4.6 Chosen sources of finance and reasons for choice
Having examined the various potential sources of finance, the business plan should identify the chosen sources, i.e. those that are most appropriate to both the owner-managers, and the type of business itself. Some firms may choose longer-term secured loans at lower rates of interest, to ease cash flow in the earlier years. Others may only need short-term initial financing, in which case the higher interest overdraft facility may be more suitable, where interest is only paid when the overdraft facility is in use.
Whatever the choice, it is necessary to describe the chosen option and the reasons for its selection over and above the alternatives. For the NVQ candidate who is preparing a busi- ness plan, the justified rejection of certain options is as much a demonstration of competence as making the choice and explaining the chosen option itself.
operate. This was briefly mentioned earlier in the introduction to the business plan (subsections 1.3 and 1.4). Using the same example of the mail order business, the overall market is in which the business plans to operate is that of model-makers or hobbyists, but within that market the owner is focusing on a particular sector, in this case model aircraft. This is in itself quite a broad sector with plenty of competition, and for that reason the owner has decided to focus on a specific subsector, i.e. the supply of a particular brand of Japanese model aircraft which is currently hard to obtain in this country. The special- ized nature of the product means that there is likely to be insufficient trade within the geographical vicinity to make the business viable, so the owner has decided to extend the range of potential customers across the whole country by offering the product for sale by mail order.
5.2 Market research – completed and planned
In this section we investigate and analyse the particular market sector in which the proposed business expects to be operating.
We must ask questions about the nature and size of the market, how easy is it to enter the market, who are the other opera- tors within the market, and how do their products and prices etc. compare with our own. This is the process of market research, and any potential lender or investor will ask two key questions about this topic: ‘What market research has been carried out to date?’ and ‘What other market research must be carried out before the business can be launched?’ In order for any potential lender or investor to have confidence in the prospects of the business venture, it will be necessary to demon- strate that these questions have been addressed and answered in a competent and comprehensive manner, and to present the results of the research in a clear and comprehensible fashion.
The process of market research is examined in more detail in Chapter 9.
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5.3 Identification of any special market influences
Some markets, by virtue of their nature, are subject to specific trends, patterns or influences. The majority of postcards are sold during the summer holiday season, whilst Christmas cards tend to sell at the end of the year. The cash receipts for holiday companies follow a definite pattern, with deposits for book- ings taken at the beginning of the year, followed by short peaks in trade at Easter and Whitsun, and with the bulk of sales income being received during June, July and August, then tailing off in September. The pattern is well established and recognized, and cash flow can be planned accordingly. The biggest potential disruption that can occur (apart from a war) is prolonged bad weather, and that is one factor which we cannot forecast well in advance.
In a similar vein, the operators of any new business must also attempt to identify any seasonal influences or market charac- teristics which will influence levels of sales, income or performance. Very often this will only be achieved as a result of direct experience gained from within the particular market, and then often only in hindsight or as a result of analysis of sales and performance figures over a period of time. For example, when I was wholesaling beers and wines to the licensed trade in the 1980s, I identified over several years a sudden substantial drop in sales around the first weeks of February and October each year, irrespective of weather etc. In spite of recent end of month salary payments, the public were not spending their money in the pubs, and so the publicans were not buying my stock. Why not? Well, quite simply, the first weeks in February and October are the deadline dates for payment or settlement of credit card balances accrued during the summer holidays in August, or in the run up to Christmas, so disposable income was at a minimum at those times. Once the pattern had been identified, stock levels could be reduced for those particular weeks in future years in order to avoid cash being tied up in unsold stock.
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Whilst it is imperative to be aware of seasonal and other influ- ences on trading levels, actually identifying these as an outsider to the market can, in fact, be very difficult, so it is important to ask questions about these potential problems as part of the market research process. Better still, try to get some experience of working within the market, or talk to someone who has done so recently.
5.4 Analysis of competitors’ products and services
This analysis can be carried out by answering a series of simple questions:
● Who are my direct competitors in the marketplace, i.e.
those providing the same or very similar products or services? In the case of our complementary therapist, for example, who else is offering aromatherapy massage in the district?
● Who might be competing indirectly with me, i.e. those providing other services which are not in direct compe- tition with me, but which might detract from my sales?
