For A-Plus Writer Only

References

Hisrich, R.D., Peters, M.P., & Shepherd, D.A. (2013). Entrepreneurship (Laureate Custom

Education). New York: McGraw-Hill Irwin.

Custom Create Edition LAUREATE EDUCATION INC

196 -1 Entrepreneurship

THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE

1 To define what the business plan is, who prepares it, who reads it, and how it is

evaluated.

2 To understand the scope and value of the business plan to investors, lenders, employees,

suppliers, and customers.

3 To identify information needs and sources for each critical section of the business plan.

4 To enhance awareness of the value of the Internet as an information resource and

marketing tool.

5 To present examples and a step-by-step explanation of the business plan.

6 To present helpful questions for the entrepreneur at each stage of the plann ing process.

7 To understand how to monitor the business plan.

I ___________ Ent~:?...':~n-~~s_h~_'__~~~h_th_E~i-tio_o -~-7- __ _

OPENING PROFILE

BELINDA GUADARRAMA

The business plan, although it is often criticized as being "dreams of glory," is

probably the single most important document to the entrepreneur at the start-up

stage. Potential investors are not likely to consider investing in a new venture until

the business plan has been completed. In addition, the business plan helps the en-

trepreneur maintain perspective as to what needs to be

accomplished. • • The development and preparation of a business plan

can entail many obstacles and takes a strong commitment

by an entrepreneur before it can actually be completed and then implemented. No

one knows this better than Belinda Guadarrama, the president and CEO of GC Micro

Corporation. Her company supplies computer hardware and software to Fortune 1000

companies as well as the defense and aerospace industry.

As the entrepreneur of this now multi-million-dollar company, Belinda has been

recognized by two Hispanic organizations-the U.S. Hispanic Chamber of Commerce

and the Latin Business Association-as Hispanic Businesswoman of the Year 2002.

Her firm has been consistently ranked among the 500 largest Hispanic-owned

companies, and in 2008 it received the Boeing Performance Excellence Award and

the U.S. Department of Agriculture Woman-Owned Business Contractor of the Year

award.

Although today she is a successful entrepreneur, the journey was a long and ardu-

ous process with a number of highs and lows. After graduating from Trinity University

and taking a number of graduate courses at the University of Texas at Austin, she be-

gan working for the Texas attorney general as the director of personnel and training.

She later moved to California during the 1980s technology boom to work for a mail-

order software company. Like many others, she arrived at work one day to find a note

on the door indicating that the business was closed.

At that point Belinda made the decision to start her own business. She felt it was a

great time to take some risks since she had no job and limited prospects. In 1986, with

a few former co-workers, she launched GC Micro Corporation. To raise initial capital

and money for other expenses while a business plan was being developed, she sold

her house and cashed in her retirement money. She made a conscious decision at this

187

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188 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

point to put everything on the line . Eventually, with business plan in hand, she began

knocking on doors to try to raise money for the start-up. It was then that she began

to face some of the lows in the entrepreneurial process as she incurred one rejection

after another. She could not even get a bank to lend her $5,000 to keep going. Fortu-

nately, she persisted until she came upon the Small Business Admin istration (SBA) loan

program that guarantees a large percentage of a loan through a local participating

bank. After submitting her plan through this program, she received her first loan

from a local bank.

Raising the start-up capital was only one of the early obstacles that she overcame.

Being a woman and a Latina, she had to overcome many negative stereotypes. In one

meeting with a potential client she was told that as a minority woman she did not

have sufficient management qualifications to represent its product line and was hence

turned down. However, her hard work and persistence paid off, and at the end of the

first year of business the company attained revenue of $209,000. With this success, the

client that had turned her down changed its mind and she became an authorized

dealer for its products.

Other success followed, and soon she was pursuing contracts with the U.S. Depart-

ment of Defense. In researching this market, she discovered that many government

contractors are required to include a percentage of minority-owned businesses as

subcontractors. She also discovered that there were not enough minority-owned

businesses, presenting great opportunities for her venture. However, as she contin -

ued to investigate her opportunities she found she was blocked from records to

which she had previously had access . She decided to pursue this in court, knowing

that this could put her entire business on the line . Subsequently, the case GC Micro

Corporation v. the Defense Logistics Agency reached the courts and then dragged on

for several years. During this time her business was in jeopardy since many companies

stated they would no longer work with her. Eventually she won her case. Her reputa-

tion as someone not afraid to take a stand and with strong leadership skills spread

throughout the industry.

The company has become one of the few just-in-time (JIT) system contract suppli-

ers. In 2003 the company received the JIT Supplier Partnership Award. Guadarrama's

entrepreneurial skills have also spilled over to civic-minded activities, supporting

such programs as the California Latino-Chicano High School Drop-Out Prevention

Program, the Canal Community Alliance, the Ochoa Migrant Farm Workers Camp,

and the Gilroy YMCA. Belinda's success is a tribute to her strong entrepreneurial

character. She was not afraid of the hard work required to plan her business-and

she was not afraid to stand up for what she felt was right. Her commitment to the

community has made her an inspiration to many other Hispanic businessmen and

women.

GC Micro Corporation now has 14 warehouses across the United States and is an

authorized dealer for about 200 manufacturers such as Sun Microsystems, IBM,

Hewlett-Packard, St orage Tek, Cisco, Dell, App le, and Sony. Now with 30 employees,

sales revenue has reached $35 million. 1

t describing all

elements and

CHAPTER 7 THEBUSINESSPLAN:CREATINGANDSTARTINGTHEVENTURE 189

PLANNING AS PART OF THE BUSINESS OPERATION Before we begin a discussion of the business plan, it is important for the reader to un- derstand the different types of plans that may be part of any business operation. Plan- ning is a process that never ends for a business. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan. The plan will become finalized as the entrepreneur has a better sense of the market, the product or services to be marketed, the management team, and the finan- cial needs of the venture. As the venture evolves from an early start-up to a mature busi- ness, planning will continue as management seeks to meet its short-term or long-term business goals.

For any given organization, it is possible to find financial plans, marketing plans, hu- man resource plans, production plans, and sales plans, to name a few. Plans may be short-term or long-term, or they may be strategic or operational. Plans will also differ in scope depending on the type of business or the anticipated size of the start-up operation. Even though they may serve different functions, all these plans have one important pur- pose: to provide guidance and structure to management in a rapidly changing market environment.

WHAT IS THE BUSINESS PLAN? The business plan is a written document prepared by the entrepreneur that describes all the relevant external and internal elements involved in starting a new venture. It is often an integration of functional plans such as marketing, finance, manufacturing, and human re- sources. As in the case of Belinda Guadarrama, it addresses the integration and coordina- tion of effective business objectives and strategies when the venture contains a variety of products and services. It also addresses both short-term and long-term decision making for the first three years of operation. Thus, the business plan-or, as it is sometimes referred to, the game plan or road map-answers the questions, Where am I now? Where am I going? and How will I get there? Potential investors, suppliers, and even customers will request or require a business plan.

If we think of the business plan as a road map, we might better understand its signifi- cance. Let's suppose you were trying to decide whether to drive from Boston to Los Angeles (mission or goal) in a motor home. There are a number of possible routes, each requiring different time frames and costs. Like the entrepreneur, the traveler must make some impor- tant decisions and gather information before preparing the plan.

The travel plan would consider external factors such as emergency car repair, weather conditions, road conditions, sights to see, and available campgrounds. These factors are basically uncontrollable by the traveler but must be considered in the plan, just as the en- trepreneur would consider external factors such as new regulations, competition, social changes, changes in consumer needs, or new technology.

On the other hand, the traveler does have some idea of how much money is available; how much time he or she has; and the choices of highways, roads, campgrounds, sights, and so forth. Similarly, the entrepreneur has some control over manufacturing, marketing, and personnel in the new venture.

The traveler should consider all these factors in determining what roads to take, what campgrounds to stay in, how much time to spend in selected locations, how much time and money to allow for vehicle maintenance, who will drive, and so on. Thus, the travel plan re- sponds to three questions: Where am I now? Where am I going? and How do I get there? Then the traveler in our example-or the entrepreneur, the subject of our book-will be

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190 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

able to determine how much money will be needed from existing sources or new sources to achieve the plan.

We saw in the opening example of this chapter how Belinda Guadarrama used the busi- ness plan to address these questions. The functional elements of the business plan are discussed here but are also presented in more detail in the chapters that follow.

WHO SHOULD WRITE THE PLAN? The business plan should be prepared by the entrepreneur; however, he or she may consult with many other sources in its preparation. Lawyers, accountants, marketing consultants, and engineers are useful in the preparation of the plan. Some of these needed sources can be found through services offered by the Small Business Administration (SBA), the Senior Corps of Retired Executives (SCORE), small-business development centers (SBDCs), universities, and friends or relatives. The Internet also provides a wealth of information as well as actual sample templates or outlines for business planning. Most of these sources are free of charge or have minimal fees for workshop attendance or to purchase or download any information. In many instances entrepreneurs will actually hire or offer equity (partnership) to another person who might provide the appropriate expertise in preparing the business plan as well as become an important member of the management team.

To help determine whether to hire a consultant or to make use of other resources, the entrepreneur can make an objective assessment of his or her own skills. Table 7.1 is an illustration of a rating to determine what skills are lacking and by how much. For exam- ple, a sales engineer designed a new machine that allows a user to send a 10-second per- sonalized message in a greeting card. A primary concern was how best to market the machine: as a promotional tool a firm could use for its distributors, suppliers, sharehold- ers, or employees; or as a retail product for end users. This entrepreneur, in assessing his skills, rated himself as excellent in product design and sales, good in organizing, and only fair or poor in the remaining skills. To supplement the defined weaknesses, the entrepreneur found a partner who could contribute those skills that were lacking or weak. Through such an assessment, the entrepreneur can identify what skills are needed and where to obtain them.

[ TABLE 7. 1 Skills Assessment

Skills

Accounting/taxes

Planning

Forecasting

Marketing research

Sales

People management

Product design

Legal issues

Organizing

Excellent Good Fair Poor

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 191

SCOPE AND VALUE OF THE BUSINESS PLAN- WHO READS THE PLAN? The business plan may be read by employees, investors, bankers, venture capitalists, suppli- ers, customers, advisors, and consultants. Who is expected to read the plan can often affect its actual content and focus. Since each of these groups reads the plan for different purposes, the entrepreneur must be prepared to address all their issues and concerns. In some ways, the business plan must try to satisfy the needs of everyone, whereas in the actual marketplace the entrepreneur's product will be trying to meet the needs of selected groups of customers.

