Understanding Business Plans

What is a Business Plan?

• A business plan is a written narrative, typically 25 to 35 pages long.
• The business plan describes what a new business intends to accomplish.
• The business plan shows how the new business intends to accomplish its aims.
• For most new ventures, the business plan is a dual-purpose document.
• The dual-purpose document is used both inside and outside the firm.

The Business Plan

• The business plan must be substantive and have sufficient details about the merits of the new venture.
• A business plan can show why the new venture is exciting, and why it should receive support.
• The Wells Fargo/Gallup Small Business Index Survey found that businesses with a business plan have significantly higher expectations for the years ahead.
• A business plan helps the founding team systematically think through every aspect of its new venture.
• A business plan communicates the merits of a new venture to outsiders, such as investors and bankers.

Audiences for a firm's business plan

• A firm's employees: Aims to help the employees of a firm operate in sync and move forward in a consistent and purposeful manner.
• Investors and Other External Stakeholders: Should make the case that the firm is a good use of an investor's funds or attention.

Red Flags in Business Plans

• Founders with none of their own money at risk is a red flag.
• A poorly cited plan is a red flag.
• Defining the market size too broadly is a red flag.
• Overly aggressive financials is a red flag.
• Sloppiness in any area is a red flag.

Structure of the Business Plan

• A business plan should follow a conventional structure to make the best impression.
• Departing from the basic structure of the conventional business plan is usually a mistake.
• Investors are busy people and want a plan where they can easily find critical information.

Online Platforms

• Many online platforms employ an interactive, menu-driven approach to assist in writing a business plan.
• Entrepreneurs should avoid a boilerplate plan that looks as though it came from a "canned" source when using these programs.

Sense of Excitement

• A business plan should project a sense of anticipation and excitement about the possibilities that surround a new venture, along with facts and figures.

Content of the Business Plan

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

Types of Business Plans

• Three types of business plans exist: summary, full, and operational.

Summary Business Plan

• The summary business plan is 10-15 pages.
• It works best for new ventures in the early stages of development.
• It can "test the waters" to see if investors are interested in their idea.

Full Business Plan

• The full business plan is 25-35 pages.
• The full business plan is best for new ventures that are at the point where they need funding or financing.
• It serves as a "blueprint" for the company's operations.

Operational Business Plan

• The operational business plan is 40-100 pages.
• It is meant primarily for an internal audience.
• It works best as a tool for creating a blueprint for a new venture's operations.
• It provides guidance to operational managers.

Recognizing the Elements of the Plan May Change

• The plan will usually change while being written.
• Insights invariably emerge when an entrepreneur or a team of entrepreneurs immerse themselves in writing the plan and start getting feedback from others.

Outline of the Business Plan

• A suggested outline of a business plan is shown.
• Most business plans do not include all the elements introduced in the sample plan.
• Each entrepreneur must decide which elements to include in their plan.

Executive Summary

• The executive summary is a short overview of the entire business plan.
• It provides a busy reader with all they need to know about the new venture's distinctive nature.
• An executive summary shouldn't exceed two single-spaced pages.
• Even though the executive summary appears at the beginning of the business plan, it should be written last.
• The plan will evolve as it's written, so not everything is known at the outset.
• An investor will first ask for a copy of the firm's PowerPoint deck or executive summary in many instances.
• The investor will request a copy of the full business plan only if the PowerPoint deck or executive summary is sufficiently convincing.
• The executive summary is arguably the most important section of a business plan.

Industry Analysis

• The industry analysis should begin by describing the industry the business will enter in terms of size, growth rate, and sales projections.
• Items to include in this section: industry size, growth rate, sales projections, industry structure, nature of participants, key success factors, industry trends, and long-term prospects.
• A business should have a good grasp of its industry before selecting a target market, including where its promising areas are and where its points of vulnerability are.
• The industry that a company participates in largely defines the playing field that a firm will participate in.

Company Description

• The company description begins with a general description of the company.
• Items to include in this section: company description, company history, mission statement, products and services, current status, legal status and ownership, and key partnerships (if any).
• While it may seem less important than the others, it is extremely important.
• The company description demonstrates to your reader that you know how to translate an idea into a business.

Market Analysis

• The market analysis breaks the industry into segments and zeroes 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, buyer behavior, competitor analysis, and an estimate of the firm's annual sales and market share.
• Most startups do not service their entire industry, instead focusing on servicing a specific (target) market within the industry.
• It's important to include a section in the market analysis that deals with consumer behavior.
• The more a startup knows about the consumers in its target market, the more it can tailor its products or services appropriately.

Economics of the Business

• This section addresses the basic logic of how profits are earned in the business.
• It also discusses 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, startup costs, and break-even chart and calculations.
• Two companies in the same industry may make profits in different ways.
• One might be a high-margin, low-volume business, while the other may be a low-margin, high-volume business.
• Computing a break-even analysis is an extremely useful exercise for any proposed or existing business.

Marketing Plan

• The marketing plan focuses on how the business will market and sell its product or service.
• Items to include in this section: overall marketing strategy; product, price, promotions, and distribution; sales process (or cycle); and sales tactics.
• To describe a startup's marketing plan, begin by articulating its marketing strategy, positioning, and points of differentiation.
• Then, discuss how these aspects of the plan will be supported by price, promotional mix, and distribution strategy.
• Discussing the company sales process is essential.

Product Design and Development Plan

• If you're developing a completely new product or service, include a section in your business plan that focuses on the status of your development efforts.
• Items to include are development status and tasks, challenges and risks, projected development costs, and proprietary issues (patents, trademarks, copyrights, licenses, brand names).
• Many promising startups never get off the ground because their product development efforts stall.
• The actual development of the product or service turns out to be more difficult than initially thought.
• This is a very important section for businesses developing a completely new product or service.

Operations Plan

• The operations plan outlines how your business will be run and how your product or service will be produced.
• Illustrate how your business will be run using "back stage" (unseen by 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.
• There should be a careful balance between adequately describing this topic and providing too much detail.
• It is best to keep this section short and crisp.

Management Team and Company Structure

• The management team of a new venture typically consists of the founder and a handful of key management personnel.
• The items to include in this section are the management team, board of directors (if you have one), board of advisors (if you have one), and the company structure.
• This is a critical section of a business plan; many investors look first at the executive summary and then go directly to this section.
• Reviewing the management team section is done to assess the strength of the people starting the firm.

Overall Schedule

• A schedule should be prepared to show the major events required to launch the business.
• The schedule should be in the format of milestones critical to the business's success, such as incorporating the venture or obtaining the first sale.
• Other milestones include the completion of prototypes, rental of facilities, obtaining critical financing, and starting production.
• An effectively prepared and presented schedule can convince potential investors that the management team knows what needs to take place to launch the venture.
• Having a plan in place to achieve the milestones is also important.

Financial Projections

• The final section of a business plan presents a firm's pro forma (or projected) financial projections.
• Items to include: sources and uses of funds statement, assumptions sheet, pro forma income statements, pro forma balance sheets, pro forma cash flows, and ratio analysis.
• After completing the earlier sections of the plan, it's easy to see why the financial projections come last.
• They take the plans and express them in financial terms.

Presenting the Business Plan to Investors

• The first rule is to follow directions in making an oral presentation.
• If you're told you have 20 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.
• The smart entrepreneur should have a good idea of the questions that will be asked and be prepared for those queries.

PowerPoint Slides to Include in an Investor Presentation

• Title Slide
• Problem
• Solution
• Opportunity and target market
• Technology
• Competition
• Marketing and sales
• Management team
• Financial projections
• Current status
• Financing sought
• Summary