A Good Business Plan
TOC o “1-3” h z u HYPERLINK l “_Toc377208955” 1 a. Definition of a business plan PAGEREF _Toc377208955 h 1
HYPERLINK l “_Toc377208956” 1 b. Functions of a business plan PAGEREF _Toc377208956 h 1
HYPERLINK l “_Toc377208957” 1 c. The essential tests of a good business plan PAGEREF _Toc377208957 h 2
HYPERLINK l “_Toc377208958” 1 d. Components of the business plan PAGEREF _Toc377208958 h 2
HYPERLINK l “_Toc377208959” An entrepreneur’s “best three friends.” PAGEREF _Toc377208959 h 3
HYPERLINK l “_Toc377208960” 2 a. The income statement PAGEREF _Toc377208960 h 3
HYPERLINK l “_Toc377208961” 2 b. Cash-flow statement PAGEREF _Toc377208961 h 4
HYPERLINK l “_Toc377208962” 2 c. The balance sheet PAGEREF _Toc377208962 h 5
HYPERLINK l “_Toc377208963” Ethics in corporate environment. PAGEREF _Toc377208963 h 5
HYPERLINK l “_Toc377208964” 3 a. Deterioration of corporate ethics PAGEREF _Toc377208964 h 5
HYPERLINK l “_Toc377208965” 3 b. Causes of deterioration of corporate ethics PAGEREF _Toc377208965 h 6
HYPERLINK l “_Toc377208966” 3 c. How deterioration of ethics can be changed PAGEREF _Toc377208966 h 7
1 a. Definition of a business planA business plan can be defined as a summary of the major considerations of a start-up business venture. The major considerations in a business plan include the entrepreneur’s proposed business idea, details about operations and finance, about the available market opportunities, the strategies to be employed in exploiting these markets, and the required managerial skills and abilities. A business plan can also be regarded as an insurance against potential dangers of starting up a business that is will fail. It is also ensures that an on-going business is secure from mismanagement.
1 b. Functions of a business planA business plan can broadly be described as having three important functions. The first function is to guide the company in the way it is to be run and the course it is expected to take in future. This function is achieved by coming up with a strategy and following it to the letter from inception of the plan. The second function of the business plan is to attract investors and lenders. A well written business plan with clearly indicated details on every necessary aspect of the business can be used to seek for the required capital from lenders and investors. Thirdly a business plan serves the function of signifying that the entrepreneur is fully conversant with the requirements of the business and everything needed to make it a successful venture.
1 c. The essential tests of a good business planFor a business plan to be considered as workable and bound to create a successful business, it must be taken through three tests. The first is referred to as the reality test which seeks to prove two things. It must prove that there actually exists a market for the products and services provided by the company. Another aspect of the reality test is that the entrepreneur should prove that he or she can implement the plan using the cost estimates provided in the plan.
The second test is called the competitive test. It evaluates how the company is positioned in relation to its customers as well as how the entrepreneur can make the company more competitive against the existing completion. The third test a business plan has to undergo is the value test in which the entrepreneur seeks to prove that the company will offer its investors a good rate of return for their investment. All the three tests are important to the entrepreneur because they measure how different aspects of the business can be implemented practically and how attractive the business is to investors and lenders.
1 d. Components of the business plan
In order to come up with a business plan that is practical and able to attract investors and lender, the entrepreneur has to clearly address each of the components the plan. The first and most important part is the executive summary. The entrepreneur should realize that the executive summary determine whether the investors will develop an interest in the business or will be put off by the idea. It has to provoke an interest in investing in the idea being proposed. Basically the executive summary describes the objectives, mission, and key areas or considerations that will ensure the business succeeds. Another important component is the company summary that describes where the company will be located and the kind of facilities required. This area has to be well addressed as it gives the picture of how the business will look like and how it can be potentially successful. For example location of the business will determine how conveniently placed the venture will be in relation to its potential clients. The other important components of the plan will include the company ownership, the products and services and other revenue streams, the strategic analysis summary which will include a SWOT analysis, market segmentation strategies, competition and purchasing patterns, and hoe the business will be implemented and managed. Investors will also be keen on the financial plan of the company whereby the initial funding and break even analysis will be considered. Summaries on the expected profit or loss statements, cash flow, and the projected balance sheet will have to be provided in the plan in clear and concise financial statements.
An entrepreneur’s “best three friends.”The balance sheet, income statements, and cash flow have been described as an entrepreneur’s best friends because they can never be isolated from any business that is aimed for success. Every entrepreneur must always have a keen eye on the charts, tables, and spreadsheets that are the backbone of financial statements in order to stay focused on the pulse of the business. These three aspects are the main determinants of how the business is doing and what its odds are for its survival. It is therefore important to keep abreast with these three tools.
2 a. The income statementThe income statement is a report that describes the cash generating ability of the business. It is important to an entrepreneur as it acts as score card on which he or she determines when the sales are made and when expenses have been incurred. An income statement uses information from other financial models like “revenue, expenses, capital, and cost of goods” (Helfert, 2001, p.42). A good entrepreneur combines these various elements of the income statement to tell how the company performed during the year by finding the difference between the cost of goods and expenses from the revenue generated by the company to get the net results in the form of profit or loss. A good entrepreneur knows that it is important to generate income every month in the first year and after every three months (quarterly) in the second year. When the business has been in operation for three years, income statements can be generated annually. The major financial projections in the income statement an entrepreneur works with include “income, cost of goods, gross profit margin, operating expenses, total expenses, net profit, depreciation, net profit before interest, interest, net interest before taxes, taxes, and profit after taxes” (Bodie, Kane & Marcus, 2001, p. 455). In keeping abreast with the pulse of the business, the entrepreneur should add a note to the income statement giving an analysis of the statement.
