Essentials of a Business Plan

Why do we need a Business Plan?Helps to describe:

Merits Requirements Risks & Potential rewards Develop and examine operating strategies and expected

results Quantifies objectives, providing measurable benchmarks for

comparing forecasts with actual results. Provides the entrepreneur with a communication tool for

outside financial sources and an operational tool for guiding the venture towards success.

Raise capital Attract key advisors, directors or team members

ContentsExecutive SummaryThe industry and the firmMarket Research and AnalysisThe Economics of the businessMarketing PlanDesign and Development PlanManufacturing and Operational PlanManagement TeamOverall ScheduleCritical Risks, Problems and AssumptionsFinancial; PlanAppendices

Executive Summary Very important –compelling and appealing One or two pages Usually prepared after the other sections are completed Business concept and the business

Should explain how product or service will change the way customers currently do certain things

Proprietary technology, trade secrets, or unique capabilities

The opportunity and strategySummarize the opportunityWhy it is compellingEntry strategy to exploit it

Target market and projectionsPrimary customer groupsPositioning of product(s) & service(s)How to reach and service these groupsStructure of the marketMarket size and anticipated sharePricing strategy

The competitive advantageThe economics, profitability, and harvest potentialGross & operating marginsExpected profitabilityDurabilityBreak-even and positive cash flow Key financial projectionsThe teamThe financial plan

The Industry and the Company A major area of consideration is the company, its concept

for its product(s) & service(s), and its interface with the industry in which it will be competingThe industryCurrent status & prospectusMarket size, growth trends, & competitorsAny new products or developments, new markets & customers,

new requirementsNational or economic trends & factors that could affect the

venture

The company and the conceptConcept of the business, product(s) or service(s), principal

customersThe product(s) and service(s)Describe in some detail each product or serviceApplication of the product or service and describe end use as well

as any significant secondary applicationsUnique features of the product or service; how value will be

added; pay back period to the customer

Any possible drawbacksPresent state of development of the product or service and the

time & money needed to fully develop, test, & introduceAny head startPatents, trade secrets, or proprietary featuresOpportunities for expansion of product line

Entry and growth strategyKey success variables in the marketing planPricing, distribution, advertising, and promotion plansHow fast you intend to grow

Market Research and Analysis Most important and most difficult section Prepare this section before any other

CustomersDescribe customers for product(s) or sevices(s)SegmentationLocation of the customers –regional, national, internationalWhether customers are easily reachableDescribe customers’ purchasing processesWhy they might change current purchasing decisionsAny orders, contracts, or letters of commitment

Market size and trend Current market size & anticipated share by market segment and/or

by regions and/or country Potential annual growth for three years Major factors affecting market growth

Competition and competitive edges Realistic assessment of the strengths & weaknesses of competitors Compare fundamental value added or created by your product or

service … Discuss current advantages and disadvantages of existing products Indicate any knowledge of competitors’actions, their profit trends Discuss three or four key competitors and why customers buy from

them and why they leave them

Estimated market share and sales Mentioning assumptions of advantages of your product, the market

size and trend, customers, competition, estimate your market share

Ongoing market evaluation Plan for ongoing market evaluation to guide product-improvement

programs.

The Economics of the BusinessEconomic and financial characteristics need to

support the fundamental attractiveness of the opportunity

Gross and operating marginsProfit potential and durabilityFixed, variable, and semi-variable costs

Show relevant industry benchmarksMonths to breakevenMonths to reach positive cash flow

Marketing planShows how sales projections will be attained

Overall marketing strategyDescribe specific marketing philosophyPlans for identifying and contacting potential

customersWhat features of the product or service will be

emphasized to generate salesIntroduction of product –regional, national, or

internationalSeasonal trends that underlie the cash conversion

cycle in the industryPlans to obtain institutional contracts

Pricing

Discuss pricing strategy and compare this with that of the major competitors

Whether gross profit margin large enough to cover all costs and still allow a profit

Justify your pricing strategy in terms of economic payback to customers

If product priced lower than that of competitors, how will maintain profitability

