Developing a business plan I. Starting a business • What is a small business?

1. Developing a business plan I. Starting a business • What is a small business? • Small business survival rates • Avoiding failure II. The importance of business planning • Purposes of a business plan III. Components of a business plan

2. Developing a business plan Starting a business What is a small business? There is a legal definition from the “Small Business Act” A small business concern is “independently owned and operated and which is not dominant in its field of operation” In general, a small business is privately owned and has less than 100 employees A “microbusiness” has less than 10 employees This definition is similar to the one used in Europe

3. Characteristics of small business Management and ownership are rarely separate Control over business operations and decisions is with one or two persons (often family members) Equity in the business is not publicly traded Owners’ personal security is required to secure business debt Limited liability is rarely present Level and number of formal contractual relations are kept at a minimum Owners’ objectives directly influence business decisions www.smallbusiness.org.au/sbc/publications/sbc004a.htm

4. Small Business Size Standards by NAICS Industry Industry title Millions of $ # of employees Subsector 516: Internet Publishing and Broadcasting Internet Publishing and Broadcasting 500 Subsector 518: Internet Service Providers, Web Search Portals, and Data Processing Services Internet Service Providers $23.0 Web Search Portals $6.5 Data Processing, Hosting, and $23.0 Related Services Subsector 541: Professional, Scientific and Technical Services Information Technology Value Added 150 Resellers GPO. (2007). Electronic Code of Federal Regulations

5. There are no guarantees in business Starting a business is hard, risky and rewarding Many small businesses fail The Small Business Administration finds that 50% fail in the first year 50-80% fail within five years Why? Over the lifetime of a business, 39% are profitable, 30% break even, and 30% lose money www.baylor.edu/bbr/images/34817.jpg

6. According to the Bureau of Labor Statistics (2005) most failures occur in the first two years Across sectors, ~66% of new establishments were still in existence two years after their birth ~44% were still in existence four years after “It is not surprising that most of the new establishments disappeared within the first two years after their birth, and then only a smaller percentage disappeared in the subsequent two years These survival rates do not vary much by industry” Not all closures are failures ~33% of closures were successful businesses

7. 31.2% still in business in 2005 www.bls.gov/ore/pdf/st060040.pdf

8. Information 1: 81% 2: 67% 3: 55% 4: 45% 5: 31% 6: 28% 7: 25% www.bls.gov/ore/pdf/st060040.pdf

9. Some reasons for failure: Lack of experience Insufficient capital (money) Poor location Poor inventory management Over-investment in fixed assets Poor credit arrangements Personal use of business funds Unexpected growth Competition Low sales images.forbes.com/media/2005/09/failure_1.jpg Ames. M. (1983). Small Business Management Berle, G. (1994) The Instant Business Plan Book

10. Common causes for business failure Cause % of failures Specific pitfalls Incompetence 46% Emotional pricing Living too high for the business Nonpayment of taxes No knowledge of pricing Lack of planning No knowledge of financing Not understanding record-keeping Lack of managerial 30% Poor credit granting practices experience Excessive bad debts Expansion too rapid Inadequate borrowing practices Lack of Experience 11% Carry inadequate inventory in line of goods or No knowledge of suppliers services Wasted advertising budget Neglect, fraud, disaster 1% cpa.utk.edu/pdffiles/adc24.pdf

11. Management mistakes that lead to business failures Going into business for the wrong reasons Following advice from family and friends Being in the wrong place that the wrong time Underestimating the time requirements Family pressure on time and money commitments Lack of market awareness and financial responsibility Falling in love with the product/business Lack of a clear focus Too much money Too optimistic or pessimistic

12. So how do you avoid failure? Develop a business plan Coming up! Derive accurate financial information about the business How much investment is needed to start up? How much to meet operational and overhead expenses until the company is profitable (and when does this happen)? Understand the marketplace and competitors What is your niche? What do your competitors do?

13. So how do you avoid failure? Know your product or service What does it do? What does is do that is different or better than competitors’ offerings? What will it cost to develop? Know your customer What are the significant demographics of your customer base? How will you market your product or service to your customers? How will you sell it to them?

14. Developing a business plan I. Starting a business • What is a small business? • Small business survival rates • Avoiding failure II. The importance of business planning • Purposes of a business plan III. Components of a business plan

15. II. The importance of business planning Planning is a form of risk management Strategic planning matches strengths of the business to available opportunities Requires collecting and analyzing information about the business environment Requires a clear understanding of the business What are its strengths and weaknesses? What are the mission, goals, and objectives? What is the market niche the business will occupy? What resource demands must be met?

