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B u s i n e s s P l a n s. P r o j e c t # 3. B u s i n e s s P l a n s. You will be required to hand in a business plan as your final project. This will be a lot of fun ! Personalize your plan (no cookie cutter approach please) Basic Requirement: How are you going to make money ?
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Project #3 BusinessPlans • You will be required to hand in a business plan as your final project. • This will be a lot of fun ! • Personalize your plan (no cookie cutter approach please) • Basic Requirement: How are you going to make money ? • Best to leverage off your product proposal (Project #1).
BusinessPlan Resources www.sbaonline.sba.gov U.S. Small Business Administration www.paloaltosoftware.com Business Plan Software
What is a Business Plan ? • A business plan is a written statement that describes and analyzes your business concept and gives detailed projections about it future. • It also covers the financial aspects of starting or expanding your business
Investors Funding Proceed or Stop Identify warning signals Why Prepare a Business Plan ? Stay on track, anticipate problems, achieve goals Improve concept & define goals Improve your odds
Getting Started • Define Business • Begin Brainstorming
Wholesale Retail Service Types of Businesses Manufacturing Project Development
General BP Questions to Ask Yourself • What problem do I solve for my customer base? • Who is my target customer? • How will I communicate with my target customer? • What products/services will I provide? • Where will my business be located? • Where will I buy the products that I need? • What hours will I operate? • Who will work for me and how will they be paid? • Who will handle critical tasks like selling, ordering, bookkeeping, marketing and shipping? • How will I advertise and promote my business? • What are my competitions’ strengths? • How am I different from the competitors, as seen through my customers’ eyes?
Questions for Retail • How will I keep abreast with fashion and taste? • Is my location accessible, do I need a heavy advertising campaign? • Location - high rent shopping center or lower rent location where there is less walk and drive by traffic? • How much inventory will I need in comparison to my expected sales and revenues?
Questions for Wholesale • Which product lines will I carry in my inventory and which will I order as required? • How will I carry accounts for my customers? • Are their any EXCLUSIVE distributorships available to me? • Will I market the products myself or will the manufacturers have marketing programs?
Questions for Service Oriented Business • Are my credentials or skills equal to or better than others in the field? • Can I sell my service as well as I perform it? • Do I have a client list to begin with or will I have to start off cold? • Am I better off associating with others or is it better to be independent?
Questions for Manufacturers • Does my manufacturing process create toxic or polluting materials - how do I deal with it? • Is there a labor pool available (skilled, unskilled)? • Will I manufacture per order or have an inventory? • Will I manufacture one product or a family for them? • Is my competition from small or large firms?
Questions for Project Development • Am I sure of the selling price of my project? • Am I sure of the project cost? • What happens if costs exceed predicted costs? • Am I sure of the time factors involved? • Is there a buyer for my project?
Business Plan: Need to Deal with Changes Trends Future Taste Technology
Business Plans • Misconception - The only thing standing between entrepreneurs and success is (Sahlman, HBR 97409): • Glossy five color charts • Bundle of complicated spreadsheets • A decade of month by month financial projections. • NOT So !
