Business Plans

1. Business Plans STS 315/Psych 418 Larry G. Richards April 13, 2006 Larry G Richards

2. Creating a successful business plan • Chapter 5 of The Portable MBA in Entrepreneurship, David E. Gumpert • The Successful Business Plan: Secrets and Strategies, Rhonda Adams Larry G Richards

3. Defining a business plan • Good: “A business plan is a document that convincingly demonstrates the ability of your business to sell enough of its product or service to make a satisfactory profit and be attractive to potential backers.” Larry G Richards

4. Defining a business plan • Better “ A business plan is a selling document that conveys the excitement and promise of your business to any potential backers or stakeholders.” Larry G Richards

5. Why write a business plan? • To sell yourself on the business • To obtain bank funding • To obtain investment funds • To arrange strategic alliances Larry G Richards

6. Why write a business plan? • To obtain large contracts • To attract key employees • To complete mergers and acquisitions • To motivate and focus your management team Larry G Richards

7. What should business plan cover? • Cover Page • Company name and address • Main Contact • Phone number • Confidentiality note • Visual Larry G Richards

8. What should business plan cover? • Table of Contents • Executive Summary • The Company • The Market • The product/service • Sales and promotion • Finances • Appendices Larry G Richards

9. Executive Summary • NOT • an abstract • an introduction • a preface • a random collection of highlights • “ the business plan in miniature” • “capture the excitement and essence of the business” Larry G Richards

10. Executive Summary • at most 2 pages • longer is not a summary • don’t dilute your message • This is all most people will read. • It may constitute the basis for their decision. Larry G Richards

11. Your Company • What’s your identity? • Business strategy • Your overall approach to producing and selling your product. • Current status • Future goals • Management team Larry G Richards

12. Presenting your product • A good name • for the product • for the company • Graphics, animations, videos • logo • advertising • Your Message, a theme for your ads Larry G Richards

13. Marketing Issues • Who will buy your product? • How do you know? • Market research • Competitive environment • “Marketing is identifying your customer prospects and determining how best to reach them.” Larry G Richards

14. Market research • Is there a market for your product? • How big is it? • Estimate actual numbers • How much of it can you capture? • Is it stable or changing? • Growing or shrinking? • “Is it worth your while?” Larry G Richards

15. Advertising • Where ? • How ? • What message? • How to differentiate your product? Larry G Richards

16. Selling • “Selling is convincing these prospects to buy.” • What are you really selling? • What benefits are you selling to the customer? • Quantify them. • Develop a promotional theme. • Identify prospective customers Larry G Richards

17. Selling • Creating an image • Delivering on the promise • Maintaining your reputation Larry G Richards

18. How are you going to convince potential investors that they can make money investing in your company and product? Larry G Richards

19. Investors concerns • How long? How quickly will your company start to make a profit? • How much? What Rate of Return can your investors expect? Larry G Richards

20. Can you make money from your idea? Larry G Richards

21. Costs and Prices • 4 to 1 rule: “ A general rule in retail is that the retail price is four times your manufacturing cost, and that you sell it to the retailer for two times your manufacturing cost. “ • Bolanos and Lewis Larry G Richards

22. Bill of Materials • Preliminary • estimates • first approximation of product cost • components • assembly • Final • solid figures • DFM/A analysis Larry G Richards

23. How to estimate costs • Work backwards from existing products • Price / 4 • # of components • relative costs of components • Obtain several estimates • Establish upper bounds • Refine estimates based on new information Larry G Richards

24. If costs are too high, • look for ways to reduce costs • outsource - have someone else make it • compromise design • abandon idea (for now) Larry G Richards

25. Strategies for Reducing Costs • examine high priced components • eliminate parts • use less expensive materials • buy off-the -shelf components • conduct cost/benefit analysis on product features: are any expensive features low on customer importance list • redesign / simplify Larry G Richards

26. Financial Model • Start from the Bill of Materials • Include costs of • production • packaging • distributing • advertising • marketing/selling • service/warranty/maintenance? Larry G Richards

27. Financial Model • Clearly state your assumptions • Note which numbers are estimates • Indicate your confidence/uncertainties • Create a spreadsheet • Perform sensitivity analysis • Predict your future profits Larry G Richards

28. Base Case Model • development costs • ramp-up costs • marketing and support costs • production costs • production volume • revenues • timing and schedule of above cash flows Larry G Richards

29. Uses of Financial Model • Go / no go decisions • should we proceed? • Sensitivity analysis • What if our assumptions are incorrect? • Trade-offs • Qualitative factors • changes in competitive environment • technological developments Larry G Richards

30. Where to get help • State Economic Development Offices • Small Business Administration • Departments of Commerce • Chamber of Commerce • Service Core of Retired Executives • Virginia Center for Innovative Technology • Local alliances and coalitions • University and college sources Larry G Richards

31. Exercise :Ulrich and Eppinger • Can you think of some successful products that would never have been developed if their creators had relied exclusively on a quantitative financial model to justify their efforts? • Do these products share any characteristics? Larry G Richards