Business Plan Overview Organizatin and Cntent Summary A business plan is a descriptin f yur business, including yur prduct yur market, yur peple and yur financing needs. Yu shuld cnsider that a well prepared business plan plays tw imprtant rles: firstly, it is a useful management tl that can help yu t plt a curse fr yur cmpany and secndly, it is a vital sales tl, that will impress venture capitalists with yur planning ability and general cmpetence as a manager. Other things being equal, a well-prepared business plan will increase yur chances b btaining the venture capitalist s financial cmmitment. Many venture capitalists like t review a shrt summary f a business plan s they can quickly decide if it is wrth their time t review the whle plan. Therefre, yur bjective in the summary is t cnvince venture capitalists t study yur plan further. Cmpany and Industry The purpse f this sectin is t prvide venture capitalists with backgrund infrmatin n yur cmpany and t describe the nature and current cnditin f yur industry. It shuld include the fllwing infrmatin: Cmpany Date and state f incrpratin Principals and what rles each f the principals played in bringing the business where it is tday. Business purpse and highlights f prgress t date, including majr develpments such as the intrductin f a new prduct. Industry Prduct Present yur view f the current status and prspects fr the industry Describe the principal participants and hw they are perfrming, including grwth in sales, prfits, and current market share. Describe the effect f majr ecnmic, scial, technlgical, r regulatry trends. Yur bjective in this sectin is t cmpletely, yet cncisely, describe yur prduct, alng with any prprietary features and future develpment plans. 1
It shuld include the fllwing infrmatin: Descriptin - Describe the cmpany s prduct in detail indicating its nature and applicatin. Include material such as engineering studies, phtgraphs, and selling brchures. Research and Develpment - Describe the nature and extent f research and develpment wrk that must be cmpleted befre yur prduct is placed n the market. The csts and time required t achieve a marketable prduct shuld be indicated. Prprietary Features - Describe any patents, trade secrets, and ther prprietary features. Discuss any ther factrs that have allwed, r culd allw yu t btain an advantageus psitin in yur industry. Feature Develpment - Discuss plans fr extensin f yur present prduct, and develpment f new r related prducts. Market Yur bjective in this sectin is t cnvince venture capitalists that yu understand yur market and can achieve yur sales target. It shuld include the fllwing infrmatin: Market Definitin - Define the target market by describing the ptential custmers, their lcatins, their interest in the prduct. and the seasn ability f their purchases. If the cmpany has a track recrd, discuss hw its prduct has been received in the marketplace. It is imprtant t discuss any negative reactins t yur prduct alng with yur present r planned actins t vercme the negative reactins. Market Size - Describe the market s current size. The market shuld be determined based n a review f statistical data and frm discussins with ptential distributrs, sales representatives, and custmer. Market Trends - Describe the market s grwth ptential. Market prjectins shuld be made fr at least three years and shuld clearly state the assumptins used, including majr factrs such as industry trends, new technical develpments, and new r changing custmer needs. Cmpetitin - Name and discuss all majr cmpetitrs. Yu shuld cmpare yur prduct with yur cmpetitrs n the basis f price, perfrmance, service, warranties, and ther imprtant features. Then review the strengths and weaknesses f yur cmpetitrs. If they are ding well, explain why yu expect t succeed. If there are n cmpetitrs, discuss the pssible develpment f cmpetitin and frm whm it is likely t cme. 2
Marketing Yur bjectives in this sectin are t prvide prjectins f sales and market share, and t cnvince the venture capitalist that yur marketing plan will achieve the prjectins. It shuld include the fllwing: Estimated Sales and Market Share Prvide an estimate f sales and market share (units and dllars). Base this estimate n yur assessment f yur custmers and their acceptance f yur prduct, yur market size and trends, and the cmpetitin. Identify any majr custmers wh have made r are willing t make purchase cmmitments. Strategy - Include a discussin f the fllwing Targeted custmers (initial and later) Methds f identifying and cntracting ptential custmers Prduct features that will be emphasized Pricing - Discuss the prices t be charged fr yur prduct and cmpare yur pricing plicy with thse f yur majr cmpetitrs. Explain hw the price yu set will enable yu t: Gain acceptance f yur prduct Maintain and increase yur market share Prduct prfits. Yu shuld justify pricing that is abve r belw yur majr cmpetitin. Sales and Distributin - Describe hw yu plan t sell and distribute yur prduct, including the fllwing: If distributrs r sales representatives will be used, describe hw they will be attracted, cmpensated, and what gegraphic areas will be cvered. If a direct sales frce will be used, describe hw it will be rganized and cntrlled. This shuld include the number and lcatin f sales persnnel and the cmmissin and/r salary they will receive. 3
