Business plan

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CHAPTER

6 The Business Plan:

Visualizing The Dream

LEARNING OBJECTIVES

By studying this chapter, you should be able to… 6-1 Explain the purpose and objectives of business plans. 6-2 Give the rationale for writing (or not writing) a business plan

when starting a new venture. 6-3 Explain the concept and process for developing a firm’s

business model. 6-4 Describe the preferred content and format for a business plan. 6-5 Offer practical advice on writing a business plan. 6-6 Understand how to present to investors. 6-7 Identify available sources of assistance in preparing a business

plan.

6-1 AN OVERVIEW OF THE BUSINESS PLAN

• Business plan – A document that outlines the basic concept underlying a business and describes how that concept will be realized.

• Writing a business plan is an opportunity to assess if a good idea is also a good investment opportunity. • It does so by providing evidence that your business

can sell enough products or services to make an attractive profit.

6-1a Key Elements of the Business Plan

• At a minimum, every business plan should include the following three key elements: 1. A logical statement of a problem and its solution. 2. A significant amount of hard evidence. 3. Candor about the risks, gaps, and assumptions

that might be proved wrong.

6-1b The Business Plan as a Tool

• Two important groups are users of business plans: 1. Company insiders.

• They use the plan as a framework to focus on important issues and activities.

2. Outsiders. • They use the plan to determine whether they will partner

with the firm.

6.1 Users of Business Plans

6-2 WILL WRITING A PLAN MAKE A DIFFERENCE?

• Studies attempting to measure whether entrepreneurs who have business plans do better than those who don’t have produced mixed results. • Some findings suggest a relationship; others do not.

6-2a The Business Plan Is Not the Business (slide 1 of 2)

EXECUTION MATTERS • Business plans are not effective if not executed. • An entrepreneur must find the right balance between planning and

becoming operational.

LISTENING MATTERS • Lean startup – An iterative process that aims to shorten the product

development process by beginning small, trying out a minimally-viable product or service with customers, and then making changes based on what you learn; also, called the build-measure-learn loop.

• Instead of engaging in months of planning and research, the entrepreneur should accept that all he or she has at the beginning of a new venture are untested hypotheses.

• Pivoting – Refocusing or recreating a startup if the initial concept turns out to be flawed.

6-2a The Business Plan Is Not the Business (slide 2 of 2)

CONTEXT MATTERS • An extensive business plan may not be very helpful when:

• The environment is too turbulent for extensive planning to be beneficial.

• The timing of the opportunity is a critical factor and becoming operational as quickly as possible may have to take priority over in- depth planning.

• A business may be so constrained by a shortage of capital that planning is not an option.

• Most entrepreneurs need the discipline that comes with writing a business plan. • A written plan helps to ensure systematic, complete coverage of the

important factors to be considered in starting a new business.

6-2b What Form Will the Business Plan Take?

• In addition to deciding when to plan, an entrepreneur must choose the form that the planning will take. • Preparing a plan requires time and money, two

resources that are always in short supply. • The entrepreneur has two basic choices when it

comes to writing a business plan: 1. Short plan – An abbreviated business plan that presents

only the most important issues in a firm’s success. 2. Comprehensive plan – A complete business plan that

provides an in-depth analysis of the critical factors that will determine a firm’s success or failure, along with the underlying assumptions.

6-3 BEGIN WITH THE BUSINESS MODEL

• The business model serves as the foundation of the business plan. • Without a good business model, there can be no

good business plan.

6-3a What Is a Business Model?

• Business model – An analysis of how a firm plans to create profits and cash flows given its revenue sources, its cost structures, the required size of investment, and sources of risk.

• The business model measures the anticipated results of the core business decisions and activities that determine a company’s profits and cash flows.

6-3b Creating a Business Model (slide 1 of 7)

• Existing firms frequently revise or adapt existing business models.

• A startup must create or discover its business model, which means there is greater uncertainty in the process.

• Creating a business model forces an entrepreneur to be disciplined and avoid wishful thinking about financial projections.