However, there are probably three perspectives that should be considered in prepar- ing the plan. First is the perspective of the entrepreneur, who understands better than any- one else the creativity and technology involved in the new venture. The entrepreneur must be able to clearly articulate what the venture is all about. Second is the marketing perspec- tive. Too often, an entrepreneur will consider only the product or technology and not whether someone would buy it. Entrepreneurs must try to view their business through the eyes of their customer. This customer orientation is discussed further in Chapter 8. Third, the entrepreneur should try to view his or her business through the eyes of the investor. Sound financial projections are required; if the entrepreneur does not have the skills to pre- pare this information, then outside sources can be of assistance. 2

The depth and detail in the business plan depend on the size and scope of the proposed new venture. An entrepreneur planning to market a new high-tech machine will need a comprehensive business plan, largely because of the nature of the product and market. An entrepreneur who plans to open a retail clothing store will not need the comprehensive cov- erage required by a new high-tech machine manufacturer. A new e-commerce business, however, may require a very different focus, particularly on how to market the Web site that will offer the goods and services. Thus, differences in the scope of the business plan may depend on whether the new venture is a service, involves manufacturing, or is a consumer good or industrial product. The size of the market, competition, and potential growth may also affect the scope of the business plan.

The business plan is valuable to the entrepreneur, potential investors, or even new per- sonnel, who are trying to familiarize themselves with the venture, its goals, and objectives. The business plan is important to these people because:

• It helps detemilne the viability of the venture in a designated market.

• It provides guidance to the entrepreneur in organizing his or her planning activities.

• It serves as an important tool in helping to obtain financing.

Potential investors are very particular about what should be included in the business plan. Even if some of the information is based on assumptions, the thinking process re- quired to complete the plan is a valuable experience for the entrepreneur since it forces him or her to assess such things as cash flow and cash requirements. In addition, the thinking process takes the entrepreneur into the future, leading him or her to consider important issues that could impede the road to success.

The process also provides a self-assessment by the entrepreneur. Usually, he or she feels that the new venture is assured of success. However, the planning process forces the entre- preneur to bring objectivity to the idea and to reflect on such questions as: "Does the idea make sense? Will it work? Who is my customer? Does it satisfy customer needs? What kind of protection can I get against imitation by competitors? Can I manage such a business? Whom will I compete with?" This self-evaluation is similar to role playing, requiring the en- trepreneur to think through various scenarios and consider obstacles that might prevent the

I

-- 202 ~ -'""''~"""~;,_

AS SEEN IN BUSINESSWEEK

DON'T EXPECT A FEE FOR MAKING AN INTRODUCTION

Q: I'm an independent record producer. About 30 years ago, I introduced a close friend to a record- ing artist, and we all became friends and produced a song together. We lost touch with the artist, who is now a millionaire, but recently my friend con- tacted him, and they plan to form a partnership. Since I introduced them initially, do I deserve any monetary compensation from their joint venture? -R.B., Manasquan, N.J.

A: The compensation you're asking about might be termed a "finder's fee," in which an individual gets a flat fee or a percentage of a business deal that he or she helped arrange, typically by making an in- troduction. "A finder's fee is associated with the per- formance of some type of service. The finder acts as an agent and thus is entitled to a fee for perform- ance," says Robert Chell, a longtime business consult- ant in Indian Wells, Calif.

However, in your case, that introduction took place 30 years ago, and then the parties lost touch. After

many years passed, your friend took it upon him- self to reestablish contact with the (apparently now-successful) recording artist and form a new partnership.

Since you didn't make the introduction this time- the parties already knew each other, and you weren't asked to be a conduit-it is pretty tough to make the case that you deserve compensation from their joint venture, Chell says: "If you'd done something spe- cific this time-maybe. But in this case, maybe not."

Other experts agreed. "If the business relationship began and ended with the production of the song way back in 1979, then an expectation of some re- ward, monetary or otherwise, is not in order," says Sheldon Kopin, president of JBS Associates, a man- agement consulting firm in Cincinnati.

Source; Reprinted from September 15, 2009, issue of Business Week by special permission, copyright © 2009 by The McGraw-Hill Com- panies, Inc., from "Don't Expect a Fee for Making an Introduction" by Karen E. Klein, www.businessweek.com/smallbiz.

venture from succeeding. The process allows the entrepreneur to plan ways to avoid such obstacles. It may even be possible that, after preparing the business plan, the entrepreneur will realize the obstacles cannot be avoided or overcome. Hence, the venture may be ter- minated while still on paper. Although this certainly is not the most desirable conclusion, it would be much better to terminate the business endeavor before investing further time and money.

192

HOW DO POTENTIAL LENDERS AND INVESTORS EVALUATE THE PLAN? As stated earlier, there are a number of cookie-cutter or computer-generated software packages or samples on the Internet that are available to assist the entrepreneur in preparing a busi- ness plan. These sources, however, should be used only to assist in its preparation, since the business plan should address the needs of all the potential readers or evaluators and should reflect the strengths of management and personnel, the product or service, and available resources. There are many different ways to present a quality business plan and thus any at- tempt to imitate or fit your strategy and objectives into a cookie-cutter approach could have very negative results. The plan needs to focus on the above-mentioned factors and should ultimately consider its purpose.

It is conceivable that the entrepreneur will prepare a first draft of the business plan from his or her own personal viewpoint without consideration of the constituencies that will ultimately

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 193

read and evaluate the plan's feasibility. As the entrepreneur becomes aware of who will read the plan, appropriate changes will be necessary. For example, one constituency may be suppliers, who may want to see a business plan before signing a contract to produce either components or finished products or even to supply large quantities of materials on consignment. Customers may also want to review the plan before buying a product that may require significant long-term commitment, such as a high-tech telecommunications system. In both cases the business plan should consider the needs of these constituencies, who may pay more attention to the experience of the entrepreneur(s) and his or her projec- tion of the marketplace.

Another group that may evaluate the plan are the potential suppliers of capital. These lenders or investors will likely vary in terms of their needs and requirements in the business plan. For example, lenders are primarily interested in the ability of the new venture to pay back the debt including interest within a designated period of time. Banks want facts with an objective analysis of the business opportunity and all the poten- tial risks inherent in the new venture. It is also important that, along with a solid busi- ness plan, the entrepreneur develop a strong personal relationship with the loan officer of the bank.

The story of Peter Pap, a successful dealer in oriental rugs, provides a good example of how lenders may evaluate a business plan. He needed additional financing to buy more rugs but was frustrated by the fact that banks would not lend him funds using his existing inven- tory of oriental rugs as collateral. He discovered that Fortune Small Business supported small businesses with a group of consultants that could help him with his plan and his attempt to get additional financing. These consultants from banking and accounting firms recommended that he modify his Web site, increase his advertising, and hire a marketing manager. He discovered that it was not the collateral that was the issue but his business plan that lacked any basis for how the loan would be used. Now with changes in his business plan and advice from one of the banking consultants he is considering approaching the Small Business Administration for a 7 A project loan to expand his business . This is a loan guaranteed by the SBA but actually provided by a federal bank. 3

Typically, lenders focus on the four Cs of credit: character, cash flow, collateral, and eq- uity contribution. Basically, what this means is that lenders want the business plan to reflect the entrepreneur's credit history, the ability of the entrepreneur to meet debt and interest payments (cash flow), the collateral or tangible assets being secured for the loan, and the amount of personal equity that the entrepreneur has invested.

Investors, particularly venture capitalists, have different needs since they are providing large sums of capital for ownership (equity) with the expectation of cashing out within five to seven years. Investors often place more emphasis on the entrepreneur's character than lenders do, and often spend much time conducting background checks. This is important not only from a financial perspective but also because the venture capitalist will play an im- portant role in the actual management of the business. Hence, investors want to make sure that the entrepreneur is compliant and willing to accept this involvement. These investors will also demand high rates of return and will thus focus on the market and financial projections during this critical five- to seven-year period.

In preparing the business plan, it is important for entrepreneurs to consider the needs of external sources and not merely provide their own perspective. This will keep the plan from being an internalized document that emphasizes only the technical advantages of a product or market advantages of a service, without consideration of the feasibility of meeting market goals and long-term financial projections.

Entrepreneurs, in sharing their business plan with others, often become paranoid, fear- ing that their idea will be stolen by one of the external readers. Most external advisors and

~204 __ j Entrepreneurship

• ETHICS

PROTECTING YOUR BUSINESS IDEA

One of the serious concerns that entrepreneurs voice relates to how to protect their business ideas, when they are also advised to share their business plans with many friends and associates. Since these plans provide comprehensive discussion of the new ven- ture, the concern is understandable. Most individuals who are asked to comment and review a business plan would act in an ethical and professional manner in providing any advice to entrepreneurs. However, there are also many examples of situations in which a family member, friend, or business associate has been accused of "stealing" an idea.

The best strategy for an entrepreneur, outside of seeking the advice of an attorney, is to ask all readers who are not representing a professional firm (such as a venture capitalist) to sign a noncompete or nondis- closure agreement. An example of such an agreement can be found in Chapter 6. Those representing a pro- fessional organization (such as a bank or venture capi- talist) need not be asked to complete a nondisclosure form since they would be insulted and would be in- clined to reject the venture before they had even read the plan.

194

potential investors are bound by a professional code of ethics, and the entrepreneur should not be deterred from seeking external advice (see Ethics box).

PRESENTING THE PLAN Often, colleges and universities or locally sponsored business meetings offer an opportu- nity for selected entrepreneurs to present their business plans in a competitive and struc- tured setting. Typically, each selected entrepreneur is asked to present the highlights of his or her business plan in a defined time frame. The entrepreneur is expected to "sell" his or her business concept in this designated period of time. This implies that the entrepreneur must decide what to say and how to present the information. Typically the entrepreneur will focus on why this is a good opportunity, providing an overview of the marketing program (how the opportunity will convert to reality) and the results of this effort (sales and profits). Concluding remarks might reflect the recognized risks and how the entrepreneur plans to address them.

Audiences at these presentations usually include potential investors who are given an opportunity to ask pointed questions regarding any of the strategies conveyed in the busi- ness plan presentation. After the completion of all the scheduled business plan presenta- tions, a winner is usually declared, with a financial reward that can range from $10,000 to $50,000. The benefit of these competitions is not necessarily the financial award since there can be only one winner. However, since the audience is made up of professional investors, there is always the opportunity for any one of the business plans presented to attract the attention of a venture capitalist or private investor. This interest may result in further nego- tiations and perhaps a future investment in the new venture. The number of schools that sponsor these business plan competitions seems to be growing significantly, and often the schools will advertise, requesting that interested entrepreneurs submit an application for participation in the competition.4

Some investors describe these presentations as elevator pitches, since they are anal- ogous to an entrepreneur getting on an elevator with one or more investors and trying to persuade them that his or her business concept is a good investment before the elevator reaches its final destination. Even for those who do not win a prize, the opportunity to present a plan and then make adjustments in the plan based on the feedback is a great learning experience.

