Operating Plan

2. Operating Plan

a. Production Processes Described

  • Carefully detail all the steps that are required to deliver your product/service to the identified target market.

b. Assets Required are Identified

  • Ensure that all the assets required to operate the business have been clearly identified in your Business Plan.

c. Supply of Product/Service – Suppliers

  • Who are the raw material suppliers and where are they located?
  • List the major suppliers and identify those you are considering. Location is important because of shipping costs and delivery time.
  • Do the suppliers have a history of being efficient and reliable?
  • Consider how long they have been in business, their turnaround time from when the order is received to when the order is shipped and their return policy for damaged items. You may wish to get information on major suppliers from the Better Business Bureau if the supplier will have a major impact on your business success.

Do you have any letters of intent from prospective suppliers?

  • Letters of intent show commitment on the part of suppliers to provide your business with the needed raw materials. These letters should be mentioned and included in the Supporting Documents section at the end of the business plan.
  • If your business success will rely on one or two major suppliers, what plans have you made to diversify?
  • When evaluating suppliers, you should consider an alternate supplier in the event that problems arise.

d. Supply of Product/Service – Price and Quality

  • What price(s) will you charge for your product(s)?
  • What is the cost of producing your product – your direct costs with providing your product or service?
  • What is the price based on – what’s the pricing strategy?

Understanding your cost of production is perhaps the most important thing to know about your business. When deciding upon the price you will charge, you should take into account a number of different factors such as your costs, product demand, desired profit levels, competitor prices and the price the market will bear. Because costs tend to be underestimated, you must calculate them very carefully, including not only raw material and distribution costs, but costs related to the day-to-day running of the business. These may include (among others):

  • Utilities
  • Labour
  • Marketing
  • Bad debts
  • Quality control expenses
  • Equipment leases
  • Taxes
  • Loan payments
  • Employee benefits
  • Proper cost calculation is of particular importance as it is much more difficult to raise prices (if costs are greater than expected) than it is to decrease them.

What prices do your competitors charge?

How will you use discounts, rebates, etc. in your pricing strategy?

State what type of discounts or rebates (if any) you will use, how often, and when you plan to use them. Some examples are volume discounts, coupons, and mail-in rebates. Discounts and rebates can be especially effective when introducing a new product to the market, or when trying to convince competitor’s current customers to try your product. However, overuse of these strategies may make some customers reluctant to purchase your product at its regular price.

  • Will customers pay immediately for the product / service – cash based business?
  • Will customers have 30 days to pay – credit based business?
  • Will it be a mixture of both?

Describe your credit policy. What credit policy is most commonly used in your industry? Customer payment terms are especially important for start-up businesses as cash outflow can be very high in the first few years.

Cash received must at least equal cash outflow in order for the business to operate. For this reason, your business will want to develop a payment policy that ensures cash is continually coming in.

Keep in mind that many businesses that offer credit (30 day or 45 day) have a certain amount that are never paid – called bad debt. Credit increases the amount of risk involved for the business.

Cost of Bringing Product/Service to Market Identified

How will you get your product(s) to the consumer?

Once you have identified the target market, you must then determine the most effective and efficient way to get your product to the consumer. The way in which you move your product to your target market makes up your distribution channel and may include one or more of the following:

  • Retail outlets
  • Direct sales
  • Brokers – local and export
  • Catalogue marketing
  • Transport companies
  • Custom brokers
  • Manufacturing agent
  • A combination

Where will your business be located and why was that location chosen?

Describe the location of the business and discuss any advantages and/or disadvantages of this site. These may include things such as labour availability, proximity to customers or suppliers, utilities, zoning, etc. Also, mention whether the land will be leased or owned. If leased, what are the terms of the lease contract?

Are you near available distribution channels?

Consider the distance between your business and the distribution channel(s) you propose to use. Compared to the competition, are you close to, or far from, these channels? This may be viewed as a competitive advantage or a disadvantage to your business due to associated shipping costs.

Who will be responsible for shipping costs?

You should first determine what is the standard practice in this industry. Shipping costs will affect the price you are able to charge for your product (i.e. if you pay for shipping, your price should reflect this added expense).

e. Risk Analysis/Assessment

In this section you will want to recognize potential problems relating to your venture and take steps to decrease the likelihood and impact of their occurrence. Be realistic and honest when identifying potential risks. Nothing is more damaging to a venture than having an investor discover negative factors the entrepreneur did not know about, does not want to discuss or has casually dismissed. Identifying and analyzing potential problems before they happen will make the venture look more attractive. It will also enable your operation to deal effectively with them if they occur.

  • What potential internal and external risks exist for this business?
  • How are these risks going to minimized or overcome?
  • Internal risks are weaknesses within your company over which you have control (such as not being able to secure a qualified manager).
  • External risks are those potential situations over which your business has little or no control (such as increased shipping costs).
  • How will your business minimize the potential impact of these risks?
  • What plans have you made in the event that these risks materialize into problems?

For example, if a qualified manager could not be secured, you could consider training a less-qualified manager. If shipping costs increased, you could consider other distribution methods or channels.

What type of insurance does the business have?

This section provides information regarding the type of insurance the business has.

Contingency Plan

In the event that the business fails, what type of exit strategy has been considered?

No new business owner likes to consider this possibility. However, if factors beyond your control force you to discontinue your business, you should consider what can be done to lessen the problems this situation presents.

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