The Business Plan: Visualizing the Dream

Transcription

1 CHAPTER OUTLINE Spotlight: CitiSlips ( 1 An Overview of the Business Plan Explain the purpose and objectives of business plans. The business plan in Appendix A could be used or students could be assigned to find business plans on the Internet and provide the URL for them for class use. The Purpose of a Business Plan Reinforce that business plans have many used in a business and discuss those uses. Business Plan a document that outlines the basic concept underlying a business and describes how that concept will be realized. Consider personal aspirations before beginning Three basic objectives for a business plan To identify the nature and the context of the business opportunity To outline the approach the entrepreneur plans to use To recognize factors that will determine whether the venture will be successful Plan will be used differently by insiders and outsiders (see Exhibit 6-1) Do You Really Need a Business Plan? Give the rationale for writing (or not writing) a business plan. Business plan is NOT the business Entrepreneur must find the right balance between planning and becoming operational Business plans offer no guarantee of success Business plans are models that help focus on important issues and activities for the new venture and prepare for the future Business plans matter to outsiders, especially important in getting financing Enhances the venture s credibility, effective selling tool with prospective customers and suppliers as well as investors How Much Planning? The Dehydrated Plan A short form of a business plan that presents only the most important issues and projections for the business The Comprehensive Plan A full business plan that provides an in-depth analysis of the critical factors that will determine a firm s success or failure, along with all the underlying assumptions 2 Preparing a Business Plan Describe the preferred content and format for a business plan. You may have knowledge of a business that could be used as an example in this section or you could choose a business plan available online to use as you work through this section. The business plan example in Appendix A could also be used for this purpose. The Content and Format of a Business Plan 59

2 The business plan should give thorough consideration to the following basic factors: The Opportunity (see Exhibit 6-2) Critical resources Entrepreneurial team Financing structure Context (or external factors) Business plan sections should include: Cover Page Table of Contents Executive Summary (a section of the business plan that conveys a clear and concise overall picture of the proposed venture) Synopsis (may be used rather than an Executive Summary) Narrative (may be used rather than an Executive Summary) Industry, Target Customer, and Competitor Analysis Company Description Product/Service Plan (A section of the business plan that describes the product to be provided and explains its merits) Marketing Plan (A section of the business plan that describes the user benefits of the product or service and the type of market that exists) Operations and Development Plan (A section of the business plan that offers information on how a product will be produced or a service provided, including descriptions of the new firm s facilities labor, raw materials, and processing requirements) Management Team (A section of the business plan that describes a new firm s organizational structure and the backgrounds of its key payers) Critical Risks (A section of the business plan that identifies the potential risks that may be encountered by an investor) Offering (A section of the business plan that indicates to an investor how much money is needed and when, and how the money will be used) Exit Strategy (a section of the business plan that focuses on options for cashing out of the investment) Financial Plan(A section of the business plan that projects the company s financial position based on well-substantiated assumptions and explains how the figures have been determined. Pro forma statements are projections of a company s financial statements for up to five years, including balance sheets, income statements, and statements of cash flows, as well as cash budgets. Appendix of Supporting Documents Could include assumptions underlying the project Résumés of the management team Advice for Writing a Business Plan Offers practical advice on writing a business plan. Analyze the Market Thoroughly Provide Solid Evidence for Any Claims Think Like an Investor 60