6.2 Basic Business Model Framework

6-3b Creating a Business Model (slide 2 of 7)

THE PROCESS • Four key elements make up the business model:

1. The revenue model. 2. Cost structures. 3. Required resources to grow the business. 4. Business model risk.

REVENUE MODEL • Revenue model – A component of the business

model that identifies the nature and types of a company’s sources of revenue.

6-3b Creating a Business Model (slide 3 of 7)

• The following are common revenue models: • Volume or unit-based revenue model.

• Customers pay a fixed price per unit in exchange for a product or service.

• Subscription/membership revenue model. • Customers pay a fixed amount at regular intervals, prior to

receiving a product or service. • Advertising-based revenue model.

• Customers pay based on cost per impression, cost per click, or cost per acquisition.

• Licensing revenue model. • Customers pay a one-time licensing fee to be able to use or

resell the product or service.

6-3b Creating a Business Model (slide 4 of 7)

• Actual revenue streams can also be classified: • Single stream.

• A firm’s revenues come from a single product or service. • Multiple streams.

• A business realizes revenues from a combination of multiple products and services.

• Independent streams. • Revenues come from selling one or more products or services to

generate revenues from other products or services. • Loss leader.

• One or several revenue streams are sold at a loss to create sales in a profitable revenue stream.

6-3b Creating a Business Model (slide 5 of 7)

• An important part of the revenue model is the value proposition. • Value proposition – A statement of how a company creates

value for its customers compared with its competitors, which provides the basis for the company’s competitive advantage.

• In other words, it lets readers of the business plan know exactly what the entrepreneur will do for his or her customers that no other company currently does for them.

COST STRUCTURES • Cost structures – A component of the business

model that provides a framework for estimating a firm’s cost of goods sold and operating expenses.

6-3b Creating a Business Model (slide 6 of 7)

• Costs and expenses can be classified in terms of the following: • Fixed costs.

• Costs that do not vary at all with volume. • Example: Rent expense.

• Variable costs. • Expenses that vary directly and proportionately with changes in

volume. • Example: Sales commissions.

• Semi-variable costs. • Expenses that include both variable costs and fixed costs. • These costs vary in the direction of, but not proportionately with,

changes in the volume of sales. • Example: Certain types of payrolls that change as a firm becomes

larger but do not change proportionally with sales changes.

6-3b Creating a Business Model (slide 7 of 7)

KEY RESOURCE REQUIREMENTS • Key resource requirements – The types and amounts of

resources required to achieve positive profits and cash flows. • Resources include the amount of investment in hard assets, such as

equipment and buildings, as well as the amount of working capital in the form of cash, accounts receivable, and inventory.

• Critical resources also include the key partners, including employees, buyers, suppliers, and investors, and the intellectual property needed to achieve the business’s success.

BUSINESS MODEL RISK • Business model risk – A component of the business model that

identifies potential risks in the model and how the model can adjust to them.

6-4 PREPARING A BUSINESS PLAN: THE CONTENT AND FORMAT

• A comprehensive business plan should consider the following key factors: 1. The opportunity. 2. Critical resources. 3. The entrepreneurial team. 4. The financing structure. 5. The context.

• Thus, the business plan will need to demonstrate that the entrepreneur has pulled together the right opportunity, the right resources, the right people, and the right financing structure.

6.3 Key Factors for Success

6.4 Abbreviated Business Plan Outline (slide 1 of 3)

Section Heading Information Provided Cover Page Company name, logo, tagline, contact information, copy

number, date prepared, and disclaimer (if needed) Table of Contents Listing of the key sections of the business plan Executive Summary One- to three-page overview of the significant points,

intended to motivate the reader to continue reading Company Description

Company objectives, the nature of the business, its primary product or service, its current status (startup, buyout, or expansion) and history (if applicable), and the legal form of organization

Industry, Target Customer, and Competitor Analysis

Key characteristics of the industry, including the different segments, and the niche where you plan to compete