Service and Warranty Plicies - Discuss the imprtance f these t yur custmers and yur plicies and methds fr handling service prblems. Advertising, Public Relatins and Prmtins - Discuss yur plans t bring yur prduct t the attentin f prspective custmers. Include yur plans fr the fllwing: Trade shw participatin Trade magazine advertisements Prmtinal literature Operatins Yur bjective in this sectin is t describe hw the prduct will be manufactured, including lcatin, plant and equipment, manufacturing prcesses, and labr. Lcatin - Describe the lcatin f the business including the advantages and disadvantages f the site cnsidering the fllwing: Wage rate Labr unins Labr availability Prximity t custmers Access t transprtatin State and lcatin State and lcal laws (including zning) Utilities (including rates) Plant and Equipment - Describe the facilities in use r t be acquired. Fr facilities t be acquired, state whether the facilities will be leased r purchased, and state the csts and timing f the acquisitins. Cmment n the future plant and equipment needs, based n sales prjectins, including the cst f additinal capacity and its timing. 4
Manufacturing Prcesses - Describe the manufacturing prcesses necessary t prduce yur prduct, including: Methd f manufacture Quality cntrl, prductin cntrl, and inventry cntrl prcedures Raw materials r cmpnents (including surce, cst, and related cntracts) Organizatin and cntrl f purchasing functin Breakdwn f fixed manufacturing csts Operatins Breakdwn f variable unit csts by prduct Labr - Describe, exclusive f management, t what extent the lcal labr frce is sufficient in terms f quality and quantity t manufacture yur prduct. If applicable, address the type f training needed and the csts t yur cmpany. Management The experience, talent, and integrity f yur management team are f primary cncern t venture capitalists. Befre agreeing t finance yur cmpany, venture capitalists will cnduct a thrugh reference check f each member f yur team. Accrdingly, this sectin f the business plan shuld describe the fllwing: Organizatin What the key management rles will be Wh will fill each psitin Hw the individuals talents cmpliment each ther Key Management The duties and respnsibilities f each individual Career highlights f each individual (a resume shuld be attached) The weaknesses f the management team Each individual s cmpensatin and wnership 5
Bard f Directrs Identify bard members Explain hw the members can benefit the cmpany Disclse the members investment in the cmpany, if any Prfessinal Services - Prperly selected prfessinal advisrs can help yu t establish the credibility f yur business venture. Therefre, it is imprtant t state the legal, accunting, public relatins, advertising, banking, and ther service rganizatins yu have selected fr yur cmpany. Overall Schedule A well-prepared and realistic schedule is critical t the cmpany s success as it indicates the ability f management t plan the cmpany s develpment; therefre, a schedule shuld be prepared that shws cmpletin dates fr majr aspects f the business plan. Critical Risks and Prblems The develpment f a business has risks and prblems, and it is best t identify these negative factrs and discuss them in a frthright manner. T determine the risks and prblems that require discussin, yu shuld determine which business plan assumptins r ptential prblems are mst critical t the success f the venture. Then, describe yur plans fr minimizing the impact f unfavrable develpments in each risk area. Financial Infrmatin The amunt f financial infrmatin needed in yur business plan will depend largely n the stage f yur financing and the amunt f mney yu are seeking. Yur plan shuld describe, in general terms, the type and amunt f finding yu are requesting. In additin, yu will need current infrmatin n the cmpany s present financial status and financial prjectins. If yur cmpany has begun peratins, yu must include current financial statements. The Funding Request - The funding request sectin f yur business plan shuld cver the fllwing infrmatin: Desired financing - Yu shuld state hw much mney yu need and what yu will d with it. Als explain any plans fr btaining financing in additin t the venture capital investment. 6
