session 4 -1preparing a business plan

7/30/2019 Session 4 -1Preparing a Business Plan

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Preparing a Business Plan


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Presentation Outline....

Establishing Priorities and doing Market Research

Conceptualizing your business Plan (Ten Questions thatyour Business Plan must answer)

Business Plan Types, format and contents


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Establishing Your Priorities

Writing a business plan is not the immediate task

Critically evaluating merits of opportunity is THE mostimportant thing you should do at outset

Gather hard facts to convince ...

yourself of the merits of spending more time on it

others to join you in the task (team and employees)

investors to back you


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Venture Opportunity Profile

Industry andMarket

Economic CompetitiveAdvantageIssue

ManagementTeam

Market Profit after tax Control over costs,price &distribution

Entrepreneurialteam

-need ROI Barriers to entry Industry andtechnicalexperience

-customer Capital

requirement

Legal advantage I

-user benefit-value added

Sales growth Contacts andnetworks

-product life Cash flow Key people

Market Size Break even

Growth rate


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Knowing Your Customer is Key Is there a group of customers that share common pains

for whom your product offers compelling, tangiblebenefits (better, cheaper, faster ...)

share a common problem (need) are aggravated by the problem (pain) no remedy on offer (relief)

The purpose of a business is to win a customerPeter Drucker


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Is My Market Attractive?

attractiveness and market size are closely related

larger markets often have many reasonably sized segments

growing markets also offer more room for competitors

emerging markets offer prospects for different approaches

For entrepreneurs seeking venture capital, look for targetmarkets that provide entrees into other market segments


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Is My Industry Attractive?

Michael Porter five forces framework ...

threat of entry

bargaining power of suppliers

bargaining power of customers

rivalry among existing competitors

threat of substitutes


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Doing Market Research to refine your

idea... Prioritize information needs based on using prototype business

designs to identify key assumptions Conduct expert interviews and gather market, customer and

business insights Develop a Secondary and primary research data gathering plan Conduct secondary data review and initial primary research

Revise assumptions and data gathering plan based on initiallearning.

Conduct further expert interviews, primary research andreview additional secondary data Review and revise business assumptions, initial strategy and

access viability of the business concept.


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Business Plan .


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Business Plans are written for at leastfive different reasons:

To help you understand an opportunity and what it willtake to exploit it

To recruit prospective partners and senior colleagues To monitor progress and keep you on track following

start-up

To rejuvenate and re-focus a business following start-up

To raise investment finance to support growth


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The Plan is Obsolete as Soon As Itis Written New discoveries are made, new products and

processes displace old

Prices change, competitors enter, partners leave,suppliers merge, buyers change, investors

commit

You learn something new


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The Concerns of the Investor

Does it create value for end users?

Is it a must buy so the end user is willing to

pay a premium? Is that must buy market

large?

high growth?

high margin? with significant barriers to entry?

Does the ventures team fit the opportunity?


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Ten Questions Your Business Plan Should Answer


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Question 1: Where Is Your Company Now?

At the outset investors need to know whether your company has

been incorporated; if yes when and by whom

completed a design or developed a prototype

developed or launched its first product/service

secured customer commitments or orders

generated any revenue; if so, how much, from where, etc.

secured finance from any source (including government grants)

Start by providing an engaging snapshot of where you have got to.

Underpin this with a compelling statement of who is involved and

what their experience, track record and commitment to business are.


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Question 2: What is your product / service?

Begin with a succinct description of the product/service proposition,then move on to set out

how the proposition is anchored in a real market opportunity the specific benefits and value that a customer will derive from using

the product

the way in which these benefits can be demonstrated and measured

why the customer will purchase on an ongoing basis

the distinctive advantages of your product and why it is a potentialwinner

At the outset it is essential to establish the link between the market

opportunity and your product or service.


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Typical mistakes at this stage include ...

being so close to the product that you cannot describe it clearly

providing excessive product detail - this can follow later

assuming that the customer benefits are self-evident - they may onlybe so to you!

failing to assess the durability of your advantage - how easily mightothers replicate it?

not demonstrating how your skills and those of your team positionyou to exploit the opportunity in a timely fashion


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Very early on in the plan you need to convey tothe reader a clear picture

This is the market opportunity

This is my product

These are the key benefits: the value proposition

This is the evidence that substantiates the value proposition

And these are the people who will make it happen - and why


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Question 3: What is your market?

Having understood your core proposition the reader wants a clearpicture of your market in terms of

market size market segmentation and niches

actual and projected growth rates in target market

geographic breadth and variation

market context - relevant environmental, regulatory, technological,demographic/social changes


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How do people make money in this market?

basis of competition - price, differentiation, range, discount

structure, etc. nature and number of substitutes (and near substitutes)

the ease or difficulty of gaining market entry

the margin opportunity - current and future

It is essential to demonstrate a real understanding of what makes the

market tick, why it is an attractive market, and why it will remain so

for some time.


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You then need to explain where in the marketyou will compete ...

choice of target market segment and rationale for this

precise description of target customers

key buying factors the purchasing process: who buys and over what time frame?

