Why a Business Plan is important

1. Chapter 6 Writing a Business PlanWhy a Business Plan is important Guidelines for writing a Business Plan Presenting the Business Plan to Investors

2. Why a Business Plan is important A business plan is a written narrative, typically 25 to 30 pages long, that describes what a business plans to accomplish and how 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 stage in the entrepreneurial process – moving from an idea to an entrepreneurial firm. A large percentage of entrepreneurs do not write business plans motivating 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.

3. 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 to present itself to potential investors, suppliers, business partners and key job candidates. The fact that a firm has a business plan proves that it’s management team is serious, that it sets exact goals with what it has to do in order to accomplish it’s objectives, minimizing the risk this way.

4. The business plan is important for the following categories of people: • A Firm’s Employees: A clearly written business plan is important for both the management team and the rank-and-field employees. The management team sometimes argues that it’s a waste of time to write a business plan because the marketplace changes so rapidly that any plan will become quickly outdated. While it’s true that marketplaces can and often do change rapidly, the process of writing the plan may be a valuable as the plan itself. Writing the plan forces the management team to think through every aspect of its business and agree on its most important priorities and goals. • Investors and Other External Stakeholders: The business plan must clearly demonstrate that the business idea is viable and offers potential investors financial returns greater than lower-risk investment alternatives

5. Guidelines for Writing a Business Plan There are several important guidelines that should influence the writing of a business plan. It is important to remember that a firm’s business plan is typically the first aspect of a proposed venture that will be seen by an investor. If the plan is incomplete and looks sloppy, it is easy for an investor to infer that the venture itself is incomplete and sloppy. Structure of the Business Plan Typically, investors are very busy people and want a plan where they can easily find critical information. If an investor has to hunt for 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.

6. There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan. The software package may be helpful in providing structure and saving time, but the information should still be tailored to the individual business. Some businesses hire consultants or outside advisers to write their business plans. Contents of the Business Plan There are three types of business plans: • 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).

7. Summary business plans are also used by very experienced entrepreneurs who don’t want to take the time to write a full business 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.

8. The business plan has to give information over all the important aspects 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.

9. 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

10. 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

11. 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

12. 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

13. Industry Analysis • Industry description:  Industry trends  Industry size and attractiveness  Profit potential • Target Market:  Description of target market  Competitive position within target market

14. 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

15. This section of the plan deals with the day-to-day operations of the company, describes how the firm plans to manufacture its products, how much of the manufacturing the firm will do itself and how much will be contracted out by others, the location of the 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

16. This section of a business plan must demonstrate the financial viability of the business. It is important to remember that a business 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 should convey to its readers is a sense that the venture’s management team is on the ball and understands the critical risks facing the business. The critical risk a new business may face depend on its industry and its particular situation.

17. Presenting the Business Plan to Investors If an investor is interested in the business plan of the new venture than he would want to meet with the entrepreneur. The first meeting with the investor is generally very short, about an hour. The investor will typically ask the firm to make a 20- to 30 minutes presentation using 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 a second meeting with the entrepreneur or with its partners. The second meeting will typically last longer and will require a more thorough presentation. The entrepreneur should respond to the requirements of the investor: he should stick to the time available for the presentation, be very precise and concise. The entrepreneur should arrive at the appointment on time, bring the audiovisual equipment with him and avoid technical jargon.

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

19. 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): 1-2 slides containing the idea which has determined the entrepreneur to start the business.  Solution: Explain how the firm will solve the problem or how it will satisfy 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.

20. 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 will compete against established companies in its target market.  Financials: In 2-3 slides briefly discuss the financials. Stress when the firm will achieve profitability, how much capital it will take 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 questions by potential investors. The question-answer phase is extremely important. The investors want to know how the entrepreneur thinks and how much he knows about the business he wants to start (they are not necessarily interested in the answers the entrepreneur gives).