2 b. Cash-flow statementA good entrepreneur knows what critical information tool cash-flow statements are in determining the amount of cash required to meet the demands of the business. Cash-flow statements analyze where cash is going to come from, when it will be needed, and how much is required. Using cash-flow statements the entrepreneur is able to control of money in the business. These statements can be used to attract investors, distributors, and clients when they show a good track record. The entrepreneur is also able to tell when profits or loses are being made by using cash-flow statements as indicators of the business’ performance. A good entrepreneur generates cash-flow statements using financial statements like the income statement to determine how much cash is at hand and revenue sources. This is usually followed by a list of expenses and capital requirements, usually logged as a negative. The final entry in cash-flow statement is the net cash-flow. In order to have a clear picture of the cash-flow statement, it is important to attach a short analysis statement showing the key points in the statement.
2 c. The balance sheetIn order to make a full analysis of the business and the way it has performed over a period of time, an entrepreneur relies on the balance sheet. This type of financial statement uses information from other financial models including the income statement and cash-flow statements to give a clear picture of the business in the last one year. The balance sheet gives a summary of the previous year’s financial statement in three areas namely assets, liabilities, and equity. A balance sheet is important to the entrepreneur as it can be used to get financing when one wants to either start a new business or expand an existing one. Most investors will ask for the company’s balance sheet for the previous year in order to determine if the company is worth investing in. Such a requirement is always accompanied with a personal balance sheet besides the one bout the business. Keeping accurate balance sheets helps the entrepreneur in maintaining a clear picture of the progress the business is making either positively or negatively. It provides a clear picture on the status of the company’s assets, long-term and short-term liabilities, and equity. It is also a major requirement when seeking for funding.
Ethics in corporate environment.3 a. Deterioration of corporate ethicsEthics in the corporate world just like elsewhere are about morals or specified rules that members of the society apply in distinguishing right from wrong. The concept of ethics is differentiated from law by the fact that unlike law which requires enforcement, ethics are voluntary matters of conscience. Corporate ethics have become a major consideration in the business environment and as such deterioration of their standards is bound to have a negative impact in the business world. For example corporate wrongdoings usually result in damage of a company’s public image and investor confidence, profit, decline in stock prices, and in severe cases resignation of top level management (Velasquez, 2002).
3 b. Causes of deterioration of corporate ethicsThere are many reasons why a company would engage in unethical conduct besides the obvious one of seeking to maximize profits and reduce cost of operations. In some cases unethical standards are applied as a way of dealing with competition. This usually involves looking for an easier option which despite the fact that it will lower the company’s ethical standards, it will significantly increase profits. However the company fails to consider the fact that by lowering ethical standards it creates a widening gap with the society. Unethical conduct may also be out of a company’s efforts to avoid potential embarrassment (Argyris, 1990).
Companies that have had serious issue of deteriorating ethical standards include Enron and Goldman Sachs. The Securities and Exchange Commission charged Goldman Sachs with corporate malpractice claiming that the investment bank acted unethically by selling investors a subprime-mortgage investment that they knew was bound to lose value. This showed a real breakdown in ethics. Another case of deteriorating standards involved Enron where its top level management concealed information on financial misconduct until an employee disclosed the malpractice to the media. In the end angry investors who had lost confidence in Enron management dumped their shares causing massive loses in the economy. This was a typical case of not being open about financial malpractices that went against corporate ethical standards.
In the current situation, the economy has really suffered under the hands of unethical financial institutions. The people at the top of some of the companies are running risk-free ventures for their own benefit. They are leaving the people at the lower levels to assume the all the risks and consequences. The government, which has had to shoulder the burden left behind by corporate malpractices, has now assumed control from financial institutions.
3 c. How deterioration of ethics can be changedUnethical corporate conduct can be prevented in four ways. The first one would be by improving transparency and disclosure of information that affects the public. The second way would be by creating an ethical environment for conducting business activities. Thirdly, it is quite imperative to conduct periodical internal audits that are thorough in nature as a way of reforming the corporate culture. Finally, compliance with corporate ethics should be made mandatory for all employees from the top to the bottom level. Middle managers should play a central role in leveraging openness in order to determine how wide the gap between the company and the society is in terms of ethics (Donaldson & Gini, 1996). The company can also engage in social corporate responsibility in order to get closer with the society and avoid situations that compromise ethical standards among its employees.
Helfert, Erich A. (2001). The Nature of Financial Statements: The Cash Flow Statement.Financial Analysis – Tools and Techniques – A Guide for Managers. New York:McGraw-Hill
Bodie, Z., Kane, A. & Marcus, J. (2004). Essentials of Investments, 5th ed. New York:McGraw-Hill Irwin.
Velasquez, M. G. (2002). Business ethics: Concepts and cases, Fifth edition. Upper SaddleRiver, NJ: Prentice Hall.
Argyris, C. (1990). Overcoming organizational defenses: Facilitating organizational learning.Upper Saddle River, NJ: Prentice Hall.
Donaldson, T. & Gini, A., (1996). Case studies in business ethics, Fourth edition. Upper SaddleRiver, NJ: Prentice Hall.