Solution Manual for Patterns of Entrepreneurship

Management 4th Edition Kaplan Warren

1118358538 9781118358535
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CHAPTER 5 – WRITING THE WINNING

BUSNESS PLAN

OBJECTIVES

• Understand the value of writing a business plan.

• Explain how the business plan serves as a blueprint for building a company.

• Know the steps towards completing a business plan.

• Learn the detailed components of a business plan.

• Understand how to write a business plan so it targets investors.

CHAPTER OVERVIEW AND TIPS ON TEACHING CHAPTER

In earlier editions, this chapter came much later in the book. However, many instructors
prefer to introduce the concept of business planning earlier in a course. We have responded
by placing this chapter here. This is the point in the course where students learn how all
the different components—markets, IP, funding, cash management, operations, etc.—must
come together into a coherent plan for presentation to a defined stakeholder. This could
be a banker, a partner, recruits, or investors. A detailed framework is provided. To avoid
the problem of a work-overload occurring at a late stage in the course, we recommend that
student teams have already drafted key sections as they learned the tools in each chapter
that deal with specific content items.

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The SurfParks LLC business plan in the book has been chosen as it is incomplete and is a
“work in progress.” One way that this can be used, particularly if the students are not
working on their own business plans, is to convert the SurfParks plan into a final version
using the prompts given in the exercise questions. One version of the SurfParks investors’
presentation is on the web where there is additional illustrative content. Students can also
test themselves with the study questions and the first eight exercises at the end of the
chapter.

INTRODUCTION

Once you decide to start a business, you understandably should have a plan to
produce products or supply services and to attract the optimum marketing, operations,
management team, and financing to get the business off to a good start.

It is important to realize and deal with the various “interest groups” that will be
crucial to your success. Each group wants to hear something from your story that
provides a comfort factor. Consider these examples:

• Financial interests want to know the risk/reward “formula” and the future “cash
out/in” possibilities associated with your new venture.
• Employees want to feel secure in knowing they have not only a job with your
company, but a possible career.
• Marketers need to know the product/service, pricing, placement, and positioning,
(the four Ps).
• Vendors, suppliers, and associates need to know what your operations will look
like so that they can plan to be part of your supply chain.
• Your partners (if any) need to codify their legal and fiduciary rights and
responsibilities for their own protection and growth.
• The entrepreneur needs to place his or her ideas beside a companion roadmap to
compare and contrast where the business is going to where it was supposed to go.
How do you accomplish all of the above in a professional and concise manner?

INSTRUCTOR’S NOTES ON
PROFILE: NIKOLAY SHKOLNIK—BUSINESS PLAN TURNS A DREAM
INTO REALITY

Have students read the profile on Nikolay Shkolnik and discuss with them the concept
that a business plan is an ever-changing document. At what critical points do students
anticipate changes to the business plan during in the business’ life span? Do students
foresee a point during the company’s life at which a business plan no longer needs to
change?

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 Students should be encouraged to develop their own business plan based on their own
potential entrepreneurial business, using the steps and tips provided throughout the
chapter.

THE VALUE OF A BUSINESS PLAN

Writing the business plan will determine if the business has a chance of becoming
successful in the following ways:

• Test the feasibility of the business concept. The business plan is the best way to
determine if the idea for starting a business is feasible.
• Increase the likelihood of the venture’s success. The business plan will ensure
that attention to both the broad marketing, operational, and financial objectives of
the new business and the details of each section get the required attention.
• Improve your business planning process to become more manageable and
effective. A plan can help the entrepreneur develop as a manager. It can provide
insight into competitive conditions that are essential in starting a business.
• Attract bank loans and investors. The plan allows for bank loans and investors
to gain insight into the business idea and determine the financial requirements.

What Is a Business Plan?

There are three essential reasons to prepare a business plan:

• Entrepreneurs reap benefits from the planning activity itself.

• The plan provides a basis for measuring actual performance against expected
performance.
• The plan acts as a vehicle for communicating to others what it is that the business
is trying to accomplish.

