Business Planning for the Pilot Trade Associations

This paper addresses a number of issues relating to the element of the project concerning business plans for the formation of the four pilot trade associations.

It is split into two sections as follows:

Section 1 The methodology to be followed in creating the business plan.

Section 2 Proposals for a task group to prepare a business plan.

1.1 Objectives of the Association

It is self evident before commencing to prepare a business plan for an Association that it is necessary to establish both the fundamental objective of the Association as well as addressing any subsidiary or minor objectives which it may seek to achieve.

Thus the fundamental objective will probably be :

With subsidiary objectives being:

It will be a matter for each Association to decide its own fundamental and subsidiary objectives.

The process of objective setting must come before all other elements of the formulation of the business plan, for until this is done, no structure can be built up for the plan.

1.2 Structure and framework of the Association

Having established the objectives of the Association, it is then necessary to address the means of achieving those objectives. This element of business planning will involve a detailed analysis of the goals to be achieved in satisfying the objectives and therefore will involve planning the development of the Association over time. This period would generally be 3 to 5 years depending on the purpose to which the plan is being put.

If the plan is prepared solely to obtain financing, the period is likely to be 5 years, but since the pilot trade associations will be producing business plans for their own management purposes, three years should be adequate. This forward planning should be conducted on the basis of a three year rolling plan, which means that the business plan will need to be revisited each year and reworked in its entirety, dropping off the first year and adding an additional year at the end of the plan.

The process of planning the structure and framework of the business over three years should be conducted at this stage with as little reference to practical considerations as possible since these will come later in the planning process. Clearly it will not be possible to ignore all practical implications of the plan at this stage but the main purpose in going through this process is to establish a framework for the business and in particular the growth of the business which can subsequently be turned into the practical means of achieving the plan.

At this stage, the objectives of the Association and the outline framework of how it will operate will be in existence. Subsequent sections of this paper address the means of achieving the objectives and the framework.

1.3 Marketing

For a Trade Association, this section will address the two key elements of its market; membership and business services.

1.3.1 Membership

The number of members it recruits is the fundamental key to the success of a Trade Association. The more members it has, the more it is able to speak as the voice of authority for the industry and therefore the greater will be its influence with government and other opinion formers and the greater income it will have. Equally, the more members it has, the greater its captive market for selling business services.

In order to establish growth in member numbers over the three years of the business plan, it will be necessary to establish at the outset, the total potential membership market. The next stage is to assess the realistic penetration of that market over the three years of the plan.

1.3.2 Business services

Membership income alone is unlikely to provide sufficient income for the Association to achieve its objectives because it will need to set a level of membership fee income which is low enough to attract new members. It will therefore need to find income streams which derive from selling value-added services to its membership.

These could take the form of some or all of the following:

Training
Vehicle testing or inspection
Staff recruitment
Legal representation
Arranging insurance
Organising financing
Cargo broking

The business planning process must involve subsidiary business planning for each and every business activity decided upon following the same procedure as used for the main business plan for the Association itself.

This may seem unwieldy but it is absolutely necessary since each separate business service will involve the commitment of resource and possibly investment and therefore will need to be tested for its business viability.

The business plan at this stage will comprise the objectives, outline framework and marketing growth. It will not as yet have addressed the means of achieving that growth and the financial implications of doing so. These comprise subsequent sections as follows.

1.4 Implications of achieving the marketing plan

This section of the plan should be prepared in two parts similar to the marketing section:

1.4.1 Membership

The marketing section of the plan will have identified the growth of membership over the three year period. It is now necessary to establish how that growth can be achieved.

Members will not simply come knocking on the Association’s door. There will need to be active selling. This could be undertaken in a number of ways, including direct mailing or the employment of a member or members of staff who would travel around recruiting members. If legislation compels a haulage company to join its local trade association, then this process is made easier. How the selling is undertaken is a matter for those compiling the business plan to judge.

1.4.2 Business services

As already stated above, each individual business service will need to have its own subsidiary business plan. Thus having established the marketing growth it is then necessary to identify what resources are necessary to achieve that market growth.

Although at this stage of the business planning process, the issues of pricing and overall costing has not been addressed, as far as the business services are concerned, these issues will need to be considered within the marketing section of their subsidiary business plans, since without regard to what the market will be prepared to accept as a price, it is not possible to consider the marketing issues attaching to a business service.

For each business service subsidiary business plan, the resources necessary for delivery of that service will be constrained by the total income which can be derived from the service. Therefore it is at the stage of the business planning process that it will be possible to test whether each separate proposed business service is commercially feasible.

1.5 Delivering service

The above two sections have addressed the means of achieving the levels of income growth for the Association (without at this stage having established the actual values of that income). The next stage is to establish what resources will be necessary to deliver the objectives of the Association as set out in section 1.1 above.

