How to write a business plan?
Business plans can be seen as a blueprint of your business proposal. It explains every minute detail of your business and gives answer to all major questions which is being asked by an Investor / stakeholders starting from idea origination to financial projections.
Pricing Strategies
This is one of the vital decisions which a company makes during the life cycle of goods / services. Success and failure of product is directly linked to the pricing nowadays. Many goods are priced on higher side but are not demanded by customers & once the price is reduced, the same product becomes a huge success. Few goods are priced on higher side and are demanded very much by customers but once the price is reduced then demand also gets reduced. Hence, pricing decisions are very tough to be made. There are various strategies which are being followed nowadays related to pricing and few of them has been discussed in detail as under.
Repo Rate
What is Repo Rate?
This is the rate at which central bank of a country (e.g. “Federal Reserve” for USA, “Reserve bank of India” for India, “Central bank of Russian Federation” for Russia) lends money to commercial banks in case of any deficiency / shortfall of funds. This is one of the important tools to control inflation rate in a country.
SWOT Analysis
SWOT (Strengths, Weakness, Opportunities & Threats) analysis is a business planning tool to assess the overall situation of the industry by highlighting various external and internal factors affecting your business. This was used for the first time in 1980’s by GE. This helps a lot in understanding your business and shows up improvement areas as well as areas which can provide competitive advantage.
Strengths & Weaknesses arises due to internal factors prevailing within organization such as Work environment, Organizational structure, Operational efficiency, Brand value / image, key personal, financial capacity, market position, Patents & many more. One should build upon their strengths and minimize weaknesses. E.g. Huge cash surplus could be strength of a company and large debt can be seen as a major weakness.
MACD - Moving Average Convergence & Divergence
This is one of the important technical analysis techniques and is used to predict movements in the stock market. MACD is the difference between short term moving average and long term moving average. This difference helps in identifying, whether prices in the recent past have moved upward or downward as compared to longer period movement. With the help of MACD line various signals can be generated.
MACD = Short period moving average (Minus) long period moving average
Simply buy and sell signals can be generated with the help of MACD, when this indicator is in a positive zone, it indicates buying as the share prices are likely to move upward in future. On the contrary, when
Rate of Change (ROC)
ROC = Current price / Price n days ago
ROC value is plotted on a graph and this moves above or below a central value, that is, one ‘1’. Here ROC value one ‘1’ is the benchmark value. Buying and selling signals are generated as follows:
Buying signals:
- When ROC is more than one ‘1’ (ROC > 1) and moving upward continuously, it indicates that market is likely to move upward.
Capital Budgeting
Before arriving at any decisions related to huge capital investment, every finance manager / analyst tries to evaluate the project on various parameters and at last selects between different available proposals / options. This process of evaluation of multiple proposals which has life of more than a year forms part of capital budgeting process. Thus it plays a vital role in decision making process and is generally used in decisions related to replacement & modernization of machinery, expansion of project and diversification of product line or services..
Assumptions
1) Capital rationing:
Managers / analyst start with the thought that there is no scarcity of funds and the firm isn't faced with capital rationing.
WACC - Weighted Average Cost of Capital
WACC stands for Weighted Average Cost of Capital. This is also referred as MCC (Marginal Cost of Capital). In simple words, this is generally the rate of return which is being required by business to earn for paying off all the obligations such as Loans, Creditors, Preference Shareholders and Equity Shareholders. In other words, WACC is the required rate of return which the investors demand for above average risk investment of a company.
Calculation
Generally, company raises capital from sources such as Debt, Equity and instruments which share the same characteristics of Debt and Equity. Most of the firms use more than one source of capital, so in order to get the overall cost of capital, we calculate WACC as follows:
Three Generic Strategies
Cost leadership strategy
Differentiation strategy
Focus strategy
Cost Leadership Strategy
First generic
strategy i.e. Cost leadership comes from aggressive construction of efficient
scale facilities, vigorous pursuit of cost reductions from experience, cost
control, good inventory management and cost minimization in few areas such as
advertisement, service and R&D activities (if any). It provides a good
defense mechanism against both powerful buyers and suppliers resulting in
control over bargaining powers. Powerful buyers start pressurizing the next
competitor to reduce down the prices to the level of cost leader in the market
which sometimes proves to be dangerous for next competitor and very few firms
survive this in long run due to operational inefficiencies which further lead
to the exit of competitors from the industry. It thus serves as a entry barrier
to the industry.
BCG Matrix
Overview
This matrix was developed by Mr. Bruce Anderson of Boston Consulting Group (BCG) in 1970’s. Through this matrix, large business groups can take their major decisions on SBUs (Strategic business units) related to growth, diversification & divestment. SBUs are basically business units / organizations which have separate profit centre head and are generally formed with independent missions & objectives. Main purpose of this matrix is to understand the market position of various SBUs on the basis of four combinations obtained from market share & market growth rate. This matrix is most commonly termed as “Growth Share matrix”.
Four combinations are mentioned below:
1. High market share, Low market growth rate – Referred as “Cash Cows”
2. High market share, High market growth rate – Referred as “Stars”
3. Low market share, High market growth rate – Referred as “Question Marks”
4. Low market share, Low market growth rate – Referred as “Dogs”
Five Forces Model - Michael Porter
This topic will add to your knowledge about the underlying sources of competitive pressure which further highlights the critical strengths and weaknesses of the company and clarifies the areas where strategic change may yield the highest payoff. It also highlights the major strengths and weaknesses of industry along with associated opportunities and threats. This model is based upon following five forces.
Fig: Five Forces model by Michael Porter
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