SETTING GOALS AND OBJECTIVES

A business plan also serves as a blueprint for building a company. A business plan
provides a means to:
• Determine whether the business is viable.
• Raise capital for the business.
• Project sales, expenses, and cash flows for the business.
• Explain to employees their responsibilities as well as company expectations.
• Improve and assess company performance.
• Plan for a new product/service development.
ROADMAP
INSTRUCTOR’S NOTES ON

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 SETTING GOALS AND OBEJCTIVES OF A BUSINESS PLAN

Bring in copies of two or three examples of business plans to class (these could be
found online). Have students look at the “bottom line” of each business plan and
define the who, what, why, when, and how of the business. Have them further identify
key parameters, such as timetables, and expected future revenue streams and the goals
of the plan.

STARTING THE PROCESS TO WRITE THE PLAN: FIVE STEPS

Step 1: Identify the Objectives - Determine who your audience is, what they want to
know, and how they will use the information you are imparting to them.

Step 2: Draft the Outline - Once the objectives have been identified, the entrepreneur
must prepare an outline for the business plan. The outline should provide enough detail to
be useful to both the entrepreneur and his or her audience.

Step 3: Review the Outline - Next the entrepreneur should review the outline to identify
areas that should be presented in even greater detail.

Step 4: Draft the Plan - The entrepreneur will probably need to conduct a great deal of
research before there is enough information to start drafting the business plan.

The last element to be prepared is the executive summary. The executive summary
consists of:

Business Concept. This section describes the business, its products or services,
and the market it will serve. It should point out exactly what will be sold, to
whom and why the business will have a competitive advantage.

Success Factors. This section details any developments within the company that
are essential to its success. It includes patents, prototypes, location of a facility,

Current Position. This section supplies relevant information about the company,
its legal form of operation, the year it was formed, the principal owners, and
key personnel.

Financial Features. This section highlights the important financial information

about the business, including its sales, profits, cash flow, and return on investment.

Step 5: Have the Plan Reviewed and Updated

Once the entrepreneur has completed a draft of the business plan, he or she should have
an independent professional review it for completeness and effectiveness.

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DETERMINING WHAT TYPE OF BUSINESS PLAN IS BEST

What type of plan should entrepreneurs prepare to meet their requirements? Three major
types of plans exist:

• Full Business Plan - An entrepreneur should use a full business plan when he or
she needs to describe the business in detail to attract potential investors, strategic
partners, or buyers.

• Executive Summary Plan - An executive summary plan is a two-to-five-page-

document that contains the most important information about the business and its
direction.

• Action Plan - An implementation or action plan is a document the management

team uses to implement the plan. It consists of a timetable and a list of tasks that
should be accomplished within a certain time frame.

Targeting the Plan to Selected Groups

Some investors invest in only certain types of businesses, such as technology, health care,
or financial services. Therefore, entrepreneurs must consider which investors or groups
are relevant to their needs and send a plan to only the appropriate groups.

• Bankers—to provide loans for expansion and equipment purchases

• Business brokers—to sell the business
• New and potential employees—to learn about the company
• Investors—to invest in the company
• The Small Business Administration (SBA)—to approve business loans
• Investment bankers—to prepare a prospectus for an IPO
• Suppliers—to establish credit for purchases

INSTRUCTOR’S NOTES ON
TARGETING THE PLAN TO SELECTED GROUPS

Have students look at each category of group mentioned above. Using the examples of
the two or three business plans brought in from the previous class (see previous
Instructor’s Notes) how have or how can the business plans be targeted to appeal to
each of the groups mentioned above? Can different types of plans (Full/Executive
Summary/Action) be targeted to different groups?

How Long Will the Preparation Take?

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A general rule of thumb is that it takes twice as long to write a good plan as foreseen.
A useful benchmark is that it will take at least two hundred hours of dedicated effort
to produce a good plan.

Writing the Business Plan

An effective and complete business plan should answer the following questions:

• What is the primary product or service?