If the major objective of the Association is to improve market conditions for its

membership, then a significant means of achieving this will be through the influencing of legislation. For the pilot associations, this will clearly mean influencing legislation locally through the local Oblast Duma but also lobbying the Federal association in order to influence legislation on a national basis. In addition, objectives such as assisting members in running their businesses and representing members on legal, technical and other issues will all require appropriate resources.

Having established in section 1.1, what the objectives are, and in sections 1.3.1 and 1.3.2, what the growth in members and member services is likely to be, it is then possible to forecast the resource necessary over the three year period of the plan required to deliver the objectives and the services.

This resource will primarily be people, for what is essentially a service organisation. Thus it will be necessary to address not just the numbers of staff necessary but also the skills needed for delivering services.

Following on from an assessment of the staffing will be an assessment of the facilities needed by those staff in order for them to carry out their functions. This will include such overheads as office furniture, the means of travelling to member companies, secretarial assistance, office consumables, etc.

1.6 Financial aspects

Thus far the business plan will have addressed both the means of achieving income and the resources necessary to deliver that income. The following sections deal with the costing of the elements of the plan, starting with pricing.

1.6.1 Pricing

The two elements of income, membership fees and business services will need to be priced separately.

The overriding constraint which applies in fixing any pricing policy is what the market is prepared to pay for the service delivered. This can be very difficult to establish, but unless it is established with some degree of certainty, the whole business plan will be fraught with uncertainty and its formulation will have been a useless exercise.

There are a number of ways of establishing the correct price for a service which customers or in this case members will be prepared to pay. The most obvious way is to ask them. This can be done on the basis of market research, either by writing to a selection of potential members or much better still, by visiting a selection, setting out the stall of services offered and discussing the proposed price for such services.

Such market research alone will not enable a meaningful pricing policy to be established. Other factors, most of which are intangible will need to be introduced. These will include the judgement of the writer of the plan, knowledge of the trading and financial profile of potential members, the extent, if any, to which membership of the association is mandatory under any existing or proposed legislation and an assessment of the added value that membership and the services of the association will make to member companies.

Unless the pricing structure is correctly established, it will be almost impossible to sell membership since anyone seeking to recruit a new member will almost invariably be asked the same question which is “what do I get for my money”. Unless the equation of value added to the business and price has been established, that question cannot be answered and the member cannot be recruited.

1.6.2 Financial costings

Having established the means of achieving income growth and pricing, as well as the means of delivering service, it is now possible to cost the business plan.

Volume growth and prices will yield total income year by year for the three years covered by the plan.

A costing of the resources in section 1.5 above will yield the expenditure year by year for the three years.

The difference between the two will be the surplus or deficit for each of the three years.

This process will yield the basic trading income and expenditure account. However, the association will be a business much like any other and therefore it will need capital to fund both fixed assets and working capital.

The capital necessary to fund fixed assets will be known from the resources section (section 1.5 above). In order to calculate the working capital requirement it will be necessary to convert the trading income and expenditure accounts produced above into cash flow forecasts. This should be done individually for each year, starting with year one. Once the cash flows have been estimated and the resultant working capital requirement has been established, the cost of servicing that capital, both for fixed assets and working capital should be added to the trading income and expenditure account for year 1 in order to establish an association income and expenditure account for year 1. If the year 1 I & E account yields a surplus, this will reduce the capital requirement for year 2 And likewise a deficit will result in the need for additional working capital in year 2. This process should then be repeated for years 2 & 3.

1.6.3 Capital Funding

At the outset, the Association will need capital funding. This will need to be borrowed. It should however aim to repay that borrowing as quickly as possible in order that it can be self sufficient and in due course generate its own capital for future investment.

The obvious source of borrowed capital is bank funding but interest rates in Russia at present may make such a source prohibitively expensive. Other sources may be the EU, the World Bank, private investors or even possibly the members themselves.

The aim should be to repay the borrowed capital over a period no longer than five years. Clearly, in order to do so, the Association would need to make consistent and substantial surpluses over those five years. This however may be inconsistent with the prevailing legislation in Russia which prevents a Trade Association from making profits. It can be argued that surpluses earned in order to establish a business are not the same as profits, particularly if there is a absolute prohibition in the Association’s rules on the distribution of surpluses, but such an argument may not be successful.

In that case, it may be possible to find other means within Russian corporate law, to achieve the same objective, possibly by the formation of a registered charity or a foundation or other means.

1.6.4 Modelling

Having produced the full costings, and therefore a detailed Association income and expenditure account for the three years of the business plan, it is probable that the I&E accounts for each of the three years yield results which are untenable. There may be deficits in each of the years or perhaps unrealistically large surpluses.

The costed I&E accounts are the key to the commercial viability of all elements of the business plan and they should be constructed in such a way as to allow them to be modelled.

