Template

Bplans' free business plan template is investor-approved. It is a rich template used by prestigious educational institutions such as Babson College and Princeton University to teach entrepreneurs how to create a business plan.

The template has six sections: the executive summary, opportunity, execution, company, financial plan, and appendix. There is a step-by-step guide for writing every little detail in the business plan. Follow the instructions each step of the way and you will create a business plan that impresses investors or lenders easily.

3. HubSpot's Downloadable Business Plan Template

HubSpot’s downloadable business plan template is a more comprehensive option compared to the one-page business template by HubSpot. This free and downloadable business plan template is designed for entrepreneurs.

The template is a comprehensive guide and checklist for business owners just starting their businesses. It tells you everything you need to fill in each section of the business plan and how to do it.

There are nine sections in this business plan template: an executive summary, company and business description, product and services line, market analysis, marketing plan, sales plan, legal notes, financial considerations, and appendix.

4. Business Plan by My Own Business Institute

My Own Business Institute (MOBI) which is a part of Santa Clara University's Center for Innovation and Entrepreneurship offers a free business plan template. You can either copy the free business template from the link provided above or download it as a Word document.

The comprehensive template consists of a whopping 15 sections.

• The Business Profile
• The Vision and the People
• Home-Based Business and Freelance Business Opportunities
• Organization
• Licenses and Permits
• Business Insurance
• Communication Tools
• Acquisitions
• Location and Leasing
• Accounting and Cash Flow
• Opening and Marketing
• Managing Employees
• Expanding and Handling Problems

There are lots of helpful tips on how to fill each section in the free business plan template by MOBI.

5. Score's Business Plan Template for Startups

Score is an American nonprofit organization that helps entrepreneurs build successful companies. This business plan template for startups by Score is available for free download. The business plan template asks a whooping 150 generic questions that help entrepreneurs from different fields to set up the perfect business plan.

The business plan template for startups contains clear instructions and worksheets, all you have to do is answer the questions and fill the worksheets.

There are nine sections in the business plan template: executive summary, company description, products and services, marketing plan, operational plan, management and organization, startup expenses and capitalization, financial plan, and appendices.

The ‘refining the plan’ resource contains instructions that help you modify your business plan to suit your specific needs, industry, and target audience. After you have completed Score’s business plan template, you can work with a SCORE mentor for expert advice in business planning.

6. Minimalist Architecture Business Plan Template by Venngage

The minimalist architecture business plan template is a simple template by Venngage that you can customize to suit your business needs .

There are five sections in the template: an executive summary, statement of problem, approach and methodology, qualifications, and schedule and benchmark. The business plan template has instructions that guide users on what to fill in each section.

7. Small Business Administration Free Business Plan Template

The Small Business Administration (SBA) offers two free business plan templates, filled with practical real-life examples that you can model to create your business plan. Both free business plan templates are written by fictional business owners: Rebecca who owns a consulting firm, and Andrew who owns a toy company.

There are five sections in the two SBA’s free business plan templates.

• Executive Summary
• Company Description
• Service Line
• Marketing and Sales

8. The $100 Startup's One-Page Business Plan

The one-page business plan by the $100 startup is a simple business plan template for entrepreneurs who do not want to create a long and complicated plan . You can include more details in the appendices for funders who want more information beyond what you can put in the one-page business plan.

There are five sections in the one-page business plan such as overview, ka-ching, hustling, success, and obstacles or challenges or open questions. You can answer all the questions using one or two sentences.

9. PandaDoc’s Free Business Plan Template

The free business plan template by PandaDoc is a comprehensive 15-page document that describes the information you should include in every section.

There are 11 sections in PandaDoc’s free business plan template.

• Executive summary
• Business description
• Products and services
• Operations plan
• Management organization
• Financial plan
• Conclusion / Call to action
• Confidentiality statement

You have to sign up for its 14-day free trial to access the template. You will find different business plan templates on PandaDoc once you sign up (including templates for general businesses and specific businesses such as bakeries, startups, restaurants, salons, hotels, and coffee shops)

PandaDoc allows you to customize its business plan templates to fit the needs of your business. After editing the template, you can send it to interested parties and track opens and views through PandaDoc.

10. Invoiceberry Templates for Word, Open Office, Excel, or PPT

InvoiceBerry is a U.K based online invoicing and tracking platform that offers free business plan templates in .docx, .odt, .xlsx, and .pptx formats for freelancers and small businesses.

Before you can download the free business plan template, it will ask you to give it your email address. After you complete the little task, it will send the download link to your inbox for you to download. It also provides a business plan checklist in .xlsx file format that ensures you add the right information to the business plan.

Alternatives to the Traditional Business Plan

A business plan is very important in mapping out how one expects their business to grow over a set number of years, particularly when they need external investment in their business. However, many investors do not have the time to watch you present your business plan. It is a long and boring read.

Luckily, there are three alternatives to the traditional business plan (the Business Model Canvas, Lean Canvas, and Startup Pitch Deck). These alternatives are less laborious and easier and quicker to present to investors.

Business Model Canvas (BMC)

The business model canvas is a business tool used to present all the important components of setting up a business, such as customers, route to market, value proposition, and finance in a single sheet. It provides a very focused blueprint that defines your business initially which you can later expand on if needed.

The sheet is divided mainly into company, industry, and consumer models that are interconnected in how they find problems and proffer solutions.

Segments of the Business Model Canvas

The business model canvas was developed by founder Alexander Osterwalder to answer important business questions. It contains nine segments.

• Key Partners: Who will be occupying important executive positions in your business? What do they bring to the table? Will there be a third party involved with the company?
• Key Activities: What important activities will production entail? What activities will be carried out to ensure the smooth running of the company?
• The Product’s Value Propositions: What does your product do? How will it be different from other products?
• Customer Segments: What demography of consumers are you targeting? What are the habits of these consumers? Who are the MVPs of your target consumers?
• Customer Relationships: How will the team support and work with its customer base? How do you intend to build and maintain trust with the customer?
• Key Resources: What type of personnel and tools will be needed? What size of the budget will they need access to?
• Channels: How do you plan to create awareness of your products? How do you intend to transport your product to the customer?
• Cost Structure: What is the estimated cost of production? How much will distribution cost?
• Revenue Streams: For what value are customers willing to pay? How do they prefer to pay for the product? Are there any external revenues attached apart from the main source? How do the revenue streams contribute to the overall revenue?

Lean Canvas

The lean canvas is a problem-oriented alternative to the standard business model canvas. It was proposed by Ash Maurya, creator of Lean Stack as a development of the business model generation. It uses a more problem-focused approach and it majorly targets entrepreneurs and startup businesses.

Lean Canvas uses the same 9 blocks concept as the business model canvas, however, they have been modified slightly to suit the needs and purpose of a small startup. The key partners, key activities, customer relationships, and key resources are replaced by new segments which are:

• Problem: Simple and straightforward number of problems you have identified, ideally three.
• Solution: The solutions to each problem.
• Unfair Advantage: Something you possess that can't be easily bought or replicated.
• Key Metrics: Important numbers that will tell how your business is doing.

Startup Pitch Deck

While the business model canvas compresses into a factual sheet, startup pitch decks expand flamboyantly.

Pitch decks, through slides, convey your business plan, often through graphs and images used to emphasize estimations and observations in your presentation. Entrepreneurs often use pitch decks to fully convince their target audience of their plans before discussing funding arrangements.

Considering the likelihood of it being used in a small time frame, a good startup pitch deck should ideally contain 20 slides or less to have enough time to answer questions from the audience.

Unlike the standard and lean business model canvases, a pitch deck doesn't have a set template on how to present your business plan but there are still important components to it. These components often mirror those of the business model canvas except that they are in slide form and contain more details.

Using Airbnb (one of the most successful start-ups in recent history) for reference, the important components of a good slide are listed below.

• Cover/Introduction Slide: Here, you should include your company's name and mission statement. Your mission statement should be a very catchy tagline. Also, include personal information and contact details to provide an easy link for potential investors.
• Problem Slide: This slide requires you to create a connection with the audience or the investor that you are pitching. For example in their pitch, Airbnb summarized the most important problems it would solve in three brief points – pricing of hotels, disconnection from city culture, and connection problems for local bookings.
• Solution Slide: This slide includes your core value proposition. List simple and direct solutions to the problems you have mentioned
• Customer Analysis: Here you will provide information on the customers you will be offering your service to. The identity of your customers plays an important part in fundraising as well as the long-run viability of the business.
• Market Validation: Use competitive analysis to show numbers that prove the presence of a market for your product, industry behavior in the present and the long run, as well as the percentage of the market you aim to attract. It shows that you understand your competitors and customers and convinces investors of the opportunities presented in the market.
• Business Model: Your business model is the hook of your presentation. It may vary in complexity but it should generally include a pricing system informed by your market analysis. The goal of the slide is to confirm your business model is easy to implement.
• Marketing Strategy: This slide should summarize a few customer acquisition methods that you plan to use to grow the business.
• Competitive Advantage: What this slide will do is provide information on what will set you apart and make you a more attractive option to customers. It could be the possession of technology that is not widely known in the market.
• Team Slide: Here you will give a brief description of your team. Include your key management personnel here and their specific roles in the company. Include their educational background, job history, and skillsets. Also, talk about their accomplishments in their careers so far to build investors' confidence in members of your team.
• Traction Slide: This validates the company’s business model by showing growth through early sales and support. The slide aims to reduce any lingering fears in potential investors by showing realistic periodic milestones and profit margins. It can include current sales, growth, valuable customers, pre-orders, or data from surveys outlining current consumer interest.
• Funding Slide: This slide is popularly referred to as ‘the ask'. Here you will include important details like how much is needed to get your business off the ground and how the funding will be spent to help the company reach its goals.
• Appendix Slides: Your pitch deck appendix should always be included alongside a standard pitch presentation. It consists of additional slides you could not show in the pitch deck but you need to complement your presentation.

It is important to support your calculations with pictorial renditions. Infographics, such as pie charts or bar graphs, will be more effective in presenting the information than just listing numbers. For example, a six-month graph that shows rising profit margins will easily look more impressive than merely writing it.

Lastly, since a pitch deck is primarily used to secure meetings and you may be sharing your pitch with several investors, it is advisable to keep a separate public version that doesn't include financials. Only disclose the one with projections once you have secured a link with an investor.

Advantages of the Business Model Canvas, Lean Canvas, and Startup Pitch Deck over the Traditional Business Plan

• Time-Saving: Writing a detailed traditional business plan could take weeks or months. On the other hand, all three alternatives can be done in a few days or even one night of brainstorming if you have a comprehensive understanding of your business.
• Easier to Understand: Since the information presented is almost entirely factual, it puts focus on what is most important in running the business. They cut away the excess pages of fillers in a traditional business plan and allow investors to see what is driving the business and what is getting in the way.
• Easy to Update: Businesses typically present their business plans to many potential investors before they secure funding. What this means is that you may regularly have to amend your presentation to update statistics or adjust to audience-specific needs. For a traditional business plan, this could mean rewriting a whole section of your plan. For the three alternatives, updating is much easier because they are not voluminous.
• Guide for a More In-depth Business Plan: All three alternatives have the added benefit of being able to double as a sketch of your business plan if the need to create one arises in the future.

Business Plan FAQ

Business plans are important for any entrepreneur who is looking for a framework to run their company over some time or seeking external support. Although they are essential for new businesses, every company should ideally have a business plan to track their growth from time to time.  They can be used by startups seeking investments or loans to convey their business ideas or an employee to convince his boss of the feasibility of starting a new project. They can also be used by companies seeking to recruit high-profile employee targets into key positions or trying to secure partnerships with other firms.

Business plans often vary depending on your target audience, the scope, and the goals for the plan. Startup plans are the most common among the different types of business plans.  A start-up plan is used by a new business to present all the necessary information to help get the business up and running. They are usually used by entrepreneurs who are seeking funding from investors or bank loans. The established company alternative to a start-up plan is a feasibility plan. A feasibility plan is often used by an established company looking for new business opportunities. They are used to show the upsides of creating a new product for a consumer base. Because the audience is usually company people, it requires less company analysis. The third type of business plan is the lean business plan. A lean business plan is a brief, straight-to-the-point breakdown of your ideas and analysis for your business. It does not contain details of your proposal and can be written on one page. Finally, you have the what-if plan. As it implies, a what-if plan is a preparation for the worst-case scenario. You must always be prepared for the possibility of your original plan being rejected. A good what-if plan will serve as a good plan B to the original.

A good business plan has 10 key components. They include an executive plan, product analysis, desired customer base, company analysis, industry analysis, marketing strategy, sales strategy, financial projection, funding, and appendix. Executive Plan Your business should begin with your executive plan. An executive plan will provide early insight into what you are planning to achieve with your business. It should include your mission statement and highlight some of the important points which you will explain later. Product Analysis The next component of your business plan is your product analysis. A key part of this section is explaining the type of item or service you are going to offer as well as the market problems your product will solve. Desired Consumer Base Your product analysis should be supplemented with a detailed breakdown of your desired consumer base. Investors are always interested in knowing the economic power of your market as well as potential MVP customers. Company Analysis The next component of your business plan is your company analysis. Here, you explain how you want to run your business. It will include your operational strategy, an insight into the workforce needed to keep the company running, and important executive positions. It will also provide a calculation of expected operational costs.  Industry Analysis A good business plan should also contain well laid out industry analysis. It is important to convince potential investors you know the companies you will be competing with, as well as your plans to gain an edge on the competition. Marketing Strategy Your business plan should also include your marketing strategy. This is how you intend to spread awareness of your product. It should include a detailed explanation of the company brand as well as your advertising methods. Sales Strategy Your sales strategy comes after the market strategy. Here you give an overview of your company's pricing strategy and how you aim to maximize profits. You can also explain how your prices will adapt to market behaviors. Financial Projection The financial projection is the next component of your business plan. It explains your company's expected running cost and revenue earned during the tenure of the business plan. Financial projection gives a clear idea of how your company will develop in the future. Funding The next component of your business plan is funding. You have to detail how much external investment you need to get your business idea off the ground here. Appendix The last component of your plan is the appendix. This is where you put licenses, graphs, or key information that does not fit in any of the other components.

The business model canvas is a business management tool used to quickly define your business idea and model. It is often used when investors need you to pitch your business idea during a brief window.

A pitch deck is similar to a business model canvas except that it makes use of slides in its presentation. A pitch is not primarily used to secure funding, rather its main purpose is to entice potential investors by selling a very optimistic outlook on the business.

Business plan competitions help you evaluate the strength of your business plan. By participating in business plan competitions, you are improving your experience. The experience provides you with a degree of validation while practicing important skills. The main motivation for entering into the competitions is often to secure funding by finishing in podium positions. There is also the chance that you may catch the eye of a casual observer outside of the competition. These competitions also provide good networking opportunities. You could meet mentors who will take a keen interest in guiding you in your business journey. You also have the opportunity to meet other entrepreneurs whose ideas can complement yours.

Exlore Further

• 12 Key Elements of a Business Plan (Top Components Explained)
• 13 Sources of Business Finance For Companies & Sole Traders
• 5 Common Types of Business Structures (+ Pros & Cons)
• How to Buy a Business in 8 Steps (+ Due Diligence Checklist)

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Martin luenendonk.

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.

How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

Free business plan templates and examples

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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What Is a Business Plan? Definition and Planning Essentials Explained

Posted february 21, 2022 by kody wirth.

What is a business plan? It’s the roadmap for your business. The outline of your goals, objectives, and the steps you’ll take to get there. It describes the structure of your organization, how it operates, as well as the financial expectations and actual performance. 

A business plan can help you explore ideas, successfully start a business, manage operations, and pursue growth. In short, a business plan is a lot of different things. It’s more than just a stack of paper and can be one of your most effective tools as a business owner. 

Let’s explore the basics of business planning, the structure of a traditional plan, your planning options, and how you can use your plan to succeed. 

What is a business plan?

A business plan is a document that explains how your business operates. It summarizes your business structure, objectives, milestones, and financial performance. Again, it’s a guide that helps you, and anyone else, better understand how your business will succeed.  

Why do you need a business plan?

The primary purpose of a business plan is to help you understand the direction of your business and the steps it will take to get there. Having a solid business plan can help you grow up to 30% faster and according to our own 2021 Small Business research working on a business plan increases confidence regarding business health—even in the midst of a crisis. 

These benefits are directly connected to how writing a business plan makes you more informed and better prepares you for entrepreneurship. It helps you reduce risk and avoid pursuing potentially poor ideas. You’ll also be able to more easily uncover your business’s potential. By regularly returning to your plan you can understand what parts of your strategy are working and those that are not.

That just scratches the surface for why having a plan is valuable. Check out our full write-up for fifteen more reasons why you need a business plan .  

What can you do with your plan?

So what can you do with a business plan once you’ve created it? It can be all too easy to write a plan and just let it be. Here are just a few ways you can leverage your plan to benefit your business.

Test an idea

Writing a plan isn’t just for those that are ready to start a business. It’s just as valuable for those that have an idea and want to determine if it’s actually possible or not. By writing a plan to explore the validity of an idea, you are working through the process of understanding what it would take to be successful. 

The market and competitive research alone can tell you a lot about your idea. Is the marketplace too crowded? Is the solution you have in mind not really needed? Add in the exploration of milestones, potential expenses, and the sales needed to attain profitability and you can paint a pretty clear picture of the potential of your business.

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For those starting or managing a business understanding where you’re going and how you’re going to get there are vital. Writing your plan helps you do that. It ensures that you are considering all aspects of your business, know what milestones you need to hit, and can effectively make adjustments if that doesn’t happen. 

With a plan in place, you’ll have an idea of where you want your business to go as well as how you’ve performed in the past. This alone better prepares you to take on challenges, review what you’ve done before, and make the right adjustments.

Pursue funding

Even if you do not intend to pursue funding right away, having a business plan will prepare you for it. It will ensure that you have all of the information necessary to submit a loan application and pitch to investors. So, rather than scrambling to gather documentation and write a cohesive plan once it’s relevant, you can instead keep your plan up-to-date and attempt to attain funding. Just add a use of funds report to your financial plan and you’ll be ready to go.

The benefits of having a plan don’t stop there. You can then use your business plan to help you manage the funding you receive. You’ll not only be able to easily track and forecast how you’ll use your funds but easily report on how it’s been used. 

Better manage your business

A solid business plan isn’t meant to be something you do once and forget about. Instead, it should be a useful tool that you can regularly use to analyze performance, make strategic decisions, and anticipate future scenarios. It’s a document that you should regularly update and adjust as you go to better fit the actual state of your business.

Doing so makes it easier to understand what’s working and what’s not. It helps you understand if you’re truly reaching your goals or if you need to make further adjustments. Having your plan in place makes that process quicker, more informative, and leaves you with far more time to actually spend running your business.

What should your business plan include?

The content and structure of your business plan should include anything that will help you use it effectively. That being said, there are some key elements that you should cover and that investors will expect to see. 

Executive summary

The executive summary is a simple overview of your business and your overall plan. It should serve as a standalone document that provides enough detail for anyone—including yourself, team members, or investors—to fully understand your business strategy. Make sure to cover the problem you’re solving, a description of your product or service, your target market, organizational structure, a financial summary, and any necessary funding requirements.

This will be the first part of your plan but it’s easiest to write it after you’ve created your full plan.

Products & Services

When describing your products or services, you need to start by outlining the problem you’re solving and why what you offer is valuable. This is where you’ll also address current competition in the market and any competitive advantages your products or services bring to the table. Lastly, be sure to outline the steps or milestones that you’ll need to hit to successfully launch your business. If you’ve already hit some initial milestones, like taking pre-orders or early funding, be sure to include it here to further prove the validity of your business. 

Market analysis

A market analysis is a qualitative and quantitative assessment of the current market you’re entering or competing in. It helps you understand the overall state and potential of the industry, who your ideal customers are, the positioning of your competition, and how you intend to position your own business. This helps you better explore the long-term trends of the market, what challenges to expect, and how you will need to initially introduce and even price your products or services.

Check out our full guide for how to conduct a market analysis in just four easy steps .  

Marketing & sales

Here you detail how you intend to reach your target market. This includes your sales activities, general pricing plan, and the beginnings of your marketing strategy. If you have any branding elements, sample marketing campaigns, or messaging available—this is the place to add it. 

Additionally, it may be wise to include a SWOT analysis that demonstrates your business or specific product/service position. This will showcase how you intend to leverage sales and marketing channels to deal with competitive threats and take advantage of any opportunities.

Check out our full write-up to learn how to create a cohesive marketing strategy for your business. 

Organization & management

This section addresses the legal structure of your business, your current team, and any gaps that need to be filled. Depending on your business type and longevity, you’ll also need to include your location, ownership information, and business history. Basically, add any information that helps explain your organizational structure and how you operate. This section is particularly important for pitching to investors but should be included even if attempted funding is not in your immediate future.

Financial projections

Possibly the most important piece of your plan, your financials section is vital for showcasing the viability of your business. It also helps you establish a baseline to measure against and makes it easier to make ongoing strategic decisions as your business grows. This may seem complex on the surface, but it can be far easier than you think. 

Focus on building solid forecasts, keep your categories simple, and lean on assumptions. You can always return to this section to add more details and refine your financial statements as you operate. 

Here are the statements you should include in your financial plan:

• Sales and revenue projections
• Profit and loss statement
• Cash flow statement
• Balance sheet

The appendix is where you add additional detail, documentation, or extended notes that support the other sections of your plan. Don’t worry about adding this section at first and only add documentation that you think will be beneficial for anyone reading your plan.

Types of business plans explained

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. So, to get the most out of your plan, it’s best to find a format that suits your needs. Here are a few common business plan types worth considering. 

Traditional business plan

The tried-and-true traditional business plan is a formal document meant to be used for external purposes. Typically this is the type of plan you’ll need when applying for funding or pitching to investors. It can also be used when training or hiring employees, working with vendors, or any other situation where the full details of your business must be understood by another individual. 

This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix. We recommend only starting with this business plan format if you plan to immediately pursue funding and already have a solid handle on your business information. 

Business model canvas

The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea. 

The structure ditches a linear structure in favor of a cell-based template. It encourages you to build connections between every element of your business. It’s faster to write out and update, and much easier for you, your team, and anyone else to visualize your business operations. This is really best for those exploring their business idea for the first time, but keep in mind that it can be difficult to actually validate your idea this way as well as adapt it into a full plan.

One-page business plan

The true middle ground between the business model canvas and a traditional business plan is the one-page business plan. This format is a simplified version of the traditional plan that focuses on the core aspects of your business. It basically serves as a beefed-up pitch document and can be finished as quickly as the business model canvas.

By starting with a one-page plan, you give yourself a minimal document to build from. You’ll typically stick with bullet points and single sentences making it much easier to elaborate or expand sections into a longer-form business plan. This plan type is useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Now, the option that we here at LivePlan recommend is the Lean Plan . This is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance.

It holds all of the benefits of the single-page plan, including the potential to complete it in as little as 27-minutes . However, it’s even easier to convert into a full plan thanks to how heavily it’s tied to your financials. The overall goal of Lean Planning isn’t to just produce documents that you use once and shelve. Instead, the Lean Planning process helps you build a healthier company that thrives in times of growth and stable through times of crisis.

It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

Try the LivePlan Method for Lean Business Planning

Now that you know the basics of business planning, it’s time to get started. Again we recommend leveraging a Lean Plan for a faster, easier, and far more useful planning process. 

To get familiar with the Lean Plan format, you can download our free Lean Plan template . However, if you want to elevate your ability to create and use your lean plan even further, you may want to explore LivePlan. 

It features step-by-step guidance that ensures you cover everything necessary while reducing the time spent on formatting and presenting. You’ll also gain access to financial forecasting tools that propel you through the process. Finally, it will transform your plan into a management tool that will help you easily compare your forecasts to your actual results. 

Check out how LivePlan streamlines Lean Planning by downloading our Kickstart Your Business ebook .

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, how often should a business plan be updated, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that details a company's goals and how it intends to achieve them. Business plans can be of benefit to both startups and well-established companies. For startups, a business plan can be essential for winning over potential lenders and investors. Established businesses can find one useful for staying on track and not losing sight of their goals. This article explains what an effective business plan needs to include and how to write one.

Key Takeaways

• A business plan is a document describing a company's business activities and how it plans to achieve its goals.
• Startup companies use business plans to get off the ground and attract outside investors.
• For established companies, a business plan can help keep the executive team focused on and working toward the company's short- and long-term objectives.
• There is no single format that a business plan must follow, but there are certain key elements that most companies will want to include.

Investopedia / Ryan Oakley

Any new business should have a business plan in place prior to beginning operations. In fact, banks and venture capital firms often want to see a business plan before they'll consider making a loan or providing capital to new businesses.

Even if a business isn't looking to raise additional money, a business plan can help it focus on its goals. A 2017 Harvard Business Review article reported that, "Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical nonplanning entrepreneurs."

Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. An established business that has decided to move in a new direction might create an entirely new business plan for itself.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. These include being able to think through ideas before investing too much money in them and highlighting any potential obstacles to success. A company might also share its business plan with trusted outsiders to get their objective feedback. In addition, a business plan can help keep a company's executive team on the same page about strategic action items and priorities.

Business plans, even among competitors in the same industry, are rarely identical. However, they often have some of the same basic elements, as we describe below.

While it's a good idea to provide as much detail as necessary, it's also important that a business plan be concise enough to hold a reader's attention to the end.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, it's best to fit the basic information into a 15- to 25-page document. Other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and attached as appendices.

These are some of the most common elements in many business plans:

• Executive summary: This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services: Here, the company should describe the products and services it offers or plans to introduce. That might include details on pricing, product lifespan, and unique benefits to the consumer. Other factors that could go into this section include production and manufacturing processes, any relevant patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
• Market analysis: A company needs to have a good handle on the current state of its industry and the existing competition. This section should explain where the company fits in, what types of customers it plans to target, and how easy or difficult it may be to take market share from incumbents.
• Marketing strategy: This section can describe how the company plans to attract and keep customers, including any anticipated advertising and marketing campaigns. It should also describe the distribution channel or channels it will use to get its products or services to consumers.
• Financial plans and projections: Established businesses can include financial statements, balance sheets, and other relevant financial information. New businesses can provide financial targets and estimates for the first few years. Your plan might also include any funding requests you're making.

The best business plans aren't generic ones created from easily accessed templates. A company should aim to entice readers with a plan that demonstrates its uniqueness and potential for success.

2 Types of Business Plans

Business plans can take many forms, but they are sometimes divided into two basic categories: traditional and lean startup. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These plans tend to be much longer than lean startup plans and contain considerably more detail. As a result they require more work on the part of the business, but they can also be more persuasive (and reassuring) to potential investors.
• Lean startup business plans : These use an abbreviated structure that highlights key elements. These business plans are short—as short as one page—and provide only the most basic detail. If a company wants to use this kind of plan, it should be prepared to provide more detail if an investor or a lender requests it.

Why Do Business Plans Fail?

A business plan is not a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections to begin with. Markets and the overall economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All of this calls for building some flexibility into your plan, so you can pivot to a new course if needed.

How frequently a business plan needs to be revised will depend on the nature of the business. A well-established business might want to review its plan once a year and make changes if necessary. A new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is an option when a company prefers to give a quick explanation of its business. For example, a brand-new company may feel that it doesn't have a lot of information to provide yet.

Sections can include: a value proposition ; the company's major activities and advantages; resources such as staff, intellectual property, and capital; a list of partnerships; customer segments; and revenue sources.

A business plan can be useful to companies of all kinds. But as a company grows and the world around it changes, so too should its business plan. So don't think of your business plan as carved in granite but as a living document designed to evolve with your business.

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

U.S. Small Business Administration. " Write Your Business Plan ."

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What is a business plan? Definition, Purpose, and Types

In the world of business, a well-thought-out plan is often the key to success. This plan, known as a business plan, is a comprehensive document that outlines a company’s goals, strategies , and financial projections. Whether you’re starting a new business or looking to expand an existing one, a business plan is an essential tool.

As a business plan writer and consultant , I’ve crafted over 15,000 plans for a diverse range of businesses. In this article, I’ll be sharing my wealth of experience about what a business plan is, its purpose, and the step-by-step process of creating one. By the end, you’ll have a thorough understanding of how to develop a robust business plan that can drive your business to success.

What is a business plan?

Purposes of a business plan, what are the essential components of a business plan, executive summary, business description or overview, product and price, competitive analysis, target market, marketing plan, financial plan, funding requirements, types of business plan, lean startup business plans, traditional business plans, how often should a business plan be reviewed and revised, what are the key elements of a lean startup business plan.

• What are some of the reasons why business plans don't succeed?

A business plan is a roadmap for your business. It outlines your goals, strategies, and how you plan to achieve them. It’s a living document that you can update as your business grows and changes.

Looking for someone to write a business plan?

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These are the following purpose of business plan:

• Attract investors and lenders: If you’re seeking funding for your business , a business plan is a must-have. Investors and lenders want to see that you have a clear plan for how you’ll use their money to grow your business and generate revenue.
• Get organized and stay on track: Writing a business plan forces you to think through all aspects of your business, from your target market to your marketing strategy. This can help you identify any potential challenges and opportunities early on, so you can develop a plan to address them.
• Make better decisions: A business plan can help you make better decisions about your business by providing you with a framework to evaluate different options. For example, if you’re considering launching a new product, your business plan can help you assess the potential market demand, costs, and profitability.

