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Testing A Business Plan: Reality Test

The document discusses three tests - reality, competitive, and value - that a business plan must pass for it to be considered valid. The reality test examines the feasibility of the product or service idea and the existence of a target market. The competitive test assesses the management's ability to gain an edge over rivals and the company's strengths against competitors. The value test ensures the plan demonstrates sufficient probability of repayment or return on investment by analyzing financial risks like leverage, liquidity, profitability, and current ratio.

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Tarikul Tareq
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225 views2 pages

Testing A Business Plan: Reality Test

The document discusses three tests - reality, competitive, and value - that a business plan must pass for it to be considered valid. The reality test examines the feasibility of the product or service idea and the existence of a target market. The competitive test assesses the management's ability to gain an edge over rivals and the company's strengths against competitors. The value test ensures the plan demonstrates sufficient probability of repayment or return on investment by analyzing financial risks like leverage, liquidity, profitability, and current ratio.

Uploaded by

Tarikul Tareq
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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TESTING A BUSINESS PLAN

The business plan is a written document prepared by the entrepreneur that


describes the entire relevant external & internal element in starting a new
venture, its operational & financial details, its marketing opportunities &
strategies & its managers skills & abilities. There is no alternative for a well
prepared business plan. Thus the effectiveness of the business depends on the
appropriateness of the business plan. If the business plan is defective the owner
of the business can not established and run that business efficiently. A business
plan must go by with three test, then it is called valid or a business plan. They are:

 The reality test


 The competitive test
 The value test

Reality Test:
The reality test has internal and external components.

 The internal components of the reality test focuses on the product or


services itself. It also includes management risk, manufacturing process,
business risk, industry growth rate, physical plants, machinery and
equipment etc.
 The external component of the reality test revolves around providing
that a market for the product or service really exist. It focuses on
industry attractiveness, market niches, potential customers, market size,
degree of competition, future outlook, product forecast, pricing,
distribution etc.
Competitive Test:
The competitive test has also some internal and external components.

 The internal competitive test focuses on managements ability to create


a company that will gain an edge over existing rivals. To pass this part
of the competitive test , a plan must provide the quality, skills and
experiences of the ventures management team. It also evaluates
strength and the weakness of the business, contingency plans,
technology utilization etc.
 The external part of the competitive test evaluate the company’s
relative position to its key competitors. It also focuses on company’s
opportunities and threat for its success and survival.

Value Test:

To convince lenders and investors to put their money into the ventures, a
business plan must prove them that it offers a high probability of repayments
or an attractive rate of return. The ventures must have a long term strategic
vision and a particular focus on operations. Entrepreneurs must be able to
demonstrate their knowledge of :

 Supplies and all related cost of goods


 Unit labor cost
 Market-determined selling and gross profit margins
 Break-even point

A business plan must have some financial risk. We can measure this financial
risk in four way such as leverage, liquidity, profitability and current ratio. Value
test is valid if we analyze these financial risk.

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