6.4 Abbreviated Business Plan Outline (slide 2 of 3)

Section Heading Information Provided Product/Service Plan

Justification for why people will buy the product or service, based on its unique features

Marketing Plan Marketing strategy, including the methods of identifying and attracting customers, selling approach, type of sales force, distribution channels, types of sales promotions and advertising, and credit and pricing policies

Operations and Development Plan

Operating or manufacturing methods, operating facilities (location, space, and equipment), quality-control methods, procedures to control inventory and operations, sources of supply, and purchasing procedures

Management Team Description of the management team, outside investors and/or directors, and plans for recruiting and training employees

6.4 Abbreviated Business Plan Outline (slide 3 of 3)

Section Heading Information Provided Critical Risks Any known inherent risks in the venture Offering How much capital the entrepreneur needs and how the

money will be used (section used to attract investors) Exit Strategy Ways an investor—and the entrepreneur—may be able

to harvest their business investment Financial Plan Contemplated sources of financing; any historical

financial statements, if available; pro forma financial statements for three to five years, including income statements, balance sheets, cash flow statements, and cash budgets

Appendix of Supporting Documents

Various supplementary materials and attachments to expand the reader’s understanding of the plan

6-4a Cover Page

• The cover page should contain the following information: • Company name, address, phone number, and website. • Tagline and company logo. • Name of contact person with mailing address, phone number,

and e-mail address. • Date on which the business plan was prepared. • If the plan is being given to investors, a disclaimer that the

plan is being provided on a confidential basis to qualified investors only and is not to be reproduced without permission.

• Number of the copy.

6-4b Table of Contents

• The table of contents provides a sequential listing of the sections of the plan, with page numbers.

6.5 Table of Contents for BlueAvocado’s Business Plan

Table of Contents 1.0 Introduction 2.0 The Company 3.0 Market Opportunity 4.0 Product Overview 5.0 Lauren Conrad Partnership 6.0 Technology Initiatives 7.0 Supply Chain 8.0 Marketing/Sales Plan 9.0 Financial Overview

10.0 People 11.0 Sustainability Issues 12.0 Conclusion/Contact Appendices

Source: BlueAvocado, Co. Reprinted with permission.

6-4c Executive Summary (Overview) (slide 1 of 2)

• Executive summary (overview) – A section of the business plan that conveys a clear and concise overall picture of the proposed venture and creates interest in the venture.

• The executive summary should be written last. • In no more than three (preferably two) pages, the executive

summary should include the following subsections: • A description of the opportunity. • An explanation of the business concept. • An industry overview. • The target market. • The competitive advantage you hope to achieve in the market. • The economics of the opportunity. • The management team. • The amount and purpose of the money being requested (the

“offering”), if you are seeking financing.

6-4c Executive Summary (Overview) (slide 2 of 2)

• The executive summary may be in the form of a synopsis or a narrative. • A synopsis briefly covers all aspects of the business plan, giving

each topic relatively equal treatment. • The narrative tells a story.

• In deciding which format to use, consider the following: • Composing an effective narrative requires a gifted writer who can

communicate the necessary information and generate enthusiasm without crossing the line into hype.

• A narrative is more appropriate for businesses that are breaking new ground with a new product, a new market, or new operational techniques.

• Ventures that have one dominant advantage find the narrative format to be effective.

• A narrative works well for companies with interesting or impressive backgrounds or histories.

6.6 BlueAvocado Overview

6-4d Company Description (slide 1 of 2)

• In writing this section, the entrepreneur should answer the following questions: • When and where is the business to be started? • What is the history (if any) of the company? • What are the firm’s objectives? • What changes have been made in structure and/or

ownership? • In what stage of development is the firm—for example, seed

stage or full product line? • What has been achieved to date? • What is the firm’s competitive advantage or distinctive

competence?

6-4d Company Description (slide 2 of 2)

• What are the basic nature and activity of the business? • What is its primary product or service? • What customers will be served? • What is the firm’s form of organization—sole proprietorship,

partnership, limited liability company, corporation, or some other form?