3 Don't Hide Weaknesses-Identify Potential Fatal Flaws Maintain Confidentiality 3 Understanding the Business Model Explain the concept and process for developing a firm's business model Three key elements makeup the business model: The revenue model which defines the nature and types of a company's sources or revenues The cost structures that drive the company's costs and expenses The maximum investment that will be required to make the business profitable and cash flows positive. \ Revenue Model Cost Structures Maximum Investment 4 Resources for Business Plan Preparation Identify available sources of assistance in preparing a business plan Computer-Aided Business Planning Professional Assistance in Business Planning o Get referrals o Look for a fit o Check references o Get it in writing 5 Keeping the Right Perspective Maintain the proper perspective when writing a business plan. Important: Writing a business plan is primarily an ongoing process and only secondarily the means to an outcome. The process is just as important as if not more so than the finished product ANSWERS TO END-OF-CHAPTER DISCUSSION QUESTIONS 1. Describe what entrepreneurs mean when they talk about a business plan. There is no one correct definition of a business plan. After all, there is no one plan that works in all situations. But in general, a business plan is a written document that outlines the basic idea underlying a business and related startup considerations. A business plan is an entrepreneur s game plan; it crystallizes the dreams and hopes that motivates an entrepreneur to take the startup plunge. The business plan should lay out your basic idea for the venture, describe where you are now, indicate where you want to go, and outline how you hope to get there. It can also be defined as a document that convincingly demonstrates that your business can sell enough of its product or service to make a satisfactory profit and to be attractive to potential backers. 61

4 2. When should you write a business plan? When might it not be necessary or even advisable to write a plan? A written plan helps to ensure systematic coverage of the important factors to be considered in starting a new business. By identifying the variables that can affect the success or failure of the business, the business plan becomes a model that helps the entrepreneur and any employees focus on important issues and activities for the new venture. Finally, a business plan is essential when additional capital from outside investors will be needed at some time in the foreseeable future. In some startup situations, the environment is just too turbulent, experiencing too much change, for extensive planning to be beneficial. In new fields there may not be enough information to be able to plan. In these situations, adaptability may be more important than a careful plan for the future. The last thing you want to do is decrease your willingness to adapt when necessary because it does not fit the plan and this does happen occasionally, especially when investors become so focused on the plan that they insist that the entrepreneur not vary from the plan. Planning may also pose a problem when the timing of the opportunity is a critical factor. Becoming operational as quickly as possible may have to take priority over in-depth planning; but you should be careful not to use timing as an easy excuse not to plan. 3. Explain the two types of business plans. In what situation(s) would you use each type of plan? The two types of business plans are the summary plan and the comprehensive plan. The summary plan is a short form of a business plan that only presents the most important issues and plans for the business. It should focus heavily on market issues, such as pricing, competition, and distribution channels. It provides little in the way of supporting information. A summary plan is adequate if you are not seeking significant amounts of outside financing, except for the possibility of bank financing. Furthermore, you may use a summary plan when you are trying to gauge investor interest to see if a full-length plan is worth the time and effort. When entrepreneurs and investors speak of a business plan, they usually refer to a comprehensive or full business plan that provides an in-depth analysis of the critical factors that will determine a firm s success or failure, along with all the underlying assumptions. Such a plan is beneficial when (1) describing new opportunities (startups), (2) when facing significant change in the business or the external environment (changing demographics, new legislation, or developing industry trends), or (3) when explaining complex business situations. 62

5 4. Why is the executive summary so important in a business plan? The executive summary provides the reader a first impression of the opportunity, and it is here where you either catch the readers attention or you don t. If you don t, most likely the reader will not continue reading. This is the entrepreneur s opportunity to convey a clear and concise picture of the proposed venture and, at the same time, create a sense of excitement regarding its prospects. This means that it must be written and, if necessary, rewritten to achieve clarity and create interest. Even though the executive summary comes at the beginning of the business plan, it provides an overview of the whole plan and should be written last. 5. How might an entrepreneur s perspective differ from an investor s in terms of the business plan? The entrepreneur and the investor have very different interests. The entrepreneur is willing to accept risk in an effort to establish an enterprise because of its potential for success. Given his/her personal involvement with the venture, it is easy for the entrepreneur to view the business plan with optimism. In contrast, the investor is more sensitive to the potential for failure of an enterprise, and thus is more careful when evaluating a business plan. It is important for the entrepreneur to anticipate this difference in perspectives so that the business plan can be written with the investor s likely reactions in mind. If the investor s perspective is factored into the business plan, it is more likely to attract outside capital. 6. Describe the major sections to be included in a business plan? The major sections in the business plan are set forth in Exhibit 6-3, which is provided below: EXHIBIT 6-3 Section Heading Cover Page Table of Contents Executive Summary Industry, Target Customer, and Competitor Analysis ABBREVIATED BUSINESS PLAN OUTLINE Information Provided: Company name, logo, tagline, contact information, copy number, date, and disclaimer (if needed) Listing of the key sections of the business plan. One- to three-page overview of the significant points, intended to motivate the reader to continue reading. Key characteristics of the industry, including the different segments, and the niche where you plan to compete. 63