The modelling process will involve a complete analysis and revisiting of all elements of the business plan thus far established, but for the first time on the basis of a comparison of those elements one with the others. This process will involve altering elements of the plan contained in the sections above, in such a way as to model the I&E accounts in order to show a realistic and feasible commercial operation. However, it has to be accepted that this may not be possible and if that is the case, the business plan will be found wanting and the only conclusion which can be come to will be that the proposition is commercially unfeasible.

Alternatively, if the modelling process produces a feasible series of income and expenditure accounts, the business plan will have been demonstrated as workable.

1.7 Sensitivity analysis

The formulation of any business plan is an exercise in forecasting. No one can know the future with certainty. Most of the elements of the plan will have been based on judgemental assessments, and if any, some or all of those assessments are wrong, then the plan will be in danger of failing.

In order to put this issue into perspective, it is important to test the assumptions used in the formulation of the plan. This is carried out using a process termed sensitivity analysis.

Each assumption should be examined individually and an assessment made of the worst outcome for that assumption as well as the best. Many of the assumptions will be interdependent, one with the other and therefore the process of establishing worst and best case scenarios will be a long and detailed process.

When this exercise has been carried out, the costings should be reworked on the basis of the worst possible case And also on the basis of the best.

This process will yield a range of probability for success for the business, within which the actual performance will fall. It is then a matter of commercial judgement to assess where along the line between worst and best scenario, the actual performance is likely to fall, having regard to the original costings produced before the exercise in sensitivity analysis had been undertaken.

Essentially this process will enable an assessment to be made of the risk involved in embarking on the proposed business.

1.8 Purpose of the plan

Given that the business will inevitably require some degree of capital funding, the business plan will serve as a means of inducing an investor to provide the necessary funds. To some extent, this is a once only exercise although any investor will wish to see regular management information during the currency of the loan in order to ensure that its investment is protected.

The other major use of the business plan will be to assist in the management of the Association itself. As such, the plan will comprise a blue print for the conduct of the business over the first three years of its operation and a means of testing regularly that the business is operating in the manner in which it was anticipated to.

Because the business plan will comprise a significant management tool, and accepting that circumstances will change in the light of experience, gained in operating the business, it is imperative that the plan is revisited regularly and reworked regularly. This should be carried out annually, when the whole plan should be reworked, dropping off the oldest of the years and adding a forecast for next year at the end of the plan. In this way, the plan will be changing constantly year by year, but most importantly any changes which would have an adverse effect upon the business can be anticipated in advance and action taken to avoid adverse elements.

2.1 Introduction

Business plans are unique to each undertaking. Although a blue print plan can be produced and to some extent the methodology will be similar for each pilot association, the content of each business plan will be different for each association.

The business plan must reflect what the association wishes to undertake, and therefore although some outside help can be given in the formulation of the plan, the detail must come from those who will be responsible for carrying out the business of the association.

The author of the plan must be the Chief Executive of the Association although he will require the considerable assistance of an accountant in writing the plan.

2.2 Objectives and structure

Section 1 detailed the methodology involved in formulating a business plan. The first task to be undertaken is to establish the objectives of the association.

This function is best undertaken by carrying out a brain storming session, involving staff and possibly members of the pilot associations, under the chairmanship of a moderator, who can be a member of the TACIS project team.

This same session can also address the structure and framework of the association(section1.2).

2.3 Marketing

Formulation of the marketing plan and the means of achieving the marketing targets are best dealt with by a separate sub group. This group will need some guidance on how to set about formulating the proposals and would benefit from having the involvement of a marketing expert.

The creative design of new business income streams should be opened up to all those involved in the work of preparation of the business plan, to ensure that all ideas have an opportunity of being considered. Individuals can be asked to research their own ideas for business services and feed back the results of their research to the marketing sub group.

When it has finished its work, the marketing sub group should report back to the main task group.

2.4 Delivering service

When the marketing sub group has completed its investigations, the question of the necessary resources, to deliver the services will need to be addressed. This should be undertaken be the Chief Executive of the Association, because he alone will be responsible for delivering the services and therefore it is he alone who must judge what resources will be necessary to enable him to do so.

2.5 Finance

The pricing of the Association’s services should be established by the Chief Executive, using the methodology detailed in section 1.6.1.

The issues of costing, capital funding and modelling should be undertaken by the accountant..

2.6 Sensitivity analysis

Only the Chief Executive can assess the sensitivities of the plan although he should be assisted in this task by the accountant, who will subsequently formulate the financial projections on a best and worst case basis.

2.7 Adoption of the plan

When the plan has been finalised, it should be circulated to all those who participated in the initial task group. Each member of that task group should be asked to consider the plan, make any suggestions for change, discuss these with the Chief Executive and then signify his acceptance of the plan.

TNRUS 9604 - August 1998

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