Writing a Business Plan Chapter 6

1. Writing a Business PlanChapter 6

2. Chapter Objectives(1 of 2) • Explain the purpose of a business plan. • Discuss how a business plan can be a dual-use document. • Explain how the process of writing a business plan can be as important as the plan itself. • Identify the advantages and disadvantages of using software packages to assist in preparing a business plan. • Explain the difference between a summary business plan, a full business plan, and an operational business plan.

3. Chapter Objectives(2 of 2) • Explain why the executive summary may be the most important section of a business plan. • Describe a milestone and how milestones are used in business plans. • Explain the purpose of a “sources and uses of funds” statement. • Describe a liquidity event. • Detail the parts of an oral presentation of a business plan.

4. What Is a Business Plan? • Business Plan • A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business plans to accomplish. • Dual-Use Document • For most new ventures, the business plan is a dual-purpose document used both inside and outside the firm. • Inside the firm, the plan helps the company develop a “road map” to follow in executing its strategies and plans. • Outside the firm, it introduces potential investors and other stakeholders to the business opportunity the firm is pursuing and how it plans to pursue it.

5. Reasons for Writing a Business Plan

6. Who Reads the Business Plan—And What Are They Looking For? There are two primary audiences for a firm’s business plan Audience What They are Looking For A clearly written business plan, which articulates the vision and future plans of the firm, helps the employees of a firm operate in sync and move forward in a consistent and purposeful manner. A Firm’s Employees A firm’s business plan must make the case that the firm is a good use of an investor’s funds or the attention of other external stakeholders. The key is to include facts generated through a properly conducted feasibility analysis. A business plan rings hollow if it is based strictly on what an entrepreneur or team of founders “thinks” will happen. Investors and Other External Stakeholders

7. Guidelines for Writing a Business Plan(1 of 4) • Structure of the Business Plan • To make the best impression, a business plan should follow a conventional structure, such as the outline for the business plan shown in the chapter. • Although some entrepreneurs want to demonstrate creativity in everything they do, departing from the basic structure of the conventional business plan format is usually a mistake. • Typically, investors are very busy people and want a plan where they can easily find critical information.

8. Guidelines for Writing a Business Plan(2 of 4) • Structure of the Business Plan (continued) • Software Packages • There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan. • Some of these programs are very helpful. However, entrepreneurs should avoid a boilerplate plan that looks as though it came from a “canned” source. • Sense of Excitement • Along with facts and figures, a business plan needs to project a sense of anticipation and excitement about the possibilities that surround a new venture.

9. Guidelines for Writing a Business Plan(3 of 4) • Content of the Business Plan • The business plan should give clear and concise information on all the important aspects of the proposed venture. • It must be long enough to provide sufficient information yet short enough to maintain reader interest. • For most plans, 25 to 35 pages is sufficient. • Types of Business Plans • There are three types of business plans, which are shown on the next slide.

10. Guidelines for Writing a Business Plan(4 of 4) Types of Business Plans Recognizing the elements of the plan may change

11. Outline of the Business Plan • Outline of the Business Plan • A suggested outline of a business plan is shown on the next several slides. • Most business plans do not include all the elements introduced in the sample plan; we include them here for the purpose of completeness. • Each entrepreneur must decide which elements to include in his or her plan.

12. Exploring Each Section of the Plan(1 of 10) • Cover Page and Table of Contents • The cover page should include the name of the company, its address, its phone number, the date, and contact information for the lead entrepreneur. • The Executive Summary • The executive summary is a short overview of the entire business plan; it provides a busy reader with everything that needs to be known about the new venture’s distinctive nature. • In many instances, an investor will first ask for a copy of the executive summary and will request a copy of the full business plan only if the executive summary is sufficiently convincing.

13. Exploring Each Section of the Plan(5 of 10) • Industry Analysis • This section should begin by discussing the major trends in the industry in which the firm intends to compete along with important characteristics of the industry. This description should include data and information about various characteristics of the industry, such as its size, growth rate, and sales projections. • This section should also discuss how the firm will diminish or sidestep the forces that suppress its industry’s profitability. • The firm’s target market should be discussed next, along with an analysis of how it will compete in that market.

14. Exploring Each Section of the Plan(1 of 10) • Company Description • This section begins with a general description of the company. Although at first glance this section may seem less critical than others, it is extremely important in that it demonstrates to your reader that you know how to translate an idea into a business. • A mission statement defines why a company exists and what it aspires to become. • A tagline is a phrase that a business plans to use to reinforce its position in the marketplace. • A product or service’s position is how it is situated relative to its rivals.

15. Exploring Each Section of the Plan(1 of 10) • Market Analysis • The market analysis breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal. • This is done through market segmentation, which is the process of dividing the market into distinct segments. • Also, A competitor analysis, which is a detailed analysis of a firm’s competitors, should be included.

16. Exploring Each Section of the Plan(1 of 10) • The Economies of the Business • This section includes the financial analysis, which is further fleshed out in the financial projections. • The costs of goods sold are the materials and direct labor needed to produce the revenue driver. • A firm’s variable costs vary by sales, while its fixed costs are costs a company incurs whether it sells something or not. • A firm’s operating leverage is an analysis of its fixed versus variable costs.