What is Wrong with Business Plans Business Plan • Too much time is wasted on numbers • Too little time on information that really matters to intelligent investors • Month-by-month predictions over several years are an “act of imagination” • Sahlman (HBR 97409)
Business Model Rather Than A lot of Numbers • Numbers in terms of model (demonstrate that you have thought through the problem) • Key drives of venture success • Address break even issue (when do I make a profit?) • Cash Flow > 0 • Sahlman (HBR 97409)
Critical Factors to Every New Venture • The People: the core team members and outside parties providing key services • The Opportunity: profile of business; how will it grow; what can stand in the way of success • The Context: the BIG picture - regulatory, environmental, interest rates, demographic trends, inflation, etc., the factors that will change but cannot be controlled by the entrepreneur • Risk and Reward: an assessment of what can go wrong (risk) and what can go right (pay-off). How can the team respond to problems and uncertainties? • Sahlman (HBR 97409)
Great Business Ideas • “…. GREAT businesses have attributes that are easy to identify but hard to assemble.” • The team’s members have skills and experiences directly related to the opportunity • Ideally, they have worked together in the past • The opportunity has an attractive and sustainable business model; it is possible to create a competitive edge and defend it • Many options exist for expanding the scope and scale of the business • Value can be extracted … positive harvest event (a sale) or by scaling down or liquidating • The context is favorable - both regulatory and economic environment • RISK is understood, and team understands how to mitigate the impact of difficult eventsSahlman (HBR 97409)
Who are the People Responsible for the Business Plan ? Why do some venture capitalists read the resume section first ? “Without the right people and the right team, none of the other parts of the business plan really matter.” Sahlman (HBR 97409)
Every business plan should answer the Following about the personnel ! • Where are the founders from ? • Where have they been educated ? • Where have they worked ? For whom ? • What are their accomplishments ? • What is their reputation within the business/technical community? • What is their relevant experience ? • What are their skills, abilities, knowledge ? • How realistic are they ? • Any essential team members missing ? • Can they attract/recruit high quality people ? • How will they respond to adversity ? • Do they have the ‘stomach’ to make difficult choices ? • How committed are they to the venture ? • What are their motivations ? Sahlman (HBR 97409)
The opportunity or is it ? Can you answer the following basic questions ? (1) Is the total market for the venture large, growing, or both ? (2) Is the industry now, or can it become, structurally attractive for the venture ?
The opportunity of a lifetime or is it ? Entrepreneurs or investors look for rapidly growing markets because it is often easier to obtain a share of a growing market than to fight with entrenched competitors for a small piece of a mature market.
The opportunity of a lifetime or is it ? • Can your business plan answer these questions? • Who is the new venture’s customer ? • How does the customer make decisions about buying the product ? • Is the product a compelling purchase to the customer ? • How will the product or service be priced ? • How will the venture reach all of the identified customer segments ? • How much does it cost (time and resources) to acquire a customer ? • How much does it cost to produce and deliver a product ? • How much does it cost to support a customer ? • How easy is it to retain a customer ?
What are the cash flow implications: Can your plan answer the following ? • When does the business have to buy resources, such • as supplies, materials, and personnel ? • How does your business have to pay for them ? • How long does it take to get a customer ? • How long before the customer sends the business a check ? • How much capital is needed ?
Competition: Can your plan answer the following ? • Who are the new venture’s current competitors ? • What resources do they control ? • What are their strengths and weaknesses ? • How will they respond to your market entry ? • How can your new venture respond to the competitions’ • response ? • Who else can exploit the same opportunity ?
Competition • Business is very much like chess - you need to anticipate your competitors next move. • Don’t be naive and ‘pitch’ an insurmountable lead. • You may have a proprietary lead, can you keep it ? • All opportunities have promise ! • All opportunities have VULNERABILITIES ! • You need to identify all of your vulnerabilities !
Context ! Opportunities exist in context Economy, interest rates, inflation, exchange rates Gov’t regulations
Context ! Government Regulations More than 100 new companies formed when the airline industry deregulated in the late 1970’s.
Context ! The Economy Recession in early 1990s mad it hard to get venture financing. However, as capital markets in the middle 1990’s heated up, these companies had a high rate of return.
Context Unforeseen Shift After the Tylenol incident (tampering), the packaging industry flourished. Prior to that the packaging industry was declining.
Context Every business plan should contain certain pieces of evidence of CONTEXT - Show heightened awareness of new ventures context - Demonstrate that you understand that the venture may change and describe how changes can affect the business - How will management deal with unfavorable changes in context?