The executive summary is the most important part of your business plan, even though it’s the last one you’ll write. It’s the first section that potential investors or lenders will read, and it may be the only one they read. The executive summary sets the stage for the rest of the document by introducing your company’s mission or vision statement, value proposition, and long-term goals.

The business description section of your business plan should introduce your business to the reader in a compelling and concise way. It should include your business name, years in operation, key offerings, positioning statement, and core values (if applicable). You may also want to include a short history of your company.

In this section, the company should describe its products or services , including pricing, product lifespan, and unique benefits to the consumer. Other relevant information could include production and manufacturing processes, patents, and proprietary technology.

Every industry has competitors, even if your business is the first of its kind or has the majority of the market share. In the competitive analysis section of your business plan, you’ll objectively assess the industry landscape to understand your business’s competitive position. A SWOT analysis is a structured way to organize this section.

Your target market section explains the core customers of your business and why they are your ideal customers. It should include demographic, psychographic, behavioral, and geographic information about your target market.

Marketing plan describes how the company will attract and retain customers, including any planned advertising and marketing campaigns . It also describes how the company will distribute its products or services to consumers.

After outlining your goals, validating your business opportunity, and assessing the industry landscape, the team section of your business plan identifies who will be responsible for achieving your goals. Even if you don’t have your full team in place yet, investors will be impressed by your clear understanding of the roles that need to be filled.

In the financial plan section,established businesses should provide financial statements , balance sheets , and other financial data. New businesses should provide financial targets and estimates for the first few years, and may also request funding.

Since one goal of a business plan is to secure funding from investors , you should include the amount of funding you need, why you need it, and how long you need it for.

• Tip: Use bullet points and numbered lists to make your plan easy to read and scannable.

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Business plans can come in many different formats, but they are often divided into two main types: traditional and lean startup. The U.S. Small Business Administration (SBA) says that the traditional business plan is the more common of the two.

Lean startup business plans are short (as short as one page) and focus on the most important elements. They are easy to create, but companies may need to provide more information if requested by investors or lenders.

Traditional business plans are longer and more detailed than lean startup business plans, which makes them more time-consuming to create but more persuasive to potential investors. Lean startup business plans are shorter and less detailed, but companies should be prepared to provide more information if requested.

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A business plan should be reviewed and revised at least annually, or more often if the business is experiencing significant changes. This is because the business landscape is constantly changing, and your business plan needs to reflect those changes in order to remain relevant and effective.

Here are some specific situations in which you should review and revise your business plan:

• You have launched a new product or service line.
• You have entered a new market.
• You have experienced significant changes in your customer base or competitive landscape.
• You have made changes to your management team or organizational structure.
• You have raised new funding.

A lean startup business plan is a short and simple way for a company to explain its business, especially if it is new and does not have a lot of information yet. It can include sections on the company’s value proposition, major activities and advantages, resources, partnerships, customer segments, and revenue sources.

What are some of the reasons why business plans don't succeed?

• Unrealistic assumptions: Business plans are often based on assumptions about the market, the competition, and the company’s own capabilities. If these assumptions are unrealistic, the plan is doomed to fail.
• Lack of focus: A good business plan should be focused on a specific goal and how the company will achieve it. If the plan is too broad or tries to do too much, it is unlikely to be successful.
• Poor execution: Even the best business plan is useless if it is not executed properly. This means having the right team in place, the necessary resources, and the ability to adapt to changing circumstances.
• Unforeseen challenges:  Every business faces challenges that could not be predicted or planned for. These challenges can be anything from a natural disaster to a new competitor to a change in government regulations.

What are the benefits of having a business plan?

• It helps you to clarify your business goals and strategies.
• It can help you to attract investors and lenders.
• It can serve as a roadmap for your business as it grows and changes.
• It can help you to make better business decisions.

How to write a business plan?

There are many different ways to write a business plan, but most follow the same basic structure. Here is a step-by-step guide:

• Executive summary.
• Company description.
• Management and organization description.
• Financial projections.

How to write a business plan step by step?

Start with an executive summary, then describe your business, analyze the market, outline your products or services, detail your marketing and sales strategies, introduce your team, and provide financial projections.

Why do I need a business plan for my startup?

A business plan helps define your startup’s direction, attract investors, secure funding, and make informed decisions crucial for success.

What are the key components of a business plan?

Key components include an executive summary, business description, market analysis, products or services, marketing and sales strategy, management and team, financial projections, and funding requirements.

Can a business plan help secure funding for my business?

Yes, a well-crafted business plan demonstrates your business’s viability, the use of investment, and potential returns, making it a valuable tool for attracting investors and lenders.

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Getting Started Introduction to AQA GCSE Business

This free, short online course provides all AQA GCSE Business students with a useful introduction to the structure of the course, assessment skills and how students are assessed!

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Getting Started

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Work your way through these four short videos to explore the key features of your Edexcel GCSE Business course. Each contains an activity at the end to let you check you've covered the key knowledge!

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Jane Carter

Jane is an experienced A-Level and GCSE Business teacher.

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Creating a Tutoring Business Plan - A Step-by-Step Guide

What is a tutoring business plan and do i need one, what makes a good tutoring business plan, how to create an effective tutoring business plan, sample outline, executive summary , business profile, market research.

• Sales & Marketing

Executive summary

Tutoring business plan tips and tricks, when is it good to create a tutoring business plan, when you are just starting, when bringing in partners, when you are embarking on joint ventures, when you need to secure financing, 5 mistakes you should avoid when making a tutoring business plan.

• Wrap Up & Conclusion

Do you have a knack for helping others learn? Are you looking for a way to make some extra money or simply want to be your own boss?

If so, starting your own tutoring business may be the perfect solution for you! In this blog post, we'll discuss how to create a successful tutoring business plan.

We'll cover everything, step by step, from marketing your services to setting prices and more. So, whether you're just getting started or you're looking to take your business to the next level, keep reading for some helpful tips and advice!

If you have stumbled upon this blog then you are likely wondering, do you need a business plan? Does having a business plan come with benefits? Does my already established tutoring business require a business plan? We have compiled all these answers into this article that will help you create your very own tutoring business plan with clear actionable steps and examples.

First things first, having a business plan makes running a business easier. It helps you understand your value proposition, reach potential customers and can even help with financing. In fact, businesses intending to secure a loan and those intending to secure investment capital using a business plan are positively correlated with success rates. And, while some decisions are based on risk, you cannot depend on this for the success of your business. This is where a business plan comes in handy.

Here we will provide you with a comprehensive guide on how to create a business plan for your tutoring business from scratch. Here’s what’s to come:

• What makes a good tutoring business plan?
• How to create an effective tutoring business plan?
• Tutoring business plan tips and tricks
• Tutoring business plan FAQs

Read More: Write a business plan from Gov.uk

The type of business plan you create will depend largely on your specific tutoring business. However, in general, a business plan is a document that clearly defines your milestones and how you plan to achieve them. Having a hard copy of all important details and goals to show potential investors and employees makes it easier to be held accountable while keeping track of these details and improving upon them.

A good business plan will help you to:

• Organise your thoughts in a professional and easy-to-understand way
• Make sound and informed business decisions with solid projections to reach realistic targets
• Communicate your plans to banks, your partners, and even your employees.

The biggest benefit of starting your own tutoring business is that this business can be started on any scale. You can even start it from your home with little to no investment. However, if you want to start a proper tutoring centre where students with different age groups and educational backgrounds will be helped with their education, you will first have to prepare a comprehensive tutoring business plan. The business plan will not only establish the basis of your company’s future operations and decisions but will also help you with funding your startup.

Before you start writing your business plan for your new tutoring business, spend a bit of time doing research and reading through some sample business plans written for the education and training industry. This will give you a good idea of what you’re aiming for and will also show you the various sections that different entrepreneurs include, the language they use to write about themselves and their business goals.

We have created the following sample outline for your tutoring business plan from some popular examples to give you a better idea of how to structure the perfect tutoring business plan. Remember that not all of these need to be included! Pick out the key elements for your tutoring business:

• Include a business summary, market research summary, marketing summary, financial situation summary and net income.
• Include business overview, business description, compelling value, product/service description, company history, management, location, legal structure, vision and mission, professional advisor (optional), goals and objectives.
• Include, industry profile and outlook, local market, key competitors/SWOT analysis, TOP tutors, ABC tutoring, target market, keys to success, and customer survey summary. 

Sales & Marketing

• Include pricing strategy, marketing strategy, marketing activities, marketing objectives, positioning statement, sales process and strategic alliances.
• Include physical/virtual location, legal considerations, insurance considerations, human resources, process/production and risk assessment. 
• Include past purchases, start-up costs sheet, sales forecast assumptions, cash flow, projected profit and loss and projected balance sheet. 
• Include any relevant documentation to support your business plan. 

Let's dive a little deeper into each of these categories…

The executive summary consists of your entire business plan summary. It always appears at the beginning of the plan but should be always done last. It is crucial to note that the executive summary is of utmost importance, as it will be one of the first parts of your plan that anyone reads. It should contain a summary of everything your tutoring business is focused on in a maximum of one or two pages.

One of the best pieces of advice we can give is to not oversell your business. Usually, everyone wants to find out what you are focusing on and how you are solving the problems in your industry. Therefore, start by:

• A brief description of your entire business plan.
• Try to summarise each of the sections you’re covering.
• Keep it straight to the point.
• Improve it often.

This section should cover what your tutoring business does, your unique selling point (USP), competitive value, vision, mission and so on. It is important to have clearly defined points, which might be difficult if you’re still in your inception phase. What you need to remember is that as long as you outline your objectives and what you’re hoping to achieve, your profile will look well-polished. Don’t forget to choose and highlight your tutoring method, be it online, in person, or both. If you decide to go the online teaching route, there are a lot of tools and services that can help make scheduling and conducting classes easier.  

To write your business profile, follow these steps:

• Start with an elevator pitch: Describe your business in the easiest way possible, so any reader would understand. Stay away from smart words - they might make you sound good, but in reality, they complicate the context. Explain what you do, your service description and your USP. A paragraph should be enough. Later on, move along with your value proposition, mission, vision and your goals and objectives. These points help elevate your business plan and set you apart from the competition.
• Be straight to the point: The more clear and concise you are, the better the reader will understand your business model. 
• Keep your points short: Short sentences are key here, but make sure not every sentence is short as it disturbs the reading pace and it might make it quite monotonous. The important thing here is to keep all the essential information short and explain what requires explanation a bit longer.

When you present your market research, you have to demonstrate your understanding of the tutoring industry. You have to mention factors that have an influence on the industry such as local market area, key competitors, target market and your strategy for success. An easy approach would be to start broad and then go towards more specific that applies to your services.

Start your market research with:

• Conduct industry-related interviews with key people.
• Speak to parents and students and record what they feel it’s missing.
• Identify key competitors and analyse their business offerings. 
• Determine the cost of tutoring services in your area and check if your costs are competitive.
• Create buyer personas based on your target demographic and the type of students you hoping to attract.

When your offering is defined, it is time for it to be promoted with the goal of selling it. Your sales and marketing section should contain your strategy of how are you planning to market and sell your tutoring services. It is not an easy job to attract the customers you want, so it is crucial to have a thorough think about how you’ll do it and plan ahead. 

You won’t be able to attract the customer you want by marketing where your target market isn’t present. You need to focus on making noise and push out your offering through public relations and other relevant marketing channels. This is a good exercise to demonstrate your persuasive skills and think about how can you attract students, parents and teachers to your services. Remember to be genuine and avoid ‘salesy’ language.

Here’s what you need to consider:

• Choose the platform or means of selling your tutoring services, but keep in mind that your target customer has to be on there. Do some research and find out where your target audience can be found and market there.
• Build your brand presence on your platform of choice and fill it with information that a student, parent or teacher in need of tutoring would go to.
• Once all that’s been set in stone, form a relationship with your audience and be as helpful as you can. This will help increase your brand authority and spread the word about it to other platforms.
• Top tip, if you follow most of these steps above, your brand will start getting its own voice and sell itself through loyal customers, which means you won’t have to invest much in marketing.

Your operation portion of your tutoring business plan contains essential information about general operational details that help investors understand the physical details of your vision. Information such as the location of your business, assets, legal matters, insurance and resources. If you’re just started your business, the operations plan can also serve as a checklist for startups as it includes a list of everything that must be done to start turning a profit. To put it simply, you explain how your business operates from all points of view.

And the most stressful part of a business plan as some may say, it’s your finances and how you keep track of them and maximise revenue for your tutoring business. This is where a tutoring business plan comes in handy, as you need to forecast spending and make sure you have the necessary resources to succeed.

Predictions are not always certain, but what you have to do is do as much research as possible in order to be as accurate as you can. Your business will grow over time, therefore the forecasting and budgeting will get more complex. That’s why it is important that not only essential but also relevant financial data is meticulously recorded in your books.

Invoicing is an extremely important part of tracking finances for your tutoring business. Invoices collect the charges that have been placed on your clients from lessons and ad hoc charges. When a company generates invoices, it can review each one before sending them to its clients. Clients that have received lessons will be able to see any sent invoices and pay for them from their accounts. They can be viewed from their own login, or they can be sent to their email address as well as an attachment.

At TutorCruncher, we create and generate those by default. We pretty much already have those templates created based on the company's address, logo and email etc. Here’s an example of a basic layout of the invoices that we generate

Companies can decide if they want to add additional text to those Invoice PDFs that get sent out as well. Sometimes they might want to have their own description of what’s included on the Invoice or to remind clients to double-check them etc. Here is where it’s displayed on the INV (Default Text)

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• ### Be concise

It’s really important that potential investors can understand what your business is all about from a quick glance at your plan. Make sure you include a summary of your business, and how it will make money right from the start using simple language throughout.

• ### Be specific

Being specific is just as important as being concise. The details will help you dive deeper into how you will actually deliver on your plan and promises.

• ### Know your market

A big part of knowing whether your business will be successful is understanding your audience. Make sure your plan is clear about your target market and that you have chosen them based on solid evidence. 

• ### Know your finances

If your business isn’t going to make any money, it won’t be successful so you need to be very clear on how you will make a profit. Your tutoring business plan will be incredibly useful when it comes to securing loans and investments if needed.

While starting, a business plan can serve as a plan of action. It is unlikely that you immediately want to secure loans or funding when starting, but creating a business plan can significantly clarify your next steps. Having guesstimates in your forecast can be risky in the long run, which means having experience in predicting your financial future might make forecasting more dependable. To get that experience, you can start with a business plan. Here's more information on setting up a business to check out.

Asking someone to commit to your tutoring business and sharing your passion before knowing the ins and outs is like asking them to buy a house without checking it out in person first. The spontaneity might seem fun at first but it is a huge commitment that needs a thorough evaluation. Using a business plan will help you convey your vision succinctly and show every relevant point to a potential partner.

A joint venture is an agreement between companies to share the work and the profit and have the same or similar goals. As a tutoring business, you could have this agreement with non-profit organisations or aided educational institutions. A business plan is a handy tool in this case to relay not just the vision of your business, but also all required information, like your projected profit and loss, your sales tactics, and anything else you might feel is relevant.

A good and well-written business plan will summarise your business’s history and background, which you will need to successfully communicate to banks and investors and secure financing. It is your opportunity to convince investors that your business will be a high-yield investment for their money. Lenders will want to see the actual potential in your business. Every detail from your marketing strategy to financial projection has to be presented to them to showcase that potential. This will be best done with a business plan.

Now that you have some in-depth knowledge about crafting a tuition business plan, here are 5 mistakes you should avoid to make your business plan foolproof:

• Every statistic and detail in your plan should be based on realistic data. Your plan should not have unrealistic financial projections. 
• Do not be inconsistent, your plan should quote consistent stats and have solid, unidirectional strategies.
• Be clear about what your business plan is. A business plan is not a detailed and defined budget. While a budget is part of it, the business plan is more than just your income and expenses. 
• Do not include too much information. The purpose of your plan is to be concise and to focus on the key elements of your tutoring business. 
• Make sure your plan is proofread multiple times. Include your team in the process. 

Wrap Up & Conclusion

Putting together a business plan for your tutoring company is a long but worthwhile endeavour. If you follow the template above, by the time you are done, you will truly be an expert. You will really understand the tutoring industry, your competition and your customers. You will have developed a marketing plan and will really understand what it takes to launch and grow a successful tutoring business. If you have any questions on getting started or setting up your tutoring business get in touch with us here at TutorCruncher, we’re here to help!

We build business management software for tutoring companies. Whether you are a small team or an established company, we can help you give your clients a 5-star service while spending less time on administration.

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Tutor Business Plan Template

Written by Dave Lavinsky

Over the past 20+ years, we have helped over 8,000 entrepreneurs and business owners create business plans to start and grow their tutoring service. On this page, we will first give you some background information with regards to the importance of business planning. We will then go through a tutoring business plan template step-by-step so you can create your plan today.

Download our Ultimate Business Plan Template here >

What is a Tutoring Business Plan?

A business plan provides a snapshot of your tutoring service as it stands today, and lays out your growth plan for the next five years. It explains your business goals and your strategy for reaching them. It also includes market research to support your plans.

Why You Need a Business Plan for a Tutoring Business

If you’re looking to start a tutoring service, or grow your existing tutoring service, you need a business plan. A business plan will help you raise funding, if needed, and plan out how you will grow your business in order to improve your chances of success. Your business plan is a living document that should be updated annually as your company grows and changes.

Sources of Funding for Tutoring Businesses

With regards to funding, the main sources of funding for a tutoring service are personal savings, credit cards, bank loans and angel investors. With regards to bank loans, banks will want to review your business plan and gain confidence that you will be able to repay your loan and interest. To acquire this confidence, the loan officer will not only want to confirm that your financials are reasonable. But they will want to see a professional plan. Such a plan will give them the confidence that you can successfully and professionally operate a business.

The second most common form of funding for a tutoring service is angel investors. Angel investors are wealthy individuals who will write you a check. They will either take equity in return for their funding, or, like a bank, they will give you a loan. Venture capitalists will not fund a tutoring service. They might consider funding a tutoring company with a national presence, but never an individual location. This is because most venture capitalists are looking for millions of dollars in return when they make an investment, and an individual location could never achieve such results.

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How to write a business plan for a tutoring service.

Your business plan should include 10 sections as follows:

Executive Summary

Your executive summary provides an introduction to your business plan, but it is normally the last section you write because it provides a summary of each key section of your plan.

The goal of your Executive Summary is to quickly engage the reader. Explain to them the type of tutoring service business you are operating and the status; for example, are you a startup, do you have a tutoring service that you would like to grow, or are you operating a network of tutoring businesses?

Next, provide an overview of each of the subsequent sections of your plan. For example, give a brief overview of the tutoring industry. Discuss the type of tutoring you are offering. Detail your direct competitors. Give an overview of your target market. Provide a snapshot of your marketing plan. Identify the key members of your team. And offer an overview of your financial plan.

Company Analysis

In your company analysis, you will detail the type of tutoring you are offering.

For example, you might operate one of the following types:

• Exam preparation : this type of tutoring company provides exam preparation and training materials for high school students, undergraduate students, and recent college graduates preparing for college entrance exams such as the SAT, ACT, GRE, etc.
• Primary school tutoring : this type of tutoring specializes in helping students in K-12. This type of tutoring is typically subject-specific – math, literature, history, etc.
• Occupational and advanced academics tutoring : agencies may sometimes specialize in occupational certification for those entering the workforce as engineers, mechanics, technicians, etc.

In addition to explaining the type of tutoring you provide, the Company Analysis section of your business plan needs to provide background on the business.

Include answers to questions such as:

• When and why did you start the business?
• What milestones have you achieved to date? Milestones could include placement goals you’ve reached, the number of new contracts, etc.
• Your legal structure. Are you incorporated as an S-Corp? An LLC? A sole proprietorship? Explain your legal structure here.

Industry Analysis

In your industry analysis, you need to provide an overview of the tutoring industry.

While this may seem unnecessary, it serves multiple purposes.

First, researching the tutoring industry educates you. It helps you understand the market in which you are operating.

Secondly, market research can improve your strategy particularly if your research identifies market trends.

The third reason for market research is to prove to readers that you are an expert in your industry. By conducting the research and presenting it in your plan, you achieve just that.

The following questions should be answered in the industry analysis section:

• How big is the tutoring industry (in dollars)?
• Is the market declining or increasing?
• Who are the key competitors in the market?
• Who are the key suppliers in the market?
• What trends are affecting the industry?
• What is the industry’s growth forecast over the next 5-10 years?
• What is the relevant market size? That is, how big is the potential market for your tutoring service? You can extrapolate such a figure by assessing the size of the market in the entire country and then applying that figure to your local population.

Customer Analysis

The customer analysis section must detail the customers you serve and/or expect to serve.

The following are examples of customer segments: elementary students, middle school students, high school students, etc.

As you can imagine, the customer segment(s) you choose will have a great impact on the type of tutoring you offer. Clearly, high school students would want different subject tutoring and would respond to different marketing promotions than professional certification clients.

Try to break out your target market in terms of their demographic and psychographic profiles. With regards to demographics, include a discussion of the ages, genders, locations and income levels of the customers you seek to serve. Because most tutors primarily serve customers living in the same city or town, such demographic information is easy to find on government websites.

Psychographic profiles explain the wants and needs of your target market. The more you can understand and define these needs, the better you will do in attracting and retaining your customers.

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Competitive Analysis

Your competitive analysis should identify the indirect and direct competitors your business faces and then focus on the latter.

Direct competitors are other tutoring services.

Indirect competitors are other options customers may use that aren’t direct competitors. This includes peers, teachers, or graduate students. You need to mention such competition to show you understand that not everyone who needs help with grade improvement and test preparation will hire a tutoring company.

• What types of customers do they serve?
• What types of tutoring services do they offer?
• What is their pricing structure (premium, low, tiered, etc.)?
• What are they good at?
• What are their weaknesses?

With regard to the last two questions, think about your answers from the customers’ perspective. And don’t be afraid to ask your competitors’ customers what they like most and least about them.

The final part of your competitive analysis section is to document your areas of competitive advantage. For example:

• Will you provide superior services?
• Will you provide services that your competitors don’t offer?
• Will you make it easier or faster for customers to engage your services?
• Will you provide better customer service?
• Will you offer better pricing?

Think about ways you will outperform your competition and document them in this section of your plan.

Marketing Plan

Traditionally, a marketing plan includes the four P’s: Product, Price, Place, and Promotion. For a tutoring service, your marketing plan should include the following:

Product: in the product section you should reiterate the type of tutoring that you documented in your Company Analysis. Then, detail the specific courses or subject help you will be offering. For example, in addition to high school level math tutoring, will you provide GED preparation, or will you be specializing in certification preparation for a specific occupation?

Price: Document the prices you will offer and how they compare to your competitors. Essentially in the product and price sub-sections of your marketing plan, you are presenting the services you offer and their prices.

Place: Place refers to the location of your tutoring services. Document your location and mention how the location will impact your success. For example, is your tutoring office located next to a high school or near a retail district, etc? Discuss how your location might provide a steady stream of customers.

Promotions: the final part of your tutoring marketing plan is the promotions section. Here you will document how you will drive customers to your location(s). The following are some promotional methods you might consider:

• Advertising in local papers and magazines
• Reaching out to schools and teachers
• Reaching out to local websites
• Social media marketing
• Local radio advertising

Operations Plan

While the earlier sections of your business plan explained your goals, your operations plan describes how you will meet them. Your operations plan should have two distinct sections as follows.

Everyday short-term processes include all of the tasks involved in running your tutoring service, such as serving customers, attracting future applications, processing paperwork, etc.

Long-term goals are the milestones you hope to achieve. These could include the dates when you expect your 100 th student to successfully improve their grades, or when you hope to reach $X in sales. It could also be when you expect your Xth student to excel at a specific exam, or when you expect to launch a new location.

Management Team

To demonstrate your tutoring business’ ability to succeed as a business, a strong management team is essential. Highlight your key players’ backgrounds, emphasizing those skills and experiences that prove their ability to grow a company.

Ideally, you and/or your team members have direct experience in teaching or tutoring. If so, highlight this experience and expertise. But also highlight any experience that you think will help your business succeed.

If your team is lacking, consider assembling an advisory board. An advisory board would include 2 to 8 individuals who would act like mentors to your business. They would help answer questions and provide strategic guidance. If needed, look for advisory board members with experience in education and/or successfully running small businesses.

Financial Plan

Your financial plan should include your 5-year financial statement broken out both monthly or quarterly for the first year and then annually. Your financial statements include your income statement, balance sheet and cash flow statements.

Balance Sheets : Balance sheets show your assets and liabilities. While balance sheets can include much information, try to simplify them to the key items you need to know about. For instance, if you spend $50,000 on building out your tutoring office, this will not give you immediate profits. Rather it is an asset that will hopefully help you generate profits for years to come. Likewise, if a bank writes you a check for $100,000, you don’t need to pay it back immediately. Rather, that is a liability you will pay back over time.

Cash Flow Statement : Your cash flow statement will help determine how much money you need to start or grow your business, and make sure you never run out of money. What most entrepreneurs and business owners don’t realize is that you can turn a profit but run out of money and go bankrupt. For example, let’s say a company approached you with a $100,000 contract for helping employees achieve certification, that would cost you $50,000 to fulfill. Well, in most cases, you would have to pay that $50,000 now for curriculum, employee salaries, etc. But let’s say the company didn’t pay you for 180 days. During that 180 day period, you could run out of money.

In developing your Income Statement and Balance Sheets be sure to include several of the key costs needed in starting or growing your tutoring service:

• Location build-out including design fees, construction, etc.
• Cost of equipment like software, office equipment, etc.
• Payroll or salaries paid to staff
• Business insurance
• Taxes and permits
• Legal expenses

Attach your full financial projections in the appendix of your plan along with any supporting documents that make your plan more compelling. For example, you might include your office design blueprint or location lease.

Putting together a business plan for your tutoring company is a worthwhile endeavor. If you follow the template above, by the time you are done, you will truly be an expert. You will really understand the tutoring industry, your competition and your customers. You will have developed a marketing plan and will really understand what it takes to launch and grow a successful tutoring service.

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Buss Course Companion

AQA AS Business Studies Unit1 (BUSS1)

Course Companion

AQA AS Business Studies Unit 1 (BUSS1) Course Companion

© Tutor2u Limited All Rights Reserved www.tutor2u.net

Publishers Information

AQA AS Business Studies Unit 1 Course Companion

2nd Edition June 2010

Author: Jim Riley

© Tutor2u Limited All Rights Reserved

No part of this material may be reproduced in whole or in part without the express written permission of Tutor2u Limited.

This publication is not endorsed or approved by AQA.

Tutor2u Limited

Boston House

214 High Street

Please contact [email protected] with details of any errors, omissions or suggestions for future editions.