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 195

INFORMATION NEEDS Before committing time and energy to preparing a business plan, the entrepreneur should do a quick feasibility study of the business concept to see whether there are any possible barriers to success. The information, obtainable from many sources, should focus on mar- keting, finance, and production. The Internet, discussed later in the chapter, can be a valu- able resource for the entrepreneur. Before beginning the feasibility study, the entrepreneur should clearly define the goals and objectives of the venture. These goals help define what needs to be done and how it will be accomplished. These goals and objectives also provide a framework for the business plan, marketing plan, and financial plan.

Goals and objectives that are too general or that are not feasible make the business plan difficult to control and implement. For example, an entrepreneur starting a sporting goods store that specialized in offbeat sports (e.g., rollerblading, skateboarding, and snowboarding) developed a business plan that called for six stores to be opened by year 2 of the start-up. A friend and business confidant read the plan and immediately asked the entrepreneur to explain how and where these stores would be located. Not having a clear understanding of the answers to these questions suggested to the entrepreneur that his business objectives needed to be much more reasonable and that they needed to be clarified in the marketing and strategy segments of the plan. The business associate explained to the entrepreneur that a business plan is similar to building a house, in that it is necessary that each step in the process be related to the goals and objectives or outcome of the construction. From this experience the entrepreneur rewrote the business plan to reflect more reasonable goals and objectives.

Jay Jackson determined, while managing an audiovisual distribution business in South- east Asia, that there may be a market for custom-made teak furniture. He and his wife JL decided to launch a furniture importing business in the United States by having teak furni- ture manufactured in Indonesia that would be produced from teak walls and floors that were being ripped out of homes destined for renovation or demolition. The business de- pended on gathering potential customers from trade shows. However, potential customers at these trade shows did not seem enthusiastic and saw this product as just another furniture company. By talking to these customers in greater depth, they found that they were most intrigued by the concept of recycling the teak wood . It also appeared from these discussions that the more upscale consumer interested in ecofriendly products would be the best target market. As a result of listening to their customers, the Jacksons refocused their business plan objectives to appeal to a more upscale customer interested in ecofriendly products. In addition, they modified their intended offerings to focus on house and garden furniture. They then proceeded to identify nontraditional, unique trade shows that would include their target market such as a collector antique trade show. The attendees at these shows matched their target market and soon business took off. They now expect to exceed sales of $1 rnillion.5

From the first example, we can see the importance of feasible, well-defined goals and ob- jectives in the business plan. In the second example, we note that a well-defined business strategy based on market information can provide a more effective focus of the business model. Once this solid foundation is in place, strategy decisions can then be established that will allow the company to achieve those goals and objectives.

Market Information One of the initial pieces of information needed by the entrepreneur is the market potential for the product or service. To ascertain the size of the market, it is first necessary for the en- trepreneur to define the market. For example, is the product most likely to be purchased by men or women? People of high income or low income? Rural or urban dwellers? Highly

l 206 l Entrepreneurship

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196 PART 3 FROM THE OPPORTUNilYTO THE BUSINESS PLAN

educated or less educated people? A well-defined target market will make it easier to pro- ject market size and subsequent market goals for the new venture. For example, let's assume that an entrepreneur in the Boston area notes the success of businesses such as Au Bon Pain and Panera Bread Company and thus is considering launching a food business that offers the convenience of "fast food" but with the taste of a sit-down restaurant. With a huge tourism trade the entrepreneur decides on a mobile (food cart) crepe business that will in- clude a number of carts situated in high-traffic areas.

To build a strong marketing plan with reasonable and measurable market goals and ob- jectives the entrepreneur will need to gather information on the industry and market. Most entrepreneurs have difficulty with this stage and do not often know where to begin. The best way to start is to first visualize this process as an inverted pyramid (see Figure 7.1). This means that we start with very broad-based data and information and work down until we can develop a positioning strategy and quantifiable goals and objectives. All this infor- mation can then be used in the industry analysis and marketing planning sections of the business plan that are discussed later in this chapter. (Also see Chapter 8.)

As noted in Figure 7.1, we begin the process by evaluating general environmental trends. This would include household income trends, population shifts, food consumption habits

FIGURE 7.1 An Upside-Down Pyramid Approach to Gathering Market Information

General environmental and demographic trends

National food industry trends

Local environmental and demographic trends

Local food industry trends

Local competition strengths and weaknesses

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 197

and trends, travel, and employment trends . This information can be found in sources such as the U.S. Census Bureau, Bureau of Labor Statistics, Forrester, Reuter Business Insights, and Statistical Abstracts, to name a few. These sources are available in the local college or uni- versity library. Some sources such as the U.S. Census Bureau can be found online or in the local community library. Table 7.2 provides a partial list of sources that can be considered for typical census-related data. Forrester and Business Insights are private services and can be obtained from libraries or by purchasing specific reports on your industry or market.

TABLE 7.2 Sources of Data on Environmental Trends, Industry Trends, Financial Ratios, and Other Benchmarks

Source Description

1. U.S. Census (www.census.gov) A. U.S. Population Projections for 2010 Projections of population by area. B. Service Annual Survey Estimates in dollar volume of receipts in

selected service industries. Also includes year-to-year ratios.

c. County Business Patterns Economic data of small areas by industry for analyzing market potential, budgeting, and forecasting.

D. Statistical Abstracts Statistics on social and economic variables at national, state, and metropolitan levels.

E. Annual Survey of Manufactures Statistics such as industry outputs, inputs, and operating data on manufacturing activity, by industry groups.

F. Current Industrial Reports Regular reports measuring production and shipments of wide range of products.

2. Industry and Market Data A. Encyclopedia of American Industries Industry trends and market data compiled

on all SIC-coded firms. B. Standard & Poor's (NetAdvantage Wide array of industry and market survey

and Market Insight) data on private and public firms . c. Stat-USA (U.S. Department of A large database of financial and trade

Commerce) information. Also provides financial and operating ratios.

D. Market Share Reporter Compilation of market share statistics across array of products and services.

E. RDS TableBase Provides market share, ran kings, industry/ product forecasts.

F. Other sources on industry or market trends are MarketLine, Forrester, lnvestext, and Mintel Reports. These reports may be purchased or accessed through a university library.

3. Financial and Industry Operating Ratios A. RMA eStatement Studies (Robert Compilation of 150,000 financial statements

Morris Associates) of banking customers with ratios and benchmarks .

B. Almanac of Business and Industrial Historical compilation of financial data on Financial Ratios (Leo Troy) 4.7 million companies.

c. Industry Norms and Key Ratios Ratios and financial percentages of over (Dun & Bradstreet) 1 million financial statements.

D. Financial Studies of the Small Business Ratios of 70 business categories for over 3,000 companies earning less than $1 million.

E. Bizminer (www.bizminer.com) Local and regional market research reports, financial ratios on over 16,000 products and services in 300 U.S. markets. Most cost less than $100 .

20s I '"'~'~"'""h'' ~- -· --t--------···------- -··---·-----·----------·-------- --··---------·--------------

198 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

The next step is the assessment of trends in the national food service industry. We would look for data on total food sales and commercial restaurant sales by type of restau- rant. This information can be found in such sources as Dun and Bradstreet's AllBusiness, Standard & Poor's (S&P's) Market Insight, and S&P's NetAdvantage. Standard and Poor's also provides very specific data on the food industry such as in its Industry Sur- veys: Restaurants and the National Restaurant Association. Also see Table 7.2 for more in-depth information on some of the important sources of information that can be used in this analysis.

Notice that the first two stages in Figure 7.1 focus on the national market, and the next two stages consider trends in the local market where the business will be located. This con- sists of general local economic trends and an assessment of the local food service industry. The sources may include the same ones mentioned above except data related only to the local market would be considered. In addition, the state of Massachusetts publishes data on tourism (the Massachusetts Travel Industry Report) and economic trends (U.S. Census Bureau) . Also implicit in this local food service industry analysis is the regulatory environ- ment. Each state has distinct regulations regarding alcohol and food delivery license requirements. These data can also be found online or in your local library.

The final step is an analysis of the local competitive environment. In this example the entrepreneur would need to identify any restaurants, food stands, or push-cart food services that could be competitors. This list can be found in the yellow pages, local town hall (food license bureau), or through observation. Each local competitor's strengths and weaknesses should be assessed. This can be judged by using marketing research (discussed in Chap- ter 8); evaluating the competitors' Web sites, advertising, menus, and locations; and review- ing any published articles that have appeared in the local media. A spreadsheet can then be prepared with the list of competitors in the first column, followed by columns devoted to their strengths and weaknesses.

Once all this analysis has been completed, the entrepreneur is ready to clarify the prod- uct or service offering, actual market positioning in the competitive environment, and mar- ket objectives. These are part of the marketing plan and are discussed in more detail in Chapter 8. These data, in addition to contributing to the preparation of the marketing plan, lay the groundwork for the financial projections and forecasts discussed in Chapter 10.

Operations Information Needs

The relevance of a feasibility study of the manufacturing operations depends on the nature of the business. Most of the information needed can be obtained through direct contact with the appropriate source. The entrepreneur may need information on the following:

• Location. The company's location and its accessibility to customers, suppliers, and distributors need to be determined.

• Manufacturing operations. Basic machine and assembly operations need to be identified, as well as whether any of these operations would be subcontracted and to whom.

• Raw materials. The raw materials needed and suppliers' names, addresses, and costs should be determined.

• Equipment. The equipment needed should be listed, with its cost and whether it will be purchased or leased.

• Labor skills. Each unique skill needed, the number of personnel required for each skill, pay rate, and an assessment of where and how these skills will be obtained should be determined.

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 199

• Space. The total amount of space needed should be determined, including whether the space will be owned or leased.

• Overhead. Each item needed to support manufacturing-such as tools, supplies, utilities, and salaries-should be determined.

Most of the preceding information should be incorporated directly into the business plan. Each item may require some research, but this information is necessary to those who will assess the business plan and consider funding the proposal.

FINANCIAL INFORMATION NEEDS Before preparing the financial section of the business plan, the entrepreneur will need to prepare a budget that includes a list of all possible expenditures in the first year and a list of all revenue sources, including sales and any external available funds. Thus the budget includes capital expenditures, direct operating expenses, and cash expenditures for nonex- pense items. The revenue from sales must be forecast from market data, as discussed earlier. Forecasting is discussed in more detail in Chapter 8. To prepare the actual budget (see Chapter 10) the entrepreneur will need to identify benchmarks in the industry that can be used in preparing the final pro forma statements in the financial plan. These benchmarks or norms establish reasonable assumptions regarding expenditures based on industry his- tory and trends. This is a very acceptable method to arrive at the necessary projected costs for the new venture.

