A feasibility study of business idea

192 P A R T 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

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 contin- ued to increase in spite of the economic downturn. In 2011 online sales are expected to reach approximately $197 billion, an increase of about 12 percent over 2010. In Western Europe online sales have risen 13 percent in 2011 to about $125 billion. Increased gas prices and convenience are the major reasons for the increase in e-commerce sales. 6 An entrepreneur in the process of writing a business plan can also access one of the popular search engines: Google, Yahoo!, BING, MSN, AOL, or Ask Jeeves. Simply con- ducting a search of a topic (for example, “online sporting goods”) may reveal several Web sites, articles, or sources of information to assist the entrepreneur in writing the business plan. Use of these search engines has become a commonplace procedure now to answer questions or gather information either for personal use or business purposes. 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. A discussion group is an online forum where one can discuss a topic specific to the Web site with others. Individuals post responses to questions on the Web site. Blogs refer more to talking to or about something rather than creating a dialogue. Social networks are the fastest growing new trend in technology. They are Web sites where those with similar interests can communicate using such sites as MySpace, Twitter, LinkedIn, Windows Live Spaces, or Facebook. These are the most popular networks in the U.S. and they serve many uses depending on the needs of the entrepreneur. Marketing strategies utilizing these social networks are discussed in Chapter 8. Using Usenet, which represents the newsgroups on the Internet, 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 services. Individuals who are members of the newsgroups will then respond to these questions, 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 under- standing 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. This outline is only meant to be a guide. As we discussed earlier in this chapter the entrepreneur should be aware that each busi- ness plan may be different depending on the purpose of the plan and who will be reading it. However, most of the items in this outline are critical elements in a general plan and should be

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 193

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 III. Industry Analysis A. Future outlook and trends B. Analysis of competitors C. Market segmentation D. Industry and market forecasts IV. Description of Venture A. Product(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 business 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. Market research data C. Leases or contracts D. Price lists from suppliers

TABLE 7.3 Outline of a Business Plan

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194 P A R T 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

addressed by the entrepreneur. Each of the items in the outline is detailed in the following paragraphs of this chapter. Key questions in each section are also appropriately detailed.

Introductory Page This is the title or cover page that provides a brief summary of the business plan’s con- tents. 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.

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.

TABLE 7.4 Sample Introductory Page

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 195

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 interna- tional level 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

environmental analysis Assessment of external uncontrollable variables that may impact the business plan

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196 P A R T 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

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 provide 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 data- bases that can be researched for relevant data to incorporate into this section of the busi- ness 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 Patterns, Current Industrial Reports, Service Annual Survey, and Monthly Re- tail and Food Service Sales and Inventories. More specific data on demographic trends and possible target market numbers can be found in: Profiles of General Demographic Characteristics 2010 Census/Population, Mediamark Reporter, and Lifestyle Market

industry analysis Reviews industry trends and competitive strategies

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 197

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. After 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. After enlarging a local map, the entrepreneur noted that the morning flow of traffic

description of the venture Provides complete overview of the product(s), service(s), and operations of a new venture

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 will 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?

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198 P A R T 3 FROM THE OPPORTUNITY TO 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 a U-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 from 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

TABLE 7.6 Describing the Venture

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?

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 199

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 from production to the customer. It might include inventory or storage of manufactured

production plan Details how the product(s) will be manufactured

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?

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200 P A R T 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

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 turn, affect service quality (including such factors as reliability, 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 comprehensive 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 partner- ship, 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 organization. Table 7.8 summarizes some of the key questions the entre- preneur 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 interact in performing their management functions. Chapter 9 provides more detail on this part of the business plan.

marketing plan Describes market conditions and strategy related to how the product(s) and service(s) will be distributed, priced, and promoted

organizational plan Describes form of ownership and lines of authority and responsibility of members of new venture

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 201

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. The last financial item needed in this section of the business plan is the projected balance sheet. This shows the financial condition of the business at a specific time. It sum- marizes 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

assessment of risk Identifies potential hazards and alternative strategies to meet business plan goals and objectives

financial plan Projections of key financial data that determine economic feasibility and necessary financial investment commitment

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?

