BUSINESS PLANNING THE ROLE OF THE BUSINESS PLAN

What is a business plan? • A business plan is a written document that sets out the basis idea underlying a business and related startup considerations. • For an entrepreneur planning to start his or her own business venture, a business plan will play four basic objectives:

• • It identifies the nature and the context of the business opportunity – why does such an opportunity exist? It presents the approach the entrepreneur plans to take to exploit the opportunity. It identifies the factors that will most likely determine whether the venture will be successful or not. It serves as a tool for raising financial capital.

• A business plan can be viewed as an entrepreneur’s game plan; it crystallizes the dreams and hopes that motivate the entrepreneur to attempt to start the business. • It should explain where the business person is, where he or she wants to go, and how he or she proposes to get there • The plan should lay out the key variables for success or failure, thereby helping you prepare for different situations that may occur by thinking about what could go right and what could go wrong.

• A business plan is in large part an opportunity for an entrepreneur and a management team to think about the key drives of a venture’s success or failure. • In reality, the business plan is in essence, a bridge between an idea and reality. Without first mentally visualizing the desire end result, the entrepreneur is not likely to see the venture become a physical reality.

• The role of a business plan is to provide a clear visualization of what the entrepreneur intends to do. • The business plan is not a onetime event. In fact, this is primarily an ongoing process and only secondarily the means to an end product or outcome.

The Need For A Business Plan • According to Jack Stack, an advisor to small companies, “To build a great company, you need an operating model that you constantly refine and improve…. I mean a complete set of systems, a methodology that defines the way you run every aspect of your business. ” Developing such a model is the essence of a business plan.

Users of a business plan: A business plan has two primary functions: 1. To provide a clearly articulated statement of goals and strategies for internal use; and 2. To serve as a selling document to be shared with outsiders.

Two major groups of people interested in a business plan are: 1. Those critical to the firm’s success: customers, suppliers, and investors; • By enhancing the firm’s credibility, the business plan can serve as an effective selling tool for prospective customers and suppliers, as well as investors. • A good plan may be helpful in gaining suppliers’ trust and securing favorable credit terms. Likewise, by convincing prospective customers of a firm’s potential for longevity, the plan may reassure those customers that the new firm is likely to be around to service a product or to continue as a procurement source. • It should also be noted that both investors and lenders use the business plan to better understand the new venture, the type of product or service it offers, the nature of the market, and the qualifications of the entrepreneur and the management team. Also, venture capitalists would not fund any business before reviewing a properly prepared business plan.

2. Internal users – these include new firm’s management and its employees. Preparing a business plan imposes needed discipline on the entrepreneur and the management team. Similarly, a business plan can be effective in selling the new venture to those within the company. It provides a structure for communicating the entrepreneur’s mission to current – and prospective – employees of the firm.

• The Investor’s Perspective: • The entrepreneurs characteristically focus on the positive potential for the start up – what will happen if everything goes right. • The prospective investor, on the other hand, plays the role of the skeptic, thinking more about what could go wrong. • At the most basic level, a prospective investor has a single goal: to maximize potential returns on an investment through the cash flows that will be received, while minimizing risk exposure. Like any informed investor, they will look for ways to shift risk to the entrepreneur.

• To prepare a business plan that will capture the investor’s interests, the investor should understand that – – Investors have a short attention span: The speed with which business plans are initially reviewed requires that they be designed to communicate effectively and quickly to prospective investors. They must not sacrifice thoroughness or substitute a few snappy phrases for basic factual information. To make the plan read, it must first gain in interest of the investor; and it must be formulated with that purpose in mind. Certain features appeal to investors, while others are distinctly unappealing. In order to raise capital from outside investors, the business plan must be the “right” plan – that is, it must speak the investor’s language.

• Investors are more market-oriented than productoriented, realizing that most patented inventions never earn a dime for the investors. • Investors are also looking for: • Evident of customer acceptance of the venture’s product service. • An appreciation of investors’ needs, through recognition of their particular financial goals, as evidenced in their required rates of return. • Evidence of focus, through concentration on a limited number of products or services • Proprietary position, as represented by patents, copyrights, and trademarks.

Factors that repel investors: 1. Infatuation with the product or service rather than familiarity with and awareness or market place needs 2. Financial projections at odds with accepted industry norms 3. Unrealistic growth projections 4. Need for custom or application engineering, which makes substantial growth difficult.

• How Much Business Planning Is Needed? • In making a decision regarding the extent of planning, an entrepreneur must deal with tradeoffs. Preparing a business plan requires both time and money, two resources that are always in limited supply. • Other major considerations are:

• • • Management style and ability Preferences of the management team Complexity of the business Competitive environment Level of uncertainty

PREPARING A BUSINESS PLAN Two issues are of primary concern in preparing a business plan: 1. The basic format and effectiveness of the written presentation; and 2. The content of the plan.

• Formatting and Writing a Business Plan: • The quality of a completed business plan ultimately depends on the quality of the underlying business concept. A poorly conceived new venture idea cannot be rescued by good writing. A good concept may be destroyed by writing that fails to effectively communicate.

The Business Plan • Although the business plan for each new venture is unique and no single format or formula can guarantee success, there are guidelines as prospective entrepreneur can follow in preparing a plan. Most business plans exhibit considerable similarity in basic content. A summary of typical business plan follows (see also figure 8 -3)

1. Title – – – page: The title page is the first page of the business plan and should contain the following: Company name, address, phone number, fax number and web address Company logo, if available Names, titles, addresses and phone numbers of the owners and key executives Date on which the business plan was issued Number of the copy Name of the preparer, if other than the owners and key executives.