We return to our crepe business example. In projecting his costs for operating the business, our entrepreneur might choose to consider the many secondary sources that provide percentage norms for such costs. For example, these sources would provide per- centage norms in the industry for such costs as food, beverages, equipment, personnel, and licenses. Expenditures such as rent, utilities, insurance, and personnel costs can also be ascertained from newspapers or advertisements, or from phone conversations with real estate agents, insurance agents, equipment suppliers, and the utility companies in the area.

The benchmarks or financial ratios needed to prepare financial statements can be found in such sources as Financial Studies of the Small Business (Financial Research Associates), Industry Norms and Key Business Ratios (Dun & Bradstreet), Annual Statement Studies (Robert Morris Associates), RMA eStatement Studies, and the Almanac of Business and Financial Ratios (Leo Troy). More detailed information on the services these sources pro- vide can be found in Table 7.2. It is also possible to find benchmarks by reviewing lOK reports of similar public competitors. Trade associations and trade magazines also may publish valuable data that can supplement the preceding sources to prepare the financial statements in the business plan. These pro forma statements will need to be prepared monthly in the first year and then either quarterly or annually for the next two years. Some investors require five-year projections, so the entrepreneur may need to clarify exactly what is needed by those who review the business plan.

USING THE INTERNET AS A RESOURCE TOOL The changing world of technology offers new opportunities for entrepreneurs to be able to access information for many business activities efficiently, expediently, and at very little cost. The Internet can serve as an important source of information in the preparation of the business plan for such segments as the industry analysis, competitor analysis, and measurement of market potential, to name a few. Entrepreneurs will also find the Internet

_ 210~~~ Entrepreneurship

200 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

a valuable resource in later-stage planning and decision making. Besides being a business intelligence resource, the Internet also provides opportunities for marketing strategy ; through its Web site, a firm can provide information on the company, its products and services, and ordering instructions.

According to data published by the Department of Commerce, online sales have con- tinued to increase in spite of the economic downturn. In the third quarter of 2008 online sales were up 6 percent over the same period one year earlier. E-commerce sales reached $34.4 billion in the third quarter of 2008. Although online retail sales accounts for only 3.4 percent of all retail sales, it continues to grow each year as more and more consumers enjoy the benefit of ordering products from their home. 6

An entrepreneur in the process of writing a business plan can also access one of the pop- ular search engines: Google, Yahoo! , MSN, AOL, or Ask Jeeves. Simply conducting a search of a topic (for example, "online sporting goods") may reveal several Web sites, arti- cles, or sources of information to assist the entrepreneur in writing the business plan. Use of these searches has grown about 20 percent over the past two years, depending on the search engine?

An entrepreneur should access competitors' Web sites to gain more knowledge about their strategy in the marketplace. Internet service is not costly and is an important vehicle for the entrepreneur to gather information about the market, competition, and customers as well as to distribute, advertise, and sell company products and services .

In addition to accessing Web sites, the entrepreneur can also investigate social networks , blogs, and discussion groups. Discussion groups such as Yahoo! Groups and Usenet are the most noteworthy, although many Web sites also have discussion groups associated with them. Blogs refer more to talking to or about something rather than creating a dialogue. Social networks are Web sites where those with similar interests can communicate using such sites as MySpace, Bebo, or Facebook. These sites may serve many uses depending on the needs of the entrepreneur. Using Usenet, which represents the news groups on the Inter- net, the entrepreneur can use keywords to identify the most appropriate newsgroups. These newsgroups represent potential customers who can be asked specific questions on their needs, competitive products, and potential interest in the new venture's products and ser- vices. Individuals who are members of the newsgroups will then respond to these ques- tions, providing valuable information to the entrepreneur.

Compared with alternative sources the entrepreneur need only make a small investment in hardware and software to be ready to use these online services. With its continuous im- provements and modifications, the Internet will continue to provide invaluable opportuni- ties for the entrepreneur in planning the start-up or the growth of a venture.

WRITING THE BUSINESS PLAN The business plan could take hundreds of hours to prepare, depending on the experience and knowledge of the entrepreneur as well as the purpose it is intended to serve. It should be comprehensive enough to give any potential investor a complete picture and understand- ing of the new venture, and it should help the entrepreneur clarify his or her thinking about the business.

Many entrepreneurs incorrectly estimate the length of time that an effective plan will take to prepare. Once the process has begun, however, the entrepreneur will realize that it is invaluable in sorting out the business functions of a new venture.

The outline for a business plan is illustrated in Table 7.3. Each of the items in the out- line is detailed in the following paragraphs of this chapter. Key questions in each section are also appropriately detailed.

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CHAPTER 7 THE BUSIN ESS PLAN: CREATING AND STARTING THE VENTURE 201

TABLE 7.3 Outline of a Business Plan

I. Introductory Page A. Name and address of business B. Name(s) and address(es) of principal(s) C. Nature of business D. Statement of financing needed E. Statement of confidentiality of report

II. Executive Summary-Two to three pages summarizing the complete business plan

Ill. Industry Analysis A. Future outlook and trends B. Analysis of competitors C. Market segmentation D. Industry and market forecasts

IV. Description of Venture A. Prod uct(s) B. Service(s) C. Size of business D. Office equipment and personnel E. Background of entrepreneur(s)

V. Production Plan A. Manufacturing process (amount subcontracted) B. Physical plant C. Machinery and equipment D. Names of suppliers of raw materials

VI. Operations Plan A. Description of company's operation B. Flow of orders for goods and/or services C. Technology utilization

VII . Marketing Plan A. Pricing B. Distribution C. Promotion D. Product forecasts E. Controls

VIII. Organizational Plan A. Form of ownership B. Identification of partners or principal shareholders C. Authority of principals D. Management team background E. Roles and responsibilities of members of organization

IX. Assessment of Risk A. Evaluate weakness(es) of bus iness B. New technologies C. Contingency plans

X. Financial Plan A. Assumptions B. Pro forma income statement C. Cash flow projections D. Pro forma balance sheet E. Break-even analysis F. Sources and applications of funds

XI. Appendix (contains backup material) A. Letters B. M arket resea rch dat a C. Leases or contracts D. Price lists from suppliers

~

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1

202 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

Introductory Page

This is the title or cover page that provides a brief summary of the business plan's contents. The introductory page should contain the following:

The name and address of the company.

The name of the entrepreneur(s), telephone number, fax number, e-mail address, and Web site address if available.

A paragraph describing the company and the nature of the business.

The amount of financing needed. The entrepreneur may offer a package (e.g., stock or debt). However, many venture capitalists prefer to structure this package in their own way.

A statement of the confidentiality of the report. This is for security purposes and is important for the entrepreneur.

This title page sets out the basic concept that the entrepreneur is attempting to develop . Investors consider it important because they can determine the amount of investment needed without having to read through the entire plan. An illustration of this page can be found in Table 7.4.

Executive Summary

This section of the business plan is prepared after the total plan is written. About two to three pages in length, the executive summary should stimulate the interest of the potential investor. This is a very important section of the business plan and should not be taken lightly by the entrepreneur since the investor uses the summary to determine if the entire business plan is worth reading. Thus, it should highlight in a concise and convincing manner the key points in the business plan.

[ TABLE 7.4 Sample Introductory Page

KC CLEANING SERVICE OAK KNOLL ROAD BOSTON, MA 02167

(617) 969-0010 www.cleaning.com

Co-owners: Kimberly Peters, Christa Peters

Description of Business:

This business will provide cleaning service on a contract basis to small and medium-sized businesses. Services include cleaning of floors, carpets, draperies, and windows, and regular sweeping, dusting, and washing. Contracts will be for one year and will specify the specific services and scheduling for completion of services.

Financing:

Initial financing requested is a $100,000 loan to be paid off over six years. This debt will cover office space, office equipment and supplies, two leased vans, advertising, and selling costs.

This report is confidential and is the property of the co-owners listed above. It is intended for use only by the persons to whom it is transmitted, and any reproduction or divulgence of any of its contents without the prior written consent of the company is prohibited.

!

I

I

I

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<;;;...<:::o:s::::JCUt' of external

llable variables

CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 203

Generally the executive summary should address a number of issues or questions that anyone picking up the written plan for the first time would want to know. For example:

What is the business concept or model?

How is this business concept or model unique?

Who are the individuals starting this business?

How will they make money and how much?

If the new venture has a strong growth plan and in five years expects to be positioned for an initial public offering (IPO), then the executive summary should also include an exit strategy. If the venture is not initially expecting this kind of growth, the entrepreneurs should avoid any discussion of an exit strategy in the executive summary.

Any supportive evidence, such as data points from marketing research or legal docu- ments or contracts that might strengthen the case on the preceding issues, also should be in- cluded. Under no circumstances should the entrepreneur try to summarize every section of the plan, especially since the emphasis placed on the preceding issues depends on who is reading the plan.

It should be remembered that this section is only meant to highlight key factors and mo- tivate the person holding the plan to read it in its entirety. Key factors for some plans might be the people involved. For example, if one of the entrepreneurs has been very successful in other start-ups, then this person and his or her background needs to be emphasized. If the venture has a contract in hand with a large customer, then this would be highlighted in the executive summary. It is similar to the opening statement a lawyer might make in an impor- tant court trial or the introductory statements made by a salesperson in a sales call.

Environmental and Industry Analysis It is important to put the new venture in a proper context by first conducting an environmental analysis to identify trends and changes occurring on a national and inter- nationallevel that may impact the new venture. This process was described earlier in this chapter. Examples of these environmental factors are:

Economy. The entrepreneur should consider trends in the GNP, unemployment by geographic area, disposable income, and so on.

Culture. An evaluation of cultural changes may consider shifts in the population by demographics, for example, the impact of the baby boomers or the growing elderly population. Shifts in attitudes, such as "Buy American," or trends in safety, health, and nutrition, as well as concern for the environment, may all have an impact on the entrepreneur's business plan.

Technology. Advances in technology are difficult to predict. However, the entrepreneur should consider potential technological developments determined from resources committed by major industries or the U.S. government. Being in a market that is rapidly changing due to technological development will require the entrepreneur to make careful short-term marketing decisions as well as to be prepared with contingency plans given any new technological developments that may affect his or her product or service.

Legal concerns. There are many important legal issues in starting a new venture; these were discussed in Chapter 6. The entrepreneur should be prepared for any future legislation that may affect the product or service, channel of distribution, price, or

l 214 j Entrepreneurship

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204 PART 3 FROMTHEOPPORTUNITYTOTHEBUSINESSPLAN

industry analysis

Reviews industry trends

and competitive strategies

promotion strategy. The deregulation of prices, restrictions on media advertising (e.g., ban on cigarette ads or requirements for advertising to children), and safety regulations affecting the product or packaging are examples of legal restrictions that can affect any marketing program.

