DEVELOPING AN EFFECTIVE BUSINESS PLAN Entrepreneurship Management Lecture Series

Background

Background (source:Naron/shane)Entrepreneurs often dismayed when they receive lukewarm reception from finance housesventure capitalists, business angels, etc---to their perceived great business ideas.Entrepreneurs must realise that they face a serious and tough task centered around the process of persuasionthe task of inducing others to share our views and see the world the way we do.Tatistics show that more than 60% of small , new companies have no business plan or no written plans of any kind.

Why should an entrepreneur write a business plan?Is a business plan a predictor of ultimate success?How do venture capitalists and other potential investors actually evaluate business plans?

Pitfalls to Avoid in PlanningPitfall 1: No Realistic GoalsPitfall 2: Failure to Anticipate RoadblocksPitfall 3: No Commitment or DedicationPitfall 4: Lack of Demonstrated Experience (Business or Technical)Pitfall 5: No Market Niche (Segment)

What is a Business Plan?

Why write a Business Plan?Business Plan is a detailed roadmap for converting a recognised opportunity into a profitable business. (Baron & Shane, 2008:206).A business plan described the new ventures business model how it will actually operate and how it will, potentially make a profit.Comprehensive business pan describes:- opportunity- how the product or service will be produced or delivered

Why write a Business Plan? Contd- what skills and abilities the founding team brings to the new venture- how the company will be structured- how the new company will gain a competitive advantage- what critical risks it faces- what financial resources it needs

What is a Business Plan? Contd Every aspect of the venture needs to be covered:the project, marketing, research and development, manufacturing, management, critical risks, financing, and milestones or a timetable.

Benefits of a Business PlanSpecifically for the entrepreneur:The time, effort, research, and discipline needed to put together a formal business plan forces the entrepreneur to view the venture critically and objectively.The competitive, economic, and financial analysis included in the business plan subject the entrepreneur to close scrutiny of his or her assumptions about the ventures success.

Benefits of a Business Plan, cont.Since all aspects of the business venture must be addressed in the plan, the entrepreneur develops and examines operating strategies and expected results for outside evaluators.The business plan quantifies objectives, providing measurable benchmarks for comparing forecasts with actual results.The completed business plan provides the entrepreneur with a communication tool for outside financial sources as well as an operational tool for guiding the venture towards success.

Benefits of the Business Plan contdSpecifically for the financial sources:Details of the market potential and plans for securing a share of that market.The ventures ability to service debt or provide an adequate return on equity.Identifies critical risks and crucial events with a discussion of contingency plans.A clear, concise document that contains the necessary information for a thorough business and financial evaluation.

Key Aspects of Information in Business Plans

Components of a Business Plan

Components of a Business PlanBusiness Plan should address basic questions:- what is the basic idea for the new product or service?- why is this new product useful or appealing and to whom?- how will the idea for the new venture be realised ---what is the overall plan for making the product, for marketing it, for dealing with existing and future competitions

Components of a Business Plan- who are the entrepreneursdo they have the required knowledge, experience, and skills to develop this idea and to run a new company?- how will the new venture be structured, and how will it operate once it is launched?

Components of a Business Plan- if the plan is designed to raise money, how much funding is needed, what type of financing I required, how will it be used, and how will both entrepreneurs and other individuals realise a return on their investment

Components of a Business PlanPay particular attention to the following basic principles:- the plan should be arranged and prepared in proper business form- the plan should be succinct- the plan should be persuasiveWhere will the information for the business plan come from?.......feasibility analysis

Components of a Business PlanQuality of the idea behind the new venture and the quality (experience, expertise. Skills) of the individuals who put the business plan together are crucial elements.

The Five-Minute ReadingStep 1: Determine the characteristics of the venture and its industryStep 2: Determine the financial structure of the plan (amount of debt or equity investment required)Step 3: Read the latest balance sheet (to determine liquidity, net worth, and debt/equity)Step 4: Determine the quality of entrepreneurs in the venture (sometimes the most important step)Step 5: Establish the unique feature in this venture (find out what is different)Step 6: Read the entire plan over lightly (this is when the entire package is paged through for a casual look at graphs, charts, exhibits, and other plan components)

Putting the Package TogetherAppearanceLengthThe cover and title pageThe executive summaryThe table of contents

Guidelines to RememberKeep the Plan Respectably ShortOrganize and Package the Plan AppropriatelyOrient the Plan Toward the FutureAvoid ExaggerationHighlight Critical RisksGive Evidence of an Effective Entrepreneurial TeamDo Not OverdiversifyIdentify the Target MarketKeep the Plan Written in the Third PersonCapture the Readers Interest