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17. Planning helps you place the business in a context This includes competitors, potential partners, local, state, and federal governments, suppliers, customers, interest groups… It helps lay out a path to manage these complex and conflicting relationships It provides at least an initial blueprint for the business It is proactive Decisions are based on predictions of future states of the environment, not reactions to crises as they occur In an unstable, technology driven business environment it is critical to success

18. Why write a business plan? It is a guide for the business It lays out goals and objectives It is a prospectus for investors It explains why they should give you money The details about the products and services, operations, management team, employees and resource needs are important So are the descriptions of the marketing and sales plans It helps allocate resources properly, handle unforeseen complications, and provide the basis to make the right decisions

19. Developing a business plan I. Starting a business • What is a small business? • Small business survival rates • Avoiding failure II. The importance of business planning • Purposes of a business plan III. Components of a business plan

20. Where do you start? Components of a business plan Executive Summary Company Summary Products and Services The Market Opportunity Strategy and implementation Management Team Financing requirements Appendix www.wilsonweb.com/commpix/1230-bus-plan.jpg

21. Executive Summary Mission statement and overall goals This is a link between performing a social function and the more specific targets or objectives of the business It identifies the business’ value proposition It describes the primary objective of the business What is it setting out to do and how will it be done? It briefly describes what is needed How much funding or loan money is needed? What for? www.bbsrc.ac.uk/biobusiness_guide/images/quotes/investor.gif

22. Executive Summary A concise definition of the company Summarize the main details of the business How the business will address market needs What niche will the business fill and how will the product or service be marketed and to whom? The product or service idea What are you producing or providing? Competitive advantages What advantages set the business apart from competitors? Team members aggregate strengths

23. Company summary What does the business do? This should not simply summarize the product or service It should link to results of the output (social function) and competencies developed in producing the output What is its business model? What are the business’ short term and long-term objectives? What resources and funding are needed to support the start-up process? What is the legal status (sole proprietor? partnership?)

24. Company summary Why it’s good to set goals and objectives Legitimizes the business’ activities Focuses attention and sets constraints and a standard of assessment for employees Identifies the nature of the business and elicits commitment Reduces uncertainty by clarifying what the business is pursuing Help the business learn and adapt by showing discrepancies between goals and actual progress Provides a rationale for organization design

25. Products and services What is the main product or service? What does it do? What is involved in the production of the product? What raw materials are used? How much do they cost? Who are the suppliers? Where are they located? Why were they chosen? What need does it fulfill in the marketplace?

26. Products and services What is involved in the production of the service? What is the service? Why is the business able to provide it? How and where it is provided? Who will be doing the work? What are the potential problems that you could experience when producing your product or service? What are the best and worst case scenarios and how will they be handled? Answering this question involves thinking about risk management

27. Products and services What is the value proposition? It is a statement summarizing the ways in which a business’ product or service is differentiated from that of competitors It briefly describes the customer segment and competitors Why should anyone purchase or use the product or service? What needs will it meet for them? What benefits can they expect? It should be concise and clear

28. Products and services Strong value propositions should describe tangible results Increased revenues Faster time to market Decreased costs Improved operational efficiency Increased market share Decreased employee turnover Improvements for customers Improved customer retention levels

29. Template: (Company name)’s (product/service name) is intended for (target customer) who (statement of need or opportunity). Our product/service will be a market leader in (product/service category) because (statement of primary differentiation). For example: XL Corp’s document management service is intended for the small business owner who is swimming in paper. Our service will be a market leader in records management because it simplifies small business record keeping.

30. www.hindujatmt.com/en/tech/abt/images/chart.jpg

31. Products and Services Competitive overview What is the industry sector in which the business is competing? Direct competition provides the same product or service to the same market What is their market share? What are their pricing and marketing strategies? How similar is their offering? Indirect competition provides the same product or service to a a different target markets Will the business ever move into these markets?

32. Products and Services Competitive overview Identify the competition by product line or service as well as market segment Assess strengths and weaknesses Determine how important the target market is to them Identify barriers to entry into the marketplace How long before new competitors enter into the marketplace What is the window of opportunity?

33. The Market Opportunity Target market Who is the primary target market for the product or service? A group of customers or users with a set of common characteristics distinguishing them from other customers Demographics and buying or usage behavior Who is the secondary market? How are these markets expected to change over the next year? Two years? Five years?

34. The Market Opportunity Sales forecast What is the size of the market? The number of annual purchases they make in products or services similar to the business’ own The geographic areas they reside in Forecasted market growth for this group Are new products or services expected to be introduced in the short term? The long term? Why will the business be able to gain market share? What % in a year? Two years? Five years?

