in particular the evolution of:
● Revenues
● Costs
● Working capital
● Capital expenditures
● Assumptions at the corporate level:
● The evolution of the corporate costs structure
● Financial management policy:
● Financing costs
● Raising/reimbursement of financings
● Equity injections
● Dividend distributions
● Fiscal policy
● The management of noncore (surplus assets) corporate activities
It is worth noting that:
● Assumptions shall be coherent with the competitive strategies formulated by the company management, as well as with the actual precise actions envisaged to implement the plan.
● Assumptions shall be coherent among each other. As a consequence, hypotheses on financing costs shall be in line with the forecasts on the interest rates evolution.
● All the assumptions shall be explicitly reported and, if possible, corroborated by independent data and supporting materials.
Exhibit 2.5 shows the business plan of Gamma, a company operating in the advertising industry. It shows the assumptions formulated by the company management around the evolution of its market share with separate estimates for the off-line and on-line distribution channels.
Exhibit 2.5 The definition of the quantitative assumptions (the Gamma case)
2.2.5 Preparation of the Plan Forecasts
The last phase of the planning activity is represented by preparation of the forecasts for the income statement, balance sheet, and cash flow statement, which give a condensed representation of management's expected results on the back of the implementation of the chosen and pursued competitive strategies. When the company operates in multiple sectors of activity, it is necessary to take two steps:
1. Develop the forecasts for the income statement, balance sheet, and cash flow statement for:
● Each business sector in which the company operates
● The corporate headquarters
2. Integrate these prospects so as to give a holistic representation of the results expected.
2.3 WHAT DRIVES THE PREPARATION OF A BUSINESS PLAN?
In the previous sections we have gone through the main phases making up the activity of business plan preparation, which are common to all the business plan types. This, however, does not also imply that the logic and standpoint to be assumed when preparing the business plan are always the same. Actually, they vary in function of the nature and type of business activity carried out by the company.
Previously, we have represented the key areas of attention to consider with regard to the above aspect. Precisely, we have highlighted the necessity, in the case of companies operating in multiple businesses, to:
● Define the following:
● Competitive strategies
● Actions to carry out to implement the above strategies
● Quantitative assumptions necessary to develop the plan's forecasts (both at corporate and business unit level)
● Develop the forecasts for the income statement, balance sheet, and cash flow statement, with regard to:
● Each business unit/activity
● The corporate structure
● The company as a whole
Bearing this in mind, over the next paragraphs we will focus on the logics and rationale that should underpin the business plan formulation and that are a function of the very nature of the company's business activity. In particular, we will distinguish among:
● Companies producing standardized goods on a large scale
● Commercial companies operating through a network of points of sale
● Companies working on order
● Companies operating in regulated sectors
For each of these categories we will present a case to show the most appropriate mechanics that should underpin the business plan preparation.
2.3.1 A Components Manufacturer
Company Delta operates in the mechanical components manufacturing sector, marketed to several end applications. The manufacturing activity is carried out in two plants, employing about 600 employees. The main geography to market the products is the national one. Its clients are industrial and distribution companies.
The company commercializes its products through agents. In order to define its competitive strategies, Delta has recently carried out some research aimed at detecting the key factors driving its clients' purchasing behavior. This study has shown that the following factors are the most important ones:
● Delivery speed (almost as much as punctuality)
● Price, above all in the cases of standardized products used for pretty straightforward applications
● Possibility to receive consulting services and assistance both prior to and after the purchase
The following paragraphs will analyze the main hypotheses formulated by Delta management to develop its plan (which spans a time horizon of five years).
Assumptions on Revenues
Taking into account the activity carried out by Delta:
● Expected revenue forecast in t1, t2, and t3 has been quantified on the basis of the forecasts of:
● Revenue volume and market price in the reference market, developed by some leading research provider companies
● Delta market share
● Revenue associated with the main clients (based on the commercial reviews carried out for the principal clients at the end of t0)
● Expected revenue has been obtained as the sum of:
● Revenue as is: defined on a client-by-client basis, assuming that execution of the business plan commercial actions does not take place.
● Additional revenue from new commercial activities: they concern both the old and the new (expected) clients, and are based on the expectations of Delta management around the effects of the implementation of the business plan (new applications, improvement of existing products, etc.). The quantum of this improvement has been estimated also based on the probability