17. Exploring Each Section of the Plan(6 of 10) • Marketing Plan • The marketing plan focuses on how the business will market and sell its product or service. • While, A firm’s marketing strategy refers to its overall approach for marketing its products and services. • After reading this section of the plan, an investor should be confident that the firm’s overall approach to its target market and its product strategy, pricing strategy, channels of distribution, and promotional strategy are in sync with one another and make sense.

18. Exploring Each Section of the Plan(6 of 10) • Product/Service Design and Development Plan • A logical path of development that includes product conception, prototyping, initial production, and full production. • A product prototype is the first physical manifestation of a new product, often in a crude or preliminary form. While, A virtual prototype is a computer-generated 3D image of a product or service idea.

19. Exploring Each Section of the Plan(7 of 10) (Section A 19-11) • Operations Plan • This section of the plan deals with the day-to-day operations of the company. • An overview of the manufacturing plan (or service delivery plan) should be followed by a description of the network of suppliers, business partners, and service providers that will be necessary to build the product or produce the service the firm will sell. • Any risks or regulations pertaining to the operations of the firm should be disclosed, such as nonroutine regulations regarding waste disposal and worker safety.

20. Exploring Each Section of the Plan(3 of 10) • Management Team • The management team of a new firm typically consists of the founder or founders and a handful of key management personnel. • Their profile should include the following information: • ■ Title of the position • ■ Duties and responsibilities of the position • ■ Previous industry and related experience • ■ Previous successes • ■ Educational background

21. Exploring Each Section of the Plan(4 of 10) • Company Structure • This section should begin by describing the structure of the new venture, including the reporting relationships among the top management team members. • The board of directors is a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm. • A board of advisors is a panel of experts asked by a firm’s management to provide counsel and advice on an ongoing basis. • The Overall Schedule • A schedule should be prepared that shows the major events required to launch the business.

22. Exploring Each Section of the Plan(8 of 10) • Financial Projections • The final section of a business plan presents a firm’s pro forma (or projected) financial projections. It demonstrates the financial viability of the business. A careful reader of the plan will scrutinize this section. • The financial plan should begin with an explanation of the funding that will be needed by the business during the next three to five years along with an explanation of how the funds will be used. • This information is called a sources and uses of funds statement. • The next portion of this section includes financial projections, which are intended to further demonstrate the financial viability of the business.

23. Exploring Each Section of the Plan(9 of 10) • Financial Plan (continued) • The financial projections should include three to five years of pro forma income statements, balance sheets, and statements of cash flows, as described in Chapter 8. • It is important to remember that the business plan should be based on realistic projections. • If it is not and the company gets funding or financing, there will most certainly be a day of reckoning. Investors and bankers hold entrepreneurs accountable for the numbers in their projections.

24. Exploring Each Section of the Plan(10 of 10) • Critical Risk Factors • Although a variety of potential critical risks may exist, a business should tailor this section to depict its truly critical risks. • Appendix • Any material that does not easily fit into the body of a business plan should appear in an appendix. Examples of materials that might appear in the appendix include: • Resumes of the top management team members, photos or diagrams of product or product prototypes, certain financial data, and market research projections.

25. Putting It All Together(1 of 2) The 10 Most Important Questions a Business Plan Should Answer Does the firm have an exciting and sensible business model? Will other firms be able to easily copy it? Is the business just an idea, or is it an opportunity with real potential? Is the product or service viable? Does it add significant value to the customer? Was a feasibility analysis completed? Is the industry in which the product or service will be competing growing, stable, or declining? Does the firm have a well-defined target market?

26. Putting It All Together(2 of 2) The 10 Most Important Questions a Business Plan Should Answer Is the firm organized in an appropriate manner? Are its strategy and business practices legal and ethical? Is the management team experienced, skilled, and up to the task of launching the new firm? Are the financial projections realistic, and do they project a bright future for the firm? What rate of return can investors expect? How will the firm’s competitors react to its entrance into their markets? What are the critical risks surrounding the business, and does the management team have contingency plans in place if risks become actual problems?

27. Presenting the Business Plan to Investors(1 of 3) • Making a Presentation to Investors • If the business plan successfully elicits the interest of potential investors, the next step is to meet with the investors and present the plan in person. • The first meeting with an investor is generally very short, about one hour. The investor will typically ask the firm to make a 20- to 30-minute presentation using PowerPoint slides and use the rest of the time to respond to questions. • If the investor is impressed and wants to learn more about the venture, the firm will be asked back for a second meeting.

28. Presenting the Business Plan to Investors(2 of 3) • Tips on Making an Oral Presentation to Investors • When asked to meet with an investor, the founders of a new venture should prepare a set of PowerPoint slides that will fill the time slot permitted. • The presentation should be smooth and well rehearsed. The slides should be sharp and not cluttered with material. • The first rule in making an oral presentation is to follow instructions. If an investor tells an entrepreneur that he or she has one hour and that the hour will consist of a 30-minute presentation and a 30-minute question-and-answer period, the presentation shouldn’t last more than 30 minutes. • Questions and Feedback expect from the Investor

29. Presenting the Business Plan to Investors(3 of 3) Ten PowerPoint Slides to Include in an Investor Presentation • Title slide • Problem • Solution • Business model • Management team • Industry and target market • Competition • Intellectual property • Financial projections • Current status, amount of money requested, and projected use of funds