Basic Elements of a Business Plan

Basic Elements of a Business Plan
Entrepreneurship Unit 3, Lesson 1 Entrepreneurs must have a business plan to be taken seriously. UNT in rights reserved. Copyright © Texas Education Agency, All Rights Reserved

Copyright © Texas Education Agency, 2013. All Rights Reserved
Copyright © Texas Education Agency. The materials found on this website are copyrighted © and trademarked ™ as the property of the Texas Education Agency and may not be reproduced without the express written permission of the Texas Education Agency, except under the following conditions: Texas public school districts, charter schools, and Education Service Centers may reproduce and use copies of the Materials and Related Materials for the districts’ and schools’ educational use without obtaining permission from the Texas Education Agency; Residents of the state of Texas may reproduce and use copies of the Materials and Related Materials for individual personal use only without obtaining written permission of the Texas Education Agency; Any portion reproduced must be reproduced in its entirety and remain unedited, unaltered and unchanged in any way; No monetary charge can be made for the reproduced materials or any document containing them; however, a reasonable charge to cover only the cost of reproduction and distribution may be charged. Private entities or persons located in Texas that are not Texas public school districts or Texas charter schools or any entity, whether public or private, educational or non-educational, located outside the state of Texas MUST obtain written approval from the Texas Education Agency and will be required to enter into a license agreement that may involve the payment of a licensing fee or a royalty fee. Copyright © Texas Education Agency, All Rights Reserved

Goals The student can categorize a business plan and explain the need for a well-orchestrated business plan. The student can explain a marketing plan, including price competition, non-price competition, market analysis, competition, marketing research, market segmentation, demographics, and sales forecasting. The student can research business plan outlines, resources, and templates using web search engines. Copyright © Texas Education Agency, All Rights Reserved

Goals (Continued) The student can identify a legal plan, including the appropriate form of legal organization, including sole proprietorship, partnership, corporation, and S corporation. The student can describe a leadership team The can create and present a well-orchestrated business plan and critically explain the contents. Copyright © Texas Education Agency, All Rights Reserved

Introduction A business plan is a proposal that describes the new business to potential investors. Detailed Description – Describe what the business is, what it will sell, etc. Ownership and Legal Structure Partnership Sole Proprietorship Corporation S Corporation The business plan provides the one opportunity to get the attention of financial institutions and venture capitalists who might invest money in the business. The business plan is important because it provides the roadmap for the business. It lays out a detailed plan regarding the type of business that will be started, what the product or service is that will be sold, how the product will be marketed, and how the business will be financed. Copyright © Texas Education Agency, All Rights Reserved

Introduction Skills and Experience – Describe the experience and talents of those who are starting the business. Financial Plan – Detail the finances of the business. Details include how much you will be charging, expected revenue, and expenses and cash flow for business. A self-analysis is a good way to start determining what skills and expertise the individual who is starting the business has. How are those skills and experiences beneficial to this particular business? How will they make the business successful? The financial plan should detail everything money related for the business. How much will startup equipment and buildings cost? How much are supplies? How much will customers be charged for the goods or services? How long before you expect to make a profit? A balance sheet, an income statement, and the cash flow information should be included in this section of the business plan. Copyright © Texas Education Agency, All Rights Reserved

Introduction Organization – This should explain how the organization is set up. Who is in charge? How are duties divided among any other employees? Marketing plan – This section explains how you plan on selling and promoting your product or service. Where will it be sold? To Whom? And how will you reach them? The organization typically includes the CEO or President and then describes how the work flows. This should also include how many employees you are expecting to hire and what their duties will be. The marketing plan details where and how the product will be sold and promoted. If there are specific pricing strategies that are used, they will be explained in the marketing plan. Copyright © Texas Education Agency, All Rights Reserved

Ownership/Legal Structure
The legal structure of the business will fall into one of four categories and should be explained in the business plan. Sole proprietorship – One person owns the company Partnership – Two or more people own the business A sole proprietorship is a business of one person. That person owns and runs the business. Advantages are that the individual does not need to split profits or share management decisions. Disadvantages are that the one person has sole responsibility of running the business. They may have long days and nights and may be the only source of money for the business. If they are sued, they can lose their house, cars, all bank accounts—there is no limit to the personal liability. A partnership has two or more people running the business. Advantages are that they can share responsibility and have more sources of money. Disadvantages are that they have to share the profit and they may not always agree on all management decisions. They have the same liability issues as a sole proprietorship. Copyright © Texas Education Agency, All Rights Reserved

Ownership/Legal Structure
Corporation – Business is a separate legal entity. This method has least liability for owners’ personal assets. S Corporation – This setup is the same as corporations, but for taxing purposes, the income of the corporation is passed through to the individual shareholders; it is the shareholders who pay taxes on the corporations income instead of the corporation. Corporations are set up through filing legal paperwork with the state. The advantage of having a corporation is that there are more sources of income because you can sell stock, specialize management, and limit liability for the owners. If someone sues a corporation, they cannot get a legal judgment for the owners’ personal assets—only for the corporation’s assets. An S corporation has the same advantages and protections. It only differs in taxation. Copyright © Texas Education Agency, All Rights Reserved