6 Company Description Product/Service Plan Marketing Plan Operations and Development Plan Management Team Critical Risks Offering Financial Plan Appendix of Supporting Documents Company objectives, the nature of the business, its primary product or service, current status (startup, buyout, or expansion) and history (if applicable), and the legal form of organization. Justification for why people will buy the product or service, based on its unique features. Marketing strategy, including the methods of identifying and attracting customers, selling approach, type of sales force, distribution channels, types of sales promotions and advertising, and credit and pricing policies. Operating or manufacturing methods, operating facilities (location, space, and equipment), quality-control methods, procedures to control inventory and operations, sources of supply, and purchasing procedures. Description of the management team, outside investors and/or directors and plans for recruiting and training employees. Any known inherent risks in the venture. How much capital the entrepreneur needs and how the money will be used (section used to attract investors) Contemplated sources of financing; any historical financial statements for the last three to five years or as available; pro forma financial statements for three to five years, including income statements, balance sheets, cash flow statements, and cash budgets. Various supplementary materials and attachments to expand the reader s understanding of the plan. 7. If the income statement of a financial plan shows that the business will be profitable, why is there a need for a statement of cash flows? This question draws attention to the difference between the two financial statements. A potentially profitable business may run into difficulties because of irregularities in cash flow. Growth in inventories or accounts receivable, for example, may soak up all the profits and require more funds. And there may be a 64

7 delay in collecting accounts receivable, leading to delay in realizing profits in the form of cash. 8. Describe common mistakes that entrepreneurs make in writing a business plan. 1) No clear plan for progress. Too often, entrepreneurs make broad, unsubstantiated statements without good, solid data to support them. Investors want you to support every statement and every number in your projections. Vague ideas and circuitous statements just don t work. 2) Failing to describe the product in layman s terms. There is a temptation to use too much industry jargon. Present your product or service in simple, understandable terms. 3) Lack of market and competitor research. Everyone has competitors, and to say that We have no competition is almost a sure predictor of failure. You must show where you fit in your market and know the details of your competitors strengths and weaknesses. If possible, include estimates of their market shares and profit levels. 4) Financial statements that are too little or too much. Entrepreneurs tend to err either by providing incomplete financial statements or by including page after page of monotonous financial data. Either extreme is unacceptable. Provide all of the following: pro forma income statements, balance sheets, and cash flows statements, with a complete list of assumptions that underlie the financials. Most importantly, make sure that the numbers make sense. 5) Hiding Weaknesses. One difficult aspect of writing a business plan is effectively dealing with problems or weaknesses--and every business has them. While an entrepreneur wants to make a good impression, ignoring or glossing over a negative issue can prove damaging and even fatal when trying to raise capital. If there are weaknesses in the plan, the investors will find them. At that point, an investor s question is "what else haven't you told me?" The best way of properly handling problems and weaknesses is to be open and straightforward and to have an action plan that effectively addresses the problem. Put another way, integrity matters. 6) Missing the Fatal Flaw. With most opportunities, there are potential fatal flaws. It is tempting for the entrepreneur to become so infatuated with the opportunity, that he or she cannot see such flaws. For instance, one might need to ask, What is the possible impact of new technology, e-commerce, or changes in consumer demand that could significantly impact the proposed venture? 7) Bad Grammar. Nothing turns off a prospective investor faster than a poorly written business plan. Obtain a good editor, and review, review, review. 8) The overall plan is too long. The goal is not to write a long business plan, but a good business plan. People who read business plans appreciate brevity and view it as an indication of your ability to identify and describe in an organized way the important factors that will determine the success of your business. 9. Investors are said to be more market-oriented than product-oriented. What does this mean? What is the logic behind this orientation? 65