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202

included. Any assumptions considered for the balance sheet or any other item in the finan- cial 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 neces- sary 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 included 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 opera- tions. It is important that the implementation of the strategy contain control points to ascer- tain progress and to initiate contingency plans if necessary. Some of the controls necessary in manufacturing, marketing, financing, and the organization are discussed in subsequent

A S S E E N I N B U S I N E S S N E W S AN UNUSUAL START-UP: ELEVATOR PITCH FOR COFFEE POUCHES

A softball teammate tells you about a new product he has heard about that substitutes for chewing tobacco. You have recently sold your business in California and you are looking for some opportuni- ties to invest your money in an interesting start-up. As a longtime athlete in high school and college you have continued to play softball in local leagues and would love to entertain some way to invest in a prod- uct that would involve professional athletes. Would you consider investing in the new product? We all watch baseball players that are often chew- ing tobacco and constantly spitting, much to the dis- may of viewing audiences. Pat Pezet and Matt Canepa have a solution to the chewing tobacco problem as well as a great substitute for those who need a caf- feine boost and do not have the ability to make a cup of coffee. Their innovation is chewable flavored cof- fee pouches that contain about as much caffeine as a quarter cup of coffee as well as a small amount of vitamins. They come in two flavors: mint chocolate and mocha. Matt and Pat were both amateur and mi- nor league baseball players and were finishing their degrees at California Polytechnic State University when one night while working on an economic

project, they decided to stuff wads of coffee grinds in their mouths instead of making a pot of coffee. The caffeine “kicked in” and they both decided that they might be on to something. After this discovery the two friends won a couple of business plan competitions that netted them funds and interest from investors who heard their presenta- tion. In 2009 with their business plan and initial fund- ing they launched Grinds. As a rollout they targeted minor and major league baseball players with Grinds as a substitute for chewing tobacco. Word of mouth quickly elevated their success such that a number of players have become testimonials for the product. Revenues in 2011 are expected to break the six fig- ure mark by the end of the year. With limited funds they have utilized social networks such as Twitter and Facebook to get the word out about their prod- uct. They are considering FDA approval since the product is considered a supplement. Other options are to increase the flavors offered and to consider other channels of distribution such as retail stores.

Source: Adapted from www.getgrinds.com ; www.twitter.com/ getGRINDS ; www.facebook.com/getGRINDS ; and “Grinding It Out,” by Matt Villano, Entrepreneur (September 2011), p. 21.

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 203

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 often given is that planning is dull or boring and is something used only by large compa- nies. This may be an excuse; perhaps the real truth is that some entrepreneurs are afraid to plan. 7 Planning is an important part of any business operation. Without good planning, the entrepreneur 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 impor- tant for the entrepreneur. 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, instead, that businesses fail because of the entrepreneur’s inability to plan effectively. In- telligent planning is not a difficult or impossible exercise for the inexperienced entrepre- neur. 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 frequent 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 inven- tory, 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.

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204 P A R T 3 FROM THE OPPORTUNITY TO THE BUSINESS PLAN

• 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. 8

Updating the Plan The most effective business plan can become out-of-date if conditions change. Environ- mental factors such as the economy, customers, new technology, or competition—and in- ternal 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, indus- try, and market. If these changes are likely to affect the business plan, the entrepreneur should determine what revisions 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 operate 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.

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 205

IN REVIEW

S U M M A R Y

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 consultants. 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. 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-organized 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 information 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 ob- jectives also provide a framework for setting up controls for the business 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.

R E S E A R C H T A S K S

1. There are many software packages that aim to help entrepreneurs write a business plan. Research the Internet and select three of these software packages. What is different about them? How are they similar? How can they assist an entrepreneur in the preparation of his final business plan?

2. Find five business plans in your library. 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.

C L A S S D I S C U S S I O N

1. Given the difficulties in accurately predicting the future, is a business plan useful? Provide three reasons for writing one and three reasons for not preparing a plan. What is your conclusion and why?

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?

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206 P A R T 3 FROM THE OPPORTUNITY TO THE 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 risks 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?

S E L E C T E D R E A D I N G S

Bartes, Frantiŝek. (2011). Action Plan—Basis of Competitive Intelligence Activities. Economics and Management, vol. 16, pp. 664–69.

Competitive intelligence has become an important business practice. The author argues that competitive intelligence is often improperly understood. His view is that it is a means of forecasting the future. It then becomes the basis of planning and important strategic decision making.

Bekiaris, Maria; and Dan Warne. (September 2010). Starter Kit. Money, pp. 36–38. This article provides important questions and answers related to starting a new business. The plan is regarded as one of the most important steps to get a new venture on the right path. Responses to questions regarding registering a business, setting up a company bank account, determining insurance needs, where to get help, and how to set up an efficient office are all addressed.