Marketing Products/Services Describe in detail Market Demographics Geographics Psychographics Product Benefits Describe what your product or service will be in detail. How is it made? Where will you get supplies? Etc. The next step is to fully describe who the customers of the product are. This needs to be very specific, so you can reach your target customer. By using market segmentation to describe the targeted customer, the odds of reaching those customers increases. Demographics is segmenting the market by statistics such as age, race, gender, education, marital status, etc. Psychographics is segmenting the market by interests or hobbies, such as gourmet cooking or sports. Geographics segment the market by location, and product benefits are segmented by certain features or products that the customer is seeking. Copyright © Texas Education Agency, All Rights Reserved

Marketing Competition Who/What/Where Location Where will your business be located and why did you choose that location? The next step is to determine who your competitors are going to be. What products do they offer? How are they promoting their product to their target customer? How much are they charging for their product? Where is their product being distributed? Are they using the Internet, local distributors, direct marketing, etc.? If you understand who your competitors are, you are more likely to effectively challenge them for market share. For instance, if your competitor charges 10% more than you do and they do not sell on the Internet, you can craft a marketing plan around selling on the Internet and advertise that you have lower prices. Copyright © Texas Education Agency, All Rights Reserved

Marketing Competition is the struggle between companies for customers. Some companies choose to compete focusing on sale prices; this is called price competition. Non-price competition businesses focus on factors other than price to attract customers: quality, services, location, financing, or reputation. The competition between companies for customers can get pretty fierce. Some companies choose to focus on low prices or sales to attract customers. These businesses feel that if the products are equal, customers will choose the lowest prices. Other companies choose to focus on their reputation or the quality of their products to attract customers. These businesses may have high-end products or offer exceptional service to get customers to purchase from their businesses. The product itself may determine which competition strategy a company chooses to use. Copyright © Texas Education Agency, All Rights Reserved

Financial Management Identification of Risks Human Natural Economic Financial Statements Income statement Balance sheet Cash flow Every business venture has risks. The goal is to minimize risks. Risks are discussed more fully in the next slide and they fall into three categories. Pro forma financial statements should be conservative when predicting profits and aggressive when looking at business expenditures. These statements include the income statement, which shows the company’s profit (which is revenue minus their expenses). The balance sheet shows the company’s assets and liabilities. What is left over is the owner’s equity. The cash flow shows how much cash is coming into the business via revenue and what is being paid out via expenses. Copyright © Texas Education Agency, All Rights Reserved

Risk Management Business Risks are the possibility of business loss or failure. There are three types of business risks. Economic Natural Human Business risks can be categorized into three different categories: economic, natural, and human. It is important for business people to understand what these risks are, so they can put plans in place to minimize these risks. Knowing what your greatest strengths and weaknesses are will enable the business to have a greater chance of success. Copyright © Texas Education Agency, All Rights Reserved

Risk Management Economic Risks occur from changes in the overall business conditions. These risks include the following: type or amount of competition, product obsolescence, and government regulation. Economic risk encompasses many aspects of business that business owners have no control over. Competition can come from new companies or existing companies who modify their product or drop prices to be more competitive. Examples of companies that were not paying close enough attention to their competitors include the video rental business and book seller business. A major video rental business did not keep up with competitors offering movies online. Certain book sellers ignored the e-reader trends. In many cases, it can be cheaper to enlist foreign producers who can manufacture goods at lower costs (due to natural resource advantages or lower labor costs). Depending upon the business, products may become obsolete very quickly. For instance, stores that sell cell phones see their products become obsolete every six to nine months. Clothing stores also see fashion changes at least twice a year. If these stores have a large amount of inventory when products become obsolete, they are forced to sell the existing inventory at reduced prices (which affects their profit). Our government can add additional regulations or change the laws at any time (which can affect business). They may require a business to pay higher taxes or provide a higher level of environmental restrictions. All of these changes make it harder for business to make a profit. If a company has to issue a recall, it can be very expensive. They will have to notify all of the owners and then replace or repair the defective part. Recalls also have a negative affect on potential customers of the product. Copyright © Texas Education Agency, All Rights Reserved

Operations Critical for business success Management on a day-to-day basis Necessary equipment Personnel needed for success In this section, the day-to-day operations are described. Who will manage the business? What equipment and supplies will be needed? Where will they come from? Who will the employees be? What will there day-to-day duties be? Copyright © Texas Education Agency, All Rights Reserved

Executive Summary Summarize goals and objectives for the business Emphasize your commitment to the success of the business The executive summary in the business plan should pull all of the concepts together. It re-emphasizes the entrepreneur’s intentions for success and provides a high-level overview of the business plan. The executive summary should be at the beginning of the business plan, but it is written last (since it is a summary of the entire plan). This section can be read quickly by anyone interested in the business—from it, they should have a good understanding of the company and how it will be run. Copyright © Texas Education Agency, All Rights Reserved

Assignments Compare the Competition Compare your business to another that sell similar merchandise; compare prices, product selection, customer service, community involvement, promotion, quality, reliability, public image, and financial success. Create a table to compare the businesses and decide which business has the better track record for current and future success. Explain the rationale for your selected business. Copyright © Texas Education Agency, All Rights Reserved

Basic Elements of a Business Plan

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