Chapter 12: Developing an Effective Business Plan
Important Format Issues to Consider when Creating a Business Plan
(1) Appearance (2) Length (3) The Cover and Title Page (4) The Executive Summary (5) The Table of Contents
The 10 Elements of a Business Plan
(1) Executive Summary (2) Business Description (3) Marketing Segment (4) Operations (5) Management (6) Financial (7) Critical Risks (8) Harvest Strategy (9) Milestone Schedule (10) Appendix or Bibliography
Reasons to Update the Business Plan:
(1) Financial Changes (2) Additional Financing (3) Changes in the Market (4) Launch of a New Product or Service (5) New Management Team (6) Reflect the New Reality
Suggestions for the Business Plan Presentation:
(1) Focus on the PAIN for which your venture will be the solution (2) Demonstrate the REACHABLE MARKET instead of a dramatic potential market (3) Explain the BUSINESS MODEL - how this venture is designed to make money (4) Tout the MANAGEMENT TEAM (5) Explain your METRICS - highlight your own metrics used to calculate any revenue projections (6) MOTIVATE the audience- enthusiasm is hugely important (7) Emphasize your CHARACTER and TRUSTWORTHINESS (8) Be COACHABLE - listen clearly and intently to any suggestions or questions; demonstrate your willingness to accept advice and be guided through unseen waters (9) Why YOU and why NOW? - be confident in yourself and in your team
IV. Operatons Segment
(1) Identify location: advantages vs disadvantages (2) Specific operational procedures (how it operates, facilities needed, equipment needed) (3) Personnel needs and uses (4) Proximity to suppliers (number, transportation costs, labor supply, wage rates, needed skilled positions) Cost data associated with all operation factors should be presented.
Questions to Consider When Writing an Effective Business Plan
(1) Is your plan organized so key facts leap out at the reader? (appearances count) (2) Is your product/service and business mission clear and simple? (state the value you will provide to your customers) (3) Are you focused on the right things? (4) Who is your customer? (5) Why will customers buy? How much better is your product/service? (how will the customer benefit from buying your product) (6) Do you have a competitive advantage? (differences and any unique qualities) (7) Do you have a favorable cost structure? (8) Can the management team build a business? (9) How much money do you need? (10) How does your investor get a cash return?
Guidelines to Remember when Creating a Business Plan
(1) Keep the plan respectably short (20-25 pages) (2) Organize and Package the Plan Appropriately (3) Orient the Plan Toward the Future (4) Avoid Exaggeration (best-case, worst-case, probable-case) (5) Highlight Critical Risks (6) Give Evidence of an Effective Entrepreneurial Team (7) Do Not Over-Diversify (focus attention on one main opportunity) (8) Identify the Target Market (9) Keep the Plan Written in the Third Person (avoid personalizing the plan) (10) Capture the Reader's Interest (highlight the uniqueness of the venture)
Presenation of the Business Plan: The Elevator Pitch
(1) Know the outline thoroughly (2) Use keywords in the outline that help recall examples, visual aids, or other details (3) Rehearse the presentation to get a feel for its length (4) Be familiar with any equipment to be used in the presentation - use your own laptop (5) The day before, practice the complete presentation by moving through each slide
Five Most Common Pitfalls Experienced by Entrepreneurs
(1) No realistic goals (2) Failure to anticipate roadblocks (3) No commitment or dedication (4) Lack of demonstrated experience (Business or Ethical) (5) No Market Niche (segment)
A business plan provides the following benefits to financial sources:
(1) The business plan provides the details of the market potential and plans for securing a share of the market (2) Through prospective financial statements, the business plan illustrates the venture's ability to service debt or provide an adequate return on equity (3) The plan identifies critical risks and crucial events with a discussion of contingency plans that provide opportunity for the venture's success (4) By providing a comprehensive overview of the entire operation, the business plan gives financial sources a clear, concise document that contains the necessary information for a thorough business and financial evaluation (5) For a financial source with no prior knowledge of the entrepreneur or the venture, the business plan provides a useful guide for assessing the individual entrepreneur's planning and managerial ability
Three Main Viewpoints to Understand when Developing a Business Plan:
(1) The entrepreneur's - has the most in-depth knowledge of the technology or the creativity involved (2) The marketplace - demonstrate the benefits to users and the existence of a substantial market (3) Investor's - concentrated on the financial forecast; sound financial projections are necessary for the investor to evaluate the worth of their investment
One of the major benefits of a comprehensive business plan:
Helps an enterprise avoid common pitfalls that often undo all previous efforts.
Variable Costs
These costs vary depending on the amount of production of goods or services Ex: music festivals
VIII. Harvest Strategy
This section should outline the entrepreneur's preparedness for: - Liquidity event (IPO or sale) - Continuity of business strategy - Identify successor This section deals with management succession and investor exit strategies, in the events of ownership and/or management changes.