All the preceding external factors are generally uncontrollable. However, as indicated, an awareness and assessment of these factors using some of the sources identified can pro- vide strong support for the opportunity and can be invaluable in developing the appropriate marketing strategy.

As stated earlier (see Figure 7.1), this process can be visualized as an upside-down pyra- mid leading to specific market strategy and objectives. Once an assessment of the environ- ment is complete, the entrepreneur should conduct an industry analysis that will focus on specific industry trends. Some examples of these factors are:

Industry demand. Demand as it relates to the industry is often available from published sources. Knowledge of whether the market is growing or declining, the number of new competitors, and possible changes in consumer needs are all important issues in trying to ascertain the potential business that might be achieved by the new venture. The projected demand for the entrepreneur's product or service will require some additional marketing research, which will be discussed in Chapter 8.

Competition. Most entrepreneurs generally face potential threats from larger corporations. The entrepreneur must be prepared for these threats and should be aware of who the competitors are and what their strengths and weaknesses are so that an effective marketing plan can be implemented. Most competitors can be easily identified from experience, trade journal articles, advertisements, Web sites, or even the yellow pages.

There are numerous sources that the entrepreneur can consult to attain general industry and competitive data for inclusion in this part of the business plan. Some of these were mentioned earlier in this chapter (also review Table 7.2), in relation to our discussion of the gathering of market information. Many of these sources can be found in local or university libraries. They include: Encyclopedia of American Industries, Encyclopedia of Emerging Industries, Standard and Poor's Industry Surveys, MarketLine Business Information Cen- tre, Forrester, Investext Plus, and Mintel Reports. Each of these sources focuses on differ- ent types of industries or markets and can be easily evaluated as to their benefit either by an online search (such as Google) or by a visit to a local library. Most of these sources also provide published reports that are available for purchase.

The last part of the business plan's industry analysis section should focus on the specific market, which would include such information as who the customer is and what the busi- ness environment is like in the specific market and geographic area where the venture will compete. Thus, any differences in any of the preceding variables that reflect the specific market area in which the new venture will operate must be considered. This information is particularly significant to the preparation of the marketing plan section of the business plan, which is discussed in Chapter 8.

In addition to the numerous industry sources given, there are also many market databases that can be researched for relevant data to incorporate into this section of the business plan. Market share and size of market often can be assessed from databases such as: TableBase and Business & Industry, Market Share Reporter, Economic Census, County Business Pat- terns, Current Industrial Reports, Service Annual Survey, and Monthly Retail and Food Ser- vice Sales and Inventories. More specific data on demographic trends and possible target market numbers can be found in: Profiles of General Demographic Characteristics 2000 Census/Population, Population Projections (projections for 20IO available), Mediamark

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· tion of the re Provides lete overview of the

(s) , service(s), and

·ons of a new

CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 205

TABLE 7.5 Critical Issues for Environmental and Industry Analysis

1. What are the major economic, technological, legal, and political trends on a national and an international level?

2. What are total industry sales over the past five years?

3. What is anticipated growth in this industry?

4. How many new firms have entered this industry in the past three years?

5. What new products have been recently introduced in this industry?

6. Who are the nearest competitors?

7. How w ill your business operation be better than this?

8. Are the sales of each of your major competitors growing, declining, or steady?

9. What are the strengths and weaknesses of each of your competitors?

10. What trends are occurring in your specific market area?

11. What is the profile of your customers?

12. How does your customer profile differ from that of your competition?

Reporter, and Lifestyle Market Analyst. Finally, state-by-state population, demographic, and housing data usually are available from each state's Web site.

A list of some key questions the entrepreneur should consider for this section of the business plan is provided in Table 7.5.

Description of Venture The description of the venture should be detailed in this section of the business plan. This will enable the investor to ascertain the size and scope of the business. This section should begin with the mission statement or company mission of the new venture. This statement basically describes the nature of the business and what the entrepreneur hopes to accom- plish with that business. This mission statement or business definition will guide the firm through long-term decision making . Mter the mission statement, a number of important factors that provide a clear description and understanding of the business venture should be discussed. Key elements are the product(s) or service(s), the location and size of the business, the personnel and office equipment that will be needed, the background of the entrepreneur(s), and the history of the venture. Table 7.6 summarizes some of the impor- tant questions the entrepreneur needs to answer when preparing this section of the busi- ness plan.

The location of any business may be vital to its success, particularly if the business is re- tail or involves a service. Thus, the emphasis on location in the business plan is a function of the type of business. In assessing the building or space the business will occupy, the en- trepreneur may need to evaluate such factors as parking; access from roadways to facility; and access to customers, suppliers, distributors, delivery rates, and town regulations or zon- ing laws. An enlarged local map may help give the location some perspective with regard to roads, highways , access, and so forth.

Recently an entrepreneur considered opening a new doughnut shop at a location diago- nally across from a small shopping mall on a heavily traveled road. Traffic counts indicated a large potential customer base if people would stop for coffee, and so on, on their way to work. Mter enlarging a local map, the entrepreneur noted that the morning flow of traffic

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206 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

TABLE 7.6 Describing the Venture I

1. What is the mission of the new venture?

2. What are your reasons for going into business?

3. Why will you be successful in this venture?

4. What development work has been completed to date?

5. What is your product(s) and/or service(s}?

6. Describe the product(s) and/or service(s), including patent, copyright, or trademark status.

7. Where will the business be located?

8. Is your building new? old? in need of renovations? (If renovation is needed, state costs.)

9. Is the building leased or owned? (State the terms.)

10. Why is this building and location right for your business?

11. What office equipment will be needed?

12. Will equipment be purchased or leased?

13. What experience do you have and/or will you need to successfully implement the business plan?

required drivers to make a left turn into the doughnut shop, crossing the outbound lane. Un- fortunately, the roadway was divided by a concrete center strip with no break to allow for a left-hand turn. The only possibility for entry into the shop required the customer to drive down about 400 yards and make aU-turn. It would also be difficult for the customer to get back on the roadway traveling in the right direction. Since the town was unwilling to open the road, the entrepreneur eliminated this site from any further consideration.

This simple assessment of the location, market, and so on, saved the entrepreneur fro m a potential disaster. Maps that locate customers, competitors, and even alternative locations for a building or site can be helpful in this evaluation. Some of the important questions that might be asked by an entrepreneur are as follows:

How much space is needed?

Should I buy or lease the building?

What is the cost per square foot?

Is the site zoned for commercial use?

What town restrictions exist for signs, parking, and so forth?

Is renovation of the building necessary?

Is the facility accessible to traffic?

Is there adequate parking?

Will the existing facility have room for expansion?

What is the economic and demographic profile of the area?

Is there an adequate labor pool available?

What are local taxes?

Are sewage, electricity, and plumbing adequate?

If the building or site decision involves legal issues, such as a lease, or requires town variances, the entrepreneur should hire a lawyer. Problems relating to regulations and

tion plan Details the product(s) will

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 207

TABLE 7.7 Production Plan

1. Will you be responsible for all or part of the manufacturing operation?

2. If some manufacturing is subcontracted, who will be the subcontractors? (Give names and addresses.)

3. Why were these subcontractors selected?

4. What are the costs of the subcontracted manufacturing? (Include copies of any written contracts.)

5. What will be the layout of the production process? (Illustrate steps if possible.)

6. What equipment will be needed immediately for manufacturing?

7. What raw materials will be needed for manufacturing?

8. Who are the suppliers of new materials and what are the appropriate costs?

9. What are the costs of manufacturing the product?

10. What are the future capital equipment needs of the venture?

If a Retail Operation or Service:

1. From whom will merchandise be purchased?

2. How will the inventory control system operate?

3. What are the storage needs of the venture and how will they be promoted?

4. How will the goods flow to the customer?

5. Chronologically, what are the steps involved in a business transaction?

6. What are the technology utilization requirements to service customers effectively?

leases can be avoided easily, but under no circumstances should the entrepreneur try to negotiate with the town or a landlord without good legal advice.

Production Plan If the new venture is a manufacturing operation, a production plan is necessary. This plan should describe the complete manufacturing process. If some or all of the manu- facturing process is to be subcontracted, the plan should describe the subcontractor(s), including location, reasons for selection, costs, and any contracts that have been com- pleted. If the manufacturing is to be carried out in whole or in part by the entrepreneur, he or she will need to describe the physical plant layout; the machinery and equipment needed to perform the manufacturing operations; raw materials and suppliers' names, addresses, and terms; costs of manufacturing; and any future capital equipment needs. In a manufacturing operation, the discussion of these items will be important to any potential investor in assessing financial needs.

Table 7. 7 summarizes some of the key questions in this section of the business plan. If the new venture does not include any manufacturing functions, this section should be eliminated from the plan.

Operations Plan All businesses-manufacturing or nonmanufacturing-should include an operations plan as part of the business plan. This section goes beyond the manufacturing process (when the new venture involves manufacturing) and describes the flow of goods and services

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208 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

marketi11g pla11 Describes market

conditions and strategy

related to how the

product(s) and service(s)

will be distributed,

priced, and promoted

orga11izatiollal pla11 Describes form of

ownership and lines of

authority and

responsibility of members

of new venture

from production to the customer. It might include inventory or storage of manufactured products, shipping, inventory control procedures, and customer support services . A non- manufacturer such as a retailer or service provider would also need this section in the business plan to explain the chronological steps in completing a business transaction. For example, an Internet retail sports clothing operation would need to describe how and where the products offered would be purchased, how they would be stored, how the in- ventory would be managed, how products would be shipped, and, importantly, how a customer would log on and complete a transaction. In addition, this would be a conven- ient place for the entrepreneur to discuss the role of technology in the business transac- tion process. For any Internet retail operation, some explanation of the technology requirements needed to efficiently and profitably complete a successful business transac- tion should be included in this section.

It is important to note here that the major distinction between services and manufactured goods is services involve intangible performances. This implies that they cannot be touched, seen, tasted, heard, or felt in the same manner as manufactured products. Airlines, hotels, car rental agencies, theaters, and hospitals, to name a few, rely on business delivery or quality of service. For these firms, performance often depends on location, facility lay- out, and personnel, which can, in tum, affect service quality (including such factors as re- liability, responsiveness, and assurance). The process of delivering this service quality is what distinguishes one new service venture from another and thus needs to be the focus of an operations plan. Some key questions or issues for both the manufacturing and nonman- ufacturing new venture are summarized in Table 7.7.