Contents Introduction to AQA AS Business Unit 1 .....................................................................6 Section 1: Starting a Business ......................................................................................7 Enterprise and Entrepreneurs .......................................................................................8

Introduction.......................................................................................................................................... 8 Entrepreneurs ..................................................................................................................................... 9 Motives for starting a business ........................................................................................................... 9 Downsides of starting a business ..................................................................................................... 10 Risk and reward ................................................................................................................................ 10 Opportunity cost ................................................................................................................................ 11 Government and entrepreneurs ........................................................................................................ 12 Exam tips........................................................................................................................................... 13 Guided revision questions ................................................................................................................. 14

Generating and Protecting Business Ideas ............................................................... 15 Introduction........................................................................................................................................ 15 Sources of business ideas ................................................................................................................ 15 What makes a good idea? ................................................................................................................ 17 Franchises ......................................................................................................................................... 17 Protecting a business Idea ................................................................................................................ 19 Exam tips........................................................................................................................................... 20 Guided revision questions ................................................................................................................. 21

Transformation Resources into Goods and Services ............................................... 23 Introduction........................................................................................................................................ 23 Inputs to the transformation process ................................................................................................. 23 Outputs from the transformation process .......................................................................................... 24 Adding value ..................................................................................................................................... 25 Exam tips........................................................................................................................................... 26 Guided revision questions ................................................................................................................. 27

Business Plans ............................................................................................................. 28 Introduction........................................................................................................................................ 28 Limitations of a business plan ........................................................................................................... 29 Contents of a business plan .............................................................................................................. 29 Sources of information and guidance ............................................................................................... 30 Exam tips........................................................................................................................................... 31 Guided revision questions ................................................................................................................. 32

Market Research for a Start-up ................................................................................... 33 Introduction........................................................................................................................................ 33 What a Start-up Business Needs to Know ........................................................................................ 33 Secondary Data ................................................................................................................................ 34 Primary Research ............................................................................................................................. 35 Quantitative and qualitative research ................................................................................................ 37 Sampling ........................................................................................................................................... 38 Exam tips........................................................................................................................................... 40 Guided revision questions ................................................................................................................. 41

Understanding Markets ............................................................................................... 42 Introduction........................................................................................................................................ 42 Defining a market .............................................................................................................................. 42 Geographical markets ....................................................................................................................... 43 Factors affecting demand .................................................................................................................. 44 Introduction to market segmentation ................................................................................................. 47

Why use market segmentation? ....................................................................................................... 47 Demographic segmentation .............................................................................................................. 48 Geographic segmentation ................................................................................................................. 49 Limitations of market segmentation .................................................................................................. 50 Analysing market data ....................................................................................................................... 50 Exam tips........................................................................................................................................... 51 Guided revision questions ................................................................................................................. 53

Choosing a Legal Structure ........................................................................................ 54 Introduction........................................................................................................................................ 54 Comparing the different structures .................................................................................................... 55 Social enterprises .............................................................................................................................. 56 Exam tips........................................................................................................................................... 57 Guided revision questions ................................................................................................................. 58

Sources of Finance for a Start-up ............................................................................... 59 Introduction........................................................................................................................................ 59 Internal sources ................................................................................................................................. 60 External sources ............................................................................................................................... 60 Personal sources .............................................................................................................................. 61 Choosing the right source of finance ................................................................................................ 62 Exam tips........................................................................................................................................... 63 Guided revision questions ................................................................................................................. 64

Choosing the Business Location................................................................................ 65 Introduction........................................................................................................................................ 65 Factors affecting the choice of location ............................................................................................. 65 Technology & home-based start-ups ................................................................................................ 67 Exam tips........................................................................................................................................... 68 Guided revision questions ................................................................................................................. 69

Employing People ........................................................................................................ 70 Introduction........................................................................................................................................ 70 Full-time employees .......................................................................................................................... 71 Part-time employees ......................................................................................................................... 72 Temporary contracts ......................................................................................................................... 73 Consultants and advisers .................................................................................................................. 74 Flexible working ................................................................................................................................ 75 Exam tips........................................................................................................................................... 75 Guided revision questions ................................................................................................................. 77

Section 2: Financial Planning ..................................................................................... 78 Calculating Costs, Revenues and Profits .................................................................. 80

Meaning & importance of profit ......................................................................................................... 80 Measuring sales ................................................................................................................................ 81 Measuring costs ................................................................................................................................ 82 Exam tips........................................................................................................................................... 84 Guided revision questions ................................................................................................................. 85

Using Break-even Analysis in Decision-making ....................................................... 86 Introduction........................................................................................................................................ 86 Contribution ....................................................................................................................................... 86 Break-even level of output ................................................................................................................ 88 Using a table to calculate break-even output .................................................................................... 88 Using a formula to calculate break-even output................................................................................ 89 Using a chart to calculate break-even output .................................................................................... 89 Changes to break-even ..................................................................................................................... 93

Strengths and limitations of break-even analysis.............................................................................. 95 Exam tips........................................................................................................................................... 95 Guided revision questions ................................................................................................................. 97

Cash Flow Forecasting ................................................................................................ 98 Introduction........................................................................................................................................ 98 The nature of cash flow ..................................................................................................................... 98 How to forecast cash flow ................................................................................................................. 99 Why cash flow forecasting is important ........................................................................................... 101 Limitations of cash flow forecasting ................................................................................................ 102 Sources of information for cash flow forecasts ............................................................................... 103 Exam tips......................................................................................................................................... 103 Guided revision questions ............................................................................................................... 104

Setting Budgets .......................................................................................................... 105 Introduction...................................................................................................................................... 105 Why businesses use budgets ......................................................................................................... 106 Sales budget ................................................................................................................................... 106 Expenditure budget ......................................................................................................................... 107 Profit budget .................................................................................................................................... 108 Methods of setting the budgets ....................................................................................................... 108 Limitations of budgets ..................................................................................................................... 109 Exam tips......................................................................................................................................... 109 Guided revision questions ............................................................................................................... 110

Assessing Business Start-ups .................................................................................. 111 Introduction...................................................................................................................................... 111 The risks of business failure............................................................................................................ 113 Assessing the business plan ........................................................................................................... 114 Exam tips......................................................................................................................................... 115 Guided revision questions ............................................................................................................... 116

Mini Case Studies....................................................................................................... 117 Examination Technique ............................................................................................. 121

Introduction to BUSS1 ..................................................................................................................... 121 How you are assessed .................................................................................................................... 121 Top tips for exam success .............................................................................................................. 123

Introduction to AQA AS Business Unit 1

This course companion provides you with a comprehensive set of notes and revision questions for the new AQA AS Business Studies specification for Unit 1 (BUSS1).

BUSS1 is named “Planning and Financing a Business”.

The focus of BUSS1 is on starting a small business. The important word there is small. As in:

• A business with very few resources (finance, people, assets)

• Operating in local or national markets (though it may grow later to operate in international markets)

• A business with no existing customers

You need to remember this emphasis on small businesses. It affects the actions the business can take and the options available to it.

Our Course Companion closely follows the structure of the BUSS1 specification. We’ve also picked out the most important elements and given them special emphasis, so you can be sure that you have a set of notes here that will help you prepare effectively for the exam.

We would also encourage you to visit the tutor2u BUSS1 daily blog, on which we’ll provide you with further support during your studies.

The study notes in this Companion are organised by topic under each of the main specification headings. Access them using the menu bar at the top of every page (interactive version only). If you need to print them out at any time, just right-click on the page content and choose your printing options.

Please note that these resources are protected by copyright, and must not be reproduced or sold. That’s a good example of a small business protecting its business ideas (section 2!)

Section 1: Starting a Business

It seems appropriate that the start of your AS Business Studies course asks you to consider what is involved in starting a business!

Section 1 of BUSS1 is all about the process of starting a small business. What you'll cover in this section is highly practical. Over 400,000 small businesses are started in the UK every year. The entrepreneurs behind these start-ups look at the very issues you'll cover in this section.

Here are the key topics you cover in Section 1:

• Why entrepreneurs start new businesses and what it takes to succeed

• Where the ideas for start-ups come from and how a good business idea can be protected

• The key concepts of risk, reward and opportunity cost

• The ways in which a business can add value to a product so that profits can be made

• Putting a business plan together, both to raise finance and also to make sure that the risks of the start-up are properly understood

• Using market research to support the business plan and help the entrepreneur understand the size and structure of the market, and how much competition the new business will face

• Raising finance - one of the toughest challenges for a start-up

• The key factors that the start-up must address when it comes to choosing a location for the business

• What kind of employees (if any) to bring into the business

The main focus on Section 1 is on business planning. Each of the activities that are covered is brought together into the business plan. Later on in the course, you get the chance to assess how successful the business planning of a start-up has been.

Enterprise and Entrepreneurs

Introduction

The long line of budding entrepreneurs and publicity-seekers climbing the stairs into the Dragon’s Den is proof that enterprise has captured the imagination in the UK. The sheer variety of product and business ideas pitched to the Dragons suggests that it is quite easy to come up with a new business concept. The problem is that turning an idea into a successful business is actually quite difficult!

The difficulty of running a business doesn’t seem to put people off! In the UK there are around 4.5 million separate businesses, of which 3.3 million have no staff.

The vast majority of businesses in Britain are small. Only 6,000 businesses have more than 250 staff.

Every year, a substantial number of new businesses are formed. Figures released by Barclays in July 2008 showed that there were 409,000 start-ups in the year to March 2008. Unfortunately, in the same period, 458,000 businesses closed. Many start-ups don’t survive much beyond their third birthday – but still people keep “stepping up to the plate” to have a go.

Your BUSS1 course encourages you to study the process of starting a business, looking at the skills, challenges and pitfalls that face every entrepreneur.

This introductory section is important since it goes right to the heart of the business start-up process. Here’s what you need to know:

• What is meant by the terms “enterprise” and “entrepreneur” • Why entrepreneurs take risks and what rewards do they want in return? • What is meant by the concept of “opportunity cost”? • The other motives (in addition to financial returns) for starting a business • How government provides support to encourage enterprise and new businesses

Entrepreneurs

In recent years the media have glamorised the challenge of starting and growing a business. A quick search on Amazon.co.uk will display many books by entrepreneurs and other “business experts” describing “how they made it”, “my first million” etc. Prime-time television shows such as Dragons Den, Risking it All and The Apprentice have proved hugely popular by showcasing the challenges faced in setting up a business. Entrepreneurs such as Sir Alan Sugar, Sir Richard Branson and Sir James Dyson have earned enormous fortunes and provide inspiration for the next generation of budding business leaders.

Entrepreneurs play an important role in society. They make a major contribution to economic activity. Imagine how many jobs are created by the 400k+ start-ups each year and by the small businesses that prosper and take on more staff. They encourage innovation through investment and risk-taking. Many of the products and services you use on a day-to-day basis have been developed through entrepreneurial activity rather than in the research laboratories or board-rooms of large multinationals.

However, it is important to realise that starting a business is rarely glamorous. In fact it is nearly always very hard work. For every success story there are almost certainly many more business failures or businesses that don’t meet the expectations of the people who set them up.

Entrepreneurs take on the challenge of starting and growing a business. What characteristics are required to help them succeed?

Not surprisingly, much research has been done to examine the personality and other characteristics of successful entrepreneurs to see if there is a proven method or route to success. You will find many lists of “what is takes to be an entrepreneur”, but they tend to say the same things. So here is a summary of the key findings!

Key characteristics of successful entrepreneurs:

• Passionate about their product or service and about getting things right for the customer • Visionary – they have faith in what they are trying to do • Energetic and driven – prepared to work consistently long hours, especially in the early

stages • Self-starting and decisive – they don’t wait for others to take decisions • Calculated risk-taking – not reckless; they are prepared to take a risk in order to

maximise the rewards • Multitasker – able to take on more than one role (product development, selling,

recruitment) • Resilient – able to handle problems and overcome hurdles • Focused – sets clear goals and self-imposed high standards • Results-orientated – take pleasure from achieving targets and setting the bar higher

The important thing to remember about the list above is that an entrepreneur is unlikely to possess all these characteristics! Anyone who starts a business has strengths and weaknesses. However, the savvy entrepreneur recognises where his/her weaknesses lie and takes steps to address them (e.g. recruit someone with the right skills).

Motives for starting a business

What motivates someone to become an entrepreneur?

Money of course! The chance to earn significant profits, buy a yacht, take numerous holidays, buy designer goods and send the kids to the best private schools.

But, wait a minute! Is money and personal wealth really the main motivation?

Evidence suggests that there are many more reasons why someone wants to start a business.

Here are some of the motives that are often quoted by entrepreneurs:

• More control over working life – want to choose what kind of work is done • Need a more flexible work schedule, including being able to work from or close to home • Feel that skills are being wasted and that potential is not being fulfilled • Want to escape an uninteresting job or career • A desire to pursue an interest or hobby • Fed up with being told what to do – want to be the boss! • Want the feeling of satisfaction from building a business • Want more of the rewards from the effort being put in • Fed up with working in a business hierarchy or bureaucratic organisation • As a response to a change in personal circumstances – e.g. redundancy, illness,

bereavement

Downsides of starting a business

The BUSS1 textbooks (there are eight of them!) focus almost entirely on the positive reasons for starting a business. However, there are many potential drawbacks to being an entrepreneur.

Running a business means that an entrepreneur will:

• Face occasional loneliness and isolation. This is often the case for home-based start-ups.

• Be unable to blame others when things go wrong – the buck stops with the entrepreneur • Probably be under financial pressure – earning little or sometimes nothing as the

business tries to establish itself • Have to work much harder than in a conventional job – average working of 70+ hours per

week is common. This puts a great strain on family and social life • Probably suffer from higher stress levels • Have to rely on multi-tasking rather than call on an established network of specialists

(available in a larger business) • Usually have to work whilst sick, and not get sick pay • Experience a roller-coaster of emotions

Put simply, starting a new business is not for the faint-hearted!

Risk and reward

If setting up a new business was risk-free (i.e. a “dead-cert”) then we’d all do it. The bad news for entrepreneurs is that investing in a start-up is risky.

What is the risk? The main risk is that the business will fail and that the entrepreneur will lose his/her investment. In the case of a sole trader or partnership, the entrepreneur may also end up personally liable for the debts of the failed business (an important reason why savvy start-ups use private limited companies as their form of business organisation).

Another risk is that a failed business will leave the entrepreneur struggling to finance another business or getting a normal job.

And yet another risk is the stigma of failure itself. There is no reason why people should be ashamed of failing in business, but in reality they are.

Taken together, you can see why these risks are often the motivation for an entrepreneur to keep going, even when the business is struggling badly. When you are “risking it all” then you put heart and soul into making the business a success.

So what about the rewards?

We looked earlier at the motivations for setting up a business. Many of the intangible rewards that arise from being in business happen because these motives are achieved. A sense of satisfaction, being in control, making that first sale, achieving break-even or getting great feedback from customers. These are the kind of rewards that give entrepreneurs a buzz.

However, ultimately, it is the financial rewards that justify the effort and make taking the risk worthwhile.

To illustrate the potential financial rewards, here are a couple of examples:

• Karen Darby sold her business SimplySwitch, a service allowing consumers to compare rates for gas and electricity suppliers among other things, to the Daily Mail for £22 million.

• Linda Bennett, one of Britain’s most successful female entrepreneurs, sold her women’s fashion chain, LK Bennett, to two venture capitalists for £70 million.

[note: there is a strong tradition of entrepreneurs who have built and sold one business for a substantial amount going onto build other successful businesses. They never lose the entrepreneurial buzz. Such people are called “serial entrepreneurs”]

Opportunity cost

This is an important concept that applies to much of your studies in BUSS1.

Opportunity cost arises whenever a business decision is taken.

The opportunity cost of a decision is the cost of missing out on the next best alternative. It refers to the benefits that could have been obtained by taking a different decision.

If you think about the decisions an entrepreneur takes, then it is possible to identify the possible opportunity costs. Here are some examples:

Decision Opportunity Cost

Mark decides to leave his job as a Bank Manager and set up a franchise

The loss of salary and other benefits from working at the bank

Sheila spends her start-up marketing budget of £15,000 on a direct mailing campaign

The £15,000 could have been spent on a radio and magazine advertising campaign, or a lower amount spent on marketing with the balance saved

To finance his start-up, Gavin takes out a £100,000 bank loan on which interest of 10% will be paid

The annual £10,000 interest to be paid on the loan could been used to invest in extra production capacity, if Gavin had invested his own funds in the business

Although this is an important concept in your BUSS1 course, in reality, entrepreneurs don’t spend lots of time agonising over opportunity costs. In fact, most entrepreneurs won’t recognise the term.

However, they do weigh up alternatives and, using a combination of calculation and instinct (“gut feel”), they make the decisions that they believe are best for the business.

Government and entrepreneurs

It is interesting that the AQA course asks you to study how governments help entrepreneurs. When you speak with successful entrepreneurs, they will often claim that their achievements are in spite of government action rather than because of government support!

Nevertheless we have to cover this, so here are the key points.

Firstly, you should appreciate that government likes enterprise and entrepreneurial activity. As mentioned earlier, entrepreneurs:

• Create jobs and help keep unemployment low • Invest and innovate • Generate substantial export earnings • Pay substantial amounts of tax • Encourage competition in markets

So what help does government provide to entrepreneurs? Here are the key elements:

Business Link Advice on how to start, run or grow a business; includes a superb website

Department for Business, Enterprise and Regulatory Reform (“BERR”)

The main government department that coordinates the support provided to businesses. BERR also provides funding for various business support organisations. Website click here

Companies House Manages the formation, administration and closure of companies, including the provision of company information. Website click here

UK Trade & Investment Provides business opportunities, expert trade advice and support to UK-based companies wishing to grow their business overseas. Website click here

Competition Manage competition regulation and provide support and advice

Commission & Office of Fair Trading

regarding the treatment of consumers. OFT website here.

Regional Development Agencies

Nine regional organisations (in England) that channel government investment and support into key priorities. Website click here

Government Grants Not available to all businesses. Grants are available from several sources, such as the government, European Union, Regional Development Agencies, Business Link and local authorities. Website click here

Risk is not something for an entrepreneur to fear. It is a part of business life. The challenge is to identify the key risks, evaluate them, and then make decisions using sound judgement. It is relatively easy to start a new business in the UK. The support provided by the government for entrepreneurs is limited - few start-ups make use of government help. Running a start-up is always tough - even a successful business might seem to have many problems and challenges to overcome. Remember this when the examiner describes a business that seems to be in trouble. It is vital that you are able to describe the reasons why people want to become entrepreneurs and the characteristics that successful entrepreneurs tend to have.

Guided revision questions

Revision questions for Enterprise & Entrepreneurs

(1) Define the term “entrepreneur” (2 marks)

(2) What do you understand by the word “enterprise”? (2 marks)

(3) Give three characteristics of a successful entrepreneur (3 marks)

(4) Explain what is meant by the terms “risk” and “reward” (4 marks)

(5) State three possible problems that might be faced by an entrepreneur starting a business for the first time (3 marks)

(6) Define the term “opportunity cost” and give an example for a management consultant who leaves her job to set up an e-commerce business (4 marks)

(7) Explain why the time of an entrepreneur is an important aspect of opportunity cost for a start-up (5 marks)

(8) Give three reasons why it is important for a developed economy to encourage enterprise and entrepreneurship (4 marks)

(9) Suggest two ways in which the government could encourage more people to start their own businesses (4 marks)

Generating and Protecting Business Ideas

This section of BUSS1 covers questions such as:

• Where does an entrepreneur get a good idea that can be turned into a successful business?

• Is it possible to identify the characteristics of a good business idea (i.e. one with potential) as compared with ideas that are likely to fail?

• Once found, how can a good business idea be protected, if at all, against unfair copying? • Should an entrepreneur develop his/her own idea, or is it better to invest in setting up a

business using an existing business format (e.g. franchising)?

As you work through this section, you might find the following equation helpful:

Good idea + Entrepreneur = Business Potential

This equation isn’t a mathematical formula. It is intended to point out that, for a start-up business, it is not enough to just have a good idea. The idea needs to developed, refined and exploited by the entrepreneur in order to achieve the business potential. Business history is littered with good ideas that were not successfully exploited by the first person who thought of them!

Sources of business ideas

The main sources of business ideas for a start-up are summarised below:

Business experience

Many ideas for successful businesses come from people who have developed experience of working in a particular market or industry. For the start-up, there are several advantages of applying this experience to a new business:

• Better insights into customer needs and wants

• Knowledge of competitors, pricing, distribution channels, suppliers etc

• Less need for start-up market research

• More realistic assumptions about sales, costs

• Industry contacts, who might then become the first customers of the start-up!

All of the above help the business planning process and you could argue that they reduce the risks of a start-up.

On the other hand, you might argue that “familiarity breeds contempt”. In other words, detailed experience of an industry means that the budding entrepreneur doesn’t have a fresh perspective. Someone who is new to a market may be able to exploit approaches that have worked in other industries to make an impact with the start-up.

Personal experience

Many ideas come to entrepreneurs from their day-to-day dealings in life, or from their hobbies and interests.

For some of us, frustrating or bad experiences are a source of irritation. For the entrepreneur they might suggest a business opportunity.

It is often said that one of the best ways to spot a business opportunity is to look for examples of poor customer service (complaints, product returns, persistent queues etc). Such examples suggest that there is an opportunity to do something better, quicker or cheaper than the existing products.

Hobbies and interests are also a rich source of business ideas, although you have to be careful to avoid assuming that, just because you have a passion for collecting rare tin openers, there is a ready market from people with similar interests. Many people have tried to turn their hobby into a business and found that generates only a small contribution to household income.

Observation

Simply observing what goes on around you can be a good way of spotting an idea. Often an idea will be launched in another country and has not yet been tried in other, similar economies. When Stephen Waring was in the USA attending a wedding, by luck he sat next to someone who ran a household service business (treating lawns). After some brief market research, Stephen found out that there was no similar business in the UK, so he launched one. It has since become a hugely successful franchise business – Green Thumb.

It is worth looking at some other examples of how successful start-ups got their ideas in order to appreciate the diversity of sources. Here are some good ones:

Business Entrepreneur Where the Idea Came From

Glasses Direct James Murray- James was fed-up with being charged “rip-off prices” for

Wells prescription glasses. He researched the supply chain and found he could offer consumers the same product at substantially cheaper prices by selling direct.

King of Shaves Will King Will found traditional wet-shaving painful due to his sensitive skin. His girlfriend suggested using oil to smooth the process. An oil-based solution to shaving was developed and is now a world leader.

Tyrrell’s Crisps Will Chase Will needed to find an alternative use for the output from his loss-making potato farm. He added value to the potatoes by turning them into premium-priced crisps.

Superjam Fraser Doherty Fraser turned his grandmother’s recipe for sugar-free jams into a best-selling grocery brand.

Beautiful Vending

Neil Mackay & Richard Starrett

Neil & Richard spotted the potential for grooming machines whilst working in entertainments industry.

Jo Jingles Gill Thomas Gill made a lifestyle choice to move out of the corporate world and set up her own business. She combined her personal interest in teaching music to children with an idea for a franchise format.

What makes a good idea?

Having an idea for a business is the easy bit. It is much harder to work out whether the idea has potential.

Good business ideas tend to have one or more of the following characteristics:

• Solve a problem • Offer a cheaper or better way of doing things than existing products or services • Are simple and practicable • Can be developed and delivered to the market quickly • Have a clear focus on meeting the needs of the target customer • Anticipate market trends and exploit growth opportunities

As we mentioned earlier, a business idea for a start-up doesn't have to be original. Many new businesses are formed with the intention of offering an existing business idea. The use of franchises is a great example of that.

The basic idea for a franchise is this. A franchisor grants a licence (the "franchise" to another business (the "franchisee") to allow it to trade using the brand or business format. That might sound a bit complicated! The trick is to remember that the franchisor is in charge - the franchisor is the original owner of the business idea.

Franchises are a significant part of business life in the UK and other developed economies. Here are some quick statistics that illustrate that:

• Franchises generated annual sales of £12.4 billion in the UK in 2007 • There are over 800 different franchised business formats in the UK and that number is

rising by around 5% each year • The average sales turnover per franchise outlet is £360,000 • 90% of franchises are reported to be profitable • A franchise has average borrowings of £70,000, suggesting that banks are happier to

make loans to franchise businesses than other start-ups • The typical franchisee is aged 47. 66% are men and 86% of franchisees are married! • Franchises are particularly popular in the service (tertiary) sector.

For a start-up entrepreneur, there are several advantages to investing in a franchise:

• It is still your own business • The investment should be in a tried and tested format and brand • The franchisee gets advice, support and training • It is easier to raise finance - the high street banks have significant experience of

providing finance to franchises • No industry expertise is required in most cases • The franchisee benefits from the buying power of the franchisor

Overall, investing in a franchise is a lower risk method of starting a business & there is a lower chance of business failure

However, as with all business decisions (remember opportunity cost!) there are several disadvantages for the franchisee:

• Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up

• There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business

• There is always a risk that the franchisor will go out of business • The franchise needs to earn enough profit to satisfy both the franchisee and franchisor -

there may not be enough to go round!

In terms of your BUSS1 exams, here are some key points to remember about franchises:

There are many good franchise opportunities available for a start-up, but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise

A franchise is a kind of "halfway house" for a budding entrepreneur. It is a lower risk method of market entry and it is often easier to raise finance. However, running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.

Protecting a business Idea

Have you ever wondered what the TM letters mean when you see them next to a business name, logo or brand? Ask some entrepreneurs about TM and they will tell you that it stands for "Totally Meaningless", and they would have a point. It is often difficult to protect a business idea, whether the entrepreneur tries to use a registered trademark, patent or by using the protection of copyright. Nevertheless, it is worth trying to gain protection where available.

You should remember that a small business does not have to be based on an invention or innovative product design. It is more important that there are sufficient customers that want to buy the product.

However, if the entrepreneur has come up with an invention, an innovative name or design on which the business is based, then the law provides a variety of protection methods to prevent other people from copying the idea. It is not enough to rely on these protections or the law. A start-up or small business needs to be on the lookout for "pirates" so that it can take action.

Protecting a business idea is really about protecting the "intellectual property" (often shortened to "IP") of the business. The owner of IP can control, and be rewarded for, its use. For example, they can sell IP, hire it or licence it out. The problem is that IP is quite easy for other people to steal or use without permission. Anyone who has downloaded pirate mp3 files is guilty of this theft, as are the many vendors of pirated goods that you come across in city centres and car boot sales around the UK.

The main kinds of legal protection are summarised below:

A common question asked of applicants on Dragons Den is "have you got patent protection"? However, there are some strict rules that must be applied in order for a patent to be granted. In order for a patent to be granted, the invention must be:

(2) Be an innovative step (i.e. not obvious to other people with knowledge of the subject)

(3) Be capable if industrial application (i.e. it can be made and used!)

(4) Not be excluded (certain types of invention don't count - e.g. scientific theories, artistic creations)

If granted, a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner. A patent can last for up to 20 years.

A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention. For example, a patent owner could grant a larger manufacturing business the right to use the idea in a product, in return for a royalty.

Actually, TM does not stand for "Totally Meaningless". A trademark ("TM") is something that identifies a product in the eyes of the customer. In other words, the customer recognises the symbol, logo or name because it is distinctive!

Registering a trademark gives a business the right to prevent others from using an identical or confusingly similar mark on goods and services that are the same (or similar) to the trade-marked product. Once granted, protection lasts for 10 years.

This is an important protection for many businesses, particularly in areas such as media, design and publishing.

Copyright is an automatic right that protects the way an original idea is expressed in a piece of work. That work might be a book, a website, a film, musical composition etc. Copyright protection for the author of the work lasts for 70 years after the author's death - i.e. for a long time! Copyright comes into effect as soon as a work is created.

The owner of copyrighted content can control how the work is exploited, for example by licensing others to publish the work in return for a licence fee or royalty.

Remember that the best business ideas are usually copied, often very quickly, by other competitors. Relatively few start-ups are able to get protection from patents, copyright or trademarks. The best protection for a small business comes from delivering a great product and building customer loyalty.

Make sure you know the precise difference between a trademark, patent and copyright. They offer different kinds of protection. Patents, in particular, are quite difficult to obtain.

You should appreciate that a start-up doesn't have to have a new idea. It might be focusing on doing the same thing as a competitor, only cheaper, quicker or better.

Small businesses are also constrained by their time and resources. A business idea often comes from personal or business experience, and is developed whilst the entrepreneur is working for someone else!

Revision questions for Generating and Protecting Business Ideas

(1) Outline three factors that can determine the success of a new business idea (6 marks)

(2) Explain why it is not enough simply to have a good business idea for a new business to succeed (6 marks)

(3) What is meant by "brainstorming"? (2 marks)

(4) Explain why start-up businesses are often started by people with significant business experience in the relevant market (4 marks)

(5) Define the term "market niche" (2 marks)

(6) Explain what is meant by the term "gap in the market" (4 marks)

(7) Identify an example of a niche product in each of the following markets: (8 marks)

(1) Overseas holidays or travel

(2) Consumer electronics

(3) High street retailing

(4) Magazines or newspapers

(8) Why might it be the case that a large business would not compete in a small niche market? (4 marks)

(9) Briefly describe two key factors that an entrepreneur would need to consider before targeting a market niche (4 marks)

(10) What do you understand by the term "USP"? (2 marks)

(11) Outline three factors that would help an entrepreneur assess how attractive a target market is for a start-up opportunity (6 marks)

(1) List four examples of a business format franchise operating in the UK (4 marks)

(2) Explain the difference between a "franchisor" and a "franchisee" (4 marks)

(3) Outline two advantages and two disadvantages of setting up a new business to run a franchise (4 marks)

(4) List four parts of the support package that a franchisee could expect to receive from a franchisor (4 marks)

(5) Explain why franchises tend to operate in the tertiary (or service) sector (4 marks)

(6) Outline the main advantages to a franchisor or using franchises as part of a growth strategy (4 marks)

Protecting business ideas

(1) List the three main ways in which a business can protect its ideas (3 marks)

(2) Outline two reasons why a business would want to protect a good business idea (4 marks)

(3) Define the term "patent" (2 marks)

(4) Explain why a start-up might struggle if the success of the business largely relies on a successful patent application (4 marks)

(5) Briefly explain why the development and protection of intellectual property is increasingly important for businesses start-ups in tertiary industries such as software development, media and design (6 marks)

(6) What type of business idea could be protected by copyright? (2 marks)

(7) Explain the difference between a patent and a trademark (4 marks)

Transformation Resources into Goods and Services

A good way to think of a business is to imagine inputs entering an imaginary black box. What come out of the box are outputs. The black box is the business – what is does how it does it and so on.

A new business needs resources in order to trade. The activities of a new business should be designed to turn those resources into products and services that customers are willing to pay for. This process is known as the “transformation process”.

If the value of what customers pay for the outputs is more than the cost of the inputs, then the business can be said to have “added value”.

So, in summary, the transformation process is about adding value.

That sounds pretty theoretical. So, let’s take a look at some practical examples of what is involved in the transformation process.

Inputs to the transformation process

In order to make products and deliver services, a business needs resources – i.e. inputs. The textbooks often refer to these as “factors of production”, which is a slightly boring way of describing real resources such as:

Labour – the time and effort of people involved in the business: employees, suppliers etc

Land – think of this as the natural resources that are used by the business – e.g. actual land, energy, and other natural resources

Capital – capital includes physical assets such as machinery, computers, transport which are used during production. Capital can also include finance – the investment that is required in order for the business activities to take place.