II. Table of contents: The table of contents provides a sequential listing of the sections of the plan, with page numbers. III. The Executive Summary: This is crucial in getting the attention of the one-minute investor. It must convey a clear and concise picture of the proposed venture and, at the same time, create a sense of excitement regarding its prospects. • It must be written and rewritten to ensure clarity and creates interest. • It should provide an overview of the whole plan and written last • It should be in form of a synopsis or a narrative.

• a) Synopsis: – Covers all aspects of the business plan, giving each topic relatively equal treatment. – It simply states in abbreviated fashion, the conclusions of each section of the completed business plan. – Although it is relatively easy to prepare the synopsis can be rather dry reading for prospective investor.

b) Narrative: • This tells the reader a story. It can convey greater excitement than the synopsis. • A narrative is more appropriate for business that are breaking new ground, with either a new product, a new market, of new operational techniques. • It is also a better format for businesses that have one dominant advantage, such as holding an important patent or being run by a well-known entrepreneur. • The narrative works well for companies with interesting or imperative backgrounds or histories (see pages 204295)

IV. Vision and mission statement: The firm’s mission statement concisely describes, in writing, the intended strategy and business philosophy for making the entrepreneur’s vision a reality. • It should convey how combined efforts in all areas of the business will move it toward its goal. • It should distinguish the firm from all others • It should remain simple, believable and achievable.

V. Company overview: The main body of the business plan begins with a brief description of the firm. The section should answer the following questions: • • • When and where was this business started? What changes have been made in structure and/ or ownerships? In what stages of development is the firm – for example, seed stage or full product line? What has been achieved to date? What is the firm’s distinctive competence? What are the basic nature and activity of the business? What is its primary product or service? What are the firm’s objectives? What is the firm’s form or organization – sole proprietorship, partnership, or corporation? What are the current and projected economic states of the industry? Does the firm intend to become a publicly traded company or an acquisition candidate?

VI. Products and/or service plan: This section discusses those products and/ or services to be offered to the firm’s customers. • If a new or unique physical product is to be offered and a working model or prototype is available, a photograph of it should be included in this section of the business plan. • Investors will naturally show the greatest interest in products that have been developed, tested and found to be functional. • Any innovative features should be identified any patent protection explained. • The products’ features should be identified.

• VII. Marketing plan: Prospective investors and lenders attach a high priority to the market considerations. • They do not want to invest in a product that is well engineered but unwanted by customers. • The marketing plan, therefore, must identify users benefits and the type of market that exists. • Depending on the type of product or service being offered, the marketing plan may be able not only to identify but also to quantity the financial benefit to the user – for example, by showing how quickly a user can recover the cost of the product or service through savings in operating costs. • The marketing plan should document customer interest by showing that a market exists and that customers are ready to buy the product or service. • The marketing plan must also examine the competition and describe elements of the proposed marketing strategy – for example, by specifying the type of sales force and the methods of promotion and advertising that will be used.

• VIII. Management plan: Prospective investors look well managed companies. • The factors they consider, the quality of the management team is paramount; it is even more important than the nature of the product or service. • The management plan must detail the proposed firm’s organizational structure and the backgrounds of those who will fill its key positions. • Investors desire a well-balanced management team – one that includes financial and marketing expertise in related enterprises and in other startup situations is particularly valuable in the eyes of prospective investors.

• IX Operating plan: The operating plan offers information on how the product will be produced or the service provided; it is importance varies from venture to venture. • This plan discusses such items as location and facilities: how much space the business will need and what types of equipment it will require. • The operating plan should also explain the firm’s proposed approach to assuring quality, controlling inventory and using subcontractors or obtaining raw materials.

• X. Financial Plan: Financial analysis constitutes another crucial piece of the business plan; it is contained in the financial plan section of the business plan. Pro-forma statements: which are projections of the company’s financial statements are presented for up to five years. • – – The forecasts include balance sheets, income statements and statements of cash flows on an annual basis for three to five years, as well as cash budgets on a monthly basis for the first year and on a quarterly basis for the second and third year. The financial projections must be supported by wellsubstantial assumptions and explanations of how the figures have been determined.

– Statement of cash flows deserve special attention, because a business can be profitable but fail to produce positive cash flows. – A statement of cash flow identifies the source of cash – how much will be raised from investors and how much will be generated from operations. – The statement of cash flows should clearly indicate how much cash is needed from prospective investors and for what purpose. – The plan should outline the mechanism available to investors for exiting the firm.

• XI. Appendix of supporting documents: The appendix should contain various supplementary supporting and attachments to expand the reader’s understanding of the plan. • Information included in this section includes any items referenced in the text of the plan. Such include resumes of key investors, owners/managers, photographs of products, facilities and buildings, professional references, marketing research studies, pertinent published research and signed contract of sales.

WHAT NOT TO DO Common mistakes to avoid 1. Failing to provide solid data. Too often entrepreneurs make broad unsubstantiated statements without good, solid data to support them. 2. Failing to describe the product in lay terms. There may be a temptation to use too much of industry jargon. Present in simple, understandable terms. 3. Failing to thoroughly analyze the market. 4. Including financial statements that are overly detailed or incomplete.

5. Hiding weaknesses 6. Overlooking the fatal flaws. 7. Using bad grammar 8. Making the overall plan too long.