Chapter 4

Writing a business plan.

Chapter Objectives
 Explain the purpose of a business plan.
 Describe the two primary reasons for writing a business plan.
 Describe who reads a business plan and what they’re looking for.
 Explain the difference between a summary business plan, a full business plan,
and an operational business plan.
 Explain why the executive summary may be the most important section of a
business plan.
 Describe a milestone and how milestones are used in business plans.
 Explain why it’s important to include separate sections on a firm’s industry and
its target market in a business plan.
 Explain why the “Management Team and Company Structure” section of a
business plan is particularly important.
 Describe the purposes of a “sources and uses of funds” statement and an
“assumptions sheet.”
 Detail the parts of an oral presentation of a business plan.

I. Business Plan
Only 31% of entrepreneurs write a business plan, but those are 6 times more likely to
start an actual business

A business plan is a written narrative, typically 25 to 35 pages long, that describes what
a new business plans to accomplish.
Dual-Use Document: for most new ventures, the business plan is a dual-purpose
document used both inside and outside the firm.

A. Reasons to write a business plan

1. Internal reason: Forces the founding team to systematically think through every
aspect of their new venture and blueprint.
2. External reason: Communicates the merits of a new venture to outsiders,
provides a selling document to present to investors, suppliers and bankers.

B. Who Reads the Business Plan—And What Are They Looking For?
1. A firm’s employee: A clearly written business plan helps the employees of a firm
operate in sync and move forward in a consistent and purposeful manner, even
though the market conditions change rapidly.
2. Investors and other external shareholders: A firm’s business plan must make the
case that the firm is a good use of an investor’s funds or the attention of others.
To appeal to this group, the business plan must be realistic and not reflective of
overconfidence on the firm’s part. At the same time, the plan must clearly
demonstrate that the business idea is viable and offers potential investors
financial returns greater than lower-risk investment alternatives.
 C. Guidelines for Writing a Business Plan

1. Structure of the Business Plan

To make the best impression a business plan should follow a conventional structure,
such as the outline for the business plan shown in the chapter. Although some
entrepreneurs want to demonstrate creativity, departing from the basic structure of the
conventional business plan is usually a mistake. Typically, investors are busy people and
want a plan where they can easily find critical information.

Software Packages: There are many software packages available that employ an
interactive, menu-driven approach to assist in the writing of a business plan. Some of
these programs are very helpful. However, entrepreneurs should avoid a boilerplate
plan that looks as though it came from a “canned” source.

Sense of Excitement: Along with facts and figures, a business plan needs to project a
sense of anticipation and excitement about the possibilities that surround a new
venture.

Typical business plan redflags:

 Founders with none of their own money at risk
 A poorly cited plan: cite sources for all primary and secondary research.
 Defining the market size too broadly
 Overly aggressive financials: sober, well-reasoned statements backed by sound
research and judgment gain credibility quickly.
 Sloppiness in any area

2. Content of the Business Plan

The business plan should give clear and concise information on all the important aspects
of the proposed venture. It must be long enough to provide sufficient information yet
short enough to maintain reader interest. For most plans, 25 to 35 pages is sufficient.

3. Style or Format of the Business Plan

The plan’s appearance must be carefully thought out. It should look sharp but not give
the impression that a lot of money was spent to produce it. 3 Types of Business Plans:

4.Recognizing the Elements of the Plan May Change

It’s important to recognize that the plan will usually change while written. New insights
invariably emerge when an entrepreneur or a team of entrepreneurs immerse
themselves in writing the plan and start getting feedback from others.
II. Outline of Business Plan
A suggested outline of a business plan is shown on the next several slides. Most business
plans do not include all the elements introduced in the sample plan; we include them
here for the purpose of completeness. Each entrepreneur must decide which elements to
include in his or her plan. First cover letter and table of content should include the
company’s name, address, phone number, date, contact information for the lead
entrepreneur and the company’s web site address if it has one.

Section 1: Executive Summary

The executive summary is a short overview of the entire business plan. It provides a
busy reader with everything that needs to be known about the new venture’s distinctive
nature. An executive summary shouldn’t exceed two single-spaced pages.
 In many instances an investor will ask for a copy of a firm’s executive summary
and will ask for a copy of the entire plan only if the executive summary is
sufficiently convincing. The executive summary, then, is arguably the most
important section of a business plan and should be done at the end.

Section 2: Industry Analysis

This section should begin by describing the industry the business will enter in terms of
its size, growth rate, and sales projections.
Items to include in this section:
 Industry size, growth rate, and sales projections
 Industry structure: refers to fragmented (more open to new entrance) or
concentrated.
 Nature of participants
 Key success factors
 Industry trends: technological advances, social trends, economic trends, political
and regulatory changes.
 Long-term prospects

Before a business selects a target market it should have a good grasp of its industry—
including where its promising areas are and where its vulnerability are. The industry
that a company participates in largely defines the playing field that a firm will
participate in.