Enterprise – enterprise is the entrepreneurial “fairy-dust” that brings together or organises the other inputs. The entrepreneur takes the decisions about how much capital, what kind of labour etc and how & when they are needed in the business. You will probably agree that enterprise is the most important input for a successful business.

Inputs by themselves are rarely enough for a start-up to succeed. They need to be the right kind of inputs, in the right mix. So, for example, a successful entrepreneur will be keen to ensure:

High quality people are employed (the best the business can afford at each stage of development) and that these people are retained and invested in (training)

Capital investment is focused on efficiency and quality – use of modern machinery or IT systems of the right kind can have a significant effect whether a small business is able to compete

Outputs from the transformation process

The outputs of business activities are reflected in the products and services sold to customers. It is quite useful to think of ways in which similar business activities can be grouped based on those outputs.

Economists and business examiners alike have traditionally categorised the outputs from the transformation process into these three groups:

Sector Businesses involved in…

Primary Extraction of natural resources (e.g. oil, gas) and farming activities

Secondary Production of finished goods and components (e.g. flat-screen TVs, computer memory chips, games consoles, industrial equipment, motor vehicles. The secondary sector is also often referred to as the “manufacturing sector”.

Tertiary Providing a service of some kind. E.g. health, travel, legal, finance, building, security. The list of potential services is endless. Think of this as any business activity that involves people doing things for you! Retail businesses are in the tertiary sector.

In recent years, some textbooks have also suggested that there is a fourth sector – the Quaternary sector. The quaternary sector consists of those industries providing information services, such as computing and ICT (information and communication technologies), consultancy (offering advice to businesses) and R&D (research, particular in scientific fields).

In most textbooks you will see the outputs of the Quaternary sector included in the tertiary sector. Don’t worry; the distinction isn’t important. What is important is that you remember that the Tertiary sector in the UK has grown strongly over recent decades and now accounts for about 75% (three quarters) of all business activity.

Importantly for AQA Unit 1, most start-up businesses are in the tertiary sector.

A final word about the categorisation of business activities (outputs) into sectors. Remember that is perfectly possible for a single business to be operating in more than one sector.

For example, many farms in Britain (farming = primary sector) also offer holiday accommodation (tertiary sector) and produce processed foods such as cheese and ice-cream from farm supplies (secondary sector).

Here is another example. Morrison’s supermarkets (i.e. tertiary sector - one of the four largest supermarkets in the UK) also own and operate its own factories that make many of the food products sold in store (secondary sector).

Adding value

Adding value sounds like a bit of business jargon – and it is! However, it also has quite a precise meaning which is important. So it is worth learning this…

Adding value = the difference between the price of the finished product/service and the cost of the inputs involved in making it.

It is relatively easy to think of some examples of how a production process can add value.

You may remember the adverts showing part-built cars rolling down the production line being assembled by robots. The final, completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts. Value has been added. How much value is determined by the price that a customer is persuaded to pay.

Alternatively, imagine Gordon Ramsay preparing some fish for a meal at Claridge’s. 30 minutes of cooking later the meal is being served for a high price, substantially more than the cost of buying the ingredients. Value has been added.

You don’t have to use robots or have the culinary skills of Gordon Ramsay to “add value”. For example, businesses can add value by:

• Building a brand – a reputation for quality, value etc that customers are prepared to pay for. Nike trainers sell for much more than Hi-tec, even though the production costs per pair are probably pretty similar!

• Delivering excellent service – high quality, attentive personal service can make the difference between achieving a high price or a medium one

• Product features and benefits – for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect.

Finding ways to add value is a really important activity for a start-up or small business. Quite simply, it can make the difference between survival and failure; between profit and loss. The key benefits to a business of adding value include:

• Charging a higher price

• Creating a point of difference from the competition

• Protecting from competitors trying to steal customers by charging lower prices

• Focusing a business more closely on its target market segment

The concept of "adding value" is an important one in BUSS1. You should think about how different kinds of business can add value, but also how they can keep their business simple and low-cost (i.e. not add too many "bells and whistles" that customers are not prepared to pay for).

Look out for low profit margins as a sign that the BUSS1 case study business is not adding sufficient value. Are input costs too high? Is the selling price of the output too low?

Remember that the transformation process (inputs turned into outputs) isn't just about physical things. Service sector businesses also have a transformation process – e.g. the time of people + creative skills and software turned into services.

Revision questions for Transforming Resources into Goods and Services

(1) What are the four factors of production? (4 marks)

(2) State, with an example of a business in each, the three main sectors of the UK economy (6 marks)

(3) Explain what is meant by the term “adding value” (2 marks)

(4) Give an example of how a business could operate in both the primary and secondary sectors (4 marks)

(5) Which industry sector is largest in the UK? (2 marks)

(6) Distinguish, using an example, between an input and an output (4 marks)

Business Plans

There is no doubt that the physical process of writing a business plan is one of the most boring activities that a start-up entrepreneur has to do. However, it is also perhaps the most important part of the start-up process.

The business plan brings together the answers to the key questions that any start-up must be able to answer:

• What is the product and how is it different or unique? • What is the target market segment and who are the potential competitors? • Who are the customers; how much will they buy and at what price? • What will it cost to produce and sell the product? • At what stage will the business break-even and what are the likely profits? • What investment is required to launch and establish the business? • Where will the money come from and what type of finance is required?

Answering these questions honestly is crucial if the start-up is to stand a chance of getting off the ground. The questions get answered in the business plan. The plan might be a one page summary, or a detailed 30 page booklet with many appendices. The format doesn't matter. What matters is the process of putting the plan together and how the plan is used.

Here are the main reasons why a start-up should have a business plan:

• Provides a focus on the business idea - is it really a good one, and why? • Producing a document helps clarify thoughts and identify gaps in information • The plan provides a logical structure to thinking about the business

• It encourages the entrepreneur to focus on what the business is really about and how customers and finance-providers can be convinced

• It helps test the financial viability of the idea - can the business achieve the required level of profitability

• The plan provides something which can be used to measure actual performance • A business plan is essential to raising finance from outside providers - particular

investors and banks

The above list will prove helpful in your BUSS1 exams. If the examiner asks a question about business planning, it is important to remember that the plan is about more than just raising money from the bank or investors

Limitations of a business plan

Business planning is not an easy process. For a start-up, the plan is often produced with incomplete or out-dated information, it can be time-consuming and there is a danger than the financial forecasts produced might create misplaced optimism about the business prospects.

For the entrepreneur, a common complaint is that he/she does not have time to plan. A detailed business plan is certainly time-consuming, although there are plenty of resources available to help The trick is to remain well organised, to do enough (but not too much market research) and to seek help (ideally free) when needed.

Contents of a business plan

For a start-up there are usually two kinds of business plan - a simple one and a detailed one. Some businesses need to produce both.

We'll take you through the main contents of these types of plan, but first a word of caution. The main thing to remember in BUSS1 is why a reader of a business plan would want to know the information provided. The purpose of the plan needs to suit the audience for the plan; it should be written with the reader in mind.

The simple business plan is rarely shown to outsiders of the business. It is written by the entrepreneur, for the entrepreneur. The simple plan helps summarise the key aims and targets of the business and the actions required to make the business a reality. It is likely to be written in quite an informal way. What would go into the simple plan? Areas such as:

The idea - a simple description of the proposed business

• Where the idea came from and why it is a good one • Key targets for the business - sales, profit, growth (gives a sense of direction for the

business), ideally for the next 3-4 years • Finance required - how much from the founder, how much to be loaned over how loan

and from who • Market overview - main segments, market size (value, quantity), growth, market shares

of main competitors (if known) • How the business will operate (location, premises, staff, distribution methods) • Cash flow forecast (important) + trading forecast

The detailed business plan is needed if a more complicated or larger business is planned as a start-up, or if the entrepreneur needs to raise money from business angels or get a substantial loan from a bank. There are hundreds of books and other guides which are designed to help the

production of such plans. Banks and firms of accountants provide specialist support for this kind of document. However, in terms of your BUSS1 course, the main thing is to know what needs to go into the detailed plan. So here is a summary of the key content:

Executive summary: a brief 1-2 page summary of the detail! Should contain nothing new, but highlight the key points

Market: a profile of the target market segment based on market research

Product: what it is and how it is differentiated from existing products in the market (the "unique selling point")

Competition: an honest description of the competition in the target market - what they do well, their weaknesses and their likely response once the start-up has entered the market

Protecting the idea: how the product and business can be protected from competition - e.g. patents, trademarks, distinctive approaches to marketing or distribution that competitors will find hard to replicate

Management team: a crucial area for any investor. Who is involved in the start-up and what will they be doing? What experience and expertise do they bring? Which management roles will need to be filled as the business grows? Appendices should contain the employment histories of key management.

Marketing: the key elements of the marketing mix should be explained here. Remember that for a start-up the marketing budget is likely to limited, so the plan should describe a credible approach to promoting the product and include realistic assumptions about how many customers will buy and at what price

Production /operations: this explains what is involved in the production process, what capacity is needed, who will supply the business, where it will be located etc. A reader of the plan will want to know that the detailed operational issues have been considered carefully, and that the cash flow forecast takes account of all operational requirements

Financial projections: a summary of the cash flow and trading forecasts. This section should highlight the key assumptions that have been made and also outline the main risks and opportunities in the forecasts (i.e. what might go wrong, or where things might prove better than forecast). The detailed projections would be included in the appendices.

Funding requirements: here the figures from the cash flow forecast are taken and used to highlight what funding the business needs, and when. This section would explain proposals for where the funding needs to come from (founder, banks, investors etc).

Exit strategy: another key area for any investor. This is a description of how the entrepreneur expects investors to get a return on their investment. Who might eventually buy the business, when, and for how much?

Sources of information and guidance

Given the importance of business planning, it is not surprising that there is a wealth of free and other guidance available to the entrepreneur.

Here are some of the main support resources available:

The main high street banks all provide specialist support to start-ups to help produce a business plan.

Barclays Bank

Bank of Scotland

Business Link

The Government-funded agency provides comprehensive guidance on the business planning process

Other sources

Many commercial organisations that deal with start-ups and small businesses provide advice on business planning: e.g.

Websites dedicated to small business are also active in this area: e.g.

Smallbusiness

Remember that a business plan isn't just written to raise finance. It plays an important role in the whole start-up process.

A start-up's business plan needs to be flexible. The figures are bound to change once the business starts trading and the entrepreneur discovers what the market is really like.

A good business plan provides a focus and a discipline for the entrepreneur. However, it is no substitute for what really matters to make the business a success - i.e. hard work, skill, luck etc.

Too much business planning is a bit like procrastination - putting off more important work. The entrepreneur needs to spend most time out in the market, finding customers, promoting the product etc.

Revision questions for Business Plans

(1) Define the term “business plan” (2 marks)

(2) Outline the main purpose of a business plan (2 marks)

(3) Why is it important that a business plan contains key targets and objectives? (6 marks)

(4) What is meant by the term "executive summary"? (2 marks)

(5) List six sections that are likely to be contained in a detailed business plan (6 marks)

(6) Why is it important that a business plan should address the target market for a business and the nature of competition it faces? (4 marks)

(7) Explain why writing a business plan can help an entrepreneur identify the potential problems with a new business idea (6 marks)

(8) Name three external organisations that could help an entrepreneur develop a business plan for a start-up (3 marks)

(9) Briefly explain why an entrepreneur might be reluctant to write a business plan during the start-up process (4 marks)

Market Research for a Start-up

You have the business idea, or perhaps you have narrowed the choice down to a few business ideas. You may know which market your new business wishes to enter. So what happens next?

The answer is market research. For a start-up, this is a crucial activity. Understanding the target marketplace in as much detail as possible (given time and cost constraints) comes before raising money, choosing a location or putting together a business plan.

Market research is particularly important if a start-up needs to raise finance. A new business will find it very hard to raise finance if it cannot demonstrate that it understands the structure of the target market and that is has a clear idea of how the product it intends to offer will be positioned in the market.

A good way to think about the market research process is to remember that it involves two parts:

(1) What a start-up business needs to know (2) How that knowledge and understanding can be obtained (research methods)

What a Start-up Business Needs to Know

Market fundamentals

The starting point for market research is to identify the market fundamentals:

• How big is the market? (measured by sales, volume etc) • How fast is the market growing and what is the market growth potential?

• Who are the existing competitors and what market shares do they have? • How is the market segmented? (“segments” are the different parts of a larger market –

e.g. low price or high quality) • What kind of customers are there in the market? What are their preferences in terms of

when and where they buy, what prices they pay and which methods of promotion are effective?

Finding a niche

The purpose of market research for a start-up is the find a position in a niche market that will enable the business to charge a reasonable price and to earn reasonable profits once the business has been set-up and established.

Why should start-ups aim for a market niche? Because surviving in high volume or mass-market segments is rarely possible for a start-up. The largest market segments are normally dominated by well-established businesses that enjoy lower costs and can charge low prices. In other words, a start-up will face stiff competition from much stronger competitors if it tries to set-up in a mass market.

An entrepreneur needs to be satisfied that there is likely to be a demand for the product or service. However, at the start-up stage, funds are often limited and a new, small business is constrained by how much research can actually be carried out.

Effective market research is not about getting hold of lots of statistics or detailed reports. It is about getting the details and insights that help plan an effective business strategy. Remember that a small business can learn much about the market by simply trading, talking to customers and suppliers on a day-to-day basis etc.

An important distinction can be made between two broad kinds of market research data:

Primary data: data collected first-hand for a specific purpose by the entrepreneur

Secondary data: data that already exists and which has been collected for a different purpose.

For a start-up, it is most likely that secondary research will be the main source of market research. This is because it is less costly and quicker & easier to obtain. Gaps in knowledge might be filled with some primary research.

Secondary Data

Once a business starts trading, it quickly develops data that can help it understand the market. Sales reports, financial data, customer feedback and other information are really useful sources of insights into a market and a how the products of a business are performing. This kind of data is called “internal” data – i.e. information that comes from within the business.

The problem for a start-up is that this internal research data does not exist – it needs to start trading before the data is created! So the start-up entrepreneur has to rely mainly on external secondary data – information that is available from sources outside of the business.

There is a wide variety of external secondary sources, many of which are free. Here are some examples of cost-effective and useful external secondary research:

Google The essential starting point for any secondary market research! Effective searching on Google quickly identifies the main reports, websites and organisations that can speed up the research process.

Government sources

Office of National Statistics provide detailed insights on the UK economy and society; individual departments provide detailed reports on many industry sectors

Trade associations Most industries have one or more industry associations which existing to promote the market and protect member interests. They are a great source of market analysis

Trade press & magazines

Essential reading for an entrepreneur, particularly if the start-up is in a market in which the founder has little or no experience. A great of keeping up-to-date with market news, new products etc

Directories Online and offline, there are many excellent directories of existing competitors and suppliers in a market.

Price-comparison websites

Made possible by the Internet, the rapid growth of price-comparison sites allows a start-up to compare and contrast pricing strategies of existing competitors. Note these tend to focus on larger consumer markets (e.g. insurance, travel, retail) rather than industrial markets.

Competition websites, marketing materials, price lists

Also essential reading before launching a start-up. The entrepreneur gets valuable information on the marketing mix (product, price, promotion and distribution) of the businesses against which the start-up must compete.

Market research reports

Organisations such as Mintel, Keynote and others produce a wide variety of reports that analyse individual markets. Often expensive (typically £500 each), these reports are best for giving an overview rather than detailed insights into a specific market.

By its nature, secondary research will vary in terms of its usefulness to a start-up – after all, it has been created for a difference purpose, it may be out-of-date and it may be subject to bias. It may also not quite be in the right format or focused on the right target market.

However, secondary research has many advantages to a start-up:

• The information is readily available (particularly online) – so research can be done right now!

• It is generally cheaper than primary research; in many cases it is free • Good secondary research provides an excellent overview of a target market

Primary Research

In most cases, a start-up will still have gaps in its understanding of a market even after looking at the available secondary data. Primary research is usually used by a new business to fill these gaps – as far as is possible given the time and funding available.

It is best to think of primary research as the way that the entrepreneur gets answers to the important questions that need answers before trading begins. For example:

• What do potential customers think of my new product or service? • How can I obtain supplies of the right goods at the best price? • What price should I charge? • What is the best way of reaching potential customers (e.g. e-commerce, retail, direct

The problem with primary research is that it is usually time-consuming and expensive. Getting a market research agency to conduct primary research is one option, but the costs are high and the entrepreneur must wait for the results. Accordingly, most primary research by a start-up is conducted by the entrepreneur, often in an informal way.

There are various methods of primary research, each with their own advantages and disadvantages:

Method Comments

Observation Watching how consumers behave provides many insights, but can leave many questions unanswered. Observation works well for in retail markets; sit outside a shop and watch how many people walk by, look at the window display etc. Observation is a good way of assessing how products are packaged, displayed. However, observation will not, by itself, explain why consumers are doing what they do!

The use of survey questionnaires is a popular way of generating primary data. The questionnaire poses a series of questions about a product or service and also requests details about the person completing the survey so that responses can be profiled and grouped. There a various survey methods, the most popular of which are:

Postal surveys Sent to the address of potential customers who complete the form and send back in a pre-paid envelope. A relatively cheap method, a postal survey can cover a wide geographical area and avoids the potential for interviewer bias. However, response rates (the proportion of people sending back a completed survey) are often very low and it can take many weeks before an acceptable number of surveys are returned.

Telephone interviews Not to be confused with “telesales” (which is a method of selling), the telephone interview allow quicker feedback than a postal survey. However, potential customers are often wary of being called and may be reluctant to give anything other than short answers.

Online surveys Increasingly popular and relatively low cost, online surveys are now widely used by small businesses as a way of capturing the views of existing and potential customers. Online surveys are suitable for a start-up in the pre-trading period; they can be set-up for very low cost and can be updated frequently generating high quality, topical data.

Face-to-face surveys Personal interviews conducted face-to-face. Good for getting detailed insights from an individual and the interviewer can probe answers more closely to improve the insights gained. However, face-to-face surveys can be influenced by interviewer bias, the respondent may be giving the answers he/she thinks are wanted, and the method is time-consuming and costly.

Experiments Similar to test marketing, experiments allow a business to discover how customers respond to different product options (e.g. different packaging, pricing, promotional offers). In the start-up phase, experimenting with these variables can generate very useful customer insights without going to the expense of a full product launch. Experiments are particularly useful for products or services sold online – where prices and other marketing messages can be changed quickly.

Focus groups Groups of potential customers are brought together to discuss their feelings about a product or market. Focus groups are a good way of getting detailed information about customer tastes and preferences. Assuming that the members of the group are representative of the target customer base, a focus group can provide useful insights into how a new product will be received in the market. They are effectively for testing various elements of the marketing mix – e.g. packaging, branding and price.

Test marketing This involves selling a new product in a restricted section of the market in order to assess customer reaction. For example, a start-up could start by selling to a limited local area in order to iron-out product issues. Software firms often test-market their products by offering “beta” versions for testing by a small group of potential customers. Test marketing can be a good predictor of how a new product or service will be received by the larger market. However there is a danger that the impact of the full launch of a new product will be diminished, particularly if competitors find out about the test!

Given the range of primary research methods available, which ones are best for start-ups? The answer is – it depends! When answering exam questions in this area, you should remember that the start-up is likely to be restricted in terms of finance and time. The best primary research for a start-up is likely to be research that is low-cost and timely and which fills the gaps in market knowledge that are not covered by secondary research.

Quantitative and qualitative research

The distinction between primary and secondary research is really about the different sources of market information. An alternative way of thinking about market research is to consider the two main approaches – qualitative and quantitative. Market research can be classified into two kinds of information:

Qualitative research

Qualitative research is based on opinions, attitudes, beliefs and intentions. This kind of research deals with questions such as “why”? “Would?”, or “how?”

Qualitative research aims to understand why customers behave in a certain way or how they may respond to a new product or service. Given that these opinions are often obtained from small numbers of people, the findings are not necessarily statistically valid. However, such data can highlight potential issues which can be explored in quantitative research.

Focus groups and interviews are common methods used to collect qualitative data. This kind of data is often revealing and useful, but it is more costly and time-consuming to collect, particularly for a start-up.

Quantitative research

This is research based on larger samples and is, therefore, more statistically valid. Quantitative research is concerned with data and addresses question such as “how many?”, “how often”, “who?”, “when?” and “where?”

The results of quantitative research will generally be numerical form – for example:

• 35% of customers rate the new product as “attractive” • 70% of potential customers use the Internet to buy their hotel accommodation in Dorset • 3 out of 5 customers will buy a new food product after being offered a free in-store

The main methods of obtaining quantitative data are the various forms of survey – i.e. telephone, postal, face-to-face and online.

Sampling is a particularly important concept when undertaking primary market research.

Market research is aimed at understanding a market as a whole. However it is rarely possible to get the views of all customers, or speak to all suppliers. Research therefore relies on taking a sample and trusting that the findings from a sample are representative of the market population as a whole.

In market research, a sample is a group of people that is intended to represent the overall target population.

Primary market research is undertaken by sampling the views of a selection of customers. The sample size is simply the number of people in the sample.

What should the sample size be? Remember that in BUSS1 we are concerned with small businesses, so cost and time is an issue. There is a trade-off (choice) to be made between cost and accuracy. Large sample sizes increase the reliability of the research, however lower sample sizes reduce the cost of the research. It all depends on what the entrepreneur needs to know!

The degree to which the results from a sample are a reliable predictor of the overall market is known as the confidence level. For example, a confidence level of 90% means that the results of the research will be right nine times out of ten.

Choosing a sampling method

There are three main methods that are used to choose a sample in market research:

Random sample A random sample gives each member of a population an equal chance of being chosen. For example, a random number generator may select contact details from a spreadsheet; a researcher may stop and talk to every 20th person who passes outside a shop.

The main advantage of this is that bias is not introduced when the sample is chosen. However, a random sample also assumes that all members of the population are the same, which is rarely the case!

The main drawback of random sampling for a start-up is the cost of the required sample size. Random sampling needs large sample sizes in order to achieve acceptable confidence levels.

Quota sample Quota sampling involves the population being segmented (broken up) into groups that share specific characteristics. The research then focuses on a specific sample size (quota) chosen for each group.

For example, the quota might be for the research to interview 25 A Level students and 75 GCSE students from a secondary school, or the quota may state that 60% of those surveyed must be women aged 45-55.

Quota sampling can help market research focus more closely on the target customers or market segments. However, it takes more time than random sampling and is the sampling method most likely to result in bias.

Stratified sample Stratified samples are used when the research wants to provide insights into specific market segments or customer groups. Once the target group is selected the sample is chosen at random from that group.

A stratified sample still has the benefit of being random (i.e. low bias) and is not as expensive or difficult to obtain as a full random sample.

Given the range of sampling methods available, which should a start-up or small business use?

The main factors affecting the choice of sampling method are:

Finance and cost This is perhaps the most important consideration. Start-ups are unlikely to be able to afford substantial market research. Market research in the early stages of a new business is likely to be low cost, or even better, free!

Type of product If the start-up is looking to provide an existing product or service, then it is likely that there will be substantial secondary research already available. By contrast, a new product is less likely to have secondary data available

Level of risk The newer the product and the greater the investment prior to launch – the greater the risk. If the start-up is investing significantly upfront and there is a high chance of failure, this increases the need for effective primary research. In such a situation, there is a case for choosing a random sample, backed up by additional quota or stratified samples.

Target market If the start-up’s product is targeted at a specific segment (e.g. geographical, age, income) then it becomes easier to target primary research. If the business can identify the target customers, then it is usually more appropriate to conduct research using a stratified sample.

BUSS1 focuses on small businesses that do not have the resources to invest in substantial market research. Research that is undertaken by a start-up should be closely focused and ideally low-cost.

You need to make sure that you are able to state concisely the advantages and disadvantages of the different kinds of market research.

You should also question the data that is provided about market research in BUSS1. Was the sample size large enough? Is it out-of-date? How relevant is it to the target market and customers?

The best market research insights for a start-up often come simply from trading, talking to customers and suppliers, observing what happens with a product launch etc.

Revision questions for Market Research for a Start-up

(1) Define the term “market research” (2 marks)

(2) Distinguish between primary and secondary research (4 marks)

(3) List four probable sources of secondary research for a new e-commerce business targeting the women’s fashion market (4 marks)

(4) List three possible sources of primary market research that could help an entrepreneur estimate the likely demand for a local gardening services business (4 marks)

(5) Explain why samples are used in primary market research (4 marks)

(6) Briefly explain stratified sampling (3 marks)

(7) List three factors that a start-up business should consider before conducting a survey (3 marks)

(8) Outline three reasons why market research information might prove inaccurate (6 marks)

(9) List two advantages and disadvantages of using large sample sizes in primary market research (4 marks)

(10) Explain why businesses increasingly use online surveys as a source of market research (4 marks)

(11) Describe the difference between quantitative and qualitative research (4 marks)

(12) A hotel wants to measure customer satisfaction with their stay. Which would be the most appropriate approach – quantitative or qualitative research? (4 marks)

Understanding Markets

This part of the BUSS1 course requires you to focus on the place where a start-up business must compete; the place where buyers and sellers come together. We’re talking about the market.

Quite simply, a new business is bound to fail unless it has a reasonable understanding of its target market. What does the new business need to understand?

• The needs and wants of customers, and how these differ • The buying behaviour of customers – why, what and how they buy • The ways in which a market is split up into different parts to serve different customer

needs – these are known as market segments • The nature of demand in the market – how are prices set & the factors that influence the

quantity of demand • The size and growth rate of the overall market and its segments • The proportion of market demand that is already taken by competitors – an important

concept known as market share

As you can see, there is a lot to understand! However, this is a really important area in BUSS1, so take time to work through each part of this section.

Defining a market

Let’s start with a definition:

A market is anywhere where buyers and sellers come together to transact with each other.

The traditional image of a market is a physical place where buyers and sellers come together in one place. This still happens, of course. Take a drive along any main road on a Sunday and

you will come across car boot sales – the classic example of a physical market in action. The UK has many towns that are referred to as “market towns”, so-called because they host a town-centre market on regular dates throughout the year.

However, the term market has a much wider relevance when it comes to business studies. A market exists whenever buyers and sellers come together. So you should appreciate that the buyer and seller don’t have to be in the same place in order to conduct transactions with each other.

Do you sell or buy items on EBay? Have you bought products from Amazon.co.uk, bought tracks from iTunes? Have you bought something from a catalogue by making a phone call? In all these examples, you have participated in a market, although you were not physically with the other party to the transaction!

So, there are many different kinds of market. The BUSS1 specification requires that you understand how the variety of market types can be categorised. Here is a summary of the main market categories:

Geographical markets

The two main categories of geographical markets (from the point of view of a start-up) are:

Local markets

Definition:

Where customers are a short distance from suppliers

Common for the sale of fresh and locally-sourced products and the delivery of locally-supplied services. The car boot sale is a great example of a local product market. The use of local services (e.g. franchise operations, hairdressers) is another good example. Your local high street or retail park is another example, where consumer goods are sold to people who tend to live pretty close.

Businesses operating in local markets enjoy several advantages. They are physically closer to their customers, so are better placed to understand local cultural issues and traditions. It is also easier to develop relationships with local customers, to engage in market research and to respond quickly to changes in the market.

The main downside to operating in local markets is that the market size may be relatively small.

National markets

A market where customers are spread throughout the country or over a large area

National markets are very common in the UK. Here, the same product or service is offered to customers who are spread around the country. A business may have several (or many) locations in the country in order to reach those customers.

One way to illustrate this is to think of businesses that seem to be everywhere as you travel round the UK. For example, you’ll see BT phone vans, BSkyB satellite dishes, Tescos, McDonalds and Subway branches in just about every town and city in the UK. These businesses are operating in national markets – e.g. the markets for telephones, television, groceries and fast food. However, you will notice from the examples given that businesses which are national in terms of the scope of their operations are definitely not small businesses! Your BUSS1 case study business in the exam is very unlikely to be so large or complex.

Another way to think of a national market is in terms of the total sales of a product or service across the country. For example, the total demand for greetings cards, jams or loft conversions. A start-up or

small business can be focused on a national market, although it is likely that it will have a very small share of the market.

Physical and electronic markets

We have touched on these two categories already.

A physical market brings buyers and sellers together in the same location. We’ve already mentioned car boot sales and markets in town centres. Farmers’ markets are another good example.

A much larger number of markets are now electronic. Businesses find their customers using a variety of electronic media, including the Internet, mobile telephony, digital television and via email. Transactions are completed electronically with the delivery method depending on the nature of the product sold.

Both physical and electronic markets are important to start-ups and small businesses. For example, Fraser Doherty started his Superjam business by selling his homemade jams at farmers markets and then promoting them in the aisles of supermarkets. By contrast, Nick Jenkins’ specialist greetings card business Moonpig has always relied on using electronic markets, building sales by running a specialist website.

The key points to remember about electronic markets are that:

They provide an easier way for start-ups to enter a national market, particularly if the business has identified a small niche segment of that market

Electronic markets tend to be highly price-competitive since it is quite easy for customers to search for products from a variety of suppliers and to compare the best prices available (just about every consumer goods market has one or more price comparison website).

