Operational Plan

The is the sixth article in a series of posts focused on deconstructing the essential elements of creating a Business Plan. 

 

Business Planning Articles

 

Business Plan Introduction

The Executive Summary

General Company Description

Product & Services

Marketing Plan

Operational Plan

Management & Organization

Startup Expenses & Capitalization

Valuation & Ask

Financial Plan

Appendixes

Refining Your Plan

 

 

Operational Plan

 

The Operational Plan, and sixth part of your business plan is meant to explain to the reader how your business operates and produces it’s unique solution. 

This part of your business plan should be thorough, between 2-4 pages in length.

The purpose of the Operational Plan is to explain how your company functions. Elements to described include; where your business is located, what equipment you leverage to develop your solution, the people involved in leading your operations, the processes you have in place and your surrounding environment. 

 

Production

 

The first section of your operation plan should outline the methods employed to develop your product or service. 

Entrepreneurs should provide descriptions of the following topics:

 

Production Techniques

Production Cost

Quality Control

Customer Service

Product Development

Research & Development

 

In this part of your Business Plan, using schematics and diagrams can dramatically improve the quality and clarity of your Operational Plan, particularly for businesses who have a complex operational structure. 

Manufacturing businesses should use flow charts to illustrate the entire production process. Listing the production equipment you leverage and their associated costs gives the reader good insights into the capital costs involved in creating your solution. 

Business that procure products for resale or raw materials for manufacturing should describe the sources of their supply chain, the terms and conditions for sales, alternate supply chain sources to address procurement risk, and inventory control systems you will implement or already have in place. 

Should your business employ sub-contractors be sure to include a list of the sub-contractors you have involved and explicitly describe their role, responsibilities and how they fit in the production plan of your business. Include alternative sub-contractors to address sub-contract risk or describe the profile of the sub-contractors you aim to employ in the future.  

 

Location

 

Next, entrepreneurs should describe the qualities of their location, or the location the company needs. 

The physical qualities worth explaining include:

 

Amount of Space

Type of Building

Zoning

Power & Utility Requirements

Working Hours

Shipping & Handling Requirements

 

An important component to conducting business and keeping costs low is to consider how accessible your company’s location is to relevant transportation networks and suppliers. 

Particularly for businesses that depend on a physical distribution network, be sure to describe your proximity to important freeways, airports, railroads and shipping ports. 

If your business manufactures a product and is still searching for the right location, include drawings or concepts of the proposed facility your business requires to maximize its potential. 

Most new business do not invest heavily in construction, however if a new location is a requirement for your operations include all of the specifications and the associated costs in your Operational Plan. 

Costs to consider for your operational requirements include:

 

Occupation Expenses (rent / lease / mortgage)

Maintenance

Utilities

Insurance

Remodeling costs

 

The costs associated to your operational requirements will provide a perspective to the reader of all the costs associated with doing business for your venture, and they should complement the figures your provide later on in your Financial Plan.

 

Legal Environment

 

Next, entrepreneurs should describe the legal environment their business operates in. This means explaining all of the legal requirements or permissions your business must fulfill or obtain to operate and market it’s solution. 

Typical legal requirements include:

 

Licenses

Bond Requirements

Permits

Health, Workplace or Environmental Regulations

Industry Specific Regulations

Zoning or Building Code Requirements

Insurance Coverage

Trademarks, Copyright or Patents (existing & pending)

 

This section should clearly explain how easily your business can operate form a regulatory perspective. Entrepreneurs should always make sure that they have all of the proper legal approvals and certifications to operate their business. 

Missing, failing to produce a legal requirement, and/or operating without the proper authorization can dramatically damage any potential deal, and will reflect very poorly on the company’s management. 

 

Personnel

 

The following section of your Operational Plan should outline the number of employees in your business and their specific responsibilities. 

Entrepreneurs should briefly describe the type of labor (unskilled, skilled, profession) required for their business to operate, who is currently involved as a key personnel, and where you plan to find the right employees for your business should your need them. 

Your explanation of your company staff should include:

 

Number of Employees

Pay Structure

Training Methods & Requirements

Quality of Existing Staff

Contract or Part-Time Labor

 

Describing the backgrounds of the C-Level leaders of your company and their respective responsibilities can provide the reader with a better understanding of the leadership within your business and the company culture. 

Describing any important employee scheduling and operative procedures can also provide insights into your company’s process. 