• Is there a market for the product or service? Has the opportunity been
well defined?
• Who are the target customers for the product or service, and what value do you
provide them?
• What is the pricing structure?
• Who is the competition, and what are the barriers to entry?
• What risks and market constraints are involved?
• What sales distribution channels will be needed to sell the product or service?
• Who are on the management team, and what are their specific talents?
• What is the current financial cash flow and breakeven plan?
• What are the immediate financial needs of the business?
• What are the future financial goals for the business and its founder?

INSTRUCTOR’S NOTES ON WRITING THE BUSINESS PLAN

Have students continue to look at the examples of business plans brought in and
answer the questions above. Students should do the same for their own business plan.

A TYPICAL BUSINESS PLAN FORMAT AND CONTENT

Creating the Title Page and Table of Contents

The title page includes the name, address, and phone number of the company and the
CEO. The table of contents provides a sequential list of the business plan sections as well
as their corresponding pages.

Writing the Executive Summary

As we noted earlier, the executive summary must be able to stand on its own. The
executive summary should be no more than two to three pages long and should convince
the reader that the business will succeed.

Writing the Overview of the Company, Industry, Products, and Services

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The company description provides an overview of how all of the elements of the business
fit together.

What is the business?

What customers will it serve?
Where is it located, and where will it do business?

Compiling the Marketing Analysis

The marketing analysis section should describe how the business will react to market
conditions and generate sales to ensure its success.

• Market Opportunity: The marketing section must establish a demand or need

for the product or service and should define both the market and the opportunity.

• Competition: The marketing section should describe the market conditions that
exist in the business, including the degree of competition and what impact this
competition is likely to have on the business.

• Marketing Strategy: The marketing section should define how the business will
use its marketing tools. This can include factors such as distribution, advertising
and promotion, pricing, and selling incentives.

• Market Research: The marketing section should document market research as a

part of the marketing plan or in a section by itself. Of most value are data
obtained from primary market research.

• Sales Forecasts: Usually financial projections are presented in the financial

section of a business plan.

• Support Material: Include in the appendix materials that will make the plan
more credible, such as industry studies, letters of support, brochures, and reviews
or articles related to the product or service.

The products and services section of the business plan describes the characteristics and
appeal of the products or services. This section may include a prototype, sample, or
demonstration of how the products work. The section should include the following:

• Physical Description: A description of the physical characteristics of a product

usually includes photographs, drawings, or brochures. In the case of a service, a
diagram sometimes helps to convey what service the business is providing.

• Statement Regarding Use and Appeal: The entrepreneur should comment on

the nature of the product or the service’s various uses and what constitutes its
appeal.

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 • Statement Regarding Stage of Development: This is a description of the stage
of development (prototype design, quality testing, implementation, and so on) of
the product or service that the entrepreneur plans to introduce into the
marketplace.

• Testimonials: Entrepreneurs can include a list of experts or prior users who are
familiar with the products or services and who will comment favorably on them.

Describing the Marketing and Sales Plans

The marketing and sales strategy section of the business plan describes how the business
will implement the marketing plan to achieve expected sales performance.

Pricing Strategy and Plan

Pricing is an important element in the marketing strategy because it has a direct impact
on the business’s success.

• Cost-Plus Pricing: All costs, both fixed and variable, are included, and a profit
percentage is added on.

• Demand Pricing: The business sells the products or services based on demand or
whatever the market will bear.

• Value Pricing: The business sells its products/services to capture a major part of
the overall value that is created for the customer.

• Competitive Pricing: The company enters a market where there is an established

price and where it is difficult to differentiate one product from another. In this
situation, there is limited flexibility to make price adjustments.

• Markup Pricing: The price is calculated by adding the estimated profit to the
cost of the product. In some industries, such as cosmetics and health care, profit
levels may be higher than in others, such as automotive components.

Entrepreneurs should analyze competitors’ distribution channels before deciding

to use similar channels or alternatives. Distribution channels include
the following:

• Direct Sales: Products and services are sold directly to the end user. This is the
most effective distribution channel.

• Original Equipment Manufacturer (OEM) Sales: An OEM will often bundle

or promote its products with yours or pay a royalty on each product sold.

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 • Manufacturer’s Representatives: These individuals handle an assortment of
products and divide their time based on the products that sell the best.