Setting up a new business in an electronic market tends to have lower start-up costs than entering a physical market.

Factors affecting demand

As we mentioned in the introduction, it is important that a start-up business understands the nature of demand for its products, and how demand can be affected by certain factors.

Many of the concepts covered in this section are drawn from the world of economics. However, don’t worry if you are not studying economics. We can keep the theory quite simple!

The main factors that affect demand can be summarised as follows:

The most important factor, particularly in any market when customers are price-sensitive. As the price of a product increases, the demand for it will usually fall. The extent to which this happens is known as the price elasticity of demand (which you will study in more detail in BUSS2). If the product has no close competitors or consumers find it hard to substitute it for other products, then an increase in price will have relatively little effect on demand.

Like all businesses, a start-up needs to remember that the price of a product or service is often seen as a signal of value for money or quality by customers. A higher price might put some customers off who don’t perceive it as good value for money compared with cheaper alternatives. Conversely, a product priced too cheaply might deter customers who associate low prices with poor quality!

Setting prices is, therefore, a tough task for any start-up. There is no magic formula, although market research can quickly tell the business whether its prices are out of line with the competition.

Demand for most products and services is closely related to the disposable incomes of customers. The more that households and businesses have to spend, the more they are likely to demand!

A key measure of incomes in the economy is Gross Domestic Product (GDP) which is the main measure of economic growth. As an economy grows (an increase in GDP), consumers have higher incomes and translate this into greater demand for products and services. In contrast, a weaker economy where GDP is falling, should lead to lower demand.

However, the link between GDP and demand is not quite as clear-cut as you might think. If consumer incomes are rising, they may decide to demand more luxury or higher-priced goods at the expense of basic or lower-priced goods. Alternatively, as the economy weakens, consumers may switch demand towards goods which have low or “value for money” prices, at the expense of more expensive products. We have seen this happening in the UK recently as consumers have moved spent more in the discount grocery chains such as Aldi and Lidl, as a result of the “credit crunch”.

Tastes and fashions

As a consumer, what you buy is often influenced by your tastes and interests and by what is fashionable. Consumer product markets are particularly influenced by changes in fashion.

The main issue for a start-up business is to consider whether demand in the target market is likely to be strong enough, for long enough! The danger is that investment in starting a new business in a fashionable market segment may be completed at a time when demand starts to fall as consumers move onto a different market. Fashionable products quickly attract new entrants which reduces the available sales and profits.

A good example would be the coffee bar market in the UK. Ten years ago there were relatively few coffee shops and a start-up would have a good chance of establishing itself in the market (either locally or nationally). However, the market is now saturated with competitors, making it very difficult for a start-up entering the industry now.

Competitor actions

It is rare that a business has a market all to itself! The demand for a product or service will be directly affected by the actions of competitors in the market. This is all part of the game of capturing market share.

A start-up entering a market should expect a hostile response from existing competitors. They may decide to lower their prices or offer other promotions in order to retain their customers. They may launch new and improved versions of their products to counter the new entrant. Alternatively, a competitor may copy the approach taken by the start-up, particularly if it is innovative and popular with customers.

The opposite is also true. A competitor may decide to leave a market segment in order to concentrate on other activities. This will increase the share of demand available to businesses that remain in the market.

Social and demographic factors

Social and demographic factors related to the changes that take place in society and the population which influence demand. Some examples will help make the point. In the UK recently we’ve seen:

• An increase in single-person households • Growth in the number of affluent, retired people • Increased awareness of, and interest in the environment • Higher immigration into the UK, particularly from the enlarged European Union • Greater consumer demand for organic products and for businesses based around social

There are many more social changes. The point is that each affects what and how much is demanded by customers.

Seasonal factors

In some markets, demand changes depending the time of the year.

Some markets traditionally experience peaks in demand during the summer - for example tour operators focusing on family holidays, ice-cream manufacturers and visitor attractions. Others see peak demand in the autumn and winter – e.g. distributors of heating supplies, retailers that rely on the Christmas trade.

The key point about seasonal factors is that the start-up or small business needs to understand which seasonal factors are relevant to the market they are in. There is little they can do to avoid seasonal peaks and troughs in demand, but knowledge of them certainly helps business planning (e.g. allowing for them in any monthly cash flow forecasts).

Government action

Changes in legislation and government regulation can certainly affect demand.

Some legislative changes have the effect of reducing demand in certain markets. A great example is the introduction of the ban on smoking in public places. This has reduced demand (spending) in traditional pubs, although it was expected to result in increased demand for eating out at pubs and restaurants. Actually, the evidence to-date is that there hasn’t been an increase in customers visiting smoke-free pubs for a meal!

Some legislative changes are designed to de-regulate a market, which should have the effect of increasing demand. For example, the de-regulation of certain betting and gaming laws in the UK initially had the effect of increasing visitors to bingo clubs. However, the growth in online bingo has had an opposite effect, reducing demand (the number of people who come to the club and the average amount that they spend there).

A key point to remember about changes to demand caused by government action is that there is nothing a business can do about it! It is outside the control of the entrepreneur. The trick is for the entrepreneur to be aware of recent or pending changes and to have taken account of them in business planning.

Introduction to market segmentation

Market segmentation was mentioned in our section on how entrepreneurs conduct market research. We pointed out how important it is for a start-up to have a clear sense of its target market and how, ideally, the start-up should aim to establish the business in a niche market segment.

So what is segmentation all about?

Markets consist of customers with similar needs. For example, consider the wide variety of markets that exist to meet the need to:

• Eat (e.g. restaurants, fast food)

• Drink (e.g. coffee bars, pubs & clubs)

• Travel (for business and leisure, near or far)

• Socialise (as couples, with family, with friends)

• Be educated (as a child, adult, for work or other reasons)

As you can imagine, such markets (if they were not further divided) would be very broad.

The great news for any business is that customers in any broad market are not the same. For example, within the market to provide meals, customers differ in the:

• Benefits they want

• Amount they are able to or willing to pay

• Media (e.g. television, newspapers, and magazines) they see

• Quantities they buy

• Time and place that they buy

It therefore makes sense for businesses to divide (or “segment”) the overall market and to target specific segments of a market so that they can design and deliver more relevant products and services

A market segment can be defined as follows:

A part of a market which exists to serve a group of customers with specific needs and wants.

The process of segmentation involves subdividing markets, channels or customers into groups with different needs, to deliver tailored propositions which meet these needs as precisely as possible.

Why use market segmentation?

There are several important reasons why businesses should attempt to segment their markets carefully. These are:

Better matching of customer needs

Customer needs differ. Creating separate products for each segment makes sense and provides customers with a better solution

Enhanced profits for business

Customers have different disposable incomes. They are, therefore, different in how sensitive they are to price. By segmenting markets, businesses can raise average prices and subsequently enhance profits

Better opportunities for growth

Market segmentation can build sales. For example, customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory, lower-priced product

Retain more customers

Customer circumstances change, for example they grow older, form families, change jobs or get promoted, change their buying patterns. By marketing products that appeal to customers at different stages of their life ("life-cycle"), a business can retain customers who might otherwise switch to competing products and brands.

Target marketing communications

Businesses need to deliver their marketing message to a relevant customer audience. If the target market is too broad, there is a strong risk that (1) the key customers are missed and (2) the cost of communicating to customers becomes too high / unprofitable. By segmenting markets, the target customer can be reached more often and at lower cost

Gain share of the market segment

Unless a business has a strong or leading share of a market, it is unlikely to be maximising its profitability. Minor brands suffer from lack of scale economies in production and marketing, pressures from distributors and limited space on the shelves. Through careful segmentation and targeting, businesses can often achieve competitive production and marketing costs and become the preferred choice of customers and distributors. In other words, segmentation offers the opportunity for smaller firms to compete with bigger ones.

Types of market segmentation

Whilst there are many ways to segment a market, the BUSS1 course only requires you to have an understanding of two of the main methods: demographic and geographical segmentation. We’ll cover these two in some detail below, and then provide you with a quick insight into the other methods.

When looking at these two methods, please remember that segmentation is an art, not a science. There are no precise rules or formulae that help the entrepreneur split the market up. Market research can help, but much segmentation is done using gut instinct and experience of a market gained over time.

Demographic segmentation

Demographic segmentation consists of dividing the market into groups based on variables such as age, gender family size, income, occupation, education, religion, race and nationality.

As you might expect, demographic segmentation variables are amongst the most popular bases for segmenting customer groups.

This is partly because customer wants are closely linked to variables such as income and age. Also, for practical reasons, there is usually a lot more market research data available to help with the demographic segmentation process.

The main demographic segmentation variables are summarised below:

Age Consumer needs and wants change with age although they may still wish to consumer the same types of product. So marketers design, package and promote products differently to meet the wants of different age groups. Good examples include the marketing of toothpaste (contrast the branding of toothpaste for children and adults) and toys (e.g. pre-school, 5-9, 10-12, teen, family).

Life-cycle stage

A consumer stage in the life-cycle is an important variable - particularly in markets such as leisure and tourism. For example, contrast the product and promotional approach of Club 18-30 holidays with the slightly more refined and sedate approach adopted by Saga Holidays!

Gender Gender segmentation (that’s men and women to you and me) is widely used in consumer marketing. Great examples include the clothing, hairdressing, magazine, toiletries and cosmetics markets.

Income Many companies target affluent consumers with luxury goods and convenience services. Good examples include Lexus cars & Moet & Chandon champagne. By contrast, many companies focus on marketing products that appeal directly to consumers with relatively low incomes. Examples include Aldi and Lidl (discounted groceries) and fast-fashion clothing retailers such as TK Maxx.

Social class Many marketers believe that a consumers "perceived" social class influences their preferences for cars, clothes, home furnishings, leisure activities and other products & services. There is a clear link here with income-based segmentation.

Lifestyle Marketers are increasingly interested in the effect of consumer "lifestyles" on demand. Unfortunately, there are many different lifestyle categorisation systems, many of them designed by advertising and marketing agencies as a way of winning new marketing clients and campaigns!

Geographic segmentation

Geographic segmentation tries to divide markets into different geographical units: these units include:

• Regions: e.g. in the UK these might be England, Scotland, Wales Northern Ireland or (at a more detailed level) counties or major metropolitan areas

• Countries: perhaps categorised by size, development or membership of geographic region

• City / town size: e.g. population within ranges or above a certain level

• Population density: e.g. urban, suburban, rural, semi-rural

Geographic segmentation is an important process - particularly for multi-national and global businesses and brands. Many such companies have regional and national marketing programmes which alter their products, advertising and promotion to meet the individual needs of geographic units. However, it is less relevant for the start-up or smaller business.

Limitations of market segmentation

It would be nice to think that market segmentation is the answer to a lot of the entrepreneur’s problems. By spotting a clear niche market using segmentation, the start-up business can focus all its efforts on reaching the target customer base.

If only business life was that simple. It isn’t. Here are some key limitations with market segmentation:

Lack of information and data: some markets are poorly researched with little information about different customer needs and wants

Difficulty in measuring and predicting consumer behaviour: humans don’t all behave in the same way all of the time. The way that they behave also changes over time! A good example is the “grey generation” (i.e. people aged over 50). The attitudes and lifestyles of the grey generation have changed dramatically in recent years.

Hard to reach customer segments once identified: it is one thing spotting a segment; it is another finding the right way to reach target customers with the right kind of marketing message

Analysing market data

Markets need to be measured in order to assess the size, growth and competitive shares of the market. Such data is key information for any business – large or small. It is important to know what the potential sales are from competing in a market and which competitors are winning the battle for the available customers.

This is an area of BUSS1 where you may be asked to perform calculations – the same kind of calculations that an entrepreneur may make. The key areas we’ll cover are:

• Market size (volume and value measures) • Market growth (percentage growth) • Market shares (percentage of the market owned by each competitor)

A worked example

The market size is a measure of the total sales in a market. Total sales can be measured in terms of

Volume – i.e. the quantity of products sold

Value – i.e. the sales value of products sold. Remember that sales value = quantity x price

To take an example: imagine that Derek is planning to open a car valeting business in his home town of Worcester. His market research has provided the following data:

• Approximately 25,000 cars are valeted in the Worcester area each year • The average price of a car valet service is £10 • Last year there were about 22,000 car valets performed

• Whilst there are many small car valeting businesses in the Worcester area, the three largest competitors currently achieve the following annual sales:

Cleanstyle £65,000

WorcesterValet £45,000

AutoFresh £30,000

What analysis can be performed using this data?

Firstly, we can calculate market size, since we have a volume measure and an average price.

So the total value of valeting sales = number of valets per year (25,000) x average price (£10) = £250,000.

Secondly, we can also work out market shares. This is because we know the overall market size and the sales of the three largest competitors. The table below shows how this data can be calculated:

Sales (£) Share (%)

Cleanstyle £65,000 26.0%

WorcesterValet £45,000 18.0%

AutoFresh £30,000 12.0%

Others £110,000 44.0%

Total £250,000 100.0%

You can see from the above table how market share is calculated. Take the example of Cleanstyle, which is the market leader with sales of £65,000. That means that Cleanstyle’s share of the market size (£250,000) = £65,000 / £250,000.

Market share is calculated as a percentage, so the number is 26% (i.e. (65/250) x 100)

After calculating the individual market shares for the three largest competitors, you can see that the balance of all the other car valeting businesses must equal 44%. This is because the total market shares of a market = 100%.

From the information given, we can also calculate market growth. We are told that last year the total volume of car valets was 22,000. This year it is 25,000, which is an increase of 3,000 valets.

To calculate market growth, we express the change (3,000) as a percentage of the previous figure (22,000). So market growth is 3,000 / 22,000 = 13.6%

There is lots of opportunity to analyse a market in a way that helps a start-up: segments, growth, size, trends, customers etc. A start-up that is focused on really understanding its market has the best chance of success. Look out for evidence of this in your BUSS1 case study.

In the exam you will be expected to be able to calculate market share, market size and market growth, and to be able to interpret the calculations. Make sure you practice these calculations - don't shy away from them!

You should also appreciate that there are several factors that affect demand for a product, not just price. Some factors will be more important than others - it depends on the product and market!

Revision questions for Understanding Markets

(1) Define the term “market” (2 marks)

(2) Explain the meaning of the word “demand” (2 marks)

(3) Using an example of each, describe what is meant by geographic and demographic segmentation (4 marks)

(4) Define the term “market segment” (2 marks)

(5) Explain why segmentation is so important for a start-up wanting to target a niche market (4 marks)

(6) Why is age such a popular method of demographic segmentation? Support your answer with two real-life examples (6 marks)

(7) List three consumer markets in which gender is used as a way to segment the market (3 marks)

(8) Why might market segmentation be unhelpful to a start-up business? (4 marks)

(9) How might a grocery supermarket use socio-economic groups for market segmentation? (6 marks)

(10) Define the terms “market size”, “market growth” and “market share” (6 marks)

(11) Explain why a market growth might be slowing even though the overall size of the market is rising (3 marks)

(12) List two reasons why the sales value of a market rise even if the size of the market in volume terms has fallen? (3 marks)

(13) What is the market share of a business that sells £12 million in a market whose size if £60 million (2 marks)

(14) A market was worth £150 million in 2006 and £165 million in 2007. What was the market growth rate in 2007?

Choosing a Legal Structure

If there was a prize for the most boring part of any business course, this would win every time! BUSS1 is no different!

However, for a start-up, making the right choice of business structure is actually quite important. The choice made has significant implications for what happens if the business fails and also for how much finance the business can raise.

So it is worth concentrating reasonably hard on these notes – boring though the topic is!

The term “business structure” refers to the legal structure a business takes. The entrepreneur can basically choose from these options: (these are covered in a little more detail in the other study notes in this section)

Structure Definition & overview

Sole trader The most common type of business structure. A sole trader is just an individual owning the business on their own. Remember that a sole trader can also employ people – buy those employees don’t share in the ownership of the business.

The sole trader owns all the business assets personally and is personally responsible for the business debts. A sole trader has unlimited liability (see below).

Ordinary Where a business is started and owner by more than one person.

partnership The legal Partnership Agreement sets out how the partnership is run, covering areas such as how profits are to be shared; what the partners have to invest into the business; how decisions are taken; what happens if a partner wants to leave or dies.

The partners between them own all the business assets and owe all business liabilities. Partners, therefore, also have unlimited liability.

Limited liability partnership (“LLP”)

Fairly new form of partnership in which the partnership is treated as a separate legal entity with its own assets and liabilities. Like a company, the LLP is registered at Companies House must file accounts. The partners continue to control and own the business – but the crucial different is that they are protected by limited liability.

Limited company Limited companies differ from sole traders and ordinary partnerships in that they are separate legal entities to the founders. A legal entity can own things itself (assets), can sue and be sued.

Companies are owned by their shareholders and run by directors. The shareholders appoint the directors (who in most cases are one and the same people!) who must then run the company in the interests of the shareholders.

Now this is the important bit. Shareholders own a share of the company, but they do not own the assets of the company and they are not liable for the debts of the company.

It is the company that is responsible for owning assets and paying debts. If the company becomes insolvent (i.e. it cannot pay its debts), then the company is closed. The shareholders are not liable for any debts owed by the company that cannot be settled. That is the importance of unlimited liability.

By far the most common form of limited company is a private limited company. Private, in this case, means that the shares of the company are not traded publicly on a stock exchange.

By contrast, a public limited company (“plc” after its name) tends to have a larger value of share capital invested and its shares may be traded publicly. Don’t worry too much about plc’s – they are very rare in the case of start-ups and small businesses – which is what you concentrate on in BUSS1.

Comparing the different structures

Given the range of business structures available, which one is best for a start-up? The answer is (as always) – it depends. The important thing is that an entrepreneur gets professional advice about the most relevant structure for their needs.

Here is a summary of the main advantages and disadvantages of the three main alternative business structures:

Advantages Disadvantages

Sole trader Quick & easy to set up – the business can always be transferred to a limited company once launched

Simple to run – owner has complete control over decision-making

Minimal paperwork

Full personal liability – “unlimited liability”

Harder to raise finance – sole traders often have limited funds of their own and security against which to raise loans

The business is the owner – the business suffers if the owner becomes ill, loses interest etc

Pay more tax than a company

Ordinary partnership

Quite simple – certainly the simplest way for two or more people to form a business together

Minimal paperwork once Partnership agreement set up

Business benefits from the expertise and efforts of more than one owner

Partners can provide specialist skills

Greater potential to raise finance – partners each provide the investment

A poor decision by one partner damages the interests of the other partners

Harder to raise finance than a company

Partners are bound to honour decisions of others

Limited company

Limited liability – protects the personal wealth of the shareholders

Easier to raise finance – both through the sale of shares and also easier to raise debt

Stable form of structure – business continues to exist even when shareholders change

Can pay less tax

Greater admin costs

Public disclosure of company information

Directors’ legal duties

Social enterprises

One kind of business structure that has grown rapidly in the UK in recent years is the “social enterprise”. Social enterprises are the most common form of “not-for-profit” enterprises.

The clue in the phrase “not-for-profit” tells you much about the aims and objectives of social enterprises. It is important to appreciate that a social enterprise is not a charity.

Social enterprises are defined as:

“Businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners’.

In other words, a social enterprise is a proper business that makes its money in a socially responsible way. These ventures are not necessarily formed to reinvest all profits into the communities. Social entrepreneurs can make a good profit themselves. However, their business model is also designed to benefit others.

Social enterprises complete alongside other businesses in the same marketplace, but use business principles to achieve social aims.

A few things all social enterprises have in common are:

• They are directly involved in producing goods or providing services • They have social aims and ethical values • They are self-sustaining, and do not rely on donations to survive (i.e. they are not

Well known examples of social enterprises include Divine Chocolate, the Eden Project and fair-trade coffee company Cafedirect.

Recent government data suggests that there are more than 55,000 social enterprises in the UK with a combined turnover of £27bn. Social enterprises account for 5% of all businesses with employees, and contribute £8.4billion per year to the UK economy.

Getting the protection of limited liability is essential if the entrepreneur is investing significant capital into a start-up or if the business will have large debts. Remember that BUSS1 is about start-ups and small businesses. These businesses almost never become public limited companies in the first 5-10 years of trading, so don't bother spending much time learning about stock market flotations. Make sure you have a strong knowledge of the advantages and disadvantages of the various forms of business organisation.

Revision questions for Choosing a Legal Structure

(1) Define the term “sole trader” (2 marks)

(2) Explain why there are so many sole trader businesses in the UK (4 marks)

(3) List two advantages and two disadvantages of setting up in business as a partnership (4 marks)

(4) Who owns a partnership? (2 marks)

(5) Briefly outline the purpose of the partnership agreement (3 marks)

(6) What is the difference between “unlimited liability” and “limited liability” (4 marks)

(7) Do the members of a partnership enjoy limited liability? (2 marks)

(8) Identify the main advantages of using a private limited company for a business start-up (6 marks)

(9) Define the term “shareholder” (2 marks)

(10) List three examples of “not-for-profit” businesses (3 marks)

(11) Define the term “social enterprise” (2 marks)

Sources of Finance for a Start-up

Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.

Raising finance for start-up requires careful planning. The entrepreneur needs to decide:

• How much finance is required? • When and how long the finance is needed for? • What security (if any) can be provided? • Whether the entrepreneur is prepared to give up some control (ownership) of the start-up

in return for investment?

The finance needs of a start-up should take account of these key areas:

• Set-up costs (the costs that are incurred before the business starts to trade) • Starting investment in capacity (the fixed assets that the business needs before it can

begin to trade) • Working capital (the stocks needed by the business –e.g. r raw materials + allowance for

amounts that will be owed by customers once sales begin) • Growth and development (e.g. extra investment in capacity)

One way of categorising the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external). We’ll use this approach to briefly describe the main sources of finance you need to know about for BUSS1.

Internal sources

The main internal sources of finance for a start-up are as follows:

Personal sources

These are the most important sources of finance for a start-up, and we deal with them in more detail in a later section.

Retained profits

This is the cash that is generated by the business when it trades profitably – another important source of finance for any business, large or small.

Note that retained profits can generate cash the moment trading has begun. For example, a start-up sells the first batch of stock for £5,000 cash which it had bought for £2,000. That means that retained profits are £3,000 which can be used to finance further expansion or to pay for other trading costs and expenses.

It is a mistake to believe (as one BUSS1 textbook does) that start-ups are not financed by retained profits. You don’t have to wait for the business as a whole to make profits before you can start reinvesting profits earned on individual products.

Share capital – invested by the founder

The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up. This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business.

The advantages of investing in share capital are covered in the section on business structure. The key point to note here is that the entrepreneur may be using a variety of personal sources to invest in the shares. Once the investment has been made, it is the company that owns the money provided. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or the value of the business when it is eventually sold.

A start-up company can also raise finance by selling shares to external investors – this is covered further below.

External sources

Loan capital

This can take several forms, but the most common are a bank loan or bank overdraft.

A bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets and are generally at a lower rate of interest that a bank overdraft. However, they don’t provide much flexibility.

A bank overdraft is a more short-term kind of finance which is also widely used by start-ups and small businesses. An overdraft is really a loan facility – the bank lets the business “owe it money” when the bank balance goes below zero, in return for charging a high rate of interest. As a result, an overdraft is a flexible source of finance, in the sense that it is only used when needed. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time).

Two further loan-related sources of finance are worth knowing about:

The Small Firms Loan Guarantee Scheme is a government-funded scheme that makes it easier for businesses to obtain a bank loan. In return for paying a slightly higher interest rate, loans of up to £250,000 made by banks under the SGLGS are backed by the Government. The scheme is a useful way of start-ups and small businesses getting bank loans when they are not able to offer the banks suitable security.

The Princes Trust is a well-known provider of start-up business finance for young and disadvantaged people. It provides low-interest loans of up to £4,000 together with the support of a business mentor.

Share capital – outside investors

For a start-up, the main source of outside (external) investor in the share capital of a company is friends and family of the entrepreneur. Opinions differ on whether friends and family should be encouraged to invest in a start-up company. They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business. Both of these are positives for the entrepreneur. However, there are pitfalls. Almost inevitably, tensions develop with family and friends as fellow shareholders.

Business angels are the other main kind of external investor in a start-up company. Business angels are professional investors who typically invest £10k - £750k. They prefer to invest in businesses with high growth prospects. Angels tend to have made their money by setting up and selling their own business – in other words they have proven entrepreneurial expertise. In addition to their money, Angels often make their own skills, experience and contacts available to the company. Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of control over the business.

You will also see Venture Capital mentioned as a source of finance for start-ups. You need to be careful here. Venture capital is a specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over £1m, often much more). They prefer to invest in businesses which have established themselves. Another term you may here is “private equity” – this is just another term for venture capital.

A start-up is much more likely to receive investment from a business angel than a venture capitalist.

As mentioned earlier, most start-ups make use of the personal financial arrangements of the founder. This can be personal savings or other cash balances that have been accumulated. It can be personal debt facilities which are made available to the business. It can also simply be the found working for nothing! The following notes explain these in a little more detail.

Savings and other “nest-eggs”

An entrepreneur will often invest personal cash balances into a start-up. This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur – e.g. redundancy or an inheritance. Investing personal savings maximises the control the entrepreneur keeps over the business. It is also a strong signal of commitment to outside investors or providers of finance.

Re-mortgaging is the most popular way of raising loan-related capital for a start-up. The way this works is simple. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business

fails, then the property will be lost too. The credit crunch in 2008 has reduced the availability and increased the cost of this kind of finance.

Borrowing from friends and family

This is also common. Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business. This can be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan. However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties.

Credit cards

This is a surprisingly popular way of financing a start-up. In fact, the use of credit cards is the most common source of finance amongst small businesses. It works like this. Each month, the entrepreneur pays for various business-related expenses on a credit card. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. The effect is that the business gets access to a free credit period of aroudn30-45 days!

Choosing the right source of finance

The following factors need to be considered when deciding on the best mix of finance for a start-up:

Control Entrepreneurs are always best advised to hang onto as much control of their business as possible. Selling shares in the business to external investors (including friends and family) loosens that control. At the very least, an entrepreneur needs to have control over 51% of the shares in order to have the final say on key business decisions in a company

Cost The basic rule of thumb is that finance provided by the founder (or reinvested from retained profits) is the cheapest.

Somewhat more expensive is loan finance – typically priced at around 5-10 above the base interest rate, depending on the nature of the loan. If the entrepreneur can provide security for the loan, then the interest is usually cheaper than “unsecured” debt. This reflects that the security reduces the risk taken by the lender.

The most expensive finance is generally from external investors. They will typically require a much higher return than a bank. Business angels look to achieve annual returns of around 30-50% from an investment – although they are prepared to wait for the business to be sold before all this return is realised.

Amount The amount of finance required by a start-up varies depending on factors such as the length of the period before break-even is achieved and the investment required in fixed assets & product development.

Smaller amounts (e.g. £1k-20k) are generally funded by a combination of personal sources, friends & family loans and perhaps a little help from a bank. Business angels might be interested once the amount goes above £10k.

Much larger amounts than this are quite complicated to arrange. Banks and external investors will want to see the founding entrepreneur invest his/her money too, both as a sign of commitment to the idea and also to tie them into the business (give them something to lose!)

Timing Remember that a start-up doesn’t have to raise all is finance at once. One sensible approach is to go through a series of finance-raisings, obtaining money when the business actually needs it.

Flexibility Some sources of finance are more flexible than others. The most flexible is the bank overdraft, which is a facility that a business uses as necessary. If the business goes overdrawn by £15,000, then it pays interest on that amount. If the cash comes in and the bank overdraft falls to £5,000, then interest is paid on the lower amount.

Contrast this with a bank loan. Interest is paid on the whole amount loaned – whether or not the business has made use of the funds.

It is vital that a start-up chooses sources of finance that are appropriate and sufficient for its needs. Remember that too much finance of the wrong sort (e.g. an unnecessary large bank loan) can create huge problems for a start-up.

You must appreciate that many start-ups find it hard to raise finance until they have established a trading record. It is almost always up to the founder to invest funds to get things going.

Entrepreneurs are best-advised to retain as much control over their business as possible. That means not selling substantial proportions of the share capital to other investors.

A well run start-up uses its cash flow forecasts to identify when additional finance is required. This means that a start-up may choose to raise finance at several stages - not always right at the start of trading.

As always, make sure you can list the advantages and disadvantages of the various forms of finance.

Revision questions for Sources of Finance for a Start-up

(1) List three reasons why a start-up needs to raise finance (3 marks)

(2) Define the term “retained profits” (2 marks)

(3) List three personal sources of finance (3 marks)

(4) Explain why the founder of a start-up might want to own the entire ordinary share capital of the company (5 marks)

(5) Define the terms “bank loan” and “bank overdraft” (4 marks)

(6) Explain why a bank loan would be an appropriate source of finance for the purchase of plant and equipment for a new factory (4 marks)

(7) State two disadvantages of using a bank loan to finance a start-up (3 marks)

(8) Give two examples for each of internal and external sources of finance (4 marks)

(9) Explain why working capital is so important to a start-up (4 marks)

(10) Define the term “trade credit” (2 marks)

(11) Why might an entrepreneur use a personal credit card as a source of finance for a start-up? (3 marks)

(12) Using two examples of each, explain the difference between capital expenditure and revenue expenditure (6 marks)

(13) What is a business angel and why do they invest in small businesses? (4 marks)

(14) Explain why venture capitalists rarely invest in start-ups (4 marks)

(15) Outline the possible advantages and disadvantages of an entrepreneur financing a start-up with loans from friends and family (4 marks)

(16) Outline four factors that need to be considered in choosing the best sources of finance for a start-up (4 marks)

Choosing the Business Location

Where to start a new business? It is a tough question that often leaves an entrepreneur agonising over the decision.