Capitalizatin - Yu shuld explain the capital structure f the cmpany and what effect funding will have n that structure. As part f this explanatin yu shuld identify wh the stckhlders are, what their psitins in the cmpany are, hw much stck they wn, and hw much they paid fr it. Use f funds - Yur explanatin f hw yu plan t use the funds shuld be cnsistent with yur financial prjectins. If yu want seed capital, yu might simply state that the mney will be used t develp the prduct and set up a marketing rganizatin. In a subsequent rund f financing, yu can refer the reader t yur financial prjectins fr details, but explain briefly hw much f the mney will be used fr R&D, manufacturing, capital equipment, etc. Future financing - Yu shuld als explain, clearly and cncisely, anticipated future funding. D yu want capital investment in stages, r all at nce? If yu seek staged venture capital financing, when will yu require the future funding and what are the milestnes fr reaching that pint? Will yu use debt financing? If s, when, hw much, and n what expected terms? Current Financial Statements - If yur cmpany has a track recrd, prvide financial statements fr the last three years r frm inceptin. Additinally, yu shuld prvide: Detailed breakdwn f incme statement categries Operating statistics and explanatins f unusual fluctuatins Financial Prjectins - Yu shuld prvide three-year prfit and lss, cash flw and balance sheet prjectins. If yur cmpany has a track recrd, the prjectins shuld be n a quarterly basis fr the first year and annually thereafter. Prfit and Lss Frecast - Refer t Exhibit I at back f guide. Sales: Frecasted sales are the mst imprtant cmpnent f yur financial prjectins since sales vlume will dictate the necessary level f prductin r peratins. Yu shuld begin yur financial prjectins with the sales frecast. Many first time entrepreneurs make the mistake f starting at the manufacturing cst level and assuming that the marketing department can sell everything they make fr a prfit. Starting with the sales frecast will help yu define hw much cash yu will have cming frm peratins and when it will cme in. This is essential t frecasting cash flw and determining hw much equity and debt capital yu will require until the cmpany generates a psitive cash flw. Yur financial prjectin and yur funding request must be keyed t yur market expectatins. The sales frecast shuld be cnsistent with yur 7
assessment f the market size and cmpetitin and yur marketing strategy. Yu may prject sales using unit r ttal dllar vlume. Assumptins cncerning unit sales price. percentage unit r dllar vlume increases in future years, and prduct mix shuld be clearly defined. Cst f Sales: Material. direct labr and verhead requirements must be develped and translated int cst data fr each prduct line. All cmpnent csts f yur prduct shuld be cnsidered. Cst estimates shuld be btained fr materials and direct labr. Overhead includes rent and utility allcatins, fringe benefits, and indirect labr. Fixed cmpnents f verhead that d nt fluctuate with prductin vlume shuld be identified. Assumptins as t csts f majr cmpnents and chances in these csts shuld be explained. Operating Expenses: Sales expense shuld include marketing and distributin csts, sales salaries and cmmissins, strage csts and prmtin and advertising. Sales expenses wuld be expectedly high during the prduct intrductin stage. General and administrative expenses shuld include management and ffice salaries, ffice rent, legal expenses and accunting csts. Research and Develpment: Research and develpment csts will largely depend n the life cycle f yur prduct and the need t bring additinal prducts t market. Assumptins cncerning the timing f a new prduct develpment shuld be explained as well as the nature f these prducts. Incme Taxes: Incme taxes shuld be estimated using an annual effective tax rate applied t mnthly r quarterly net incme befre taxes. The annual effective tax rate is an estimate f the incme tax (bth Federal and State) fr the entire frecasted year cnsidering available tax credits and net peratin lss carry frwards. Prjected Cash Flw Statements -Refer t Exhibit II at back f guide. Prjected Cash Flw Frecasts will assist yu in determining the need and timing fr additinal financing. Excess cash generated in any given quarter r year shuld be regarded as, and put twards, shrt-term investments. Decreasing shrt-term investments r brrwings in any quarter r year, n the ther hand, can reduce cash deficiencies. 8
Balance Sheet Frecast -Refer t Exhibit III at back f guide. Assumptins fr the balance sheet items shuld be explained as fllws: Cash: Minimum fr peratins Accunts receivable and accunts payable: Number f days t cllect sales and pay payables. Inventry: Turnver assumptins Debt: Payment terms and cllateral calculatins if applicable The assumptins may be further supprted by industry r histrical statistics which shuld be recnciled t the business plan assumptins. Summary In summary yur plan shuld describe: Yur cmpany and industry The prduct The market and marketing apprach Hw the prduct will be made Wh is invlved in the cmpany, and Hw much mney the cmpany needs and what it will d with it. By fllwing these guidelines, yu shuld be able t prvide venture capitalists with a plan that is well prepared and persuasive in cnveying the ptential f yur cmpany. 9