The Business Plan: Creating and Chapter 7 The Business Plan: Creating and Starting the Venture McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Entrepreneur’s Adage #16 “Be careful not to get drunk on your own dreams. Starting a new venture requires flexibility and an open mind about change. Entrepreneurship is a process of vision and revision.” - Jordan

Planning as Part of the Business Operation Plans provide guidance and structure in a rapidly changing market environment. “Sanity Structure” that forces thinking on critical business issues. Plans evolve as the entrepreneur has a better sense of the market, the product or services, the management team, and the financial needs of the venture.

What is the Business Plan? A written document describing all relevant internal and external elements, needs and strategies for starting a new venture. An integration of functional (marketing, operations, financial, organizational, etc.) plans Generally addresses decision making for the first three to five years of operation.

Characteristics of Good Business Plans Comprehensive but succint enough to quickly give any potential investor a complete picture and understanding of the new venture. Helps the entrepreneur clarify his or her thinking about the business. As detailed as possible about strategy and specific elements of the business.

Who Should Write the Plan? The plan should be prepared by the entrepreneur or entrepreneurial team in consultation with other sources. Consultants Attornies Accountants The entrepreneur should objectively evaluate his or her own skills before deciding to hire a consultant.

Scope and Value of the Business Plan—Who Reads the Plan? The plan’s target audience should determine the plan’s content and focus. In preparing the plan it is important to consider the: Entrepreneur’s /organization’s perspective. Marketing (suppliers’ and customers’) perspective. Investor's perspective.

Scope and Value of the Business Plan—Who Reads the Plan? (cont.) Depth and detail in the business plan depend on: Size and scope of the proposed new venture The extent of the competition Access to information and early ideation flow Requirements of Funders, Customers, Suppliers Time to market considerations GENERAL RULE: “The more, the merrier; unless it delays the launch unnecessarily.”

Entrepreneur’s Adage #17 “Don’t obsess over business structure, permits, licenses and other administrative formalities… Obsess over your idea, its execution and its weak points.” - Jordan

Scope and Value of the Business Plan—Who Reads the Plan? (cont.) The business plan is valuable because it: Helps determine the viability of the venture in a designated market. Guides the entrepreneur in organizing planning activities. Serves as an important tool in obtaining financing. Inspires confidence amongst stakeholders.

How do Potential Lenders and Investors Evaluate the Plan? Lenders are interested in the venture’s ability to pay back the debt. Focus on the Four Cs of credit - Character, Cash Flow, Collateral, and Equity Contribution. Banks want an objective analysis of the business opportunity and the risks. Conservatism - Banks often cringe at new ideas and uncertain innovation.

How do Potential Lenders and Investors Evaluate the Plan? (cont.) Investors, particularly venture capitalists, have different needs: Place more emphasis on the entrepreneur’s character. Spend much time conducting background checks and business due diligence. Demand high rates of return. Focus on market and financial projections to determine their projected IRR in the project.

Presenting the Plan The entrepreneur is expected to “sell” the business concept – the so-called “Elevator Pitch” Focus on why this is a good opportunity right now. Provide an overview of the marketing program; sales and profits. Address risks and how to overcome them. Issues not covered in the plan ALWAYS come up. Investors will raise many questions – some of them unanswerable. DO NOT “BS” your way through them!

Using the Internet as a Resource The Internet can provide information for industry analysis, competitor analysis, and measurement of market potential. An entrepreneur can access: Popular search engines. Competitors’ Web sites. Social networks, blogs, and discussion groups. Syndicated data sources (for a fee)

Writing the Business Plan Introductory Page Name and address of the company. Name of the entrepreneur(s), telephone number, fax number, e-mail address, and Web site address if available. Description of the company and nature of the business. Statement of financing needed. Statement of confidentiality of report.

Writing the Business Plan (cont.) Executive Summary About two to three pages in length summarizing the complete business plan. Written AFTER all other sections have been completed. Environmental and Industry Analysis The environmental analysis assesses external uncontrollable variables that may impact the business plan. Examples: Economy, culture, technology, legal concerns, etc. The industry analysis involves reviewing industry trends and competitive strategies. Examples: Industry demand, competition, etc.

Critical Issues for Environmental & Industry Analysis

Entrepreneur’s Adage #19 “If you can read about it at Barnes & Noble, you’re probably too late.” - Jordan

Describing the Venture

Production Plan

Writing the Business Plan (cont.) Operations Plan All businesses (manufacturing or nonmanufacturing) should include an operations plan as part of the business plan. It goes beyond the manufacturing process. Describes the flow of goods and services from production or purchase to the customer. Web/digital concepts need a navigation flowchart with “Control Flow”.

Writing the Business Plan (cont.) Marketing Plan Describes strategy related to how the product/service will be distributed, priced, and promoted (the “4 P’s”). Marketing research evidence to support any of the marketing decision strategies as well as for forecasting sales should be described in this section. Potential investors regard a solid marketing plan as critical to the success of the new venture.

Writing the Business Plan (cont.) Organizational Plan Describes the form of ownership and lines of authority and responsibility of members of the new venture. For partnerships, the terms of the partnership should be included. For corporations, the following should be included: Shares of stock authorized, issued and any share options. Names, addresses, and resumes of directors and officers. Organization chart

Writing the Business Plan (cont.) Assessment of Risk The entrepreneur should indicate: Potential risks to the new venture. Potential impact of the risks. Strategy to prevent or mitigate the risk. Major risks could result from: Competitor’s reactions. Weaknesses in marketing/ production/ management team. New advances in technology and/or business models that make yours obsolete. Shortfalls in funding and inaccurate financial projections.

Writing the Business Plan (cont.) Financial Plan Contains projections of key financial data that determine the economic feasibility of the concept and the necessary financial investment commitment. It should contain: Pro-forma Income Statements for at least the first three years. Pro-forma Cash Flow Statements / Budgets for the first three years. Pro-forma Balance Sheets for the first three years. Break-Even Analyses for the first three years.

Writing the Business Plan (cont.) Appendix Contains any backup material does not belong in the body text of the document. It may include: Letters, agreements or quotes from customers, distributors, or subcontractors. Secondary data or primary research data used to support plan decisions. Leases, contracts, or other types of agreements. Price lists from suppliers and competitors. Partnership documents or corporate documents (i.e. Articles of Incorporation, Bylaws, etc.)

Entrepreneur’s Adage #20 “Get ready to work 7 days a week, 15-20 hours a day and over the holidays. And then expect to work some more.” - Jordan

Using and Implementing the Business Plan The business plan is primarily designed to guide the entrepreneur through the first year of operations. The plan should contain control points to ascertain progress and to initiate contingency plans if necessary. Businesses fail due to entrepreneur’s inability to plan effectively.

Using and Implementing the Business Plan (cont.) Updating the Plan Entrepreneurs must be sensitive to changes in the company, industry, and market. Determine what revisions are needed if changes are likely to affect the business plan. This helps entrepreneurs to: Maintain reasonable targets and goals. Keep the new venture on a course to a high probability of success.

Why Some Businesses Fail Goals are unreasonable. Loss of key team member. Entrepreneur has not made a total commitment to the business. Lack of experience in the planned business. No sense of potential threats or weaknesses to the business. No real customer need was established for the proposed product or service. People management issues. People and resources are stretched too thin.

Entrepreneur’s Adage #21 “Be careful not to let the glory of someone else’s business sway you into opening the same thing. You have to be passionate about the work as well as the results.” - Jordan