A small business starting up 10-15 years ago would soon be agonising over a key decision. Where can I find some premises? What kind of premises do I need and what will they cost?

Now in 2008, the decision about locating a start-up business is a very different one. It is possible to run a new business, even with several people, without ever having separate business premises.

The so-called “virtual business” is now a reality, made possible by easy communications and the enthusiasm of many people to work from home, as freelancers or consultants. Setting up a virtual business, often from home, is not without its problems. However, this is a very popular approach to locating a new business.

Not every kind of start-up can be based at home. When addressing the question of business location, the textbooks often use the example of a new retail business. For retailing, the search for a good location is vitally important.

In general, the most important consideration for a start-up is the cost of the business location. In your exam, it is best to assume (unless you are told otherwise) that a start-up has limited financial resources and that it will seek to minimise the start-up costs. Setting up in a new business location can add significantly to overheads – a business will incur rent, rates, insurance and many other ongoing costs simply from the decision to take some premises.

Factors affecting the choice of location

Whatever the business, there are several general factors that influence the choice of location. These are:

Communications This includes transport facilities (road, rail, air) as well as information infrastructure. Transport links are particularly important if the business delivers products, sells direct using a sales force or is

dependent on import and export. Information technology is less of an issue these days – most start-ups can quickly establish reliable broadband Internet connections.

Labour When a start-up needs to hire employees, then access to a reliable pool of staff with relevant skills is important. Businesses that are labour-intensive often look to locate in areas of traditionally low wages.

Market - customers & population

A start-up may need to be located near particular centres of population. For example, if the product is a service targeted at affluent older-aged people, then it is important to be located where there is a sufficient population of such people. Franchise businesses often analyse the population characteristics of a potential new territory before setting up in a new location.

Suppliers The business may be dependent on supplies of a particular raw material, so costs will be lower if the business is located near the source of supply (e.g. where the raw material is grown or where a distributor is based). This factor tends to be more important for manufacturing businesses rather than service businesses.

Government assistance

Government policy has often been designed to influence the locations of new businesses. If the start-up is “location-independent” (i.e. the other factors above don’t really make a difference to the choice of location), then it may be that deals and incentives offered by Government can influence the choice.

Some poorer areas of the UK are designated as “assisted areas”. These include many parts of north-east England, Wales, East Yorkshire, Cornwall etc. Locating a new business in one of these areas potentially makes government grants and loans available.

England, Scotland and Wales are also divided into regions each of which has a Regional Development Agency which targets government funding to focus economic regeneration and development on specific locations and industries. Many development agencies adopt what is known as a “cluster concept” – where investment is focused on a particular industry (e.g. IT) and the aim is to bring more businesses together in one location.

There is no magic formula which can be applied to decide the most important factors in choosing a location.

Where two possible locations have been identified, it might be that the availability of government grants or other incentives is the deciding factor.

Making a choice of location involves drawing up a list of criteria of what the start-up is looking for from business premises and then using qualitative judgement about what will work best.

Technology & home-based start-ups

The widespread adoption of low-cost, easy-to-use information technology solutions means that many entrepreneurs start their businesses at home.

In fact, pretty much everyone who starts a business does so from home, at least whilst they develop the business idea, conduct market research and decide whether or not to launch.

You might be surprised to learn that:

- In the UK, the home is the most popular location to start a business

- More than 60% of businesses are started from home; equal to more than 1,400 each week

- There are 2.1 million home based businesses in the UK contributing £364 billion in turnover to the UK economy (remember that, in total, there are about 4.5 million separate businesses in the UK)

- The highest growth in home business is coming from mums, young people and the over 50’s

- The fastest growing sectors are business & professional services, personal services, online trading, food and domestic energy

- 86% of home business owners want to grow their business, without leaving home.

[source: adapted from Enterprise Nation www.enterprisenation.co.uk]

Running a business from home has various advantages and disadvantages:

Free (or minimal cost). This is the big advantage! Remember that most start-ups are short of cash!

Requires greater self-discipline – it is easy to get distracted!

Very little travelling, although customers and suppliers might still need to be visited

Work is often interrupted – e.g. by callers to the home or by family

Work can be combined with domestic tasks and responsibilities (e.g. child care). This can mean significant cost savings

Work never goes away – it is difficult to separate work from home life

Reduced risk and a lower break-even point for the new business – no commitments to rentals and lower overheads

Potentially lonely – lack of simulation from colleagues

Environmental benefits – lower carbon footprint

Working from home can give a poor impression to potential customers

You can wear what you like! Some hidden costs – e.g. extra household insurance, potentially higher capital gains tax when the house is sold

Basing a start-up at home is not ideal for every kind of new business, though the statistics suggest that it is appropriate for most. There are several things a start-up can do which makes home-working more successful:

• Dedicating a separate room or area to work. A loft conversion, converted garage or other out-building is ideal

• Home-based entrepreneurs use quiet places such as libraries when they need to do creative tasks (such as writing)

• Coffee shops are increasingly used for meetings and work • Informal and formal social networks of home-based entrepreneurs help alleviate the

problem of loneliness and isolation

Most start-ups begin in the back bedroom, kitchen or garage - i.e. where costs are low. The rapid improvement in communication and collaboration technologies makes it possible to quite large businesses to operate without traditional business locations! A start-up often changes location several times in the early years of trading, adding more space as required. Having too much paid-for space increases the fixed costs of a start-up and raises the break-even level of output. Start-ups and small businesses often have a local geographical focus, particularly retailers and franchise operations. However, a start-up business that focuses on e-commerce might quickly find itself serving a national and international market. In the BUSS1 exam, the location issues will very much be determined by the kind of business (product, customer, sector etc). The location issues tend to be more challenging for manufacturing and retail businesses.

Revision questions for Choosing a Business Location

(1) List two advantages and two disadvantages of setting up a new business from home (4 marks)

(2) Explain what is meant by a “virtual business” (4 marks)

(3) Give an example of a qualitative and quantitative location factor (2 marks)

(4) State three fixed costs that arise from the choice of a business location away from home (3 marks)

(5) Define the term “infrastructure (2 marks)

(6) Why might a start-up service business opt to locate in a shared office space? (3 marks)

(7) Explain why transport infrastructure might be a key factor in determining the location of a new food manufacturing business (5 marks)

(8) Describe three possible location factors that would be relevant to choosing a location for a new website design business (3 marks)

(9) Why is choosing a low-cost location usually important for a start-up? (4 marks)

(10) Explain why restaurants are often located close to each other in a town or city centre (4 marks)

(11) List three types of business where it is essential to be based close to the customer (3 marks)

(12) Why might a business want to locate near to its competitors? (3 marks)

Employing People

As an introduction to the topic of employing people, it is important to remember that, in the UK, most small businesses are “one-man bands”. There are approximately 4.5 million registered businesses in the UK, and of these 3.3m have no staff. Lots of entrepreneurs work for themselves, taking on the whole variety of jobs, from selling to bookkeeping and cleaning.

However, for the remainder of this section of BUSS1, we will assume that the start-up entrepreneur needs some other people to help him or her make the business work.

For most people starting a new business, the people employed by the entrepreneur will make or break the business. It is staff who get things done, sell to customers, handle orders and deal with complaints.

Of course, people matter in every kind of business. However, in a small business the choice of employees matters more, especially because staff represent a much higher proportion of the business’s costs. If an employee in a small business does not turn up for work, the business suffers. If an employee in a small business is able to multi-task, working with enthusiasm across a range of tasks, then the entrepreneur has a greater chance of making the start-up a success.

As a business grows, it will naturally require more people to carry out the work. New skills are required, a wider range of activities are undertaken and new technologies are used. If demand grows for the product or service, then capacity needs to increase. The workloads that were initially carried out by one or two people become too much, meaning that specific tasks need dedicated people to carry them out.

It is at this stage that the small business needs to take the plunge and employ people. So, what are the options?

Here are various employment options available to the start-up entrepreneur, which are covered in more detail in other study notes in this section. In summary, these are:

Employment option Definition & Overview

Full-time Permanently employed in the business; usually working over 30 hours per week. Full package of benefits & employment rights protected by law

Part-time Works less than 30 hours per week; employed under a permanent contract of employment. Package of benefits likely to pro-rated based on hours; more limited employment.

Temporary workers Employed for specific periods and/or tasks, often under contract from an employment agency

Consultants & advisers Individuals and businesses external to the business that provide specific services and advice. E.g. accountants, lawyers, marketing specialists

Full-time employees

In the UK, there are about 30 million employees working in businesses, of which around three-quarters are in full-time employment.

Full-time is generally taken to mean an employee working 30 hours or more each week. However, it is not the hours that really matter; it is the fact that a full-time employee is fully committed to working for a business in return for the employment rights contained in the contract of employment.

The main plusses and minuses of employing full-timers are summarised below:

Maximises the output from each employee – particularly if they work overtime

Cost – the major disadvantage for a start-up business. Entrepreneur has to be sure that there is enough work to justify the cost of a full-time employee

Available full-time to handle peaks or unexpected increases in workload

May work better with other employees, since they are at work for longer (no guarantee though!)

Reduced flexibility in terms of adding skills or capacity – part-time employees provide much more flexibility

Potentially better for customer service – customers are more likely to deal with the same people

Costly if there is a downturn in business activity – full-time employees still need to be paid, even if there is less for them to do

Easier to recruit people looking for the greater security and higher rewards of full-time work

Better returns from training

Part-time employees

Approximately 25% of employees in the UK are employed part-time. That means that they work “less than full-time”. Not a very helpful definition! What that means is that part-time employment is the term used to describe various methods of employing people who don’t work a full working week.

Part-timers might be employed on a:

• Weekly hours basis - e.g. 15 hours per week (5 hours on each of Monday, Wednesday & Friday)

• Zero hours contract – where there is no fixed number of hours, but the hours worked vary as the workload changes over time

• Job-sharing basis – where two or more employees share a single role, dividing up the time on an agreed basis

The main advantages and disadvantages of part-time employment for the start-up or small business are as follows:

Keeps costs down – reduces the breakeven point (lower overheads)

Potentially higher costs on training, induction

More flexible – part-timers can work overtime if there is sufficient work to do

Not always able to handle peaks in workload

Potentially more motivating & less stressful; can help retain good people

Less opportunity for training and promotion (though not too much of an issue for small businesses)

Can recruit a wider range of skills for the same total employment cost (e.g. part-time accountant + part-time designer)

Harder to communicate with employees if they spend less time in the business

Easier to recruit people who don’t want to, or cannot, work full-time (e.g. mothers with child care duties)

Temporary contracts

Whether hired on fixed-term contracts or not, temporary employees are particularly useful if the business has seasonal peaks and troughs in workload. Temporary workers also enable a business to fill short-term gaps, for example caused by illness or maternity leave.

Temporary employees are often not directly employed by the business they work for. A common arrangement is for the “temp” to be employed by an employment agency (“temping agency”) that then bills the business for whom the service is being provided.

The main upsides and downsides of using “temps” can be summarised as follows:

Flexibility – temps give the entrepreneur better control over the cost of staff, bringing in more people when required and releasing them when things get quiet

Higher cost per hour; temps are often charged out by an agency at a rate that is more than the employee would be paid if she/he was permanently employed by the business

Ideal for specific jobs, tasks and projects – e.g. installation of IT systems, website design, relocation, handling customer calls after a promotional campaign

Temps less likely to know and understand the business, or to fit in with its culture. This might be negative for customer service

Always the chance that a high quality temp can be persuaded to join the business on a permanent basis – so employing temps is a low-cost and low-risk way of recruiting people!

Potentially less motivated and productive; less interested in career progression

Consultants and advisers

Most entrepreneurs know that making a success of a new business requires hard work, the ability to multi-task, persistence and a decent amount of good luck.

One way in which a start-up can reduce the need for good luck is to ensure that weaknesses in specific skills required by the business are covered. Many start-ups find that there are some skills for which it is always best to seek outside professional help.

A good way to think about consultants and advisers is that they are specialist suppliers of advice and guidance. They don’t tend to come cheap, but the good ones are worth it!

Professional advisers can play an important role in the planning stage for a start-up. A good adviser will help the entrepreneur avoid making the expensive mistakes and errors that can leave the business with a permanent disadvantage (or worse, failure).

Advisers and consultants for small businesses can assist in areas such as:

• Accounting and book-keeping • Banking and finance-raising • Legal (e.g. contracts, leases, protecting ideas via trademarks & patents) • Design (marketing, websites etc) • Branding & other marketing tasks • IT (e.g. telecoms, customer systems, e-commerce)

The term consultant is generally taken to mean someone who provides a more specialist service than a business adviser and who works on specific projects. A consultancy project might last a few days, several weeks or longer. For the small business or start-up, consultancy tends to be on relatively short and inexpensive projects.

A summary of the advantages and disadvantages of using advisers and consultants is provided below:

Flexibility and lower costs - access specialist skills without having to employ someone on staff

Often expensive – but that it is the cost of getting specialist advice

Skills are provided for the business when needed

May not know or appreciate the culture of the business

Possible to get specialist advice for a start-up at relatively low cost whilst the business establishes itself

Potentially less committed to the business, since they don’t work there

Over time, the adviser gets to know the business well

Flexible working

Flexible working is an attractive option for many start-ups, since effective flexible working can bring many business benefits.

The term flexible working covers any kind of flexibility in terms of time (e.g. part-time work, shift work) and location (e.g. home-working) and includes the following:

• Part-time working - covered earlier

• Flexi-time - employees choose the hours they work outside a standard set of hours set by the employer

• Job sharing - two workers share a full-time job (i.e. two part-timers)

• Term time working - normal permanent contract, but the employee can take unpaid time off in school holidays

• Zero-hours contracts - workers work only the hours they are needed

For an entrepreneur, employing the first few people in a new business is fraught with risk. Make the wrong choices or pay someone too much, and the start-up's overheads soon increase significantly. The use of part-time or temporary staff is a popular way of handling increased workload.

On the other hand there is a temptation for a small business owner to want to do everything himself/herself. This can restrict the growth potential of the business. A successful start-up will soon need people with a variety of skills and experience.

Make sure you can describe the main advantages and disadvantages of the different kinds of employment.

Revision questions for Employing People

(1) State two legal issues that a start-up must consider when employing people (2 marks)

(2) Define what is meant by “full-time” and “part-time” employment (4 marks)

(3) Why might an entrepreneur investing in her first start-up be reluctant to employ full-time employees? (4 marks)

(4) Explain why a start-up business often requires staff to “multi-task” (4 marks)

(5) State three possible drawbacks of employing temporary workers (3 marks)

(6) Define what is meant by the term “freelance” (2 marks)

(7) What is meant by “job sharing” (2 marks)

(8) Outline two advantages of employing people on a temporary rather than permanent basis (4 marks)

(9) Outline the main benefits to a business from offering flexible working arrangements (5 marks)

(10) Give three examples of areas in which a start-up is likely to benefit from using the services of advisers and consultants (3 marks)

(11) What is the main difference between a consultant and an adviser? (3 marks)

(12) Explain, using two examples, what is meant by “outsourcing” (4 marks)

Section 2: Financial Planning

The second section of BUSS1 is really concerned with just two words:

(1) Cash, and

As you work through the section you will come to understanding why we put cash ahead of profit.

Not every new business is started with the intention of earning high profits. However, every start-up needs enough cash to survive. A business can earn profits, but run out of cash and therefore fail. That's why cash comes first.

A start-up cannot succeed without sensible financial planning and this section guides you through how the entrepreneur makes sure the numbers stack-up.

The key topics covered in this section are:

• Calculating sales, costs and profit - the basic building blocks of understanding basic accounts

• Break-even and decision-making - a really important series of calculations that focus on what level of output the business needs to achieve before it starts to make money

• Cash flow forecasting - the most important financial activity that any start-up can do

• Setting budgets - less important than cash flow forecasting, but still a useful management discipline

Since this section deals with numbers, there are some calculations that you will need to be able to do. Don't try to avoid the calculations - the exam is very likely to include them and you may need to practice them regularly as part of your revision!

The final part of BUSS1 is called "Assessing Business Start-ups". This is where you bring all the previous topics together (Section 1 + Section 2). In order to assess the success (or otherwise) of a start-up, you need to consider what the aims and objectives of the new business are. You'll look at the factors that can lead to success or failure, which you can then apply to the case study business that will be included in the BUSS1 exam paper!

Calculating Costs, Revenues and Profits

Meaning & importance of profit

In this section we cover some very important financial concepts for any business – but particularly any start-up business.

The word that will appear time and time again in this section is profit. A short word, but an extremely important word if you are the entrepreneur risking your investment in a new business venture.

Profit is the financial return that entrepreneurs aim to achieve to reflect the risk that they take.

Given that most entrepreneurs invest in order to make a return, the profit earned by a business can be used to measure the success of that investment.

Profit is also an important signal to other providers of finance to a business. Banks, suppliers and other lenders are more likely to provide finance to a business that can demonstrate that it makes a profit (or is very likely to do so) and that it can pay debts as they fall due.

Profit is also an important source of finance for a business. Profits earned which are kept in the business (i.e. not distributed to the owners via dividends or other payments) are known as retained profits. Retained profits are an important source of finance for any business, but especially start-up or small businesses. The moment a product is sold for more than it cost to produce, then a profit is earned which can be reinvested.

Thanks to those wonderful accountants, profit can be measured and calculated. So here is the formula:

PROFIT = TOTAL SALES less TOTAL COSTS

When total costs are greater than total sales (or revenue), the business is said to make a LOSS.

That seems pretty simple. Unfortunately for you, the BUSS1 specification requires that you look a little closer at those sales and cost items and then to understand the relationship between cost, sales and profit. We’ll guide you through what you need to know in the following notes.

You should also remember that what we cover here is particularly relevant and useful to two other parts of the BUSS1 specification:

• Break-even analysis, and

• Using budgets

Measuring sales

First, a few words on the various terms that are used by businesses, AQA examiners and your teachers to describe what is actually the same thing!

Alternative terms for “sales” include:

• Revenues • Income • Sales turnover • Takings

We’ll stick with the word “sales”, but look out for those alternatives terms in the BUSS1 exams.

Sales arise through the trading activities of a business. The value of sales achieved in a given period is a function of the quantity of product sold multiplied by the price that customers paid. So you see that total sales can be calculated by this formula:

Total sales = volume sold x average selling price

A business that wants to achieve higher sales needs to either:

• Increase the amount or volume sold (higher quantity), • Achieve a higher selling price,

Or (ideally) both of the above!

To see how this formula works, let’s look at an example.

Petra is a talented web designer and she plans to start a new web design business that will focus on designing effective e-commerce sites for niche retailers. Petra’s sales budget assumes that she will win the following volumes of design contracts in the four quarters of her first trading year:

Quarter Number Average Value Total

per Contract Sales

Jan-Mar 6 £2,500 £15,000

Apr-Jun 7 £2,500 £17,500

Jul-Sep 5 £3,000 £15,000

Oct-Dec 8 £2,750 £22,000

Total 26 £2,673 £69,500

In the example above, Petra is expecting to achieve total sales of £69,500 in the first year of trading. These sales come from a total of 26 contracts, with an average selling price per contract of £2,673.

How might Petra improve the total sales in year one?

Winning more web design contracts might help, although 26 contracts in the first year already looks like a lot of work. A fully-functioning e-commerce site for a retailer is likely to be a relatively complex and time-consuming project, so there seems little scope for Petra to increase volumes, unless she is able to raise capacity by employing extra designing or outsourcing elements of the work.

In Petra’s case, the solution to higher sales can probably be found in the average selling price achieved. By focusing on smaller number of higher-value contracts, Petra may be able to raise sales and deliver a better service.

For example, if Petra did just 20 contracts in Year one (6 fewer than budget) at an average contract price of £4,000, then her total sales will be £80,000 (20 x £4,000), an increase over the existing sales budget of £10,500.

How to achieve higher average selling prices?

You might initially think that the answer is to increase prices. In Petra’s case, she might price her contracts by reference to an hourly rate (e.g. £30 per hour). Increasing this rate would mean that the value of individual contracts would raise, but customers might not accept the new, higher price for the same work. It could be that a higher hourly rate will lead to Petra losing contracts that she would otherwise have won.

An alternative to increasing prices is to look for higher value work – for example contracts that involve more hours, but priced at the same rate.

Measuring costs

Successful entrepreneurs are usually obsessed with “costs”. They want to know:

• What it costs to produce the product or service? • What the cost of marketing the product is? • How high are the overheads of the business? • What the potential costs of a business decision are?

Why the obsession with costs? Because costs…

• Are the thing that drains away the profits made by a business • Are the difference between making a good and a poor profit margin • Are the main cause of cash flow problems in a small business • Change as the output or activity of a business changes – the entrepreneur needs to

know how these are likely to change

So let’s examine costs in a little more detail.

Distinction between fixed and variable costs

An important part of understanding costs is to look at the way that costs change when the level of activity of the business changes. We’ll use the term “output” to refer to changes in the quantities produced by a business.

In real business life, the following “textbook” distinction between types of cost is not straightforward. However, bear with us since the following topic is really important to your studies in BUSS1 and it links in closely with the topic of break-even analysis.

Costs which do not change when output changes are known as “fixed costs”

Costs which change when output changes are called “variable costs”

[Note: it is normally assumed that the percentage change in a variable cost is the same as the percentage change in output, but this doesn’t have to be the case].

Here is a summary of the main examples of fixed and variable costs in a typical start-up or small business:

Fixed Costs Variable Costs

Rent & rates for the premises Costs of raw materials and other inputs into the production process (e.g. components bought-in)

Wages & salaries of employees (those whose pay isn’t directly linked to output)

Wages of employees where pay is directly linked to output (e.g. pay per hour or pay per unit)

Marketing costs (e.g. research, advertising, Marketing costs which vary based on how much is sold (e.g. salesman commission, promotional discounts)

Insurance, bank charges, accounting & legal fees

Software and other IT-related costs (e.g. equipment leasing, website design)

Consultant and adviser costs (includes activities that are outsourced – e.g. payroll)

Product development costs (e.g. design, prototypes, consumer tests)

There are some costs which are fixed for a certain level of output, but which then change once a higher level of output has been reached. These are known as “semi-fixed costs” (you will also see them referred to as “semi-variable costs”!

A good example is office space. Take the tutor2u business as an illustration. When the business first started, it operated from a loft conversion. Then, as volumes of orders increased, the business moved to one serviced office. Since then, as volumes have grown, the business has moved into three offices to handle the need for more employees. The fixed cost of office space might have been £10,000 (say) for a year, but then increased to £20,000 per year at the higher volume (output).

Exam tips An entrepreneur starting a new business often finds it hard to forecast sales, costs and profits, especially if he/she has no experience of trading in the market. It is not unusual for the initial assumptions made in a business plan to prove inaccurate, so be careful about being too critical if this comes up in your BUSS1 case study. Setting the price for a new product is particularly difficult. Many factors influence the price that customers are prepared to pay. A good piece of advice to offer in your answers is for the entrepreneur to experiment with different prices, promotions etc in order to find a profitable price which customers are happy to accept. Start-ups often under-price their product because they fear too high a price will discourage demand when the business or product is launched. An increase in price will not necessarily result in lower quantity demanded.

Revision questions for Calculating Costs, Revenues and Profits

(1) Define the term “profit” (2 marks)

(2) State two reasons why an entrepreneur would want to forecast costs for a start-up (2 marks)

(3) State two purposes for which profits are used by a business (4 marks)

(4) In the first month of trading, a business sells 3,000 units of product A at a selling price of£10 and 2,500 units of product B at a selling price of £15. What was the total revenue in month 1? (4 marks)

(5) Explain why an entrepreneur might not be too concerned about a start-up business making a profit in the early period of trading (6 marks)

(6) Why might a start-up business set an aim of maximising sales revenue rather than profit? (4 marks)

(7) State two ways in which a business can increase its sales revenue (2 marks)

(8) When might a start-up be able to charge a high price for a new product? (4 marks)

(9) Explain why it is important for a business to know what the costs of production are (4 marks)

(10) How is total revenue calculated? (2 marks)

(11) Using an example of each, distinguish between fixed and variable costs (4 marks)

(12) What information is required to calculate the profit of a business? (4 marks)

(13) Explain why it might be difficult for a new business to set its prices effectively (4 marks)

(14) What is the relationship between variable costs and output? (2 marks)

(15) Using an example, explain why are some costs said to be "semi-fixed"? (4 marks)

(16) Explain why a start-up business is more likely to keep any profits earned in the business, rather than distribute them to the business owners (4 marks)

(17) Discuss whether profit is the most important objective for a typical start-up business (8 marks)

(18) Why might a new business only achieve relatively low sales from a product launched into a market? (4 marks)

Using Break-even Analysis in Decision-making

Of all the sections in your BUSS1 course, this is definitely one of the most important. The concept of contribution is a crucial one in business. It focuses on how much profit a business makes from each unit of product sold and whether that profit is enough to allow the business to make money overall after taking account of its fixed costs.

In the previous section we looked at the important topics of sales, variable costs and fixed costs. These essential concepts come into play in break-even analysis, so we would recommend you look back at those ideas if you are still unsure what they mean.

Break-even analysis is a mathematical as well as business concept. You need to be able to perform the calculations on this area. If you are unsure of the calculations or a bit uneasy when it comes to anything to do with numbers, you should focus your revision on this topic. There are lots of example calculations you can do in this course companion to help you.

However, break-even isn't just about numbers. You need to be able to understand the analysis and be able to interpret the results. You should also be able to describe the limitations of break-even analysis.

So what is "break-even"?

A business is said to "break-even" when it is earning enough sales to cover all its costs. The break-even point happens when sales = total costs. In other words, at the break-even point, the business isn't making a profit, but it isn't making a loss either!

It might help to use a football analogy to help explain break-even. If the business is making a profit, it is winning. If it is making a loss, then it is losing. If the business is breaking-even, then the score is a draw.

When we look at break-even, we are concerned with the following key issues:

• At what level of production (output) does break-even take place?

• What is the effect on break-even of changes in the business?

• What business decisions can be taken which affect break-even and which will help improve profits?

Contribution

Contribution looks at the profit made on individual products. It is used in calculating how many items need to be sold to cover all the business' costs (variable and fixed).

Let's start with a really important definition & formula (you really do need to know these!)

Contribution is the difference between sales and variable costs of production

Contribution = total sales less total variable costs

Contribution per unit = selling price per unit less variable costs per unit

Total contribution can also be calculated as:

Contribution per unit x number of units sold

Let's look at a simple worked example of contribution. Here is some information about a business that just sells one product:

• Selling price per unit £30

• Variable cost per unit £18

• Contribution per unit £12 (i.e. £30 less £18)

• Units sold 15,000

Using the formulae, we can perform the following calculation:

Contribution = £180,000 (i.e. £12 x 15,000 units)

Looking at the contribution per unit above (£12), you should be able to see that it can be increased by:

• Increasing the selling price per unit - i.e. more than £30

• Lowering the variable cost per unit - i.e. less than £18

Note that the total contribution of £180,000 is not the total profit made by the business. Why? This is because we have not yet taken account of the fixed costs of the business. Let's do that now...

Imagine that, in the example above, the business has the following fixed costs:

Admin: £18,000

Marketing: £25,000

Payroll: £50,000

Other overheads: £23,000

Total: £116,000

The total fixed costs of the business are £116,000. If we take these away from the contribution (£180,000), then we can calculate the overall profit or loss of the business:

Total profit = contribution less fixed costs

Total profit = £180,000 - £116,000

= a profit of £64,000 (i.e. £180,000 less £116,000)

In the above example we calculated contribution per unit by subtracting variable cost per unit from selling price per unit.

Contribution per unit is a really useful number to have, and you find it used again and again in BUSS1 questions on break-even. Make sure you know the formula and are confident in calculating it!

Break-even level of output

In this section, we’ll take you through the different methods of calculating the production output (volume, or number of units produced) at which the business achieves break-even.

We’ll look at three approaches:

• A table (or spreadsheet) showing sales and costs over different levels of output

• A formula which you can use to calculate break-even output

• A graph which charts sales and costs

Each of these approaches basically does the same thing, but you need to be happy with them all – you never know which one the examiner might include in the exam!

For each approach, we have to make some important assumptions:

• Selling price per unit stays the same, regardless of the amount produced

• Variable costs vary in direct proportion to output – i.e. variable cost per unit is the same

• All output is sold

• Fixed costs do not vary with output – they stay the same

I known what you are thinking – those assumptions don’t sound very realistic! Correct. However, you have to make these assumptions for the three approaches listed above to work! So bear with us. The unrealistic nature of the assumptions can be used when it comes to discussing the limitations of break-even analysis (which is also in the BUSS1 specification).

