UNIT FOUR : BUSINESS PLAN AND DECISION MAKING

Small business starts with a business plan. Planning is predetermined future. It is the
process of setting objectives and choosing the actions to achieve them.
Planning serves as a guide for allocating resources in coordinated way it specifies ways
and means of implementing actions. They serve as standards for controlling performance.
Planning the proposed business is the first major task of the potential entrepreneur. The
business plan briefly describes the future as the potential entrepreneurs see it. Is the
business on paper?
A good plan, which is also known as the project feasibility study, involves
a) The collection of data which are relevant to all aspects of the proposed business
b) The analysis of the collected data, and
c) The application of the result to minimize business risks..

ELEMENTS OF A BUSINESS PLAN

The contents or elements of a business plan can be envisaged in general as follows:
a. Executive summary: It is the summary of important business information. The
top management develops the scenario and provides general overview. It is
synopsis of the plan.
b. Business description : It is the historical profile of a business organization. It
provides general information about past and present of the business activities,
objectives , resources , relationship with stakeholders etc.
c. Product description : It is related to the identity of the business through product.
The patent of product, its market position, special features etc are described. It is
identifying the symbol of existence.
d. Market description : The target market, sales estimation , competitors position,
pre and post sales services, market segmentation, market research etc are included
in the statement of market description.
e. Technical aspects : Production planning and process, methods used, technology
used, effect of change of technology, technical collaboration, electronic or
computerized business etc are the matters of technical aspects.
f. Operations aspects: The aspects related to physical facilities, location near to the
source of supplies as well as users, systems of operation, policies of purchase ,
store and issue of inventory, capacity and degree of devotion of workers etc are
included in the operations aspects.
g. Financial aspects : Capital required for commencement, expansion and
modernization of business, cost of raising capital, alternative sources of capital ,
the volume of working capital needed, financial analysis tools, expected financial
results and impacts, risk and return etc are considered under this aspects.

h. Management aspects : Design and structure of organization, selection of team of

management, authority responsibility relationship, reward and punishment
systems, commitment and motivation of workers towards organizational goals etc
are the subject matters of management aspects.
i. Implementation : The schedule of implementation, the budgeting of time and
resources , making time line and prescribing limit of resources through fixed
duration, responsibility and power are included here.
j. Risks and their management : The risks are generally unseen and un told. The
keeping keen eyes over changes and probable shift are the matters of risk
management.
k. Appendices : The supplementary documents, information and the details of
research works are included here.
BUSINESS PLAN DEVELOPMENT
a. Analyze opportunities
b. Set objectives
c. Develop premises
d. Determine and evaluate alternatives
e. Select a course of action
f. Formulate action plans
g. Prepare budgets
CONCEPT AND TYPES OF DECISION MAKING
CONCEPT :
Decision is a choice among alternatives. It is a course of action consciously chosen from
acceptable alternatives to achieve objectives.
Decision making is a future oriented activity. It involves forecasting and planning. It is
the process of evaluating two or more alternatives leading to a final choice. Decision
making is closely involved in planning for the future and is directed towards a specific
objectives or goal. The decision making consists of the following characteristics:
a. objective orientation
b. dynamism
c. pervasiveness
d. continuity
e. problem solving
f. choice making
g. commitment
Rationale of decision making
Problem solving: Decision making is the process of solving problems. Problem
solving is essential for achieving objectives.

Rational choice: decision making identifies and evaluates available alternatives

for making a choice. It is based on logical facts together with judgment of the
decision maker.
Pervasive in managerial functions: decision making id pervasive in all functions
of management. Owner- manager make strategic decisions, middle managers
make tactical decisions, and lower managers make operational decisions.
Performance evaluation: all decisions influence performance. Effective
decisions are needed for business effectiveness.

Types of Decision Making

The short run decision making can be classified into different types. The genesis of
decision making lies on the operational needs.
Drop or continue product line: if there is a range of products one of which is
deemed to unprofitable, it may consider dropping the item from its range. This
type of decision is very much related to profitability. An important factor in the
decision to drop or continue a product line is whether it will increase or decrease
the future income of the business. If the profit increases by dropping the product,
that product should be dropped. But if the profit decreases by dropping, then that
product should be continued.
Decision to accept or reject special order: special order arises when a company
has excess of idle production capacity. If there is no spare capacity, the question
of special offer does not arise. Fixed cost does not increase generally by accepting
the special order, only the variables cost increase. If the price offered is more than
the marginal cost, that proposal may be accepted and vice-versa.
Make or buy: management sometimes may have to face with the decision
whether to make a part of production or buying them from outside. Such a
decision arises when a company has idle plant capacity and technical capability of
manufacturing the component. Whether to make or buy a part depends upon the
total cost. If the total cost for making is greater than buying, in that case, certainly
the company should buy the part. But if the total cost for making is lower than
buying the obviously the company hold make the part.
Replace or retain of equipment: it is a decision for equipment. Whether the existing
equipment should be retained of not is depends upon different types of costs. By bringing
the new machine inside the company, if the annual cost increases then new machine
should not be purchased. But by using new machine, if the profit is maximizing on one
hand ands cost increases in other. In this case the new machine should be acquired. Thus
this type of decision depends upon cost as well as profit
. Types of Decisions
Types of managerial decisions can be as follows:

Programmed and non-programmed

Strategic, tactical, operational
Individual and group

1. Programmed and non-programmed

a) Programmed decision: they are routine and repetitive decisions. Deals
with low risk decisions. Policies, rules and procedures are laid down to
handle them. Middle and lower level managers deal with such decisions.
For example: payroll procedures, processing admission application.
b) Non- programmed decisions: they are unstructured. They deal with
complex and non- routine problems. Each problem is new and different
from those experienced in the past. Managers apply their judgment,
intuition and creativity to solve problems. There are no standard operating
procedures. Top-level managers deal with such situations. Examples are:
introduction of new product, construction of new building,
computerization, etc.
2. Strategic, tactical, operational decisions
a) Strategic decisions: they prescribe corporate policy, strategic goals and
environmental positioning in long term perspective. They deal with nonprogrammed situations. Such decisions are made by top management.
b) Tactical decisions: they prescribe short term goals for departments, such as
production, marketing, finance, and personnel. They are made by middle
management.
c) Operational decisions: they tend to be routine and repetitive programmed
decisions. Authority is delegated to lower management to make such
decisions.
3. Individual and group decisions
a) Individual decisions: they are made by individuals. They can be for
complex or routine problems. They are generally prevalent in small
organizations.
b) Group decisions: such decisions are taken collectively by a group of
people. Examples are decisions by board of directors, teams, committees.
Interdepartmental decisions are generally taken by groups.

DECISION MAKING PROCESS

Recognize
and define
the problem

Identify
appropriate
alternatives

Evaluating
selected
alternatives

Choose the
best
alternative

Implement
decision

Evaluation and follow-up

1. Recognize and define the problem: Decision making begins with the existence
of the problem. A problem is a gap between the existing situation and the desired
outcome. The problem should be properly defined.
2. Identify appropriate alternatives: Appropriate alternatives course of actions to
solve the problem should be identified. Owner of the business should be creative
and innovative to identified alternatives. They should be based in information
collection and analysis.
The sources of alternatives can be:

Discussion with subordinates, customers, sales forecast etc.

Opinions of experts
Management information system
Brainstorming, electronic meeting etc.

3. Evaluate selected alternatives: Each selected alternatives should be evaluated in

terms of decision criteria. Key consideration is:
Feasibility of the alternative in terms of costs, time, legal constraints,
human and other resources.
Affordability and satisfactoriness of the alternatives
4. Choosing the best alternative: This is the choice phase for choosing the best
alternative. The approach for making the choice can be:
Experience: decision making is not only a rational process but also a
judgmental process. Experience can be a useful basis for choosing a
course of action.
Experimentation: it is pre-testing the alternative. Market testing of new
products is an example.
Research and analysis: a model is built to simulate the problem

5. Implement the selected alternative: Implementation is putting a decision into

action. The selected alternative should be effectively implemented into action. It
should be accepted by the people willingly.
6. Evaluation and follow-up: This step is essential to evaluate the decision
effectiveness in solving the problem. Its progress is monitored and its success is
evaluated.

THE PROCESS OF SETTING UP A SMALL SCALE INDUSTRY

The process of setting up a small business
To start a new business it demands new idea, new location, new plant, new machinery,
new inventory and new personnel.
The steps in setting up a small business are:
a) Selection of idea: It is selecting idea for a product line that satisfies customer
need a small business is born with an idea. A small business owner should have
the ability to generate a number of ideas. Such ideas should have potential to
make profit the most promising idea should be selected for establishing small
business.
b) Business plan: It deals with the approach to exploit the new ideas. it covers:
Marketing aspects: about market potentials, competition, customers, price
quality or service.
Production aspects: it is about technology, processes, methods, location
Organization and management aspect: it is about form of business, its
organization and management
Financial aspects: capital needs, sources, financial projections, records.
c) Location selection: In this step the appropriate site is selected. Location affects
accessibility of small business to customers, suppliers, employees, infrastructures
and transportation. Various factors that should be considered while selecting
location is; proximity to suppliers, proximity to market, availability of transport
facility, availability of labor, environmental factors etc.
d) Form of ownership: The legal form of ownership is decided and registered. The
choice of forms depends upon needs of the owner, nature and size of the business,
personal responsibility for debts, etc. It could be sole proprietorship, partnership,
public and private limited company.
e) Formalities: Environmental and other clearance is obtained. Licenses are
obtained. Other procedural formalities have to be fulfilled.

f) Finance: financial resources are acquired. It Small business owner is supposed to

carefully estimate initial capital requirements for start-up of business. It could
saving, borrowed money and loan from bank. this is done by estimating the
following:

Fixed assets requirements

Current assets requirements
Business promotion cost requirements
Personal living expenses of the owner

1. Assets: fixed assets are acquired. Plant and machinery have to be installed.
2. Employees: right type of employees is hired. It could be unskilled, semi-skilled
and skilled employs.
3. Production: in this step technology is selected. It can be labour or capital based.
Raw material is procured. Products are produced for marketing
4. Clearances: in this step license and permits, if needed, are obtained. Taxation
matters are handled.