• Brokers: These individuals buy products, often overseas, directly from the
distributor and sell them to retailers or end users.

• Web E-commerce: Products and services are sold through a web site or through
Internet partner alliances.

Advertising, Public Relations, and Promotion Strategies

The purpose of this section in the plan is to describe how you will tell potential customers
that you have a product or service that can satisfy their demands, to convince those
customers to buy from you, and to successfully compete with similar businesses.

Other Elements

• The marketing and sales strategy section should also include PowerPoint pie
charts, graphs, tables, and other graphics that effectively show how the marketing
effort will be organized and how business resources will be allocated among
various marketing tools.

Describing Operations

The operations section of the business plan provides a detailed, in-depth operational plan.
Creating this part of the plan gives entrepreneurs an opportunity to work out potential
problems on paper before beginning operations. Issues addressed in this section of the
business plan include the following:

• Product/Service Development: It is not unusual to prepare a business plan

before a business’s full range of products and services is developed. This is
especially true of start-up companies.

• Manufacturing: In the case of a production facility, it is important to discuss the

process by which a company will manufacture its products.

• Maintenance and Support: The plan should address the level of support a
company will provide after a customer has purchased a product or service.

Describing the Management Team

The management team’s talents and skills should be detailed in the management team

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section of the business plan. Issues that should be addressed in this section include the
following:

• Management Talents and Skills: Detail the expertise, skills, and related work
experience of the proposed management team and the backgrounds of those
individuals who are expected to play key roles in the venture.

• Organizational Chart: After introducing the key participants, it is appropriate to

offer an organizational chart that presents the relationships and divisions of
responsibility within the organization.

• Policy and Strategy for Employees: Include a statement as to how employees

will be selected, trained, and rewarded.
• Board of Directors and Advisory Board: Describe the number of directors who
will comprise the board of directors for the company.

Describing the Financial Plan

The financial plan section of the business plan should formulate a credible,
comprehensive set of projections reflecting the business’s anticipated financial
performance. In general, the following information should be presented:

• Set of Assumptions: The set of assumptions on which projections are based

should be clearly and concisely presented. Numbers without these assumptions
will have little meaning.

• Projected Income Statements: These statements most often reflect at least

quarterly performance for the first year, while annual statements are provided for
years 2 through 5.

• Projected Cash Flow Statements: Such statements should be developed in as

great a level of detail as possible for the first two years. Quarterly or annual cash
flows, corresponding to the period used for the income statements, are sufficient
for years 3 through 5.

• Current Balance Sheet: This should reflect the company’s financial position at
its inception. Projected year-end balance sheets, typically for two years, should
also be included.

• Other Financial Projections: This may include a breakeven analysis that will
demonstrate the level of sales required to break even at a given time.

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Establishing the Amount of Funds Required

The funds required and uses section of the business plan should describe how much
money is required to finance the business, where these funds will be spent, and when they
will be needed.

Exhibits (Typical):
• Census data and other population statistics
• Market potential
• Process flow (operations)
• Detailed financials
ROADMAP

UNDERSTANDING WHY BUSINESS PLANS FAIL

Any one of the following factors is likely to trigger a “no thanks” note from a banker,
angel, VC investor, or corporate partner:

• The executive summary is unclear, not concise, and not specifically targeted to
the intended audience.

• The basic concept of the business has not been researched and validated.

• The business is “so unique that there are no competitors.” There are always
competitors. They may not be obvious, but they are waiting out there to attack
your business.

• The entrepreneur has never spoken to a potential customer. “I will build a new
mousetrap, and they will come.”

• The financial projections are far too optimistic. Sales and cash flow follow a
“hockey stick” curve, with the company turning cash positive after eighteen
months of operations and growing at an annual rate of 200 percent thereafter.

• There is no discussion of either how a loan will be repaid or how an investor will
get his cash out with a satisfactory return.

• The entrepreneur signals that she wants to remain in control come whatever. One
indicator of this is not mentioning how a board will be constructed with “arm’s
length” experts who may challenge the entrepreneur. or partner with people they
cannot fully trust.

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