Chapter 6 Writing a Business Plan

Why a Business Plan is important Guidelines for writing a Business Plan

Presenting the Business Plan to Investors

Why a Business Plan is important

A business plan is a written narrative, typically 25 to 30 pageslong, that describes what a business plans to accomplish andhow it plans to accomplish it.

The business plan is used both inside and outside the firm.

The time to write a business plan is towards the end of the stagein the entrepreneurial process – moving from an idea to anentrepreneurial firm.

A large percentage of entrepreneurs do not write business plansmotivating that they don’t have time for that.

The business plan needs to be protected against the competitors that’s why many firms restrict the number of business plan copies.

The importance of a Business Plan:

• The business plan is an internal document that helps a new business flesh out it’s business model and solidify it’s goals. It should convince the reader that the business idea is viable and that the venture being created to exploit the idea has a bright future. The business plan acts as a road map for the management team and the employees of the firm.

• The business plan provides a mechanism for a company topresent itself to potential investors, suppliers, business partnersand key job candidates. The fact that a firm has a business plan proves that it’s management team is serious, that it sets exactgoals with what it has to do in order to accomplish it’s objectives,minimizing the risk this way.

The business plan is important for the following categories of people:

A Firm’s Employees: A clearly written business plan is importantfor both the management team and the rank-and-field employees.The management team sometimes argues that it’s a waste of timeto write a business plan because the marketplace changes sorapidly that any plan will become quickly outdated. While it’s truethat marketplaces can and often do change rapidly, the process ofwriting the plan may be a valuable as the plan itself. Writing theplan forces the management team to think through every aspect ofits business and agree on its most important priorities and goals.

Investors and Other External Stakeholders: The business planmust clearly demonstrate that the business idea is viable and offerspotential investors financial returns greater than lower-riskinvestment alternatives

Guidelines for Writing a Business Plan

There are several important guidelines that should influence thewriting of a business plan. It is important to remember that afirm’s business plan is typically the first aspect of a proposedventure that will be seen by an investor. If the plan is incompleteand looks sloppy, it is easy for an investor to infer that theventure itself is incomplete and sloppy.

Structure of the Business PlanTypically, investors are very busy people and want a plan wherethey can easily find critical information. If an investor has to huntfor something because it is in an unusual place or just isn’t there,he or she might simply give up and move to the next plan.

There are many software packages available that employ aninteractive, menu-driven approach to assist in the writing of abusiness plan. The software package may be helpful in providingstructure and saving time, but the information should still betailored to the individual business. Some businesses hireconsultants or outside advisers to write their business plans.

Contents of the Business PlanThere are three types of business plans:

a) Summary plan: A summary business plan is 10 to 15 pages and works best for companies that are very early in their development and are not prepared to write a full plan. The authors of a summary business plan may be asking for funding to conduct the analysis needed to write a full plan ( such as feasibility analysis).

Summary business plans are also used by very experiencedentrepreneurs who don’t want to take the time to write a fullbusiness plan.

b) Full business plan: A full business plan is typically 25 to 35 pages long. This type of plan spells out a company’s operations and plans in much more detail than a summary business plan, and it is the format that is usually used to prepare a business plan for an investor.

c) Operational business plan: Commonly running between 40 and 100 pages in length, these plans are primarily meant for an internal audience and can feature a great amount of detail. An effectively developed operational business plan can help a young company provide guidance to operational managers.

The business plan has to give information over all the importantaspects of the new business.

The actual content of the business plan:

• Executive Summary. The executive summary is a short overview of the entire business plan. In many instances, an investor will first ask for a copy of a firm’s executive summary and will request a copy of the full business plan only if the executive summary is sufficiently convincing. Although the executive summary appears at the beginning of the business plan, it should be created after the plan is finished.

• The information that should be included in the executive summary are:

The Opportunity, that is the problem to solve or need to be filled

The Description of the Business, that is how the proposed business solves the problem or fills the need

Competitive Advantage, that is the description of the business model

The Target Market The Management Team Brief Summary of the Financial Projections

• The Business includes the following information:

The Opportunity, that is the problem to solve or need to be filled

The Description of the Business: How the proposed business solves the problem or fills the

need Brief company history or background Company mission and objectives

Competitive Advantage: Description of the business model How the business will create a sustainable competitive

advantage

Current status and requirements

• Management team: One of the most important things investors want to see when reviewing the viability of a new venture is the strength of its management team. If the team doesn’t “pass muster”, most investors won’t read further. The management team of the venture should own a large enough equity stake to ensure that they are adequately motivated to weather the demands of building a successful firm.