35. The Market Opportunity Market motivations Why is this a good time to be entering this market? How will technological change affect the industry? The marketplace? Ebusiness considerations How will the business take advantage of the Internet and the web? In what ways will the business adapt to using the net in its business processes? What are potential advantages and disadvantages of involvement in ebuisness?

36. Strategy and Implementation What are you offering? Something new: product, service, feature, technology Something better: improving an existing product or service Lower price, more features, greater reliability, faster, safer, increased convenience… An underserved or new market The demand in a market is too great to be handled by existing providers There is a location that is not being served

37. Strategy and Implementation What are you offering? New delivery system or distribution channel Reaching customers more efficiently in a wider area Increased integration Extending control over the supply and or production chain What is the competitive advantage of the offering? This should be answered for all of the reasons for innovating above that apply

38. Strategy and Implementation Operational considerations How will the product or service be produced? What is the supply chain? How will the product or service be distributed? Strategy What will be the advertising and marketing strategy? What channels will be used? What is the sales strategy? How will prospects be identified? How will they be approached?

39. Strategy and Implementation Strategy Marketing activities create and maintain customers Describe any market research that has been done What is the pricing strategy? What is the branding strategy online and offline? How will the product or service be positioned in the marketplace? How will differentiation and competitive advantage be made clear? What is the website strategy?

40. Management Team Key team members Who is on the management team and why are they there? What is their expertise? What will they be doing in the business? Will people from outside the business have to be brought in? If so, what will they do? Advisory Board Who is is and why are they there?

41. Financing Requirements Start up costs How much money is needed to start up the business? What will the money be used for Develop a monthly budget showing fixed and ` variable costs Types of capital Working capital: used to meet variable costs This is very difficult to estimate To be repaid through cash during the business’ next full operating cycle, generally one year

42. Financing Requirements Start up costs Types of capital Growth capital: used to meet needs that are to be repaid with profits over a period of a few years Explain how it will be used to increase profits so that the loan is repaid in several years Equity capital: used to meet fixed costs Typically raised from investors who take the risk for dividends, capital gains or equity in the business Forecasts Offering to investors

43. Financing Requirements Forecasts What can be expected to happen in the marketplace over time? what is the projection for increases in market share? What is the projection for profitability? Offering to investors What stake can be offered to investors? Appendix Additional materials as needed

44. Making a business plan compelling A typical venture capitalist sees 1,000 business plans each year They are practiced at scanning plans and making rapid decisions about whether to read carefully What makes your plan capture his or her attention? What is the most important information for them to see? How the plan is read Executive summary --> Financials --> Management --> Exit plan --> Terms of the deal They are looking for clues about the business idea

45. Making a business plan compelling What they are thinking: Is the business idea solid? Is the market large enough for the product or service? Are the financial projections realistic and in line with the potential investor’s funding patterns? Is the management team experienced and capable enough to carry out the plan? Does the plan explain the return on investment for the investors? Have you answered these questions in the plan?

46. Making a business plan compelling What to keep in mind Make sure the facts are correct - credibility is essential Keep the plan to a reasonable length (between 10-30 pages - aim for 20 + appendices) Time period is 3-5 years with monthly projections for 2 If it’s an existing business provide historical financial data Writing should be realistic and optimistic, avoid jargon and use business language Avoid unsupported superlatives

47. Making a business plan compelling: Executive Summary ~The grab: Lead with the most compelling statement of why you have a really big idea This sets the tone for the plan A concise statement of the unique solution for problem that is be direct and specific, not abstract and conceptual Drop some impressive names if you have them World class advisors, partners, a brand name founding investor

48. Making a business plan compelling: Executive Summary ~The problem: Make it clear that there is a big, important problem that you are going to solve Establish the value proposition Your idea will increase revenues, reduce costs, expand reach ~The solution: What specifically are you offering to whom? Software, hardware, service, combination?

49. Making a business plan compelling: Executive Summary ~The solution: Use commonly used terms to state concretely what you have, or what you do, that solves the problem Where do you fit in the value or distribution chain If you have customers and revenues, make it clear If not, tell the investor when you will ~The opportunity: Provide basic market segmentation, size, growth and dynamics How many people or companies, how many dollars, how fast the growth, and what is driving the segment.

50. Making a business plan compelling: Executive Summary ~Your competitive advantage Explain your real, sustainable competitive advantage Articulate your unique benefits and advantages ~The model How specifically are you going to generate revenues, and from whom? Why is your model leverageable and scaleable? What are the critical metrics on which you will be evaluated—customers, licenses, units, revenues, margin? Where will you be in three to five years?