And howyou will compete

product positioning in the market: performance, image, quality, etc.

pricing and discount structure product support and service

customer retention strategy

scope for follow-on sales


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In addressing these issues beware of ...

market data unsupported by factual evidence

lack of basic, first-hand market research the risks inherent in under-pricing

equating a large, growing market with ease of gaining share


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You need to impart a clear understanding of ...

Market definition

Market attractiveness

Market focus:where you will compete

Market approach: how you will compete

Market position:your projected outcome


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Question 4: How will you reach the market?

Every new venture has to build a bridge to its market.

How is your bridge going to be constructed?

To answer this, you will need to define your strategy in respect of:

marketing and promotion

selling

distribution


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Marketing and Promotion: Making the product known, creatinginterest

mechanics of promotion - direct mail, advertising, platform work, trade fairs, editorial/mediacoverage

identifying target customers for promotion activities

your promotion budget and its uses

Selling: Converting interest into sales choice of sales method - in-house sales force, telemarketing, use of third parties

role of distributors, wholesalers and retailers

the mix of methods and their rationale

Distribution: Delivering to the customer order processing and fulfillment

physical stockholding and dispatch

use of third parties

projected volumes and variations


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Question 5: Who will you compete against?

Basic competitor analysis tells us about competitors

identity, size, financial results, etc. product range and performance

market reputation - quality, service, image

market positioning - price, support, selling methods

But this is only a photograph: what you (and everyone else) can see!


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The best business plans move beyond thesurface to address ...

how the dynamics of competition might evolve over time in terms ofprice, margin erosion, etc.

how existing competitors are likely to respond to your market entry

other potential entrants to the market

Typical weaknesses in this part of a business plan include

suggesting that the concept is so unique it has no competitors assuming that todays competitors will be tomorrows

focusing only on direct competition, not indirect and substitutes


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Question 6: How will your product be produced?

The operational part of the plan should set out ...

what is involved in producing the product or delivering the service resources required to do this: labour, material, facilities, etc.

capital expenditure - amount and phasing

which activities will be controlled in-house (eg. design or assembly)and which will be sub-contracted (eg. packaging)

what it will take to gear up production post start-up status of any agreements with suppliers


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In describing production and operations besure that you do not

overburden the reader with excessive detail assume technological knowledge on the readers part

use technical terms without explanation

imagine that the reader finds the production process as fascinatingas you (likely) do

ignore the risks associated with production, particularly as volumesbuild up post start-up


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Question 7: Who are the people?

The question with which most investors start. In describing yourselfand your team you need to focus on ...

directly relevant industry, market experience and skills

accomplishments and track record (P&L responsibility)

range, depth and quality of relevant contacts: customers, suppliers,key personnel and the like

experience that the team has had in working together status and nature of the commitment of both yourself and the team

key recruits still to be found


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In describing yourself and the team it is a

mistake to ...

conceal relevant information; the due diligence process will quicklyflush this out

disguise gaps in the portfolio of skills and expertise that you haveassembled

assign people to roles for which they are not fully equipped

Do remember that the section on management is not the only placewhere the team is presented. Use any opportunity in the plan todemonstrate your and the teams suitability to pursue the venture.


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Question 8: What are your financial

projections?

This part of the plan should focus on ...

core assumptions behind the financial model the link between these assumptions and your market data

key financial indicators - projected cash flow, maximum cashrequirement, summary profit & loss statement, balance sheet

your expected base case and rationale for it

the potential downside (what happens if the wheels fall off) andupside (what happens if it really takes off)


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Business plans often fall apart at this point...

too many spreadsheets

masses of indigestible financial date (in small fonts)

endless sensitivity analyses

disproportionate time devoted to the financials

Focus attention on articulating each core assumption, validatingeach assumption and demonstrating how it gives credence to yourbase case


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Question 9: How much money do you need?

Your summary financial projections will drive the fundingrequirement. For investors, the key issues are ...

how much money is needed

what it is need for: staff, premises, capital expenditures, research &development, market testing, and so on

when and in what stages it is required

the key milestones against which funds will be drawn down the form in which the finance is required


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Your prospective investor will also be interested in how he

will get his money back. You should therefore outline ...

the projected timetable for the business to achieve lift off

target time to break even, generate positive cash and profit

the most likely exit route

valuations achieved by comparable businesses

Do not feel obliged to propose a deal in the plan. Work out what thismight look like but keep it in reserve.


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Question 10: What are the risks?

Risk is inherent in starting a business. Your aim is to identify andminimize all potential risks .

list all risks relevant to key aspects of the business: product/service,market, technology, management team

identify those risks that are more/less critical

work out precisely what you can do to ameliorate key risks

keep refining the list - and your intended actions - until you are leftwith a clear summary of the core risks: i.e. those that present thegreatest threat but where you can do least to mitigate them, at leastbefore start-up


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Summary: 10 Questions

1. Where is the company now?

2. What is your product or service?

3. What is your market?

4. How will you reach the market?

5. Who will you be competing against?

6. How will your product be produced?

7. Who are the people?

8. What are your financial projections?9. How much money will you need?

10What are the risks?