For example, those offering other forms of therapy which might compete with aromatherapy.
● What prices are they charging? Are they lower, higher, or comparable with my own? Why should they differ?
● How do their services differ from mine, and is this reflected in their prices?
● What geographical areas do they cover? Do these overlap with my operating area?
● Are they operating in the same market sector as myself, and what proportion of the market do they occupy? Is there space for me within that market sector?
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Obtaining this information is part of the necessary process of market research, and the questions must be answered in order to produce a convincing and realistic marketing plan.
5.5 The marketing plan
The marketing plan constitutes the methodology statement of the business plan – ‘This is how I will sell and promote my goods or services’ – and the plan is typically presented using four key headings, usually described as the four Ps:
● TheProductis about the goods or services being offered, their purpose, quality, unique features, usefulness, appeal to the customer etc.
● The Price of the goods or services forms the basis for comparison with competitors. Price can be a selling feature in itself, e.g. by being less than that of competitive prod- ucts or, if equal, it leads the potential customer to compare quality and uniqueness with that of the competitors’
products.
● ThePlaceis concerned with the outlets and distribution channels through which the product will be delivered and, again, the perceptive marketing plan will look for opportunities or gaps in the marketplace, where demand is not being met.
● Promotionis concerned with the ways in which the prod- ucts or services will be promoted or advertised to potential customers, and how the effective use of promotional activities will lead to growth in sales and expansion of the business.
This topic will be considered in more detail in Chapter 9.
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5.6 Unique features of your products or services
Although stated in the marketing plan, it is a good idea to emphasize to potential lenders or investors, those features of your products or services that distinguish them from the oppo- sition. These can be expressed in terms of quality, competitive price, durability, value for money, fashion, practical usage or even sheer sex appeal. The important thing is that you can show that you have identified those key aspects which will help to sell your product or service in the open market, and that you are making use of that information.
5.7 Schedule of fees and charges
This is a simple list of the fees or prices which you will be charging for your goods or services. It serves as a reference point for comparison with the prices charged by your competi- tors, as a basis for calculating profit margins and to assist in the calculation of the sales revenues that are included in your budgetary plans and cash flow forecasts. It will no doubt be influenced by the prices that are being charged by your competitors, but it should also reflect the quality of your goods or services and any distinctive or unique features which differ- entiate them from the competition, and for which a premium price might be justified. The use of low prices to attract busi- ness in the short term might be a justifiable strategy, but in the longer term it is maintenance of profit margins that ensures survival. The golden rule when fixing prices is that if you sell yourself short, you will almost certainly be the loser in the long term. Competitors will either reduce their prices (and profit margins) to compete with you, or look to sell their goods or services on the basis of differential features such as those described above. Finally, remember to keep a copy of your old price lists, as these are a good point of reference should the Inland Revenue start to query the profit margins you have been achieving.
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5.8 Samples of advertising materials, leaflets, business cards etc.
It is always a good idea to include some samples of advertising materials such as business cards, newspaper adverts or leaflets within the business plan, although these need to have been produced to a professional standard and quality, otherwise they could well do your case more harm than good. With the wide- spread availability of computers and desktop publishing programs, most people should be able to produce a basic design of advertising material to illustrate their ideas for advertising and promotion.
5.9 Statement of quality standards and policy
This is a formal statement of the quality standards for the goods and services which are being provided, as well as for the behavioural standards of the staff which are supplying them.
The statements constitute a simple description of the operating standards against which the business can be visibly measured.
For example, an extract from the standards used by a wedding caterer:
● All staff will be smartly dressed at all times, and will present a friendly, smiling, and caring attitude to the customers.
● All staff involved with the preparation of food will possess a Basic Food Hygiene Certificate, and will adhere to the standards of hygiene required to comply with environ- mental health legislation.
● All food will be prepared on site no more than one hour before the time of serving, and covered to protect it from contamination. All food will be stored at the appropriate cold temperatures prior to preparation and before it is served.
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These are just a few simple examples, but they demonstrate not just the need to comply with relevant legislation, but the emphasis on providing quality products and services to the customer, as well as the standards which the customers can expect to experience from the supplier.