Marketing Plan The marketing plan (discussed in detail in Chapter 8) is an important part of the business plan since it describes how the product(s) or service(s) will be distributed, priced, and pro- moted. Marketing research evidence to support any of the critical marketing decision strate- gies as well as for forecasting sales should be described in this section. Specific forecasts for a product(s) or service(s) are indicated to project the profitability of the venture. The budget and appropriate controls needed for marketing strategy decisions are also discussed in detail in Chapter 8. Potential investors regard the marketing plan as critical to the suc- cess of the new venture. Thus, the entrepreneur should make every effort to prepare as com- prehensive and detailed a plan as possible so that investors can be clear as to what the goals of the venture are and what strategies are to be implemented to effectively achieve these goals. Marketing planning will be an annual requirement (with careful monitoring and changes made on a weekly or monthly basis) for the entrepreneur and should be regarded as the road map for short-term decision making.

Organizational Plan The organizational plan is the part of the business plan that describes the venture's form of ownership-that is, proprietorship, partnership, or corporation. If the venture is a partnership, the terms of the partnership should be included. If the venture is a corporation, it is important to detail the shares of stock authorized and share options, as well as the names, addresses, and resumes of the directors and officers of the corporation. It is also helpful to provide an organ- ization chart indicating the line of authority and the responsibilities of the members of the or- ganization. Table 7. 8 summarizes some of the key questions the entrepreneur needs to answer in preparing this section of the business plan. This information provides the potential investor with a clear understanding of who controls the organization and how other members will

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entofrisk - potential

plan goals and

e economic

- and necessary

CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 209

j TABLE 7.8 Organization Structure

1. What is the form of ownership of the organization?

2. If a partnership, who are the partners and what are the terms of agreement?

3. If incorporated, who are the principal shareholders and how much stock do they own?

4. How many shares of voting or nonvoting stock have been issued and what type?

5. Who are the members of the board of directors? (Give names, addresses, and resumes.)

6. Who has check-signing authority or control?

7. Who are the members of the management team and what are their backgrounds?

8. What are the roles and responsibilities of each member of the management team?

9. What are the salaries, bonuses, or other forms of payment for each member of the management team?

interact in performing their management functions. Chapter 9 provides more detail on this part of the business plan.

Assessment of Risk Every new venture will be faced with some potential hazards, given its particular industry and competitive environment. It is important that the entrepreneur make an assessment of risk in the following manner. First, the entrepreneur should indicate the potential risks to the new ven- ture. Next should be a discussion of what might happen if these risks become reality. Finally, the entrepreneur should discuss the strategy that will be employed to either prevent, minimize, or respond to the risks should they occur. Major risks for a new venture could result from a competitor's reaction; weaknesses in the marketing, production, or management team; and new advances in technology that might render the new product obsolete. Even if these factors present no risks to the new venture, the business plan should discuss why that is the case.

Financial Plan Like the marketing, production, and organization plans, the financial plan is an important part of the business plan. It determines the potential investment commitment needed for the new venture and indicates whether the business plan is economically feasible. (The finan- cial plan is discussed in more detail in Chapter 10.)

Generally, three financial areas are discussed in this section of the business plan. First, the entrepreneur should summarize the forecasted sales and the appropriate expenses for at least the first three years, with the first year's projections provided monthly. The form for displaying this information is illustrated in Chapter 10. It includes the forecasted sales, cost of goods sold, and the general and administrative expenses. Net profit after taxes can then be projected by estimating income taxes.

The second major area of financial information needed is cash flow figures for three years, with the first year's projections provided monthly. Since bills have to be paid at dif- ferent times of the year, it is important to determine the demands on cash on a monthly ba- sis, especially in the first year. Remember that sales may be irregular, and receipts from customers also may be spread out, thus necessitating the borrowing of short-term capital to meet fixed expenses such as salaries and utilities. A form for projecting the cash flow needs for a 12-month period can be found in Chapter 10.

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AS SEEN IN BUSINESSWEEK

ELEVATOR PITCH FOR PERFECT DINNER

A relative who has been very successful in the restau- rant business has recently sold his restaurant for a huge profit and is looking for a good investment for some of his funds. He knows that you are a good re- source since, as a struggling entrepreneur in your own right, you try to maintain an awareness of other start-ups in the area. Would you consider introducing your uncle to Karen and Jill after reading about their unique idea?

and order ahead before exiting Oak Station on the Green Line.

The business was founded by Karen Gruber, 48, who formerly handled the Kraft cheese account at ad agency J. Walter Thompson, and Jill Haas, 47, a one- time food scientist at Kraft Foods. The Perfect Dinner broke even with $500,000 in revenue last year-the average check is $41-and is looking at 8% to 10% growth this year, Gruber says. The pair, who started the venture with $250,000 from friends, family, and their own savings, is now trying to drum up $700,000 to open two more sites this fall.

Forget Boston Market or the prepared-foods sec- tion of Jewel or Whole Foods. In Oak Park, there's the Perfect Dinner, a kitchen that prepares "home-style" take-out and delivered meals. The startup is aimed mostly at "EI" riders, who can go online to scope out the shop's menu of eight to 10 daily entrees

Source: Reprinted from May 16, 2008 issue of Business Week by special permission, copyright© 2008 by The McGraw-Hill Compa- nies, Inc., from ''Perfect Dinner" by Howard Wolinsky, from "America's Most Promising Startups," www.businessweek.com/smallbiz.

210

The last financial item needed in this section of the business plan is the projected bal- ance sheet. This shows the financial condition of the business at a specific time. It summarizes the assets of a business, its liabilities (what is owed), the investment of the entrepreneur and any partners, and retained earnings (or cumulative losses). A form for the balance sheet is included in Chapter 10, along with more detailed explanations of the items included. Any assumptions considered for the balance sheet or any other item in the financial plan should be listed for the benefit of the potential investor.

Appendix The appendix of the business plan generally contains any backup material that is not nec- essary in the text of the document. Reference to any of the documents in the appendix should be made in the plan itself.

Letters from customers, distributors, or subcontractors are examples of information that should be included in the appendix. Any documentation of information-that is, secondary data or primary research data used to support plan decisions-should also be included. Leases, contracts, or any other types of agreements that have been initiated also may be in- cluded in the appendix. Finally, price lists from suppliers and competitors may be added.

USING AND IMPLEMENTING THE BUSINESS PLAN The business plan is designed to guide the entrepreneur through the first year of operations. It is important that the implementation of the strategy contain control points to ascertain progress and to initiate contingency plans if necessary. Some of the controls necessary in manufacturing, marketing, financing, and the organization are discussed in subsequent chapters. Most important to the entrepreneur is that the business plan not end up in a drawer somewhere once the financing has been attained and the business launched.

There has been a tendency among many entrepreneurs to avoid planning. The reason of- ten given is that planning is dull or boring and is something used only by large companies.

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 211

This may be an excuse; perhaps the real truth is that some entrepreneurs are afraid to plan. 8

Planning is an important part of any business operation. Without good planning, the entre- preneur is likely to pay an enormous price. All one has to do is consider the planning done by suppliers, customers, competitors, and banks to realize that it is important for the entre- preneur. It is also important to realize that without good planning the employees will not understand the company's goals and how they are expected to perform in their jobs.

Bankers are the first to admit that few business failures result from a lack of cash but, in- stead, that businesses fail because of the entrepreneur's inability to plan effectively. Intelli- gent planning is not a difficult or impossible exercise for the inexperienced entrepreneur. With the proper commitment and support from many outside resources, such as those shown in Table 7 .2, the entrepreneur can prepare an effective business plan.

In addition, the entrepreneur can enhance effective implementation of the business plan by developing a schedule to measure progress and to institute contingency plans. These fre- quent readings or control procedures will be discussed next.

Measuring Plan Progress During the introductory phases of the start-up, the entrepreneur should determine the points at which decisions should be made as to whether the goals or objectives are on schedule. Typically, the business plan projections will be made on a 12-month schedule. However, the entrepreneur cannot wait 12 months to see whether the plan has been successfully achieved. Instead, on a frequent basis (i.e., the beginning of each month) the entrepreneur should check the profit and loss statement; cash flow projections; and information on in- ventory, production, quality, sales, collection of accounts receivable, and disbursements for the previous month. Company Web sites should also be assessed as part of this process. This feedback should be simple but should provide key members of the organization with current information in time to correct any major deviations from the goals and objectives outlined. A brief description of each of these control elements is given here:

• Inventory control. By controlling inventory, the firm can ensure maximum service to the customer. The faster the firm gets back its investment in raw materials and finished goods, the faster that capital can be reinvested to meet additional customer needs.

• Production control. Compare the cost figures estimated in the business plan with day- to-day operation costs. This will help to control machine time, worker hours, process time, delay time, and downtime cost.

• Quality control. This will depend on the type of production system but is designed to make sure that the product performs satisfactorily.

• Sales control. Information on units, dollars, specific products sold, price of sales, meeting of delivery dates, and credit terms is useful to get a good perspective of the sales of the new venture. In addition, an effective collections system for accounts receivable should be set up to avoid aging of accounts and bad debts.

• Disbursements. The new venture should also control the amount of money paid out. All bills should be reviewed to determine how much is being disbursed and for what purpose.

• Web site control. With more and more sales being supported or garnered from a company's Web site, it is very important to continually evaluate the Web site to ascertain its effectiveness in meeting the goals and objectives of the plan. There are many services and software packages available to assist the entrepreneur in this process. These service companies and software alternatives are too numerous to mention here but can easily be identified from an Internet search. 9

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212 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

IN REVIEW

SUMMARY

Updating the Plan The most effective business plan can become out-of-date if conditions change. Environmental factors such as the economy, customers, new technology, or competition- and internal factors such as the loss or addition of key employees-can all change the direction of the business plan. Thus, it is important to be sensitive to changes in the company, industry, and market. If these changes are likely to affect the business plan, the entrepreneur should determine what re- visions are needed. In this manner, the entrepreneur can maintain reasonable targets and goals and keep the new venture on a course that will increase its probability of success.

WHY SOME BUSINESS PLANS FAIL Generally, a poorly prepared business plan can be blamed on one or more of the following factors:

• Goals set by the entrepreneur are unreasonable.

• Objectives are not measurable.

• The entrepreneur has not made a total commitment to the business or to the family.

• The entrepreneur has no experience in the planned business .

• The entrepreneur has no sense of potential threats or weaknesses to the business.

• No customer need was established for the proposed product or service.

Setting objectives requires the entrepreneur to be well informed about the type of business and the competitive environment. Objectives should be specific and not so mundane as to lack any basis of control. For example, the entrepreneur may target a specific market share, units sold, or revenue . These objectives are measurable and can be monitored over time.

In addition, the entrepreneur and his or her family must make a total commitment to the business to be able to meet the demands of a new venture. For example, it is difficult to op- erate a new venture on a part-time basis while still holding onto a full-time position. And it is also difficult to operate a business without an understanding from family members as to the time and resources that will be needed. Lenders or investors will not be favorably inclined toward a venture that does not have full-time commitment.