Warning signs of Pitfall #5: No Market Niche (segment)
Uncertainty about who will buy the basic idea (s) behind hte venture, no proof of a need or desire for the good or product proposed, and an assumption that customers or clients will purchase just because the entrepreneur thinks so. How to Avoid: have a market segment specifically targeted and to demonstrate why and how the specific product or service will meet the needs or desires of this target group.
Warning signs of Pitfall #1: No realistic goals
lack of any attainable goals, lack of a time frame to accomplish things, lack of priorities, and lack of action steps. How to Avoid: set up a timetable of specific steps to be accomplished during a specific period
Warning signs of Pitfall #2: Failure to anticipate roadblocks
no recognition of future problems, no admission of possible flaws or weaknesses in the plan, and no contingency or alternative plans. How to Avoid: List (1) the possible obstacles that may arise and (2) the alternatives that state what might have to be done to overcome the obstacles
A business plan provides the following benefits to the entrepreneur:
(1) The time, effort, research, and discipline needed to put together a formal business plan force the entrepreneur to view the venture critically and objectively (2) The competitive, economic, and financial analyses included in the business plan subject the entrepreneur to close scrutiny of his assumption's about the venture's success (3) Because all aspects of the business venture must be addressed in the plan, the entrepreneur develops and examines operating strategies and expected results for outside evaluators (4) The business plan quantifies objectives, providing measurable benchmarks for comparing forecasts with actual results (5) The completed business plan provides the entrepreneur with a communication tool for outside financial sources as well as an operational tool for guiding the venture toward success
Nine Components of a Business Model/Business Model Canvas
(1) Value Proposition (2) Customer Segments (3) Channels (4) Customer Relationships (5) Revenue Streams (6) Key Activities (7) Key Resources (8) Key Partners (9) Cost Structure
Customer Segments
- Different groups of people or entities that the venture aims to reach and serve - Can be based on the different needs and attributes to match implementation of corporate strategy to the characteristics of the selected group of clients
II. Business Description
- General description of business (name, special significance of name) - Industry background (current status and future trends) - Goals and potential of the business and milestones (define key terms, provide functional specificatons) - Uniqueness of product or service (advantage over competition, patents, copyrights, trademarks, special technologies or market advantages)
Value Proposition
- Products and services that create value for a specific customer segment - Distinguishes a new venture from potential competition Elements that can provide value: newness, performance, customization, design, brand, status, price, risk education, accessibility, and convenience or usability
I. Executive Summary
- Summary of the business plan featuring its most important parts - Must present the quality of the entire report; must be a clever snapshot of the complete plan; must capture reader's interest - Briefly touch on: venture itself, market opportunities, financial needs and projections, any special research or technology associated with the venture
Revenue Streams
- The cash a new venture proposes to generate from the particular customer niche Ex: selling an item, service fees, subscription fees, lease or rental income, licensing fees, or advertising income.
Key Resources
- The most important assets required to make the business model work and create value for the customer. - Sustain and support the business model Ex: human, financial, physical, or intellectual
Key Activities
- The most important elements that a venture must do to make its business model work Ex: If lower prices are the unique value proposition then creating an efficient supply chain to drive down costs would be an example of this.
Cost Structure
- The most significant costs incurred to operate the business model Charcteristics include: fixed costs, variable costs, economies of scale, economies of scope
Key Partners
- The network of suppliers and partners that optimize operations and reduce risks to make the business model work Note: complementary alliances can also be considered through joint ventures or strategic alliances with other firms.
Customer Relationships
- The types of relationships a venture establishes with specific customer segments - Ensures survival and success of any business venture Ex: Personal assistance, self-service, automated services, or community platforms
Business Plan
- The written document that details the proposed venture. - Describes current status, expected needs, and projected results of the new business - what the venture is, where it is projected to go, how it is going to get there. - Includes the project, marketing, research and development (R&D), management, critical risks, financial problems, and milestones/time table. - Road map for a successful enterprise Alternative names: venture plan, loan proposal, investment prospectus
Channels
- Ways the venture communicates with and reaches its customer segments - Effective ones will distribute a venture's value proposition in ways that are fast, efficient, and cost effective Ex: Opening a store, using major distributors, or a combination of both.
Business Model
A description of how a venture will create and deliver value.