The purpose of the Personnel section is to demonstrate to the reader that either all of the right people are currently involved in developing the company, or that the company has the right strategy in place to find the best people to involve in the business. 

Entrepreneurs should do their best to defend all of the people who impact the performance and success of the business. 

The more team-oriented and cohesive the business organizationally appears, the better it will be perceived by the reader. 

 

Inventory

 

Following personnel, entrepreneurs should describe the type of inventory the business keeps on hand. This is particularly important for manufacturing and retail businesses. 

Topics to consider when describing your inventory include:

 

Raw Materials

Supplies

Finished Goods

Average Stock Value

Rate of Turnover, & Compared To Industry Average

Seasonal Buildups

Lead Time For Ordering

 

It is very important to properly describe and value the inventory your business typically has on hand. This is an area that can breed significant confusion between the reader, potential investors, and entrepreneurs. 

Generally, business leaders overestimate the value of the inventory their business has on stock,  so be sure to apply an objective method of valuing the inventory. 

 

Suppliers

 

Next, entrepreneurs should describe the key suppliers their company uses to obtain its inventory or raw materials. The suppliers you use can reflect positively or negatively on your company. Therefore, it is vital to engage with trustworthy suppliers who offer competitive rates for the materials they provide. 

Potential investors will do a background check on all the suppliers your business uses, so make sure they will reflect positively on your venture. 

The items to include in your Suppliers analysis include:

 

Name & Addresses

Type of Material Supplied

Amount of Inventory Furnished

Credit and Delivery Policies

History & Reliability

 

In addition, consider explaining which suppliers are of greater or lesser importance, and what your company is prepared to do in the event of a shortage of any critical item, or in the case of high price fluctuations. 

 

Credit Policy

 

The last section of your business plan, and which may or may not be necessary depending on your type of venture, is the credit card policy your business will adopt. 

Credit card policies detail how and when payments are to be made, either to your company, or from your company to suppliers, retailers, distributers, etc…

Questions entrepreneurs should answer in their Credit Policy analysis include:

 

Do you plan to sell on credit?

Do you need to sell on credit? Why? Is it customary in your industry? And, expected by your customers?

What policies will you employ about who gets credit? And, how much credit?

How will you check the creditworthiness of new applicants or customers?

What payment terms will you offer customers?

Will you offer prompt payment discounts? (Typical among manufacturers)

What is the cost to extend credit? Is that cost built into your solution’s price?

 

Explaining your company's Credit Policy is important because it will reveal how you plan to manage your accounts receivable, meaning the money owed to your business. 

If your business plans to extend credit, be sure to create an mechanism to track how the money tied up in credit ages on a monthly basis. Entrepreneurs should be aware of any slow payments or payment problems occurring within their business.  

 

Accounts Receivable

 
 

 

Managing an Accounts Receivable requires establishing a policy to manage slow paying customers that covers:

 

When to notify the customer of their late payment?

When to mail a letter detailing their late payment?

When to engage a legal representative to threaten action in the event of a failed payment? 

 

The same logic applies to your Accounts Payable, or the moneys you owe to suppliers, customers, distributers, employees, etc…

 

Accounts Payable

 
 

 

Creating and using an accounts payable system can help entrepreneurs keep track of who to pay and when. Paying too early will deplete your cash on hand, however paying too late can damage your company’s credit and can cost your business valuable discounts. And, include information about any relevant vendors that offer prompt payment discounts. 

Entrepreneurs should briefly describe their accounts receivable and accounts payable as they will effectively indicate the financial health of your venture. Any description should match the information disclosed in your Financial Plan. 

 

Conclusion

 

The operational plan is intended to provide an detailed overview of how well positioned your business is to develop the solution you are proposing. 

The specific content of this section will vary greatly depending on the type of business and industry you operate in. 

Some startups may require more room or pages to accurately describe their production plan. 

However, entrepreneurs should fight that tendency. 

Providing a brief overview of a production plan in 2-4 pages and then including additional materials associated with production in the appendixes of the business plan is a great way to maintain a concise and clear structure, while also providing additional detail. 

The most important take-away is to routinely explore ways to more efficiently describe your organization’s processes. Because of the dense nature of the information provided in the production plan it is strongly suggested to use diagrams, charts, and schematics whenever you can. 

This is an area of your Business Plan where illustrations are encouraged and can make a real difference in facilitating the reader’s ability to understand your methods of production. 

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Send me a question: moebius@zenofwuwei.com