Section 3: Company Description

This section begins with a general description of the company.
Items to include in this section:
 Company description
 Company history: brief, explain driving forces, make it human.
 Mission statement: defines why a company exist and what it aspires to become (+
tagline).
 Products and services: explanation, UPS, show analytical measures here.
 Current status
 Legal status and ownership
 Key partnerships (if any)
While at first glance this section may seem less important than the others, it is extremely
important. It demonstrates to your reader that you know how to translate an idea into a
business.
Section 4: Market Analysis
The market analysis breaks the industry into segments and zeros in on the specific
segment (or target market) to which the firm will try to appeal.
Items to include in this section:
 Market segmentation and target market selection: geographically,
demographically, psychographic variables, and so forth.
 Buyer behavior
 Competitor analysis
 Firm’s annual sales and market shares, to do so:
1. Utilize the Multiplication Method: two approaches that fit this category. Start-ups
that plan to sell a product on a national basis normally use a top-down approach.
This involves trying to estimate the total number of users of the product, estimate
the average price customers pay, and estimate what percentage of the market
your business will garner. Start-ups that plan to sell locally normally use a more
bottom-up approach. This approach involves trying to determine how many
customers to expect and the average amount each customer will spend.
2. Find a Comparable Firm: and ask for an estimate of annual sales.
3. Contact Industry Trade Associations: ask if they track the sales numbers for
businesses that are similar to your business. If not, ask if there are other rules of
thumb that help new companies estimate sales as average sales per square foot”
or “average sales per employee” .
4. Conduct Internet Searches
.
Most start-ups do not service their entire industry. Instead, they focus on servicing a
specific (target) market within the industry. It’s important to include a section in the
market analysis that deals with the behavior of the consumers in the market. The more
a start-up knows about the consumers in its target market, the more it can tailor its
products or services appropriately.

Section 5: The Economics of the Business

This section addresses the basic logic of how profits are earned in the business and how
many units of a business’s profits must be sold for the business to “break even” and then
start earning a profit.
Items to include in this section:
 Revenue drivers and profit margins
 Fixed and variable costs
 Operating leverage and its implications
 Start-up costs
 Break-even chart and calculations
•Two companies in the same industry may make profits in different ways. One may be a
high-margin, low-volume business, while the other may be a low-margin, high-volume
business. It’s important to check to make sure the approach you select is sound.
Computing a break-even analysis is an extremely useful exercise for any proposed or
existing business.

Section 6: Marketing Plan

The marketing plan focuses on how the business will market and sell its product or
service. The best way to describe a company’s marketing plan is to start by articulating
its marketing strategy, positioning, and points of differentiation, and then talk about
how these overall aspects of the plan will be supported by price, promotional mix and
sales process, and distribution strategy. Of course only important points.

Items to include in this section:

 Overall marketing strategy
 Product, price, promotions, and distribution
 Sales process (or Cycle): very important
 Sales tactics: specific.

Section 7: Design and Development Plan

If you’re developing a completely new product or service, you need to include a section
in your business plan that focuses on the status of your development efforts.
Items to include in this section:
 Development status and tasks: conception, prototyping, initial production, and full production.
 Challenges and risks
 Projected development costs
 Proprietary issues (patents, trademarks, copyrights, licenses, brand names)

Many seemingly promising start-ups never get off the ground because their product
development efforts stall or the actual development of the product or service turns out
to be more difficult than thought. As a result, this is a very important section for
businesses developing a completely new product or service.

Section 8: Operations Plan

Operations plan are outlines how your business will be run and how your product or
service will be produced. A useful way to illustrate how your business will be run is to
describe it in terms of “back stage” (unseen to the customer) and “front stage” (seen by
the customer) activities.
Items to include in this section:
 General approach to operations
 Business location
 Facilities and equipment
Your have to strike a careful balance between adequately describing this topic and
providing too much detail. As a result, it is best to keep this section short and crisp.

Section 9: Management Team and Company Structure

The management team of a new venture typically consists of the founder or founders
and a handful of key management personnel.
Items to include in this section:
 Management team
 Board of directors
 Board of advisers
 Company structure

•This is a critical section of a business plan. Many investors and others who read the
business plan look first at the executive summary and then go directly to the
management team section to assess the strength of the people starting the firm.
Each profile should include : Title of the position Duties and responsibilities of the position, Previous industry
and related expérience, Previous successes, Educational background

Section 10: Overall Schedule

A schedule should be prepared that shows the major events required to launch the
business. The schedule should be in the format of milestones critical to the business’s
success.
Examples of milestones:
 Incorporating the venture
 Completion of prototypes
 Rental of facilities
 Obtaining critical financing
 Starting production
 Obtaining the first sale
An effectively prepared and presented schedule can be extremely helpful in convincing
potential investors that the management team is aware of what needs to take place to
launch the venture and has a plan in place to get there.

Section 11: Financial Projections

The final section of a business plan presents a firm’s pro forma (or projected) financial
projections.
Items to include in this section:
 Sources and uses of funds statement
 Assumptions sheet
 Pro forma income statements
 Pro forma balance sheets
 Pro forma cash flows
 Ratio analysis

Having completed the earlier sections of the plan, its easy to see why the financial
projections come last. They take the plans you’ve developed and express them in
financial terms.

III. Presenting the Business Plan to Investors

A. The Oral Presentation
The first rule in making an oral presentation is to follow directions. If you’re told you
have 15 minutes, don’t talk for more than the allotted time.
The presentation should be smooth and well-rehearsed.
The slides should be sharp and not cluttered.
Questions and Feedback to Expect from Investors
The smart entrepreneur has a good idea of the questions that will be asked, and will be
prepared for those queries.