The Truth about Business Plans And do we really need one ?

Building blocks of Biz Plan What is a fundable biz plan ?  Perspective  Comprehensive Why do you need a biz plan ? Who should write a biz plan ?

Why dont we write business plans? “Why do I need a biz plan its all there in my head “ “ Biz plans are for big companies that hire MBA’s who don’t have work, I am a very small company” “I don’t have time to write any plans as I am too busy trying to get new customers & paying my bills, any case I am not a CA”

….. Some more “I can write a business plan but who is going to appreciate it ? Any case no bank is going to give me any money, so why bother” “ Can you suggest a good book where I can learn how to write business plans ?” “ Did Dhirubhai write a business plan ?”

……. And some more Arre business he nahi hai to plan kya karega ?” I will write it tommorrow …… Can you write it for me, I can even pay 10% commission…….. Etc etc

The real reasons Don’t see real need for one, or rather believe its not really going to help We look at the larger picture and have a tendency to miss out the details ( a case of missing the tree for the woods ) Plans are nothing, planning is everything. Tend to think like industrialists. We are too much in love with our businesses, losing control is a nightmare. We never plan exits.

… and some more real reasons Cant separate personal wealth from company money We don’t have real data A hazy view of key financial parameters

Don’t have real data ? Limited view of the universe around us Market size Market Growth Competitor pricing ( we believe our products don’t have any real competitor )

Key financial parameters to track Concept of unit pricing and Break even point Fixed cost and recurring costs Marginal contribution and profits Cost of own capital and borrowed capital Cash flow and PnL Working Capital Management

Costs – Volume – Profit Analysis Fixed Costs and Variable Costs Costs are predictable over entire range of volume Constancy of unit selling price Stability of product mix Volume of sale = volume of production during an accounting period ( inventory changes are nil )

Break-even Point Sales at which total revenue earned equals total costs incurred (TR=TC). TR = Selling Price x Quantity TC = Fixed Cost + (Variable Cost/unit x Quantity) Q = F/P – V Q = Profit + Fixed Cost /Marginal Contr Breakeven Sales in Rs = Fixed cost/(1-(V/P))

Break Even Analysis Margin of Safety What is the importance of BeP in business? What are the shortcomings of BeP  In a complex cost structure not all costs can be classified as direct and indirect  Ignores time value of money  Non linear relation between P and V

Cash Flow Management What is Cash Flow ? What are Sources and Uses of Cash in a business ? How important is Cash Flow Management in a business ? Relationship between Profit/Loss and Cash Flow

Working Capital What does working capital mean? Working capital = Current Assets – Current Liabilities What does + ve or – ve working capital indicate ? How much working capital is adequate for a business ?

Some important indicators of Working capital Working capital turnover: Sales / Working capital Current Ratio Current Assets / Current Liabilities Days Sales outstanding Receivables/ Annual Sales/ 365 days Inventory Turnover Ratio Cost of Goods sold/ Inventory

Ratios Liquidity Ratios - Short term solvency - Current Ratio - Current assets/ Current Liabilities - Acid Test Ratio (Quick Ratio) = (Current assets-Inventories)/Current Liabilities - Average Collection Period = Average Receivables/ Average per day sales - Inventory Holding Period = Average Inventory/Av. COS per day

Why do we need a business plan ? Business plan is important for all the stake holders  Investors / Bank  Employees / Partners  Suppliers / Vendors / Distributors  SELF ( Whats in it for me ? )

Need for a business plan A real blueprint, a map ( If you don’t know where you are, how will you know where to go ? … an old Chinese proverb ) An important benchmarking tool.

Elements of the plan Executive Summary General Company Description Product & Services Description Marketing Plan Operational Plan Organisational Plan Financial Plan Exit Plan Enclosures

Executive Summary Documented 3mep Fundamentals of the proposed biz What is your product and service ? Who are your customers ? Outlook for your industry in the future Purpose of the plan

General Biz Description Mission and Vision Statement Company Goals & Objectives Team Description & Structure Brief about the product/ service Who is your customer? Key Parameters of Success & Biz Philosophy

Product & Services Description Detailed description of the product & services. ( What does it do ? ) Product Features Technology and IPR details Competitive benchmarks Pricing, fee, rentals After Sales Services, CRM

Marketing Plan Market Research ( primary and secondary) Market Economics ( size of the industry for related products, per capita consumption) Trends and entry barriers

Marketing Plan ……cont’d Product details, detailed description of features and benefits Customer descriptions, geographic, demographic and psychographic Competition description, SWOT analysis Niche and your reason for choosing it

Marketing plan …… further cont’d Promotion plan  Offline and Online Strategy  Promotional Budget Pricing plan  Right pricing  Competitive pricing Distribution plan Sales Forecast

Operational Plan Production  Cost  Quality  Inventory Location  Space Area  Power  Regulations  Duty Benefits

Operational Plan……… cont’d Market Access and Logistics Legal Environment Personnel Inventory and distribution Suppliers and Credit policy

Organisational Plan Top Management Structure Board and Advisory Roles Operational Team and Organogram Bankers and Financiers Legal and Accounting Service Providers Consultants

Financial Plan One year forecasted P&L Three year forecasted plan Cash flow projections ( 12 month / QoQ) Break Even Analysis

Exit Plan Whats in it for the investor ? When and how do they cash out ? How does the promoter plan to make money Private placement and IPO

Enclosures Incorporation and startup expenses giving details of promoters contribution Market Research, consultants report Articles reports on industry Product brochure, photographs of prototype Maps of locations, distribution, manufacturing Letters of commitment from suppliers, bankers Any other things that help……..

Ideas Presentation --Format Learning an effective 3 Mep If you cant get attention in the first 3 minutes you have lost Most investors don’t go beyond the executive summary page. Be prepared to defend your ideas in front of a group of professionals from different areas.

6 important questions 1. Name the product / service 2. Who is your market 3. What is your revenue model 4. Who is behind the company 5. Who is your competition 6. What is your competitive advantage

Learnings…. 3mep should always have a  Hook : Something that grabs attention  Pitch : A concise description of the idea or proposition  Closure : A clearly defined value proposition.

Watch this…..

Hmm…… Check out the hook Was there one …… or two ? What is a ‘hook’ Grab attention and hold it.

Now watch this……

Format Some tips: Don’t waste time on long introductions. Be passionate, convincing, interesting. Tell a story.

Remember Business plan activity is a process You cant ‘cook it up’ when you need it Its for investor, who is interested in buying the business not the company It can also be used to  Pitch in for the team  Prospective employees  Vendors and suppliers

Who is going to write a business plan ? YOU