Risk & Rewards “One of the greatest myths about entrepreneurs is that they are risk seekers -- All sane people avoid risk? William Sahlman (HBS, 79409)
Risk & RewardHow to Manage Risk?? Taking a picture of the unknown -- a business plan is a snapshot of an event in the future. Form coherent story opportunity people Unfold possibilities of action and reaction context
Risk & Reward • Good business plans discuss people, opportunity and context as a moving target • These categories are fluid and will change over time • - key people will leave • - opportunities will vanish • - economy will fluctuate
Risk & Reward • Fortune is hard to predict, • but you have to convince investors that you have a sense of the risk and rewards involved • It is up to the management to increase the likelihood of success and consequences of success
“True entrepreneurs want to capture all the reward and give all the risk to others. Yet risk is unavoidable.” Howard Stevenson (HBS)
Risk & Reward Your business plan should confront risk head on - in terms of people, opportunities and context Try and understand scenarios: - what happens if a key team leader leaves? - what if competition responds more ferociously than expected? - what happens if there is a revolution in Namibia, a source of key raw material?
Risk & Reward Your business plan should address candidly how the investor will get back his / her money Venture capitalists like a wide range of exit strategies - IPO - sell company outright - split up company and sell parts
Risk & Reward • Investors feel better about risk if it is up front • Cover all possibilities
“If you don’t know where you are going, any road will get you there.” • FOR ENTREPRENEURS-- • You better know where you will end up and have a map for getting there • A business plan should be the place where the map is drawn, a journey is less risky when you have directions
Visualizing Risk and Reward - What is the depth and duration of negative cash flow? - ideal, cash flow early and often - possibly generate this curve from a sensitivity spreadsheet
Visualizing Risk and Reward t) - Flat portion reveals a negligible chance of losing a small amount of money - There is a significant chance of earning between 15% and 45% - Small chance of a killer app > 20% - Possible to predict with Monte Carlo
Final Thoughts • A business plan is a call for action, must be proactive • Risk management is a key, often tilting the venture in favor of reward and away from risk • Should be a coherent document
The Format of a Business Plan There are all kinds of help out there, use it! Also, lots of books: - “Complete Business Plan” by Adams (ISBN 1-55850-645-7) - “How to Write a Business Plan” by McKeever (ISBN 0-87337-5440) - “BusinessPlan.com” by Ross (ISBN 1-55571-455-2) - “The Business Planning Guide” by Bangs (ISBN 1-547410-099-8) - “Model Business Plans” by Richter (ISBN 0-7352-0024-6) www.paloaltosoftware.com
It is a good is idea to invest in a business plan book -- go the local bookstores and library and find one you like.
Formal Business Plan • Here, a sample structure will be provided • I provide a sample, it is not intended to be “a one size fits all” document • Personalize your plan - be creative
Format Skeleton of aBusiness Plan Main Body Executive Summary A. Program OverviewB. Management & StrategyC. ProductsD. Market & SalesE. CompetitionF. OperationsG. Risks & RewardsH. Financial Models Appendix A.1. Primary Final Objective A.2. Supportive Financial Projections A.3. Historical Financial Data A.4. Organization A.5. Resources
Table of Contents Executive Summary A. Program OverviewIntroduction History Products Market Marketing and sales Competition Location Funding requirements Financial goals Return to investors B. Management and StrategiesCorporate mission Business development strategy Goals Management team Consultant C. ProductsConcept Product approach Product design Product, trademark, and regulatory status Future products D.Marketing and Sales Marketing plan overview Sales plan overview Market size Marketing research Marketing for the initial E. Competition Perspective Specific competitive products Anticipated competition F. OperationPerspective Product R&D Product design Manufacturing Quality G. Risks and RewardsRisks Benefits Stockholders H. Financial Models Appendixes
Executive Summary (1 page only) • Overview: Name the organization and generically describe its nature, mission, long-term objectives, and products. • Competitive products: Describe product types available from competitors and their weaknesses compared to your products, as lead-in to the next topic. • Your products: Depict your existing and future products and how they improve competitive shortcomings. • Added product issues: Describe additional benefits of your products and also honestly mention any weaknesses and how they are being addressed. • Business development status: Briefly outline the status of both product and business development, the latter one individually of each of three divisions (administration, technology and marketing).