8 This means that their biggest concern is market acceptance and demand. A new product may be clever and even patentable but not useful or attractive to customers. Investors are interested in products and services that will sell. COMMENTS ON CHAPTER YOU MAKE THE CALL SITUATIONS Situation 1 1. Why is your research thus far inadequate for what you need to know? You need much more than a few statistics from Google. You haven t indicated that you have thought through the marketing strategy, identified your target customers much less how to attract those customers. You need to do much more research to answer everything that you need to know before writing the business plan. 2. Do you think it will be difficult to find all the information you need? Without additional information that is missing from the case statements the answer is probably yes. It appears that there is much missing information that must be discovered and/or filled in before this business could be started. 3. What else might you do to find the information you need? You could work with a financial advisor, the SBA, SCORE, an investment banker or financial intermediary, University incubators, and get referrals. You can also do original research and discover at least some of the information that you need. Situation 2 1. What would you need to know in order to answer her question? No, a business plan is not necessary but what is critical is the implementation plan. The ability to execute your vision. The business plan is merely a model that will help the entrepreneur focus on important issues and activities for the new venture and prepare them for the future. A written plan based on good research helps to ensure the necessary systematic and complete coverage of factors important in starting a new business. 2. If she decides to write a business plan, what advice would you give her? She should start with a mini-plan. A short form of a business plan that presents only the most important issues and projections for the business. Here she should focus heavily on market issues, such as pricing, competition, and distribution channels. In the event she decides to pursue financing, this plan will serve as a platform for conveying her idea to investors/ bankers. 66

9 Situation 3 1. What problems might have contributed to the firm s poor performance? The company failed to use the business plan to manage the business. A business plan is more than a device for raising funds--it is the basis for operating a business. If they do not follow their own business plan, entrepreneurs cannot uncover weaknesses or be alerted to sources of danger before crises arise. 2. Although several problems were encountered in implementing the business plan, the primary reason for low profits turned out to be embezzlement. Martin was diverting company resources for personal use, even taking some of the construction material purchased by the company to build his own house. What could Rose have done to avoid this situation? What are his options after the fact? He could have improved the systems for control of the company s resources. He could also have established segregation of duties and authorization, which would have increased the accountability of each employee. The damage or loss of an asset could have been charged to the employee who had responsibility for that asset. One option would be for Jones to pay for the business resources that he used for personal purposes or return them to the company. Firing him from the company will affect the company because Jones is experienced in this business; the current company situation requires a good management team to manage the business. SUGGESTED SOLUTION TO CASE 6: BENJAPON S 1. Is Benjapon s executive summary more of a synopsis or a narrative? The Benjapon s executive summary is more of a narrative, but covers required information. 2. If you were an investor, would the executive summary spark your interest in the opportunity? In other words, would you continue reading the business plan for more details? 67

10 Students may have varying answers for this question and should establish why or why not to continue reading. 3. What do you like about this executive summary? What do you dislike? Students may have varying answers for these questions. Possible answer could include that the executive summary is written in a reader friendly style and flows easily from one point to the next. The only thing that appears to be missing is the reason for choosing the Boston area for the first location without establishing that there has been market research that indicates people who like Thai food in that area at the many colleges and universities. 4. Would you suggest that Jivasantikarn make any changes or additions to the executive summary? If so, what do you suggest? Students may have varying answers for these questions. A possible addition would be the market research upon which to base this business and its location. 68