Using a table to calculate break-even output

Here is a table showing the sales, variable costs, fixed costs and profits from various levels of output for a one-product business:

The product is sold for £10 per unit. The variable cost per unit is £4. Fixed costs are £40,000 (the same at each level of output).

Output Sales Variable Costs Fixed Costs Total Costs Profit

'000 £'000 £'000 £'000 £'000 £'000 0 0 0 40 40 -40 1 10 4 40 44 -34

2 20 8 40 48 -28 3 30 12 40 52 -22 4 40 16 40 56 -16 5 50 20 40 60 -10 6 60 24 40 64 -4 7 70 28 40 68 2 8 80 32 40 72 8 9 90 36 40 76 14 10 100 40 40 80 20

Using the table, you can see that the break-even output is somewhere between 6,000 and 7,000 units. At 6,000 units, the business makes a loss of £4,000. At 7,000 units, the business makes a profit of £2,000.

Using a formula to calculate break-even output

Let’s use the same information as above to show how a formula can be used to quickly calculate the break-even output.

Remember contribution per unit? (Of course you do!)

Contribution per unit = selling price per unit less variable cost per unit

In this example, contribution per unit = £10 less £4 = £6 per unit

Here comes the clever bit – the formula

Break-even output (units) = Fixed costs (£) / Contribution per unit (£)

So, break-even output = £40,000 divided by £6 = 6,666

Note: break-even output is always expressed in terms of units

So break-even output = 6,666 units

If the information is available, it is always quicker and easier to use this formula rather than use a table or draw a chart.

Using a chart to calculate break-even output

Using graph paper, it is possible to chart the financial data that allows the break-even output to be measured. We’ll use the same example data one last time!

The first step is to produce two axes:

The vertical axis shows the value of sales & costs

The horizontal axis shows the output

So here is what the blank chart would look like:

The next step is to add the fixed cost line. Remember that we assume fixed costs don’t change with the level of output. So the fixed cost line (in red below) is a horizontal line, showing £40,000.

Next we add the variable costs. We assume that variable costs vary directly with output. In our example, the variable cost per unit is £4. So variable costs for 1,000 units will be £4,000, and at 5,000 units they will be £20,000. Remember that you only need to plot a couple of points to be able to draw the straight line (in yellow below).

Next step is to add the variable costs to the fixed costs for each level of output. This is important. Remember that to calculate break-even we need to know total costs. The total cost line is shown in green on the chart.

Having dealt with costs, we can now draw the line for total sales. Remember that we assume that all output is sold for the same selling price (in this case - £10 per unit). So total sales for 2,000 units will be £20,000; 10,000 units will make £100,000 of sales. The total sales line is drawn in blue below.

Almost there! The last step is to use these lines to identify certain information from the chart.

First, the break-even output. Remember this is the point where total sales = total costs. So the output is the point where the total sales line crosses the total costs line (e.g. where the blue line crosses the green line). Find this point on the chart and then follow a vertical line down to the output (horizontal) axis. You can see this brings us to 6,666 (approximately, since our chart isn’t drawn perfectly to scale!).

Another thing you can notice from the chart is the over a range of output, total costs are higher than total sales (green line higher than the blue line). That means that in this range, the business is making losses. This is the loss-making range of output.

If the actual output is more than the break-even output, the business will be making a profit. In our example, any output more than 6,666 units will mean profits are earned.

The difference between the actual output and the break-even output is known as the “margin of safety”. For example, if actual output were 8,000 units, then the margin of safety = 8,000 units less 6,666 units = 1,334 units.

Changes to break-even

We have looked at three approaches to calculating break-even output using the same information.

The next stage is to consider what happens to break-even if the data changes. The best way to see the effect of these changes is to work through some calculations, which you can do in our exercises. However, here is a simple summary which you might find helpful:

Change Effect on Contribution per Unit Effect on Break-even Output

Higher selling price Higher Lower

Lower selling price Lower Higher

Higher variable cost per unit Lower Higher

Lower variable cost per unit Higher Lower

Increase in fixed costs No change Higher

Decrease in fixed costs No change Lower

The purpose of looking at the effect of changes in assumptions is to understand what happens to profit as key data in the business changes. This is usually referred to as “what-if analysis”.

What-if analysis can be done using any of the three methods. However, it is much easier and quicker to use the break-even formulae rather than drawing charts of new tables. We’ll use the formulae for our worked example below.

Here is the starting data for our example:

Gordon’s Seafood Restaurant

Gordon Romsey is planning to open a new seafood restaurant in the popular Cornish village of Padstow to compete with his good friend Rick Strain. His business plan makes the following assumptions:

Average selling price per meal £40

Average variable cost per meal £10

Monthly fixed costs £9,300

Your task: calculate:

(1) The contribution per unit & current break-even output

(2) The current margin of safety assuming that Gordon sells 1,200 meals per month

(3) What would happen to break-even output if the average selling price per meal increased to £50

(4) What the margin of safety would be if monthly fixed costs were 20% higher but there was no change in the number of meals served per month and the average selling price stays at £40 per meal

So, using our break-even formulae, we can quickly get to the answers. Here’s how:

Question (1)

Contribution per unit = £40 - £10 = £30

Break-even output = fixed costs / contribution per unit = £9,300 / £30 = 930 meals per month

Question (2)

Margin of safety = current output less break-even output = 1,200 meals – 930 meals = 270 meals

Question (3)

An increase of £10 in the average selling price per meal would increase the contribution per unit to £40 (i.e. £50 - £10).

So the break-even output will now be £9,300 / £40 = 744 meals per month

That means that the break-even output has fallen from 930 to 744 meals. Gordon’s restaurant has to sell fewer meals before it breaks even. That’s good news!

Question (4)

Fixed costs will be 20% higher: that means fixed costs will be £9,300 x 1.2 = £11,160

Break-even output will now be £11,160 / £30 = 1,116 meals per month

[note: the break-even output has risen (bad news) because fixed costs have gone up]

Margin of safety now = 1,200 meals – 1,116 meals = 84 meals per month

The margin of safety has fallen (bad news)

Strengths and limitations of break-even analysis

Break-even analysis is a practical and popular tool for many businesses, particularly start-ups. However, you also need to know about the limitations of the method. Here is a summary:

Strengths Limitations

Focuses entrepreneur on how long it will take before a start-up reaches profitability – i.e. what output or total sales is required

Unrealistic assumptions – products are not sold at the same price at different levels of output; fixed costs do vary when output changes

Helps entrepreneur understand the viability of a business proposition, and also those who will lend money to, or invest in the business

Sales are unlikely to be the same as output – there may be some build up of stocks or wasted output too

Margin of safety calculation shows how much a sales forecast can prove over-optimistic before losses are incurred

Variable costs do not always stay the same. For example, as output rises, the business may benefit from being able to buy inputs at lower prices (buying power), which would reduce variable cost per unit.

Helps entrepreneur understand the level of risk involved in a start-up

Most businesses sell more than one product, so break-even for the business becomes harder to calculate

Illustrates the importance of a start-up keeping fixed costs down to a minimum (higher fixed costs = higher break-even output)

Break-even analysis should be seen as a planning aid rather than a decision-making tool

Calculations are quick and easy – great for giving quick estimates

Focus your BUSS1 studies on understanding how various changes in the business can affect the break-even level of output. A break-even chart can help you illustrate this, but it is more important to understand why the changes affect break-even output, and what a business can do in response. Don't assume that break-even analysis is a proven, scientific method. It makes lots of assumptions about the ability of the business to identify which costs are variable and which are fixed - in reality this can be quite tough.

Break-even analysis is particularly useful for a new business or for any business which is loss-making or barely making profits. In the exam, you are unlikely to be asked to draw a break-even chart from scratch. But you might have to complete the missing bits of a part-complete chart and/or identify the results of the chart.

Revision questions for Using Break-even in Decision-making

(1) What is meant by the term “break-even” (2 marks)

(2) Why is it important for a start-up to understand the break-even point? (4 marks)

(3) Define the formula for calculating “contribution” (2 marks)

(4) A computer games retailer buys 450 boxed games for £12 which will be sold for £40 each. What is the total contribution from these games? (3 marks)

(5) If the total contribution is £260,000 and fixed costs are £190,000, what is the profit? (2 marks)

(6) If the total contribution is £75,000 and variable costs are £360,000, what is the total revenue? (2 marks)

(7) State two ways in which contribution can be used by a business to help make decisions (3 marks)

(8) What happens to the break-even output if there is an increase in the rent paid on a business’ factory? (2 marks)

(9) What is the effect on break-even output of a reduction in the contribution per unit? (2 marks)

(10) A hairdresser is concerned that she has to work 30 hours per week just to break-even. State three things she could do to reduce the break-even level of output (3 marks)

(11) An entrepreneur discovers that the actual break-even level of output for his start-up is much higher than he had assumed in his business plan. Analyse three possible reasons why this might be so (4 marks)

(12) Explain what is meant by the term “margin of safety” (3 marks)

(13) State three weaknesses or limitations in break-even analysis (3 marks)

Cash Flow Forecasting

There is a phrase that successful entrepreneurs understand above all others. Here it is…

“cash is king”

Which means what? Why is cash king when businesses exist to make a profit?

The answer is that a start-up might make a loss, particularly in the early stages of trading. However, so long as the business has enough cash in the bank to pay the bills, it will be able to survive. For most new businesses, survival is what it is about whilst the entrepreneur works hard to get the business up and running properly.

In order to be sure that the business has enough cash to be able to pay the bills, an entrepreneur must have a cash flow forecast. The forecast is a prediction of the totals for each kind of cash flow into and out of the business, usually calculated on a monthly basis.

Cash flow forecasting is an essential discipline for a start-up business and it is quite likely to feature in your BUSS1 exams.

However, before we look at the mechanics of putting the cash flow forecast together, we need to consider first the nature of cash flow.

The nature of cash flow

When you look at the bank statement of any business, you soon realise that cash flow is a dynamic and often unpredictable part of business life.

In business, cash is always on the move…

Cash flows into the bank account when customers pay for their sales, when a loan is received from the bank, interest is received or when assets are sold.

Cash flows out of the bank account when suppliers are paid, employee wages and salaries are paid; interest is paid to the bank and so on.

The difference between the cash inflows and cash outflows during a specific period (e.g. a week, month) is known as the “net cash flow”.

The challenge for any business (and particularly a start-up) is to ensure that it manages its net cash flow to ensure that it does not run out of money.

Start-ups and small businesses are especially vulnerable to cash flow problems. Here are some of the main reasons:

It can be a while before the business makes its first sales – the pre-trading period often involves incurring costs without getting any revenue in return

Suppliers may demand immediate or early payment from the start-up as the business has not developed a track record for paying bills on time

A new business usually has to spend up-front on expenses such as marketing and product development.

The new business will not have reserves of cash built up from profitable trading – an important source of cash known as “retained profits”.

During the early months of trading, therefore, a start-up business faces its most significant challenges in managing cash flow. Without careful management and planning of cash, the business may run out of money. You can probably see why cash flow problems are a major cause of business failure amongst start-ups.

How to forecast cash flow

Let’s now look at how to put together a cash flow forecast for a start-up business. We’ll use an imaginary case study business to illustrate the mechanics of how the forecast is put together.

For a start-up, working out the likely cash flows is a tricky task. The entrepreneur cannot rely on historical cash flow data. Instead the forecast needs to be built up by making assumptions about the likely amount and timing of each item in the forecast.

Some of these assumptions may be quite easy to make – the rent payment each quarter, the monthly wages for the part-time admin lady.

However, other assumptions are harder, particularly sales and cash receipts. How much will be sold each month? When will customers actually pay (assuming that they don’t pay in cash at the time of sale)?

To illustrate the challenges, let’s put together a three month cash flow forecast for the following start-up business:

Example – Sophie & Jack

Experienced interior designers Sophie and Jack decide to go into business together. They enter into a partnership, with each of them investing £5,000 into the business. Their “product” is a home-makeover service, modeled on the popular daytime television programmes where ordinary households are transformed through small building work and decoration.

Sophie and Jack expect to gain 2 projects per month for the first 6 months of trading; each project will generate £5,000 of sales. Customers will be expected to pay 25% of the price as a deposit with the balance on completion. Each project is expected to last one month.

The main costs associated with the start-up are:

• Equipment - £2,500 (month 1) & £2,500 in month 4), a total investment of £5,000 • Marketing - £500 per month • Legal and accounting costs - £1,250 (month 1) • Project materials – £1,500 per project (i.e. £3,000 per month). It is assumed that

suppliers will allow Sophie & Jack 30 days to pay for these costs • Sub-contracted labour (other tradesmen) - £4,000 per month. These will be paid in the

month incurred. • Sophie & Jack will pay themselves a salary of £1,000 each per month whilst the

business is established. • Other sundry costs of £500 per month have been assumed

Putting these assumptions into a cash flow forecast produces the following results:

Jan Feb Mar Apr May Jun Total CASH INFLOWS Investment 10,000 10,000 Credit sales 2,500 10,000 10,000 10,000 10,000 10,000 52,500 Total inflows 12,500 10,000 10,000 10,000 10,000 10,000 62,500 CASH OUTFLOWS Project materials 3,000 3,000 3,000 3,000 3,000 15,000 Sub-contract labour 4,000 4,000 4,000 4,000 4,000 4,000 24,000 Marketing 500 500 500 500 500 500 3,000 Legal and accounting 1,250 0 0 0 0 0 1,250 Equipment 2,500 0 0 2,500 0 0 5,000 Sophie & Jack salaries 1,000 1,000 1,000 1,000 1,000 1,000 6,000 Other costs 500 500 500 500 500 500 3,000 Total outflows 9,750 9,000 9,000 11,500 9,000 9,000 57,250 NET CASH FLOW 2,750 1,000 1,000 -1,500 1,000 1,000 5,250 Opening balance 0 2,750 3,750 4,750 3,250 4,250 Closing balance 2,750 3,750 4,750 3,250 4,250 5,250

The format of the cash flow forecast above is typical of the style used by most small businesses. You may come across different layouts and headings, but don’t worry. The important thing is to understand the main information contained in the forecast and to be able to analyse what the figures show.

So, let’s take a look around the structure of the cash flow forecast:

Cash inflows – these are the movements of cash into the business. The investment by Sophie and Jack into the partnership is a one-off cash inflow whereas the payments by customers are regular sources of cash. The challenge for Sophie and Jack is to ensure that customers pay on time. Delayed payments, for whatever reason, can seriously affect the cash flow of a small business.

In the forecast above, the monthly cash inflows are around £10,000 p/m and total £62,500 for the first six months of trading. Note that this total for cash inflow is not the same as sales. Those cash inflows include £10,000 of investment into the partnership.

Cash outflows – these are movements of cash out of the business. An important part of estimating cash outflows is to ensure that a prudent (or cautious) view is taken about both the size and timing of payments. Have all costs been taken into account? Will suppliers really offer 30 days credit before payment is required? A sensible cash flow forecast allows for what is known as “contingencies” – i.e. unexpected costs or higher than expected payments.

Looking at Sophie & Jack’s cash flow forecast, the monthly cash outflows are typically around £9,000 except for a couple of months where some investment in equipment increase the amount of cash going out of the business.

Net cash flow – this is simply the difference between the total cash inflows and the total cash outflows. Net cash flow will vary by month. When looking at a cash flow forecast in the exam, always remember to look for months in which there is a net cash outflow (i.e. a reduction in the cash balance of the business). If there is a cash outflow, the questions you should ask are:

- Does the business have enough cash left after the outflow (look at the closing balance) - If not, does the business have access to a bank overdraft

You can see from Sophie & Jack’s cash flow forecast that there is a small net cash inflow each month except in April when there is a net cash outflow of £1,500.

Net cash outflows are often caused by one-off payments (e.g. buying equipment, paying tax such as VAT) or where seasonal falls in sales mean that cash inflows are not strong.

Opening balance – this is simply the balance in the bank at the start of a period. For a start-up, the opening balance is zero. As soon as investment funds are added to the bank, then the cash flows begin! Remember that the opening balance in any one month should equal the closing balance at the end of the previous month.

Closing balance – this is the amount in the bank at the end of the month. In the BUSS1 exam, you might be asked to calculate the closing balance. The formula for the closing balance is opening balance + net cash flow.

During your studies you should try to look at several different kinds of cash flow forecast like the one above. It is important to build your confidence looking at the numbers – seeing how they are calculated and then making some judgements about what the numbers mean!

Why cash flow forecasting is important

We said earlier that “cash is king”. Cash flow is the life-blood of a small business. So you can probably seen that it makes sense for a start-up to forecast (predict) what is going to happen to cash flow to make sure it has enough to survive. If a business runs out of cash and fails, then it would be a shame if the entrepreneur hadn’t at least seen it coming.

The AQA examiner wants you to know some “textbook reasons” about why businesses forecast cash flow, so here is a list of good reasons that you should learn!

Identify potential shortfalls in cash balances in advance – think of the cash flow forecast as an “early warning system”. This is, by far, the most important reason for a cash flow forecast.

Make sure that the business can afford to pay suppliers and employees

Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts. Note – this is not really a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale

As an important discipline of financial planning – the cash flow forecast is an important management process, similar to preparing business budgets.

External stakeholders such as banks may require a regular forecast. Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals

Limitations of cash flow forecasting

It is important to remember the limitations of a cash flow forecast. They are not always reliable, largely because businesses need to make assumptions about the future. When commenting on any cash flow forecast in the exams, take a look at which figures are estimates and try to assess whether the entrepreneur has built in some contingency or safety margin.

Common reasons why cash flow forecasts prove unreliable include:

Sales prove lower than expected

It is too easy to make optimistic assumptions about sales, particularly before the business starts trading. Market research may help an entrepreneur estimate potential sales volumes and prices that customers will find acceptable. However, there is no substitute for actually starting to sell. Only by trading does the entrepreneur discover whether the product is attractive to customers, the price they will pay and what seasonal and other factors actually affect demand.

Customers do not pay up on time

This is an issue for businesses that allow customers a period of credit before paying for their purchases. Many small businesses suffer significantly from slow or delayed payment by customers. It is not unusual for a small business to have to wait 30-60 days before invoices are settled – sometimes much longer.

The cost of raw materials and other inputs prove higher than expected

This can happen in several ways. For example, the business may underestimate the price that has to be paid for each supply. Alternatively, the quantity of raw materials required may be under-estimated, perhaps because the production process doesn’t turn out to be as efficient as expected.

Certain costs are not included

A common problem for start-up, particularly if the entrepreneur does not have experience of the market in which is it launching. New entrepreneurs are often surprised by the type of costs that a small business incurs, often unexpectedly high.

Given the limitations of cash flow forecasting outlined above, how should an entrepreneur respond?

A good way is to create two different versions of the cash flow forecast:

(1) A “base case” version which is the expected or hoped-for version (2) A “downside” or “worst case” version, which takes a pessimistic view of what might

Which forecast should be used? It depends on who is reading it. The bank manager is probably best given the “downside” version so that his/her expectations are managed.

Sources of information for cash flow forecasts

The main sources for the assumptions used in the cash flow forecasts for a start-up will be:

Entrepreneur experience – there is no substitute for experience of running a small business. Some of the assumptions will be based on “gut feel” and instinct. A cash flow forecast produced by an inexperienced entrepreneur has to rely much more heavily on other sources.

Market research into key aspects of sales and costs – e.g. seasonal fluctuations in demand, average selling prices and quantities in the market, typical gross profit margins, the lead-time between marketing campaigns and orders etc

Suppliers – a great source of information on costs and also the timing of payments. What are the industry norms for paying suppliers in the market?

Advisers – it makes sense for start-ups to get help from advisers when putting the cash flow forecast together. The advisers might be from Business Link or other government-funded agency. It could also be the local bank manager or accountant – whose help is particularly useful when it comes to making sure the forecasts are complete & mathematically sound.

Exam tips You cannot underestimate the importance of cash flow forecasting for a start-up. Think of the cash flow forecast as the "early warning system", which will show when the danger periods are and how viable the business is. A business neglects cash flow forecasting is either (1) hugely profitable and doesn't care, or (2) taking a huge risk. Don't forget that cash flow forecasts are not perfect - they have their limitations, not the least because they are based on estimates and assumptions. It is important for the entrepreneur to think about the different scenarios that might arise - this is known as "what-if" analysis. The "worst-case" scenario is always worth assessing to see what might happen if things do go badly wrong! It is really important to understand that cash flow is not the same as profit. A business can be profitable, but suffer from cash outflows if customers don't pay their debts or suppliers need paying early. Investment in fixed assets (cash outflows) will help profits in the medium-term, but is bad news for cash flow in the short term. Don't forget to make the links with other parts of the BUSS1 course. For example, the use of market research can help improve the accuracy and reliability of cash flow assumptions. The cash flow forecast should also be consistent with the choices made about sources of finance. There is no point assuming the use of a bank overdraft if the bank will not provide the overdraft facility.

Revision questions for Cash Flow Forecasting

(1) Define what is meant by the term "cash flow" (2 marks)

(2) Why is it important to manage cash flow? (4 marks)

(3) What is the difference between a cash flow forecast and a cash flow statement? (2 marks)

(4) List three typical cash inflows for a small mail-order business (3 marks)

(5) Explain why a bank manager would want a start-up business to produce a cash flow forecast before agreeing to provide an bank overdraft (4 marks)

(6) List four typical cash outflows for a small retail business (4 marks)

(7) Identify two external organisations that might wish to see the cash flow forecasts of a business (2 marks)

(8) In a cash flow forecast, the opening balance of a particular period (e.g. month) is equal to what figure from the previous period? (2 marks)

(9) Explain why it is possible for a business to be profitable in a period but for the cash flow to be negative in the same period (4 marks)

(10) Explain why the use of forecasting scenarios is a useful discipline for a small business (4 marks)

(11) Why are spreadsheets so useful for producing a cash flow forecast? (4 marks)

(12) List three limitations of a cash flow forecast (3 marks)

(13) Describe why having a bank overdraft facility can help a small business manage its cash flows (4 marks)

(14) List three actions a small business could take to improve its cash flow (3 marks)

(15) How might a business benefit from delaying cash payments? (4 marks)

(16) Identify three cash flow difficulties that a start-up is likely to encounter in the first few months of trading (6 marks)

(17) List four ways in which a business uses surplus cash balances? (4 marks)

Setting Budgets

When you hear the words “budgets” and “financial planning” you probably feel the urge to fall asleep. However, if you can stay awake whilst you work through this section of BUSS1, it will be worth it. For setting budgets is an important part of starting a new business and it is closely linked to the topics of:

• Cash flow forecasting, and • Business plans

So what is a budget? A good definition of a budget is a “financial plan for the future concerning the revenues and costs of a business”.

A “financial plan for the future” might sound a bit like the cash flow forecast – and you would be almost right! However, there are two key differences between a budget and cash flow forecast.

The first is that a budget is focused on the trading profitability of the business rather than the cash flows. When looking at budgets, you are really concerned with sales (revenues) and costs. In other words, a budget is an estimate of sales income together with the costs required to produce those sales.

The other key difference is that a budget is a plan – it outlines what the business wants to happen. This is different from a forecast, which is what a business expects to happen.

Budgets are all about setting targets and allocating resources. In order for a budget process to be effective, a business needs to:

• Estimate sales reasonably accurately (sales budget), and • Estimate costs precisely (expenditure budget)

Another important point to remember is that budgeting is part of financial control.

Financial control is different from book-keeping (which is about recording the financial transactions of a business). Book-keeping is, of course, important since any business needs accurate and up-to-date figures about its financial position. However, financial control is about using the figures to keep control over the business.

As we shall see, the use of budgets brings some important disciplines to the management of any business – large or small.

Why businesses use budgets

Here are the main reasons why businesses set up and use budgets:

Budgets are used to measure whether key business objectives and targets are being achieved. For example, if the budget has an objective of achieving sales of £150,000 in the first year of trading, then the actual sales can be compared with this budget to measure success.

Budgets play a key role in controlling expenditure. The budget sets out the costs that the business can afford to incur. When actual costs are measured, the entrepreneur can see whether the expected costs are likely to more or less than expected.

Budgets can provide a sense of direction for management and employees in the sense that they include targets that provide a focus. However, remember that most start-ups businesses will have few, if any, employees. So the direction-setting purpose of the budget is really for the entrepreneur.

For a small business or start-up, the process of creating a budget is relatively straightforward, although that doesn’t mean it is easy.

Sales budget

The hard bit for a new business is to work out the projected sales for the budget period. The sales budget needs to take into account factors such as the size of the market, existing competitors and their response and the capacity of the business.

• What sales volumes will be achieved? • What price can the product or service be sold at? • When will the sales arise and through which distribution channels?

For the sales budget, it is important to be realistic. An overly-optimistic sales budget will probably give the impression that the business will generate more cash than it actually can.

Market research places a key role in the sales budget of a start-up. The assumptions made in the sales budget about selling prices, volumes and distribution channels (where products will be sold) need to be realistic and informed by what the business can find out about what really happens in the market.

Ideally, the sales budget will be based around assumptions made for individual products or product groups. The budget for each product is then added up to make the overall sales budget. A simple example is illustrated below:

Sales Budget Niche Children's Fashions Ltd

Product Qty Price Sales

000 £ / unit £'000

Girls Jackets 3.0 £11.99 £36.0

Boys Jackets 4.5 £12.99 £58.5

Girls Blouses 2.5 £8.99 £22.5

Boys Shirts 5.0 £7.99 £40.0

Total 15.0 £156.9

Expenditure budget

The next step is to assess what the costs are of delivering the sales budget. This is the expenditure (or costs) budget and is concerned with question such as:

• What are the direct costs of sales – i.e. costs of raw materials, components or subcontractors to make the product or supply the service?

• What are the sales-related expenses, such as commissions? • What are the fixed costs or overheads?

It is important that the expenditure budget is broken down into as much relevant detail as follows. For example, the budgeted fixed costs and overheads could be analysed by type, such as:

• Cost of premises, including rent, rates, office insurance etc • Staff costs – wages and salaries (don’t forget to allow for employer’s national insurance) • Utilities – e.g. lighting, heating, • Communication costs –e.g. main telephone, mobile phones, internet and email access,

web hosting • Marketing and other printing, postage and stationery • Vehicle expenses • Equipment costs (including relevant software licences) • Advertising and promotion • Travel and subsistence expenses • Legal and professional costs, including the costs of setting up the business structure

You can see from the list above that there are many items of expenditure that need to be considered by the start-up prior to trading. Most of the above cost categories will continue to be incurred by the business once it has started trading. However, the expenditure budget is particularly important for a start-up since it does not begin to generate income until its starts to trade with customers. Costs, on the other hand, are often incurred well before the first customer is served!

Market research also comes into play when creating the expenditure budget. It is particularly important if the entrepreneur has no previous experience of operating in the target market.

The overall aim of the expenditure budget is to ensure that it is prudent and complete. What do we mean by these two terms?

Prudent – the budget makes sensible, cautious assumptions about the value of costs to be incurred. For example, a prudent expenditure budget does not assume that the business will operate at maximum efficiency or that raw materials will be sourced at the best possible price.

To do so would be to create unrealistic expectations about what the profitability of the business can be.

Complete – the expenditure budget does not miss out any significant items or categories of cost. For example, if the start-up plans to sell via e-commerce, the expenditure budget should include items such as web design, server hosting, transaction fees etc. There is nothing worse when a start-up begins trading to discover a bunch of costs that had simply been missed when the expenditure budget was put together!

Profit budget

The profit budget is simply the difference between the sales budget and the expenditure budget.

The profit budget shows what the budgeted net profit is for each of the budgeted periods (usually months).

In other words, having got budgeted figures for sales and expenditure, the start-up can work out how much profit it should earn as it begins life as a new business.

The profit budget isn’t simply a mathematical calculation (performed by a spreadsheet). It enables the entrepreneur to look at costs and work out ways to reduce them. It can also help highlight potential cash flow problems, since periods where the business is budgeted to be loss-making are often associated with negative cash flow.

Methods of setting the budgets

In most established businesses, the budget-setting process is quite straightforward. Managers look at what actually happened last year, what has changed in the business and its markets, and then set a new budget that reflects the targets and objectives they want to achieve. In reality, this can be quite time-consuming (especially for a multi-location & complex business), but at least the budget-setters have the advantage of using real information on how the business trades.

However, remember that in BUSS1 we are mainly looking at a new business that is getting ready to trade. Management don’t have the luxury of lots of historical sales and expenditure data. Time is short too – there are lots of other activities that need to be done rather than spending lots of effort on putting a budget together.

So, for the start-up entrepreneur, setting a sensible budget is a tough job. How does he or she do it? Here are some tips:

An entrepreneur with some experience of the market will make good use of “rules of thumb” to set key assumptions in the budget. For example, he/she may know that the average mark-up on cost is 60%, or that the average selling price is three times raw material costs. Using these guides, if accurate, helps make sensible assumptions. Rules of thumb are identified in several ways. One great method is to simply speak to suppliers!

Market research should be used wherever possible to fill in the gaps. We touched on this when describing how the sales budget can be prepared.

Good use of advisers and consultants helps too. For example, the main high street banks have detailed experience of most markets and industry sectors; they provide free guides to the main business planning issues in these markets. Good use of expert information, usually available for free, can help make the budgets realistic and reduce the time taken to complete them.