Components of a Business PlanExecutive summary- brief & to the point 2-3 pages maximum- provide a brief, clear and persuasive overview of what the venture is all about- provide answers to all critical questions

Components of a Business PlanBackground, Purpose and Opportunity: describes the idea (opportunity) and current state of the new venture - General description of business-Industry background- Goals and potential of the business and milestones (if any)- Uniqueness of product or service

Components of a Business PlanMarketing- Research and analysis1. Target market (customers) identified2. Market size and trends3. Competition4. Estimated market share-

Components of a Business PlanMarketing-Marketing plan1. Market strategy sales and distribution2. Pricing3. Advertising and promotionsCompetition- information existing competition- how it will be overcome, pricing, etc

Components of a Business PlanDevelopment, Production and Location- where the product/service is right now in terms of development- how it will move toward actual production or delivery- where the new venture will be located- how the new venture will be operated

Production/Operation- Identify location: advantages; zoning & taxes- Proximity to suppliesAccess to transportation

Components of a Business PlanFinancial Section- Financial forecast1. Profit and loss2. Cash flow3. Break-even analysis4. Cost controls5. Budgeting plans

Components of a Business PlanManagement- Description of human capital of founding team experience, skills & knowledge- human resources needed in months ahead- information on current ownership- Management team key personnel- Legal structure stock agreements, employment agreements, ownership- Board of directors, advisors, consultants

Components of a Business Plan contdRisk Factors- what are the potential risks new venture faces?a. Price cutting by competitionb. unforeseen industry trends that make the new product/service less desirablec. Sales projections not achievedd. design, manufacturing or shipping costs that exceed estimatese. Problems stemming from managements lack of experience

Components of a Business Plan contdRisk Factors- what are the potential risks new venture faces?f. Longer expected lead times with respect to obtaining parts or raw materialsg. Difficulties in raising additional required fundingh. unforeseen political, economic, social or technological trends or development

Components of a Business Plan contdRisk Factors- Potential Problems- Obstacles and risks- Alternative courses of action

Components of a Business Plan contdHarvest or Exit- Transfer of asset- Continuity of business strategy- Identify successor

Components of a Business Plan contdScheduling and Milestones- formal incorporation of the new venture- completion of product or service design- completion of prototypes- hiring of initial personnel- product display at trade shows- reaching agreements with distributors and suppliers

Components of a Business Plan contdScheduling and Milestones- reaching agreements with corporate partners if desired- moving into actual production- receipt of initial orders- first sales and deliveries- profitabilityAppendices

Seven Deadly Sins for New VenturesIf one or more of these errors or problems are present in a business plan, it is likely to be rejected by potential investors, no matter how good other aspects of the plan may be:

- The plan is far too slick- Executive summary too long and does not get to the point- Not clear where the product is with respect to production- not clear why anyone would want to buy the product or service

Seven Deadly Sins for New VenturesPlan is poorly prepared; looks unprofessionalNo clear statement of the qualifications of the management teamFinancial projections are widely and unreasonably optimistic

Evaluation of the Business PlanAsking entrepreneurs what factors influence their decisions about new ventures seems reasonable but unfortunately they are not very good at identifying the factors that affect their decisions, especially complex ones.Investors are most often influenced by the following factors: founding teams capability, attractiveness of the product or service, potential markets and existing or potential competitors, and potential returns of the new venture

Evaluation of the Business PlanResearch findings have identified the following factors as critical in investor decision making:Market familiarityLeadership ability of the founding teamProprietary protection of products or servicesMarket growth in recent yearsNumber of competitorsStrength of competitors Entrepreneurs should always devote careful attention to these factors in their business plans

Presentation of the Business PlanEntrepreneurs should view invitations to give verbal presentations about their idea and their company as a challenge a chance to share rather than as a high-stress situation in which they overwhelmed.Rehearse the presentationBe familiar with any equipment

Presentation of the Business PlanBecause such presentations are so important to the future of the new venture, entrepreneurs should take them seriously and try to do an outstanding job.

Presentation of the Business PlanSteps that can help entrepreneurs accomplish this goal include selecting content carefully, avoiding technical jargon, showing enthusiasm tempered by reality, rehearsing carefully, paying careful to basic aspects of presentation, and adopting a cooperative attitude toward questions.

Presentation of the Business PlanEntrepreneurs should view rejections by potential investors as an opportunity to learn to improve both their business plan and their verbal presentations

ReferencesBaron/Shane, (2008), Entrepreneurship: A Process Perspective, Thomson south Western.