Generally, a lack of experience will result in failure unless the entrepreneur can either attain the necessary knowledge or team up with someone who already has it. For example, an entrepreneur trying to start a new restaurant without any experience or knowledge of the restaurant business would be in a disastrous situation.

The entrepreneur should also document customer needs before preparing the plan. Cus - tomer needs can be identified from direct experience, letters from customers, or marketing research. A clear understanding of these needs and how the entrepreneur's business will effectively meet them is vital to the success of the new venture.

This chapter has established the scope and value of the business plan and has outlined the steps in its preparation. The business plan may be read by employees, investors, lenders, suppliers, customers, and consu ltants. The scope of the plan will depend on who reads it, the size of the venture, and the specific industry for which the venture is intended.

I Entrepreneurship, Eighth Edition -{--2-~-~

CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 213

The business plan is essential in launching a new venture. The result of many hours of preparation will be a comprehensive, well-written, and well-o rganized document that will serve as a guide to the entrepreneur and as an instrument to raise necessary capital and financing.

Before beginning the business plan, the entrepreneur will need information on the market, manufacturing operations, and financial estimations. This process can be viewed as an upside-down pyramid, beginning with a very broad-based analysis down to specific market positioning and the determination of specific goals and objectives. The Internet represents a low-cost service that can provide valuable infor- mation on the market, customers and their needs, and competitors. This information should be evaluated based on the goals and objectives of the new venture. These goals and objectives also provide a framework for setting up controls for the busi- ness plan.

The chapter presents a comprehensive discussion and outline of a typical business plan. Each key element in the plan is discussed, an information-gathering process is described, and examples are provided. Control decisions are presented to ensure the effective implementation of the business plan. In addition, some insights as to why business plans fail are discussed.

SEARCH TASKS

1. Approximately how many books have been written on "how to write a business plan"? How many software packages are there that aim to help entrepreneurs write a business plan? Use data to back up your estimates. Why are there so many?

2. Find five business plans. What are the common topics covered across all five plans? What are the differences? Choose the one that you believe is the best written and then describe why you believe it is better than the others.

3. Speak to five entrepreneurs and find out why they have (or do not have) a business plan. For those who do have a business plan, find out when it was written, the purpose for which it was created, and whether it has been used and/or kept up-to-date.

ASS DISCUSSION

1. Given the difficulties in accurately predicting the future, is a business plan useful?

2. What makes an excellent business plan?

3. Would the entrepreneur be better off spending more time selling his or her product rather than investing so much time in writing a business plan?

4. If a business plan is to be used to raise capital, then why would the entrepreneur want to advertise the firm's major r isks by detailing them in the business plan?

5. What is the purpose of the business plan if the audience is (a) the entrepreneur, (b) an investor, or (c) a key supplier? How might the plan be adapted for these different audiences? Or do you believe that it is better to simply have one business plan that serves all audiences?

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214 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

SELECTED READINGS

Babaei, Ari. (November 2008). Plan for the Worst. Fortune Small Business, vol. 18, no. 9, p. 72.

Contingency planning should be an important function of the entrepreneur. Most entrepreneurs and small-business owners lack experience in hiring people and often end up making a poor choice. Preparation in making bad decisions should be reflected in a plan so the entrepreneur will know what action to take when poor decisions are made. In addition, other staff members should also be involved and be aware of any contingency plan.

Burmeister, Paul. (March 2003). What to Present to Venture Capitalists. Strategic Finance, pp. 36-39.

This article describes some of the key aspects of each section of the business plan that should be presented to venture capitalists. It also emphasizes the importance of the format and the presentation of the business plan.

Chiagouris, Larry; and Brant Wansley. (September/October 2003). Start-Up Marketing. Marketing Management, vol. 12, no. 5, pp. 38-43.

This paper reflects on the experience of the authors as consultants and executives and develops insight as to marketing practices that make a difference for a start-up company. They report that the executives of these firms, representing a wide vari- ety of industries, all created formal marketing and business plans to obtain financ- ing for their ventures. Many also regarded monitoring competitor activity and industry trends as essential to success.

Clarke, Geri. (Summer 2005). International Marketing Environment Analysis. Marketing Review, pp. 159-73.

This paper proposes a framework for international industry and environmental analysis. The authors argue that international market analysis is lacking and that domestic environmental audits are not sufficient in the more complicated interna- tional markets.

Duffy, Bobby; Kate Smith; George Terhanian; and John Bremer. (2005). Comparing Data from Online and Face-to-Face Surveys. International Journal of Market Research, vol. 47, no. 6, pp. 615-39.

This paper explores some of the issues surrounding the use of Internet-based methodologies compared to face-to-face data collection. Data from parallel surveys using both data collection techniques are compared. The authors put forth a num- ber of theories as to why differences may exist.

Henricks, Mark. (December 2008). Do You Really Need a Business Plan? Entrepreneur, vol. 36, no. 12, pp. 92-95.

This article emphasizes the significance of preparing a business plan for a new venture. The cofounders of a new energy drink discuss how the business plan guided them through the start-up phase. In addition, they mention how the experience of the actual writing of the plan, through many revisions, convinced them of the benefits of the planning process.

Macrae, John. (October/November 2008). Improve Performance Before It's Too Late. U.S. Business Review, vol. 9, no. 8, pp. 14-15.

One of the inefficiencies of efforts to gather business and competitor intelligence is that analysis tends to focus on explaining the past rather than trying to understand what decisions need to be made in the future. A software intelligence tool called Dashboard allows users direct access to information that can improve their ability to make future management decisions.

!

______ --------------------·-- __________ -··-·--- ___________ Entrepr~_eu_o~p, Elg~<h!-ditlo~ --~2_2_5 __ .

D NOTES

CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 215

Mason, Colin; and Matthew Stark. (June 2004). What Do Investors Look for in a Busi- ness Plan? A Comparison of the Investment Criteria of Bankers, Venture Capitalists and Business Angels. International Small Business Journal, vol. 22, no. 3, pp. 227-48.

This article studies investors' perceptions of the business plan. The business plan is the ticket of admission giving the entrepreneur his first and often only chance to impress prospective sources of finance with the quality of the proposal. The decision by the prospective funder whether to proceed beyond the initial reading of the business plan to consider the proposal in more detail will therefore depend on the quality of the business plan used to support the funding proposal.

Matherne, Brett P. (November 2004). If You Fail to Plan, Do You Plan to Fail? Academy of Management Executive, vol. 18, no. 4, pp. 156-57.

This article discusses a study completed by Delmar and Shane regarding the signifi- cance of business planning. Their finding supports the argument that planning first, before any action is taken in starting a new venture, reduces the chance of failure. In this article it is argued that not only should planning take place but that the founders of any new venture need to also act immediately, even at the expense of completion of the business plan.

Mohanty, Soumendra. (December 2008). Measuring the Value of Intelligence in Busi- ness Intelligence. DM Review, vol. 18, no. 12, pp. 20-23.

This article focuses on the measurement of the value of intelligence in business intelligence (Bf). Bl is important in assisting the user to analyze large amounts of data and finding trends and activities in the environment that need action by man- agement. Identifying key performance indicators and quickly disseminating the data is an important part of effective business intelligence application.

Perry, Stephen C. (2001). The Relationship between Written Business Plans and the Fail- ure of Small Businesses in the U.S. Journal of Small Business Management, vol. 39, no. 3, pp. 201-8.

This paper describes a study that investigates the influence of planning on U.S. small-business failures. The main conclusion is that very little formal planning goes on in U.S. small businesses; however, nonfailed firms do more planning than similar failed firms prior to failure.

Sahlman, William A. (1997) . How to Write a Great Business Plan. Harvard Business Review, vol. 75, no. 4, pp. 98-108.

This paper proposes that a great business plan is one that focuses on a series of questions relating to four factors critical to the success of every new venture. These factors are: the people, the opportunity, the context, and the possibilities for both risk and reward. The questions related to these four factors are discussed.

Stein, Alexander. (December 2008/January 2009). Fear. Fortune Small Business, vol. 18, no. 10, pp. 78-81.

The recent financial crisis has affected many small businesses. This article discusses how fear and anxiety during a crisis can affect business decisions.

1. See Katherine A. Diaz, "A Champion for Small Business: GC Micro's Belinda Guadarrama Breaks Barriers," HispanicTrends.com (Spring 2003), pp. 1-6; GC Micro's 'Huge Step': Petaluma Computer Contractor Selected to Provide Equipment for Federal Agencies," The Press Democrat (November 7, 2007); and www.gcmicro.com .

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216 PART 3 FROMTHEOPPORTUNITYTOTHEBUSINESSPLAN

2. Donald F. Kuratko and Arnold Cirtin, "Developing a Business Plan for Your Clients," The National Public Accountant (January 1990), pp. 24-27.

3. Brian O'Reilly, "Rugs to Riches," Fortune Small Business (May 2007), pp. 51-54. 4. David E. Gumpert, "A Winning Plan Is Just the Start," BusinessWeek Online

(November 22, 2005). 5. Kristin Ohlson, "Get Creative," Entrepreneur (July 2008), pp. 62-67 . 6. William Hoffman, "Retailers' Online Gains," Traffic World (December 15, 2008), p. 15. 7. Marshall Breeding, "Winning the Competition for Attention on the Web,"

Computers in Libraries (June 2008), p. 31. 8. Mark Henricks, "Do You Really Need a Business Plan?" Entrepreneur (December

2008), pp. 92-95. 9. John Clyman, Molly K. Mclaughlin, Michael J. Steinhart, and Sahil Gambhir,

"Manage Your Customers and Contacts," PC Magazine (November 30, 2004), pp. 146-47.

APPENDIX 7 A: SAMPLE BUSINESS PLAN-GOPHER IT

The following business plan has been condensed and edited somewhat because of space requirements. However, the areas where editing has taken place are clearly iden- tified and do not in any way detract from the meaningfulness of this example. An average business plan will vary in length depending on the industry, the size of the appendix, and the number of illustrations. The actual text of a business plan would conservatively range between 15 and 25 pages.

Venture Description

Gopher It is a personal shopping service located in the downtown business district of Boston, Massachusetts. It is based on the belief that people's schedules today are more demanding; thus the value of personal leisure time has increased. As we continue the 21st century with more and more dual-career families, personal convenience services are a high-growth market opportunity. The professional white-collar employee in the downtown district, who has high disposable income and a strong motive to increase leisure time, represents the main focus of the venture's marketing efforts.