An experienced entrepreneur will accept that some elements of any start-up budget will simply be based on “guesstimates” or hunches. This is often the case for the sales budget. As long as

the budget is revisited frequently and costs have been prudently estimated, then the use of guesstimates is fine.

Time spent working on the budget, and then periodically reviewing and amending the main assumptions, is time well spent. The budget-setting process need not take forever (a well designed spreadsheet can save dozens of hours).

Limitations of budgets

Whilst the budget-setting process is a useful management discipline, you need to be aware of the many limitations of budgets, particularly for start-ups and small businesses:

• Budgets are based on estimates and assumptions. By definition, actual results will vary from the budget (these are known as “variances” and you will cover these in BUSS2). The important point is that a business needs to know why actual results vary from budget.

• A start-up has no trading history which it can use to base the budget assumptions. For example, it would be nice to know about the seasonal profile of demand and to see what costs are actually incurred by the business idea. The first time the start-up budget is prepared, much of this information has to be guesswork (a similar problem exists when it comes to preparing the cash flow forecast).

• Setting and monitoring budgets takes time. We know that most start-up entrepreneurs are short of time. So a start-up budget (if it is produced at all) is often kept quite simple and brief so that the entrepreneur can focus efforts on other tasks.

• The motivational effect of setting budgets is limited if the start-up has no or few employees and managers.

Exam tips Remember that, for the start-up entrepreneur, the time spent setting and monitoring budgets has an opportunity cost. Three days working on a budget spreadsheet could be spent instead on visiting customers, training staff or developing new product ideas. As a result, an effective budget system for a start-up is likely to be pretty simple - often nothing more than a single spreadsheet. Don't be too critical of a BUSS1 case study business that finds it hard to summon enthusiasm for a complex budgeting process!

Revision questions for Setting Budgets

(1) Define what is meant by the term "budget" (2 marks)

(2) List three advantages that a budgeting system brings to a business (3 marks)

(3) Why might a budgeting system help a start-up business to control expenses? (2 marks)

(4) List three different kinds of budget that might be created by a start-up business (4 marks)

(5) Identify five areas that a business should research so that it can produce realistic budgets (6 marks)

(6) What items might be included in the materials budget for a start-up manufacturer of processed foods? (3 marks)

(7) Explain why it is important for a start-up business to estimate with reasonable accuracy the level of future sales (4 marks)

(8) Why do small businesses traditionally find it harder to budget realistically for revenues? (2 marks)

(9) List three reasons why a new fast-food outlet may be unable to budget its sales accurately during the first year of trading (3 marks)

(10) Explain why costs are generally related to the level of a business's activity (4 marks)

(11) Explain the link between a business budget and the aims and objectives of a start-up business (4 marks)

(12) How often might a start-up business monitor actual results compared with a business? (4 marks)

(13) Explain three reasons why a start-up business might find the budgeting process difficult (6 marks)

(14) How might budgets motivate staff? (4 marks)

(15) Explain why a small business might benefit from setting budgets on areas such as advertising, travel and accommodation costs (4 marks)

Assessing Business Start-ups

The final part of the BUSS1 course takes you beyond the start-up planning process and asks you to consider how a new business has performed after it has traded for a while.

We have already learned that most new businesses don’t survive beyond 3-5 years of trading. Some go bust. Others are simply closed or are allowed to drift as a business shell” because the original entrepreneur has gone onto do other things. Some start-ups are eventually sold and integrated into larger businesses so that they no longer exist as a separate business.

Given this, how can we assess whether a start-up has been successful or not?

The trick is to consider why the business was set-up in the first place – to look at the aims and objectives of the entrepreneur.

When you take your BUSS1 paper, it is important to remember that businesses are started for a variety of reasons. Not every new business wants to grow rapidly and become a multi-million pound concern. Not every entrepreneur wants to build a business that will generate significant personal wealth. Not every business will end up employing dozens of employees and open locations around the country and overseas.

So a good place to start this section is to consider the main types of start-up business and think about how their aims and objectives vary.

We’ll look at four key kinds of business:

• Part-time businesses

• Lifestyle businesses

• Social enterprises

• Ambitious businesses

Part-time businesses

Do you sell goods on eBay or other online auction sites? If so, then you run a part-time business.

Part-time businesses are a great way to start in business; a chance to learn what is involved without giving up the “day job” or whilst you complete a course. Part-time businesses are also ideal for people with significant other commitments (e.g. child-care).

You’ll come across many part-time businesses. EBay, party-based products, consultancy and mail-order can all be sold successfully using this method.

The objectives of a part-time business tend to be quite modest. Most aim to supplement an existing living, or earn money to cover costs. For the business to grow to its full potential, it is almost always necessary to take the business on full-time.

Lifestyle businesses

These are businesses where the entrepreneur works full-time, but the main aim of the enterprise is to provide a satisfactory living. These entrepreneurs are not ambitious; they are happy to “tick over” with the business essentially producing the same performance each year.

The main advantages of lifestyle businesses are lower stress (usually) and a low financial investment.

The downside is that lifestyle businesses tend to generate low returns and they still have quite a high failure rate.

A quick search of a business-sale website, such as www.businessesforsale.com, will soon show you how many lifestyle businesses change hands every year. Take a look at the following link which will show you how many fish & chip shops are being sold on a particular website. These are all lifestyle businesses; they are being sold for various reasons (retirement, illness, financial need etc). A new owner will come along eventually and try to make a success of the fish & chip shop. But the chances are the business will be back on the market in the future!

The aims and objectives of a lifestyle business are also likely to be modest.

Social enterprises are businesses that trade in goods or services for a social purpose. They have grown in number rapidly in recent years, with some very well known names establishing themselves against much larger competitors. Good examples include Divine Chocolate & Cafedirect.

Social enterprises have a different group of aims and objectives from a traditional profit-motivated business. They are usually said to focus on the “triple bottom line”, where their objectives are measured in terms of:

(1) Financial surplus (surplus is similar to profit)

(2) Social responsibility and contribution

(3) Environmental impact

The surplus made by a social enterprise goes to one or more social aims. For example, Divine Chocolate pays a dividend from its annual surplus (profit) to the cocoa farmers who supply the raw materials. This in turn is reinvested in local infrastructure projects by the farmers.

Ambitious businesses

Our final category of business is, perhaps, the most obvious. The entrepreneur behind an ambitious business aims for significant growth – in sales, profits etc. These businesses tend to need higher investment, they take more risks, but the returns are potentially higher. Success takes great energy, careful planning and a bit of luck. Starting and running an ambitious business can dominate the life of the entrepreneur.

When we read about the success stories of fast-growing start-ups or famous entrepreneurs, we are normally looking at ambitious businesses.

The key point to remember in BUSS1 is that not all businesses are started with such ambitious aims and objectives.

The risks of business failure

In the previous section we pointed out that describing a business as a “failure” is potentially misleading, since it depends on what the aims and objectives are.

However, whatever the kind of business, all face risks that the business will not achieve what it aims to do. In some cases that means risks that lead to the financial failure of the business.

What are the reasons why a new business fails? Here are the main ones:

Poor management

Plain and simple. Poor decisions are taken; costs are not kept under control; management don’t understand their market & customers well enough and offer a poor quality product. Bad management is at the heart of most business failures. A business idea or model that is a bad one is likely to fail, and this is a racing certainly if it is accompanied by poor management.

Sales lower than expected

It is very easy to over-estimate the sales that will be achieved by a start-up. The business plan can be over-optimistic about the price that customers will accept and the volumes they will buy.

Start-up costs too high

Another common weakness of start-up business planning. Sometimes costs are simply missed out of the cash flow forecast. Alternatively the amount is under-estimated. This is a big concern at the start-up stage, where finance is limited. A delayed product launch is often the cause of start-up cost overruns.

Unexpected shocks

These can come in various forms, although you have to be pretty unlucky to be caught by them. For example, you may have seen some businesses devastated by the floods in the UK during 2007 – those without suitable insurance may have failed. Businesses dependent on the UK housing market are suffering during 2008 as house prices fall and the number of transactions drops. However, for the vast majority of failed business, unexpected shocks are not the reason.

Overdependence on small number of customers

A start-up that is too reliant on one or more customers is at greater risk of failure than one which has a broader, more diverse customer base. If the customer relationship breaks down, or the customer itself fails, then the business is at risk. A good example – the component and other suppliers that were over-reliant on supplying Rover Cars, which failed in 2005.

Poor quality This is linked to poor management. Persistent poor quality products or services will ultimately kill a business.

Overtrading Sometimes a small business can grow too quickly and, as a result, it runs into serious cash flow problems. A business whose sales grow rapidly might find that customers take too long to pay their debts, whereas stocks build and suppliers demand payment on time. The result can be a business which appears to be successful and profitable, but which runs out of money.

Assessing the business plan

One way the AQA examiner might test this area is by asking you to assess the strengths and weaknesses of an entrepreneur’s business plan. If we remember the main purposes of the start-up business plan, one was to provide a disciplined approach to working out how the business should be run. What things should you look for?

Imagine you are one of the five Dragons in the Dragon’s Den and you are presented with an overview of a business idea and the supporting business plan. What questions would you ask the budding entrepreneur about the plan and the idea?

There are some fundamental questions that every plan (and business) should be able to answer confidently:

Is there a market in the gap?

Never mind a “gap in the market”. Much more important is whether there is sufficient demand for the start-up’s product or service. How many customers will buy, at what price, and when?

What competition will the business face?

Poor business plans tend to be complacent about the competition a new business will face. It is too easy to assume that entering a market will be plain-sailing and that existing operators in the market will not responds (e.g. by starting a price war or by launching a promotional campaign to retain customers).

Does the business have the right management skills and experience?

A good idea will not work unless the entrepreneur has the right skills and is able to build the right kind of team around her/him.

It is worth knowing that experienced entrepreneurs tend to produce better business plans! They have made mistakes in setting up their previous businesses; they tend to be cautious about sales forecasts and prudent when it comes to forecasting costs and cash flows. In your BUSS1 exam, look for evidence that the featured entrepreneur(s) have set up and run businesses before – it could be significant.

Does the business Cash flow is a critical issue for nearly all start-ups. As an investor or

have sufficient cash before it reaches profitability?

lender, you would look very carefully to see if the cash flow forecast has been prepared carefully and is realistic.

What is the break-even position

Yes – real business people actually use a concept covered in your business studies course! For start-ups that exist in order to make a profit, it is vital to understand the break-even position and the relationship between sales, variable costs and fixed costs.

It is vital that you appreciate the different objectives that a start-up might have. Not every business wants to grow rapidly into a multi-million pound concern. Many small businesses simply want to earn a lifestyle return.

In the BUSS1 case study, you should expect the business to be facing risks, problems and the possibility of eventual failure. This is entirely normal for a start-up.

You should also expect reality to be different from the assumptions made in the original business plan.

Revision questions for Assessing Business Start-ups

(1) State three possible objectives of an entrepreneur starting a new business (3 marks)

(2) State three benefits of a start-up setting clear objectives for the business (3 marks)

(3) Explain what is meant by a “smart” objective (3 marks)

(4) Describe the main risks faced by a start-up high street fashion retailer (5 marks)

(5) What is meant by a “lifestyle business” (2 marks)

(6) Explain why a poorly-prepared business plan might lead to the failure of a start-up? (4 marks)

(7) Explain why an unexpected increase in demand might cause problems for a small business (4 marks)

(8) State three reasons why there may be a change in demand that is not anticipated by a new business (3 marks)

(9) Outline the steps a small business could take to deal with an unexpected increase in costs (4 marks)

(10) State two ways in which poor management might cause the failure of a start-up (2 marks)

(11) Explain why cash flow is often a major problem for a start-up (5 marks)

(12) Why might a franchise be less of a risk than an alternative form of start-up? (4 marks)

(13) Describe three ways in which an entrepreneur could assess the successful of a start-up after it has been trading for two years (4 marks)

Mini Case Studies

Moonpig.com

http://www.moonpig.com

Business angels

Back in 1997, Nick Jenkins got the idea for his online personalised greetings card business Moonpig.com whilst taking an MBA course. Nick was looking for a product idea that could be sold using the Internet but which could be personalised and delivered through the post.

Nick financed the start-up with £160,000 of his personal funds, and spent the cash on renting premises, hiring a web development company and a printing specialist. However, it some became clear that Nick need to invest significantly more in order for the business to break-even. He has since raised several million pounds from business angel investors, although he still has a significant stake in the company.

Looking back, Nick says that it was easier for him to raise money from business angels once he had established the business and could show them a trading record. It took five years for Moonpig to start making a profit.

www.gear4.com

Loans from family

Market size and growth

Tom Dutteridge looked long and hard for a successful idea he could turn into a business.

Frustrated by corporate life, Tom took the plunge in 2003 and decided to spend three months coming up with five business ideas. Armed with his savings and a loan of £23,000 from his father, Tom developed a plan to build a consumer electronics business that would sell direct to other retailers. He named it Gear4 and invested all the remaining finance in making a product that would allow car drivers to play their iPod using the car stereo.

The product was an immediate success and by offering a wider range of related iPod accessories, sales in the first year were £1m. These increased to £1.8m in year 2 and £4.8m in year three. In 2008, turnover is expected to be £18m.

Honeyrose Bakery At the age of 33, Lise Madsen decided she wanted to start up a business of her own. She says “It was a combination of desire for independence and having enough professional confidence to do it.”

Lise formed her baking business Honeyrose with an idea of making "organic cakes full of sinful ingredients". To finance the idea, Lise raised £70,000 and friends and her previous employer, in return for a

www.honeyrosebakery.com

Reasons for becoming an entrepreneur

Limited company structure

Government assistance for entrepreneurs

Aims and objectives

Cash flow forecasts

17.5% stake in the shares of the new company. Lise also got a £320,000 grant from the London Development Agency. She started production in 2001.

Turnover has grown to £3 million in 2008. However, profit is not the only objective of the business. Lise gives away 5% of annual profits to worthwhile causes through the charitable organisation she has set up, Yellow Flower Foundation.

Lise believes that she did not raise enough finance at the start-up stage. As a result, she says the first two years were a "nightmare with cash-flow issues".

www.cultpens.com

Simon and Amanda Walker invested start-up funds of £4,000 to establish their business Cult Pens.

They had become tired of their IT careers in London and decided to buy a small stationery shop in Dartmouth as a new challenge. The shop proved the ideal platform for launching an e-commerce business that targeted a niche in the pens market.

They focused on inexpensive pens, popular with offices. Cult Pens stocks 3,600 types of pen, about 40% of the total available.

Although the start-up investment was quite low, for the first couple of years they ploughed profits from the shop back into new stock, infrastructure and staff.

Sport Stars

www.sport-stars.co.uk

Sources of business ideas – personal experience

A change in government policy created the opportunity for James Taylor to grow his business providing sports coaching to schoolchildren.

The government ruled that teachers must spend 10% each day away from the classroom to prepare lessons. James recognised an opportunity and approached head teachers with the proposal that they employ Sport Stars coaches to cover this time

He secured five contracts and by the second year sales had risen to £500,000.

Where did the idea for Sports Coaches come from? James used his personal experience running sports clubs at boarding schools and his time as a sports coach at LA Galaxy football club.

Premier Watercoolers

www.watercoolers.co.uk

Sources of business ideas – business experience

Sources of finance – bank loan & personal funds

Employing people

Phil Langley used his time working in the sales team of a bottled water firm to carry out market research for his own business. He identified an opportunity to supply mains-fed water coolers rather than the more traditional bottle-fed coolers.

Phil raised finance by taking out a £100,000 bank loan and investing £20,000 of his own funds (by selling his car).

After trading for a year, Phil realised he needed outside help to grow the business. He brought in James Cullum, an experienced engineer, in return for a 10% share of the company.

Annual turnover for Premier Watercoolers has now reached £3.5m. One of Phil’s main problems has been recruiting and retaining the right people to help sustain the growth.

Everything Environmental

Sources of finance: business angels

Business planning

Market research

Market segmentations

Evan Lewis came up with the idea for his start-up, Everything Environmental, whilst working in a sales job for a corporate gift business. His idea? To set up his own corporate gift business acting as a wholesaler for gifts made from recycled materials.

Evan raised £150,000 from private investors and had begun trading within three months!

Producing a realistic business plan was important to Evan. The results for the first year of trading were within £1,000 of the budgeted profit. Evan's target market segment is undoubtedly a small niche in the much larger corporate gifts market.

Sales of eco-friendly items are only £10m p.a. out of a total market of £1 billion. However, the eco-friendly segment is growing fast. As a result, Evan's business is enjoying sales growth of over 100% per year.

Evan's advice to entrepreneurs is straightforward: "Do be clear where your market is, because that determines your product, the price, how you sell and your entire business strategy.

Take Note Here is an example of a start-up that required zero start-up finding. It simply required the time and effort of the founders to get the business running.

Rebecca Procter and Vanessa Rogers did a business studies degree together. But when they started their transcription service business Take Note, they didn't

www.takenotetyping.com

Economic sectors

Outsourcing / employing people

Characteristics of successful entrepreneurs

bother with a business plan or financial projections. Perhaps they just didn't have time!

Take Note offer transcription and meeting note-taking services, so the business is firmly in the tertiary sector.

With no funding for the start-up, Rebecca and Vanessa have used outsourcing as the main way of keeping costs down (and lowering the break-even output).

The company now sub-contracts around a hundred people working at home, transcribing from audio files or copy typing. Finding good workers is no problem, says Vanessa, as there are plenty of highly skilled new mothers, retired secretaries and people who've been made redundant.

Like most entrepreneurs, says Rebecca, they turn their hand to everything. "We do all the admin., accounts, marketing, design, personnel and emergency cover. We also like to meet clients personally, which is very important for an internet business."

Fruitful Office

www.fruitfuloffice.com

Business structure – partnership

Daniel Ernst and Vasco de Castro started Fruitful Office to take advantage of an opportunity to help employers make their workplaces healthier. Their business supplies baskets of fresh fruit to offices.

David and Vasco decided to form a partnership. The set-up costs were £16,000, but turnover is already projected to rise to £1m per year.

Growing the business in the early days has not been without its problems. Hiring suitable staff has been a problem, since the fruit packing work has to be done during unsociable hours. Buying cheap equipment also proved to be a false economy - it kept on breaking down.

One of the lessons that Daniel and Vasco have learned is the importance of the entrepreneur delegating tasks. As they say, "every hour spent doing a job you could delegate is an hour lost in growing the business".

Examination Technique

Introduction to BUSS1

The BUSS1 exam is based on a short, unseen case study which describes the planning process of a start-up. The format of the paper will change between exam sittings. However some things will stay the same:

• It is likely to include some numerical data and you should prepare to perform calculations on areas such as break-even, market share, cash flow totals etc.

• The case study will focus on a new business and the planning process it has undertaken (note – the type of business featured will vary)

• The whole of the Unit 1 specification can be examined

• There will be 60 marks available and the exam will last for 75 minutes

The questions are contained in two sections.

Section A Shorter questions, offering lower marks, focusing on definitions, explanations, calculations etc

Section B Longer questions, offering higher marks, which focus on analysis and evaluation

35% of the marks for Unit 1 are given for demonstrating knowledge. So it is vital that you learn definitions for all the key terms in the specification. The glossary included in this tutor2u course companion contains all the terms you need to know. You also need to know the various formulae for making calculations. There aren’t too many of these – but make sure you know them and have practiced calculations many times before the exam.

In the following sections, we provide more detail about the different ways in which you are assessed in the BUSS1 exam and some tips for success in the exam hall.

How you are assessed

Your BUSS1 exam will test your ability to show certain exam skills which are known as "assessment objectives" ("AO").

There are four assessment objectives. You need to understand what they are, how to meet them and produce answers which allow the examiners to award marks for your script.

The four assessment objectives are summarised further below.

How do you know what you are being required to do in each part of the exam? There are always two key clues to look for:

(1) Mark allocation – if a part of a question only offers 2 marks, then you only need to demonstrate knowledge (e.g. provide a short definition). A task that has more than more than 10 marks available requires you to show all the exam skills – knowledge, application, analysis and evaluation.

(2) Trigger words – these are the words that start each question (your teacher may also refer to them as “command” words. They provide a strong guide as to the nature of the task.

AO1 Knowledge

35% of marks

Demonstrate knowledge and understanding of the subject content.

This might include giving a definition of a term or providing a list of relevant items.

An example of a knowledge-only question would be:

“What is meant by market segmentation?”, or

“State two items that would be included in cash outflows in a cash flow forecast”

The mark allocation in a question is the best guide to spotting questions where you need to demonstrate knowledge and understanding. Look out for 2 or 3 mark questions starting with trigger words like “define”, “state”, “identify” or “what is meant by?”

AO2 Application

28% of marks

Apply knowledge and understanding to problems and issues arising in the case study business.

Look out for the following trigger words for questions requiring application: “calculate”, “explain”, “outline”, “distinguish between”

As you can see, calculations come into application. Make sure you practice them!

Questions offering 3-7 marks will normally require both knowledge and application.

AO3 Analysis

20% of marks

Analyse problems, issues and situations

Your answers to questions that require analysis require much more depth. Often you will be asked to look at the advantages and disadvantages of a situation faced by the case study business. A well-reasoned description of both sides of the argument, using properly structured paragraphs, and a conclusion bringing the answer together is the key.

If you see parts of questions offering more than six marks, then that should alert you to the need to include proper analysis in your answers.

Key trigger words for analysis include: “Examine”; “Consider”; “Analyse”, “Explain why”

You will almost certainly have to practice writing in this structured way if you are to do well in BUSS1.

AO4 Evaluation

18% of marks

Evaluate, distinguish between and assess appropriateness of fact and opinion, and judge information from a variety of sources

Evaluation is the toughest skill to demonstrate and one which students often feel uncomfortable with. Evaluative questions ask you to reach a judgement. After looking at both sides of an argument or after analysing one or more options, you need to state your view on the best way forward. You might also be required to

offer a reasoned opinion on the most important factors affecting an option. Whatever the task, it is vital that you express an opinion that is supported by your analysis of the issue – at all times making sure you apply business studies theory to the case study business.

Questions requiring evaluation carry the highest marks.

Common trigger words for evaluation include: “Evaluate”; “Discuss”; “To what extent?”; “Justify your view”; “Do you think that?”

Top tips for exam success

During your BUSS1 course you may come across a lot of advice about how to well in the exams. Depending on the source of the advice, some will be great, some sensible and some downright misleading. Tutor2u’s AQA team has spent many years teaching AQA AS Business Studies. So, for what it is worth, here are our suggestions:

Before the exams

Keep up-to-date with business. Reading textbooks and this Companion is fine. However, there is no substitute for keeping an eye on business news stories and seeing how real businesses act.

Tutor2u’s Business Studies Blog is a great source of news, resources and links for AQA AS Business Unit 1. In fact, we have a dedicated BUSS1 channel with its own RSS feed and Facebook-friendly widget. Make sure you access this blog as often as possible so that you get an advantage over other students.

Keep practicing key term definitions. Remember that 35% of the marks in BUSS1 are for knowledge. You can save time in the exam by knowing your definitions off by heart. Use the glossary included in this Companion.

Practice the numerical aspects of BUSS1 until you can handle all the calculations and interpret the data with your eyes closed (well – almost). You must be able to calculate percentages, percentage changes, and be able to interpret tables, charts & graphs etc. It might take a while for you to get comfortable with the numbers-bit, but it will be worth it.

Build lists of advantages and disadvantages for the main topics in BUSS1. Your Companion gives you a head start on these. As a minimum, make sure you know the advantages and disadvantages of the different:

• Sources of finance (e.g. internal/external, shares/debt)

• Business structures (sole trader, partnership, limited company)

• Methods of primary & secondary research (main methods of each)

• Options for locating a business (e.g. home-based, virtual)

• Types of employment (e.g. full-time, part-time, flexible working)

• Sources of business idea (e.g. business experience, franchises)

You should, of course, practice as many exam-style questions as possible in the run-up to the exam day. This is a great way of highlighting gaps in your knowledge and understanding. It also allows you to practice those high mark-scoring exam skills.

Be prepared. It might sound daft, but you know you will have to do some calculations, so take a calculator. Someone in the exam hall will not have remembered to do this

Read the paper carefully so you can see what kind of business is featured and the kind of questions you are being asked to answer. Underline the trigger words & circle the mark allocations. Make a note of how much time you can afford to spend on each element – don’t go over this limit.

Read the questions carefully and only answer in the ways that examiner asks you to do. Make sure you use separate paragraphs to demonstrate that you are moving onto a new point or that you are moving onto some analysis or evaluation. Leave at least two lines between each paragraph so that there is a little space if you need to add an extra point later on.

Make sure your paper includes any workings that you’ve done for the numerical questions.

Don’t use non-business studies terminology or street jargon.

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• Online Lessons

Business Types and Business Growth (Online Lesson)

Last updated 1 Jun 2020

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In this online lesson, we consider the different types of business and the ways in which businesses choose to grow.

WHAT YOU'LL STUDY IN THIS ONLINE LESSON

• types of business, along with relevant examples
• strengths and weaknesses of small and large firms
• the difference between organic (internal) and external growth
• evaluating methods of business growth
• why some mergers fail

Additional teacher guidance is available at the end of this lesson. Thank you to Peter McGinn and Jon Clark for their contributions to this lesson.

HOW TO USE THIS ONLINE LESSON

Follow along in order of the activities shown below. Some are interactive game-based activities, designed to test your understanding and application of business types and growth. Others are based on short videos, including activities for you to think about and try at home, as well as some extra worksheet-based activities.

If you would like to download a simple PDF worksheet to accompany the video activities, you can download it here . You can print it off and annotate it for your own notes, or make your own notes on a separate piece of paper to add to your school/college file.

ACTIVITY 1: VIDEO - TYPES OF BUSINESS

In this short introductory video, we consider 8 different types of business structure, along with some examples.

ACTIVITY 2: THINKING TASK - FOR PROFIT V NOT FOR PROFIT FIRMS

In this task, you need to consider the characteristics of businesses that either operate for profit or not for profit. You can download the characteristics cards here . Once you have studied the cards, you can create a Venn diagram ( like the one shown here ) and match the characteristics to the correct place on the diagram. Remember that some of the characteristics apply to both types of business!

ACTIVITY 3: APPLICATION TASK - CONSTRAINTS ON GROWTH

In this "Growing Pains" activity, you have the opportunity to read 8 real-world business case studies relating to business growth. Your task is to consider some of the constraints on business growth (provided in the worksheet) and apply the relevant constraints to each case study.

You can download the activity here .

ACTIVITY 4: VIDEO - SMALL AND LARGE FIRMS

In this video, we consider the advantages and disadvantages of both small firms and large firms, and look at some strategies that might help you when you revise this topic.

ACTIVITY 5: GAME!

Review your knowledge of business growth by playing this interactive File Away game.

ACTIVITY 6: VIDEO - TYPES OF GROWTH

In this video, we introduce the difference between organic (internal) growth and growth through mergers (external growth), as well as considering some examples of the different types. We also look at mergers in more detail, exploring the difference between horizontal, vertical and conglomerate mergers.

ACTIVITY 7: THINKING TASK - BUSINESS GROWTH

To complete this activity you will need to download this additional worksheet . The first part of the activity asks you to test yourself on definitions of the main key terms for the topic of business growth, before then applying those key terms to 8 real-world case studies. As an extra challenge, you could have a go at the questions that accompany each case study and discuss your thoughts with your classmates or teacher.

ACTIVITY 8: GAME - DODGY MERGERS!

In this interactive game, you get the chance to find out more about some of the mergers that have been investigated by the Competition and Markets Authority (CMA).

ACTIVITY 9: VIDEO - EVALUATING ORGANIC GROWTH

In this video, we explore the reasons why some firms choose to use an internal growth strategy, and apply it specifically to the discount supermarket Aldi.

ACTIVITY 10: VIDEO - EVALUATING EXTERNAL GROWTH

In this final video for the online lesson, we take a look at the pros and cons of external growth, and build in some exam-technique tips by considering different types of mergers. We also take a look at why some mergers have failed.

ENRICHMENT ACTIVITY: GAME - BRITISH BUSINESSES

Have a go at this interactive game exploring some British businesses. Examples are always great to use in exams, so you could always make a note of some of the things you find out during the game.

EXTENSION TASK: PRINCIPAL-AGENT PROBLEM

The Principal-Agent Problem can exist in large firms when there is a "divorce of ownership and control". In other words, shareholders are keen on high profits so that they can earn high dividends and the value of their shares rises, whereas managers who do the day-to-day work may have different, conflicting objectives.

Take a look at this overview of the Principal-Agent Problem here in Geoff Riley's study notes and topic videos. You could also watch this short video from Marginal Revolution University. Finally, you could finish up by reading this article on the problem at Google and Apple .

ADDITIONAL TEACHER GUIDANCE

This lesson comprises:

• around 50 minutes of guided video, spread across 5 videos
• an additional 20-30 minutes of student thinking and activity time throughout the videos
• 3 worksheet-based thinking activities, helping to develop student knowledge of examples and the AO2 exam skill of application
• 3 interactive games, taking around 15-20 minutes in total, again designed to develop student confidence with examples
• Internal growth
• Diversification
• Small and medium sized enterprises (SMEs)

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