• What are the current and projected economic states of the industry?

• Does the firm intend to sell to another company or an investment group? Does it plan to be a publicly traded company, or do the owners want to transfer ownership to the next generation of the family?

6-4e Industry, Target Customer, and Competitive Analysis

• The primary purpose of this section is to present the opportunity and demonstrate why there is a significant market to be served.

• This section should: • Describe the broader industry in which the business will be

competing, including industry size, growth rate, fundamental trends, and major players.

• Identify the different segments of the industry. • Describe the niche in which the business will be participating. • Provide the context of the opportunity and demonstrate that a market

segment is being underserved. • Describe target customers in terms of demographics and

psychological variables, such as their values, their attitudes, and even their fears.

• Analyze competitors in terms of product or service attributes that they offer or are failing to provide.

6-4f Product/Service Plan

• Product/service plan – A section of the business plan that describes the product and/or service to be provided and explains its merits.

6-4g Marketing Plan

• Marketing plan – A section of the business plan that describes how the firm will reach and service customers within a given market.

• This section should include the following topics: • Methods of identifying and attracting customers. • Pricing strategies. • Selling approach. • Types of sales force. • Distribution channels.

6-4h Operations and Development Plan

• Operations and development plan – A section of the business plan that offers information on how a product will be produced or a service provided, including descriptions of the firm’s facilities, labor, raw materials, and processing requirements.

6-4i Management Team Section

• Management team section – A section of the business plan that describes a new firm’s organizational structure and the backgrounds of its key employees.

6-4j Critical Risks Section

• Critical risks section – A section of the business plan that identifies the potential risks that may be encountered by an investor.

• Common risks include: • A lack of market acceptance. • Competitor retaliation. • Longer time period and higher expenses than

expected to start and grow the business. • Inadequate financing. • Government regulations.

6-4k Offering

• Offering – A section of the business plan that indicates to an investor how much money is needed, and when and how the money will be used.

6-4l Exit Strategy

• Exit strategy section – A section of the business plan that focuses on options for cashing out of the investment.

6-4m Financial Plan

• Financial plan – A section of the business plan that projects the company’s financial position based on well-substantiated assumptions and explains how the figures have been determined.

• Pro forma statements – Projections of a company’s financial statements for up to five years, including balance sheets, income statements, and statements of cash flows, as well as cash budgets.

6-5 ADVICE FOR WRITING A BUSINESS PLAN

• The following are recommendations for writing an effective business plan: • Know your customers well. • Recognize your competition. • Provide solid evidence for any claims you are making. • Think like investors think. • Identify potential fatal flaws. • Maintain confidentiality, when appropriate. • Pay attention to the details.

• Use good grammar. • Limit the presentation to a reasonable length. • Go for an attractive, professional appearance. • Describe your product or service in lay terms.

6-6 PITCHING TO INVESTORS (slide 1 of 3)

• In addition to having a written business plan, an entrepreneur seeking capital from investors may be asked to give a pitch. • Pitch – An oral presentation of the business idea to investors. • Frequently, the entrepreneur is given 15 to 20 minutes to

present, followed by about the same amount of time for questions and answers.

• What investors want to know is relatively straightforward, as is the order in which they want to see the topics in the pitch.

• Also, the essential topics that need to be covered are the same for most businesses.

6-6 PITCHING TO INVESTORS (slide 2 of 3)

• Caroline Cummings at Palo Alto Software suggests that 12 PowerPoint slides be prepared to accompany the pitch: 1. Identify the problem to be solved. 2. Introduce your solution to the problem. 3. Discuss your beginning traction for getting sales. 4. Identify the target market. 5. Explain the costs of acquiring customers in your target market. 6. Communicate the value proposition relative to competitors. 7. Describe the basics of the revenue model. 8. Provide financial projections, along with the assumptions. 9. Sell the team. 10. Identify your funding needs, and explain the use of the funds. 11. Describe possible exit strategies. 12. End on a high note—remind investors why your

product/service/team is so great.