Running errands before work, during lunch breaks, or after work takes time and is often irritating. People often have to wait in line for services, fight traffic, and skip lunch or an opportunity for a quiet time away from the pressures of the office. Gopher It has established an errand service for professionals in the heart of the downtown business district of Boston. The company will be located at __ Street, on the first floor, where employees will have direct access to public transportation and customers will be able to stop by and conveniently request any service. Employees will typically be college students, who will perform services on foot, use public transportation, or ride a bicycle to efficiently meet customer needs. The office will contain storage space for pickup and delivery items as well as refrigeration for any specific food products. The entry area where customers will place their service order will be professionally deco- rated and staffed with trained individuals to answer questions and attend to customer needs. The number of staff will vary, depending on when the office is most busy (early morning, lunchtimes, and at close of business day).

The diverse services that will be offered are categorized as standard or custom. Standard services include dropping off and/or picking up laundry, dry cleaning, mail, tickets such as airline or theater, and prescriptions; shopping for groceries or gifts; and

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 217

making bank deposits. Customized or special services, not specifically listed or identi- fied, may also be offered based on the amount of time it takes to complete the errand. An example of a special service would be picking up an automobile that was being repaired. These special services would be priced on an hourly basis and, in the case of an automobile, may also include the expense of parking.

Industry Analysis

The service sector in the United States continues to grow. Entrepreneurs have initiated many new ventures in the service sector in response to greater demand for leisure time, the increasing number of dual-career families, and more disposable income.

Demographic Trends [This section of the business plan would provide statistical data and discussion of some of the significant demographic trends that would support the needs being addressed by this proposed venture.]

Competitor Analysis Although there are many indirect competitors to Gopher It, there are none in the Boston market that offer such a broad range of services. Courier services have existed for many years, but other service businesses have been slow in their response to customer needs by offering only pickup and delivery services. Today it is more common to find supermarkets, dry cleaners, restaurants, video stores, and auto re- pair shops offering pickup and/or delivery for their customers. Typically this service tends to be ad hoc, with little effort made to organize it based on customer needs.

Although there are a number of small businesses in other states that offer pickup and delivery services, none compares with Gopher It in terms of the extent of services offered. Shopping services for professional clients exist in almost every major market. However, Gopher It will not offer this service since it requires a distinctive trained and knowledge- able staff. There are also businesses that will pick up and deliver laundry, and others that will provide grocery shopping services. Most of these businesses are in the specific retail business for which they are providing the service; hence, their purpose is to offer pickup and delivery as an incentive to buy their retail goods. Some of the companies that offer pickup and delivery services that would indirectly compete with Gopher It are as follows:

[Direct and indirect competitors would be listed here with a description of their businesses and the services they provide.]

Marketing Plan

The marketing strategy was designed on the basis of personal interviews conducted with employers and business professionals in the downtown Boston market, which represents our target market. These interviews indicated that the individuals preferred to have someone else perform many of the time-consuming errands that they were re- quired to do on a weekly or regular basis. The majority of these individuals com- mented that they had less leisure time than in the past and, as a result, valued this free time more than ever before. They indicated a need for the types of services offered by Gopher It and a willingness to pay for these services.

The errand market is untapped and has a large customer base. The target market for our services would be white-collar, highly educated baby boomers, working in professional jobs and likely members of two-career professional households. The office is located in the downtown business district and near a major transit station where there are many individuals who fit our target market. Recent traffic statistics

228 I Entrepreneurship

218 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

indicated that more than 13,000 individuals would pass our office to and from their office to their transit stop. This high-traffic location lends itself to the convenience services that we can provide for our target market.

Marketing Goals

• To meet the growing needs of a target market defined on the basis of geography, demographics, lifestyle, and buyer intentions.

• To evaluate the competitive environment and continue to establish a differential advantage.

• To establish an effective and profitable marketing mix of service, place, price, and promotion.

Marketing Objectives

• To establish a customer base of 10 percent ofthe defined target market in the first year.

• To generate $150,000 in sales for the first year.

• To increase sales by 10 percent annually for the first three years.

• To expand to at least two new locations by the end of the first three years.

Size of Market According to our research, there are about 250,000 people in the cen- tral business district of the city of Boston. There are approximately 10,300 to 13,200 people (represents the primary market) who pass our office every business day. On the basis of our research and on demographic studies conducted in the city of Boston, about 75 percent of these individuals match our target market. This would consist of individuals between the ages of 28 and 65, male or female, with high disposable income, employed as professional businesspersons or office staff.

There is also the potential to reach an additional 10,000 customers who work on the fringe of this area and may not directly pass our office on a regular basis. This secondary market may be penetrated through advertising, word of mouth, and the distribution of marketing literature.

On the basis of the preceding information, it is estimated that the potential market is between 17,000 and 20,000 people. Our objective is to reach 10 percent of the primary market and 5 percent of the secondary market. Thus, in our first year the market would consist of about 1,275 customers.

Service The services that will be provided by Gopher It are designed to provide cus- tomers with the benefits of convenience and the saving of time. Although the services vary widely, there are standard services offered to the customer. Standard services in- clude lunch delivery, dry cleaning pickup and drop-off, grocery shopping (maximum of 10 items), and gift shopping in the downtown area. Customized services of almost any kind will also be offered on a fee-for-time basis. Examples of these customized services are auto pickup and/or drop-off, pickup of theater tickets, supply pickup, post office visits, and bank deposits. Delivery and pickup will typically involve walking, riding a bicycle, or using the transit. The most efficient and economic solution will be chosen for each situation.

Price Pricing strategy is based on a fee per errand. This strategy was determined from an evaluation of Errands Unlimited, a similar business located in Milwaukee, Wisconsin, as well as a marketing research study of the target market. For the customized services

I

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 219

the price will be based on the amount of time necessary to perform the errand, includ- ing time in transit. The lowest fee would be $5 for a quick errand that took less than five minutes. Prices for errands taking longer than five minutes would increase accord- ingly and are indicated below.

Miscellaneous Personal Services

Pick up tickets for theater district shows.

Pick up tickets for sporting events.

Wait in line for a book autograph.

Pick up automobile at repair shop.

Post office visits.

Office supply shopping.

Bank deposits.

Any other personal errands.

Time Spent (in Minutes)

(}-5

6-10

11-15

16- 20

21-25

26 +

Price

$10

$15

$20

$25

$30

$40

Regular or Standard Services Price

Express lunch delivery $7

Dry clean ing drop-off $7

Dry cleaning pickup $7

Grocery shopping (maximum of 10 items) $12

Gift shopping in downtown area $18

Promotion Gopher It w ill rely extensively on word-of-mouth advertising. However, it will be important to create an awareness of our services to the target market. To at- tract attention and to create awareness, signs will display our name and describe our services to the many individuals who actually pass by the office. Pamphlets will also be distributed to office buildings in the target market.

Facilities Plan The location of Gopher It w ill be in the lobby at __ Street in the downtown district of Boston. This location is idea l because it provides access to a large base of potential customers who pass the office going to and from work to the transit station or garage as well as those who strol l around the area during lunchtime . Esti- mates of the da ily traffic are between 4,000 and 5,000 individua ls passing through the lobby at each rush hour, which projects to between 8,000 and 10,000 passes per day. There are also about 1,000 people who work in this building and another 1,300 to 2,200 individuals who pass through the lobby at non-rush-hour time. Thus, in a typical day there are between 10,300 and 13,200 potential consumers who are likely to pass by our bus iness location. If we also include t he Bank of Boston and Shawmut building,

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220 PART 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

both on a connecting street, we have effectively extended our potential market to over 20,000 people. This large base of potential consumers is an excellent target mar- ket for our services. Even with limited resources, our storefront and location will be an important asset in promoting an awareness of Gopher It's services.

The initial location will be leased. Rent will be based on a $40 per square foot price. With electricity and other charges the rental cost will be $50 per square foot or $10,000 per month.

Certain equipment will also be necessary to operate the business effectively-a mul- tiline phone system; computer and printer; fax machine; storage for hot and cold foods; and storage for garments, gifts, and groceries. Counters will be set up in a small area at the front of the office for conducting business with clients. Little space is needed for the attendant, whose main function will be to take orders from walk-in clients and to answer the phone for call-in orders. The storage space would have food storage on one side and garment and gift storage on the other.

Organizational Plan

Gopher It will be established as a partnership. There will be three partners: David Wilson, Jack Welch, and Laura Shanley. Each will assume an equal ownership in the business. Background and roles of each of the three partners are described in the fol- lowing. A partnership agreement is summarized in the Appendix.

Management Team Background David Wilson was born in San Diego, California, and graduated from Swarthmore College with an accounting degree. Past employers include numerous restaurants, a specialty retailer, and a large bank (mutual funds). He has sig- nificant experience in managing and training people as well as financial management.

Jack Welch was born in Atlanta, Georgia, and has a food science degree from the University of Maryland and an MBA degree from Boston Col lege. He has had extensive experience in food retailing and more recently in sales and marketing with a large con- sumer food producer.

Laura Shanley was born in Jamaica Plain, Massachusetts, and has a bachelor of science degree in marketing from Boston College. She has extensive experience in a family business, a chain of small retail gift shops. This g ift shop experience involved expansion to new locations, buying, promotion, and customer relations. The business has since been sold, and Laura is seeking new endeavors in a start-up venture.

Duties and Responsibilities of the Partners

Laura Shanley-General Administrator and Manager Laura will oversee the daily operations of the business. This includes the hiring and firing of employees as well as training and supervising. Periodic employee evaluations will be completed by the general administrator and manager. She will also handle all purchasing for the office and will be responsible for opening and closing the office each day.

Jack Welch-Marketing and Sales Manager Jack will be responsible for creating promotional activities, monitoring sales, and establishing effective strategies for creating awareness of the business. He will be responsible for the design and distribution of all direct marketing materials.

David Wilson-Financial Manager David will be responsib le for finance, accounting, payroll, billing, taxes, and any other matters related to sales and revenue budgets.

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CHAPTER 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 221

The Financial Plan

Financial statements are presented in the following pages. Explanations of all financial information are also provided. The business is expected to break even in the early part of the second year with the first positive profit achieved in the month of August. Total start-up expenditures will be about $20,000. We are seeking a $40,000 loan that will be paid back over five years at 12 percent.

Risk Assessment

The proposed errand service offered by Gopher It, although free from any direct compe- tition, has a very low barrier to entry. Setup costs and high liquidity will be a significant attraction to competitors, who could subsequently penetrate some of Gopher It's mar- ket. Gopher It will need to rely on its quality of service and being first in the market to protect its market share. Our convenient location and flexibility in providing a wide range of services should support the long-term success of Gopher It in this market.

Appendix*

Resumes of Partners

Partnership Agreement

Lease Agreement

Facility Layout

Market Research Survey Results

Marketing Brochure with Price List

*The actual information in the Appendix has not been included because of space. However, the student should be able to infer from the example provided here the scope and content of a complete business plan.