III-A. Market Niche
A homogenous group with common characteristics - i.e., all the people who have a need for the newly proposed product or service - Should address the bases of customer purchase decisions: price, quality, service, personal contacts, or some combination. - Should include a competitive analysis, marketing strategy, pricing policy, and advertising plan
III-A3. Pricing Policy
A number of pricing strategies should be examined, and one should be convincingly presented: - should be compared with pricing policies of major competitors - discuss the gross profit margin between manufacturing and final sales costs
Business Model Canvas
A structured brainstorming tool entrepreneurs can use to define and understand the strategic focus and the questions that need to be answered for each of the nine business building blocks.
III-A1. Competitive Analysis
Assesses the strengths and weaknesses of competing products or services on the basis of: - price - performance - service - warranties - any other pertinent features Should also include a review of competing companies: - share of the market - sales - distribution and production capabilities Focus attention on profitabilty and profit trend of each competitor.
Warning signs of Pitfall #3: No commitment or dedication
Copying the latest social media craze, no interest in researching the idea, no desire to invest personal money, and the appearance of making a "fast buck" from an "app" or a "whim". How to Avoid: act quickly and to be sure to follow up all professional appointments; be ready and willing to demonstrate a financial commitment to the venture.
Fixed Costs
Costs are unchanged across different applications. Ex: salary, rent
Economies of Scale
Costs go down as the amount of goods ordered or produced goes up.
Economies of Scope
Costs go down due to incorporating other businesses that have a direct relation to the original product
III. Marketing Segment
Must convince investors a market exists, sales projections can be achieved, and competition can be beaten: - Research and analysis showing: 1. Target market (customers) identified 2. Market size and trends 3. Competition 4. Estimated market share
VI. Financial
Must demonstrate the potential viability of the venture. Must inlcude: - the pro forma balance sheet - the income statement - the cash-flow statement (maybe the most important document in new-venture creation) - break-even analysis - cost controls - budget plans Important to mention any assumptions used to prepare the figures.
Warning signs of Pitfall #4: Lack of Demonstrated Experience (business or ethical)
No experience in business, no experience in the specific area of the venture, lack of understanding of the industry in which the venture fits, and failure to convey a clear picture of how and why the venture will work and who will accept it. How to Avoid: give evidence of personal experience and background for the venture.
X. Appendix / Bibliography Segment
Not mandatory, but allows for additional documentation that is not appropriate in the main parts of the plan: - diagrams - blueprints - financial data - vitae of management team members - bibliographical information that supports the other segments of the plan Up to the entrepreneur to decide which items to put into this segment; material should be limited to relevant and supporting information.
VII. Critical Risks Segment
Should identify: (1) Potential external problems (unfavorable trends in the industry, design or manufacturing costs that have gone over estimates, difficulties of long lead times, un-planned for new competition) (2) Obstacles and risks (competition cuts prices, industry slumps, market projections are wrong, sales projections are not achieved, patents do not come through, or the management team breaks up) (3) Alternative courses of action (investors will want to know that the entreprenuer recognizes these risks and has prepared for such critical events)
III-A2. Marketing Strategy
Outlines the general marketing philosophy and approach of the company through a discussion of: (1) the kinds of customer groups to be targeted by the initial intensive selling effort (2) the customer groups to be targeted for later selling efforts (3) methods of identifying and contacting potential customers in these groups (4) the features of the product or service to be emphasized to generate sales (5) any innovative or unusual marketing concepts that will enhance customer acceptance
IX. Milestone Schedule
Provides investors with a timetable for the various activities to be accomplished: - realistic time frames planned - interrelationship of events within these time boundaries is understood The more detailed the schedule, the more likely the entrepreneur will persuade potential investors that they have thought things out, and are therefore a good risk
V. Management Segment
Should clearly discuss: (1) Organizational structure (2) Management team and critical personnel (including an outline of the entrepreneur's role in the venture) (3) Experience and technical capabilities of the personnel (their positions, responsbilities, and experiences that qualify them) (4) Ownership structure and compensation agreements (stock agreements, consulting fees, etc.) (5) Board of Directors and outside consultants and advisors
IIIA-4. Advertising Plan
Should include: (1) discussion of the advertising and promotional campaign contemplated to intorduce the product and the kinds of sales aids to be provided to dealers (2) Schedule and cost of promotion and advertising
Five-Minute-Reading Process Venture Capitalists Use
Step 1: Determine the characteristics of the venture and its industry Step 2: Determine the financial structure of the plan (amount of debt or equity financing involved) Step 3: Read the latest balance sheet (to determine liquidity, net worth, and debt/equity) Step 4: Determine the quality of entrpreneurs in the venture (sometimes the most important step) Step 5: Establish the unique feature in this venture (find out what is different) Step 6: Read over the entire plan lightly (this is when the entire package is paged through for a casual look at graphs, charts, exhibits, and other plan components)
The comprehensive business plan is the major tool for, and the primary document for:
determining the essential operation of a venture and managing the venture, respectively.