6-6 PITCHING TO INVESTORS (slide 3 of 3)

• Guy Kawasaki’s 10/20/30 rule provides guidelines for the pitch: • Have only 10 presentation slides. • Limit the presentation to 20 minutes. • Use a 30-point font in your slides.

6-7 RESOURCES FOR BUSINESS PLAN PREPARATION

• A variety of books, websites, and computer software packages are available to assist in the preparation of a business plan.

6-7a Computer-Aided Business Planning

• Numerous business plan software packages have been designed to help an entrepreneur think through the important issues in starting a new company and organize his or her thoughts to create an effective presentation. • However, while they can facilitate the process,

software packages in and of themselves are not capable of producing a unique plan.

• In fact, they can limit an entrepreneur’s creativity and flexibility if not used properly.

6-7b Professional Assistance

• Professionals with planning expertise, such as attorneys, accountants, and marketing specialists, can provide useful suggestions and assistance in the preparation of a business plan.

• The Small Business Administration (SBA), the Service Corps of Retired Executives (SCORE), and the Kauffman FastTrac entrepreneurial training program can also be helpful.

Key Terms business model business model risk business plan comprehensive plan cost structures critical risks section executive summary (overview) exit strategy section financial plan key resource requirements lean startup

management team section marketing plan offering operations and development plan pitch pivoting product/service plan pro forma statements revenue model short plan value proposition

�CHAPTER�6��The Business Plan: Visualizing The Dream
LEARNING OBJECTIVES
6-1 AN OVERVIEW OF THE BUSINESS PLAN
6-1a Key Elements of �the Business Plan
6-1b The Business Plan as a Tool
6.1 Users of Business Plans
6-2 WILL WRITING A PLAN �MAKE A DIFFERENCE?
6-2a The Business Plan �Is Not the Business (slide 1 of 2)
6-2a The Business Plan �Is Not the Business (slide 2 of 2)
6-2b What Form Will the �Business Plan Take?
6-3 BEGIN WITH �THE BUSINESS MODEL
6-3a What Is a Business Model?
6-3b Creating a Business Model �(slide 1 of 7)
6.2 Basic Business Model Framework
6-3b Creating a Business Model �(slide 2 of 7)
6-3b Creating a Business Model �(slide 3 of 7)
6-3b Creating a Business Model �(slide 4 of 7)
6-3b Creating a Business Model �(slide 5 of 7)
6-3b Creating a Business Model �(slide 6 of 7)
6-3b Creating a Business Model �(slide 7 of 7)
6-4 PREPARING A BUSINESS PLAN: THE CONTENT AND FORMAT
6.3 Key Factors for Success
6.4 Abbreviated Business Plan Outline (slide 1 of 3)
6.4 Abbreviated Business Plan Outline (slide 2 of 3)
6.4 Abbreviated Business Plan Outline (slide 3 of 3)
6-4a Cover Page
6-4b Table of Contents
6.5 Table of Contents for Blue Avocado’s Business Plan
6-4c Executive Summary (Overview) (slide 1 of 2)
6-4c Executive Summary (Overview) (slide 2 of 2)
6.6 Blue Avocado Overview
6-4d Company Description (slide 1 of 2)
6-4d Company Description (slide 2 of 2)
6-4e Industry, Target Customer, and Competitive Analysis
6-4f Product / Service Plan
6-4g Marketing Plan
6-4h Operations and �Development Plan
6-4i Management Team Section
6-4j Critical Risks Section
6-4k Offering
6-4l Exit Strategy
6-4m Financial Plan
6-5 ADVICE FOR WRITING �A BUSINESS PLAN
6-6 PITCHING TO INVESTORS �(slide 1 of 3)
6-6 PITCHING TO INVESTORS �(slide 2 of 3)
6-6 PITCHING TO INVESTORS �(slide 3 of 3)
6-7 RESOURCES FOR �BUSINESS PLAN PREPARATION
6-7a Computer-Aided �Business Planning
6-7b Professional Assistance
Key Terms