The main information are:

Management experience, ability and technical expertise Board of Directors: number of directors and the composition

of the board Board of Advisors

• Company Structure, Ownership, and Intellectual Property:

Organizational structure: is important, because shows how authority and responsibility are distributed within a company

Legal structure

Ownership structure of the business

Intellectual property

• Industry Analysis

Industry description:

Industry trends Industry size and attractiveness Profit potential

Target Market:

Description of target market Competitive position within target market

• Marketing Plan

Product Feasibility Pricing Strategy Channels of Distribution Promotions and Advertising

• Operations Plan

Method of Production Availability of Qualified Labor Pool Business Partnerships Types of business partnerships Purpose of business partnerships Quality Control Customer Support

This section of the plan deals with the day-to-day operations ofthe company, describes how the firm plans to manufacture itsproducts, how much of the manufacturing the firm will do itselfand how much will be contracted out by others, the location ofthe manufacturing facilities and the network of suppliers.

• Financial Plan: Capital Requirements for the Next Three to Five Years Sources of funds Uses of funds Overview of Financial Projections Cash Flow Projections Income Statements Balance Sheets

This section of a business plan must demonstrate the financialviability of the business. It is important to remember that abusiness plan should be based on realistic projections.

• Critical Risk Factors: Management Risks Marketing Risks Operating Risks Financial Risks Other Risks

One of the most important things that a business plan shouldconvey to its readers is a sense that the venture’s managementteam is on the ball and understands the critical risks facing thebusiness. The critical risk a new business may face depend onits industry and its particular situation.

Presenting the Business Plan to Investors

If an investor is interested in the business plan of the new venturethan he would want to meet with the entrepreneur. The first meetingwith the investor is generally very short, about an hour. The investor will typically ask the firm to make a 20- to 30 minutes presentationusing PowerPoint slides and use the rest of the time to ask questions.If the investor is interested in the business than he will ask for asecond meeting with the entrepreneur or with its partners. The secondmeeting will typically last longer and will require a more thoroughpresentation.

The entrepreneur should respond to the requirements of the investor:he should stick to the time available for the presentation, be veryprecise and concise. The entrepreneur should arrive at the appointment on time, bring the audiovisual equipment with him andavoid technical jargon.

Often in presentations entrepreneurs make mistakes:

They spend to much time talking about the technology that will go into a new product/service

They spend not enough time talking about the business itself

They don’t have the right material at their fingertips

Example:If an entrepreneur has a product and has submitted a patentapplication to prevent others from producing the same product, aninvestor can ask when this has submitted his patent application. Ifan entrepreneur refuses to give an exact answer about the date, itmakes a poor impression. The ability of a firm to protect its productand the competitive advantage is essential for any investor.

The issues, that the entrepreneur has to cover in the presentation of the business plan, are:

The company: offer a quick, one-slide overview of the company and its target market.

Opportunity (the problems to be solved or the need to be filled): 1-2slides containing the idea which has determined the entrepreneur tostart the business.

Solution: Explain how the firm will solve the problem or how it willsatisfy the need to be filled. This information should be spread over 1-2

slides.

The management team: Briefly explain, in 1-2 slides, each manager’s qualifications.

Industry, target market, and competition: In 2-3 slides, briefly review the industry in which the firm will compete, its target market,its direct and indirect competitors and the way in which the firms willcompete against established companies in its target market.

Financials: In 2-3 slides briefly discuss the financials. Stresswhen the firm will achieve profitability, how much capital it willtake to get there, and when its cash flow will break even.

Exit strategy: In one slide, discuss the anticipated exit strategy

After the meeting, the entrepreneur will be asked a host of questionsby potential investors. The question-answer phase is extremelyimportant. The investors want to know how the entrepreneur thinksand how much he knows about the business he wants to start(they are not necessarily interested in the answers the entrepreneurgives).