Bewayo, Edward D. (2010). Pre-Start-Up Preparations: Why the Business Plan Isn’t Always Written. Entrepreneurial Executive, vol. 15, pp. 9–23.

This paper summarizes the results of a survey of 355 small business owners in New Jersey. It found that 50 percent of these businesses prepared a business plan. The main reasons for not preparing a plan was either because the venture did not need financing or the entrepreneurs had prior experience that substituted for a business plan. However, about half of those entrepreneurs that had experience still felt compelled to prepare a business plan. There was also a high correlation between the preparation of a plan and the need for external financing.

Deeter-Schmelz, Dawn R.; Rosemary P. Ramsey; and Jule B. Gassenheimer. (Summer 2011). Bleu Ribbon Chocolates: How Can Small Businesses Adapt to Changing Environment? Mar- keting Education Review, vol. 21, issue 2, pp. 177–82.

A small regional manufacturer of chocolates that markets to trade accounts, corporate- owned stores, and online/mail is faced with declining sales in a poor economy and changes in consumer life styles. The paper focuses on serious strategic issues such as changing the product line, considering more in-source manufacturing, reducing the number of company-owned stores, increasing sales to retail outlets, or just waiting for the economy to turn around.

Finley, Daniel C. (January/February 2011). A Plan for Success. Advisor Today, vol. 106, issue 1, pp. 58–59.

Highlighted here are views on how to accomplish goals set in the planning process. The author addresses the importance of building a blueprint with details on goals and strategy to meet these goals.

Gjerde, Thomas J.; and Thomas J. Harlow . (2010 Supplement). Valuing a Turnaround Plan for a Company in the Restaurant Equipment Business. Journal of the International Academy for Case Studies , pp. 39–48.

A case study on TastySlush’s plan to restore its reputation is discussed in this paper. It provides a case study of why this company failed to maintain quality and durability

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C H A P T E R 7 THE BUSINESS PLAN: CREATING AND STARTING THE VENTURE 207

in its frozen dessert and beverage equipment. A consultant was hired to provide a turnaround plan to revive the company’s reputation in the food equipment business.

Komoszewski, Jim. (March 2011). Creating a Business Plan. Investment Advisor, vol. 31, issue 3, pp. 60–64.

This article discusses the importance of financial advisors to prepare and implement a business plan. It outlines the elements of a note card plan in order to guide investors to define goals, build a strategy, and implement changes in their business.

Robinson, Sherry; and Hans Anton Stubberud. (2011). Gender Differences in Entrepre- neurs’ Perceived Problems, Profits, and Plans. International Journal of Entrepreneurship, vol. 15, pp. 25–44.

This is a study of European business owners that had started their business and were still in operation after three years. Thus they were considered successful. Im- pediments to selling products and services due to competition and lack of demand were most often mentioned. Gender differences were also reported, with women incurring lower levels of profitability.

Schnuer, Jenna. (September 2011). Rebuild Rebuild. Entrepreneur, vol. 39, issue 9, pp. 76–78.

This is a good example of how to control and track inventory using a mobile device application called Thrive. The owner of a home furnishing store utilized this appli- cation to improve his business strategy.

E N D N O T E S

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 .

2. See Kate Lister, “Myth of the Business Plan,” Entrepreneur (January 2011), pp. 64–65; “A Simple Plan,” Entrepreneur (August 2010), p. 38; and Sarah Simoneaux and Chris Stroud, “A Business Plan: The GPS for Your Company,” Journal of Pension Benefits: Issues in Administration 18, issue 2 (Winter 2011), pp. 92–95.

3. Jack Kwicien, “Put Your Plan into Action,” Employee Benefit Advisor (April 2011), pp. 60–62.

4. See http://www.sba.gov/about-offices-content/2/3126/success-stories . 5. Jennifer Wang, “A Refined Taste,” Entrepreneur (April 2011), pp. 28–34. 6. See www.Fortune3.com ; and www.hometextilestoday.com . 7. See Jason Daley, “First Lesson: Trust Your Gut,” Entrepreneur (March 2010),

p. 106; and Carl Richards, “Planning without Fear,” Financial Planning (April 2010), pp. 93–94.

8. Allan Kent, “Choosing the Right CMS for Your Website,” NZ Business (May 2011), pp. 46–47.

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