Describe any discount allowance for prompt payment or volume purchases

Sales tacticsDescribe the methodsDiscuss the value chain and the margins for

intermediariesSpecial policies regarding discounts, exclusive

distribution rightsHow intermediaries will be selectedPresent a selling schedule and sales budget

Service and warranty policyIndicate importance to the customers’purchasing

decisions and discuss your method of handling service problems

Describe the kind and term of warrantiesCompare service and warranty policies to those of your

competitors

Advertising and promotionTrade show participation, direct mailing, trade magazine

advertisement, use of advertising agenciesSchedule and approximate costs

DistributionMethods and channels of distributionSensitivity of shipping cost as a percent of the

selling priceIf international sales are involved, how these

will be handled

Design and Development PlanDesign and development costs are often underestimated Development status and tasks Current status of each product or service and what remains to be

done Competence and expertise of the company has or will require

Difficulties and risks Possible effect on the cost of design & development, on the time to

market introduction

Costs Design and development budget Discuss the impact on cash flow projections of underestimating this

budget

Proprietary issues Describe any patent, trademark, copyright you own or are seeking Contractual rights or agreements

Manufacturing and Operational PlanOperating cycle

Lead/lag timesPlan for handling any seasonal production load

Geographical locationAdvantages and disadvantages of the site location

Facilities and improvementsHow & when the necessary facilities to start production will be

acquiredEquipment & space –leased or acquiredFuture equipment needs

Strategy and plansDescribe the manufacturing processPotential subcontractors

Production planApproach to quality control, production control, inventory control

Regulatory and legal issuesState, national, or foreign regulatory requirementsAny pending regulatory changes that can affect the nature of

opportunity and its timing

Management TeamOrganization

Key management roles and individuals who will fill these

Key management personnelDetailed background about each key personDescribe exact duties and responsibilities of each of the key

membersComplete resumes for each key member to be included as

an exhibit

Management compensation and ownershipOther investorsBoard of directorsSupporting professional advisors and services

Overall Schedule Shows the timing and interrelationship of the major events

necessary to launch the venture Deadlines or milestones critical to the venture’s success

Incorporation of the ventureCompletion of design & developmentCompletion of prototypesObtaining of sales representativesOrdering of materials in production quantitiesStarting of production or operation ……Receipt of first orderDelivery on first saleReceiving the first payment on accounts receivable

Activities most likely to cause a schedule slippage and impact on the venture’s operation; steps to be taken correct such slippages

Critical Risks, Problems, & AssumptionsMajor problems or risks

Running out of cash before orders are securedPotential price cutting by competitorsAny potentially unfavorable industry wide trendSales projections not achievedDifficulty encountered in obtaining needed bank creditRunning out of cash after orders pour in

Assumptions concerning sales projections, customer orders etc.

The Financial PlanIndicates the venture’s potential and presents

a timetable for financial viability

Pro forma income statements for at least three yearsFully discuss the assumptions (e.g., amount for bad

debts and discounts)Highlight any major risks such as the effect of a 20

percent reduction in sales from those projected

Pro forma balance sheets for three years Pro forma cash flow analysis –monthly for first year

Determine the need for and timing of additional financing and indicate peak requirements for working capital

How additional financing will be obtainedDiscuss assumptions and sensitivity of cash flow to these

assumptions

Break-even chartHow the break-even might be lowered

Cost controlMechanisms for the control of various cost elements

HighlightsMaximum amount of cash required and the timingAmount of debt and equity neededHow fast can the debt be paid

Desired financing Use of funds

Appendices Product specifications or photos List of references Suppliers of critical components Special location factors Facilities or technical analysis Reports from consultants or technical experts Copies of any regulatory approval, licenses etc.

Possible drawbacks in a business plan

No realistic goals Failure to anticipate roadblocks No commitment or dedication Lack of demonstrated experience (business or

technical) No market niche

Don’t forget…1. Keep the plan respectably short

2. Organize and package the plan appropriately

3. Orient the plan towards the future

4. Avoid exaggeration

5. Highlight critical risks

Don’t forget…6. Give evidence of an effective entrepreneurial team

7. Do not over diversify

8. Identify the target market

9. Plan should be written in the third person

10. Attempt to capture the reader’s interest

Prepare your B-plan

Work hard

Watch your business grow