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Three Types of Plans Summary Plan

10 pages, 3 important points

Comprehensive Plan 10-40 pages, seeking capital or alliances

Operational Plan

40+ pages, for going concerns, part of an annualprocess


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The Summary Plan The Business

Legal Structure, Products or Services,

Management, Personnel, Record Keeping Marketing

Target Market, Competition, Advertising

Financials Summary of Needs, Use of Funds, 3 Year CashFlow Projections, Income Projections


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Comprehensive Business Plan

Some Rules of Thumb The Expanded Executive Summary is written

last. (4 to 5 pages long)

A one page FACT sheet is used forintroductions.

An expanded Analysts Appendix will be addedlater

The appendix provides analyst:financialdetailed spreadsheets, contracts, full resumes,patents & marketing info.


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Contd

No paragraph longer than 6 or 7 lines Present key subjects in a table, chart or graph

Do not use we, our or I but use only the companyname or initials Write each Section with summary first then follow with

supporting detail (this is opposite of Univ. writing) Simple subject verb- adjective 8-12 grade writing


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Business Plan Sections

A. One Page FACT Sheet-Ex. Sum: Business Description:

Technology Description:

Proprietary Description: Regulatory Issues:

Market Size:

Sales & Profit Projections:

Customers: Funding:

Next Major Milestones:

Management Team:


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B. Company History, Mission & Goals: What business

Quality, customer service & excellence

Technology Employees

Sales goals

Research & development

Overview of management, organization & product Industry & market trends

Milestones accomplished


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C. Technology, Products & Processes: Product purpose & samples

Product features, design & pricing Product protection & life cycle

Actual market experience, beta tests, etc.

R&D plans

New Product applications, budget & timelines


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D. Market Analysis: Target market size, segments & geography

Customer profiles History of market & expected growth


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E. Competition Analysis: Types, classes, segments

Market share Product comparison & substitutes

Pricing & service

Ad & promotion analysis

Expected impact, reaction & risks


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creative insights

These aspects are the heart of plan

must be based on real investigation exhaust secondary sources

industry analysis trade associations

Trade periodicals

talk to potential customers (primary market research)

The investor wants to invest in professionallyimplemented creativity

but the investor is cynical

What about Govt. Approval?I t i li

How didyou calculate


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What is

The Fatal Flaw ?

Its not scaleable.

Wheres your manufacturing expertise?

Why not just sell the patent?

Why should I finance your lifestyle?

Im not convinced the consumer thinks he has a problem?

How much advertising can you buy for Rs.100,000?

Is there anything that is patentable?

Your distributors are family-run small businesses.How do you contact them?What about foreign competitors?

pp

What about App rovals.

Whats yourbreakeven ?

Who writes

your content?

What stops someone

producing it

for less?

How did you validate

your market

assumptions?

Product Liability will kill you

Portals dont

make money.

I cant visualize

your product.

you calculate

your market

size?

Who are

You guys??


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F. Marketing Strategy: Segment differentiation

Features and Pricing Roll-out plan

Ads & promotions

Packaging Shipping & Distribution

Credit Policies/warranty/returns


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G. New Product Applications:Vertical integration options

Features & new product development analysis

Budget, resources & timelines


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H. Management: Key management, Board of Directors & advisors

Ownership & structure Policies & performance


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I . FINANCIALS

How Much $$$ Do I Need?

Determine start up

costs and estimatemonthly operatingcosts to determineyour working capital

needs


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Financial Plan THE PRIMARY EVALUATING TOOL

Support all information

Make conservative projections Start-up Budget: amount needed to open

Operating Budget: ongoing expenses once open

Sources and Uses Sheet


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Financing Your New Business

Start up loans are verydifficult to obtain

Chances are you have to

rely on the funds you canpersonally raise


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Methods of Financing

Personal funds

Family/ friend loans and gifts

Angel investor

Venture capital Grants

Personal loan

Business loan


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Financial Plan: Startup Budget Personnel (costs prior to opening) Occupancy (lease, rent, or mortgage) Legal/ Professional Fees

Equipment Supplies Salary/ Wages Utilities Payroll Expenses Internet Licenses/ Permits Insurance Advertising/ Promotions


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Financial Plan: Operating Budget

Personnel Lease/ Rent/ Mortgage Loan Payments

Legal Fees Accounting Supplies Salaries/ Wages Dues/ Subscriptions/

Fees Repairs/ Maintenance

Insurance Advertising/ Promotions Depreciation

Payroll Expenses Internet Travel/ Entertainment Miscellaneous 3-6 Months of Operating

Capital


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Financial Plan: Sources and Uses

Sources of funds

Details of requested financing

Amount Use

Terms

SOURCES & USES OF FUNDS


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SOURCES & USES OF FUNDS

SOURCES OF FUNDS

INVESTMENT CAPITAL

Cash on Hand

Investment by Founder

Investment by Others

Incentives and Grants

DEBT CAPITAL

Bank Business Loan

Bank Personal Loan

SBA Guaranteed Loan

Other Loans

TOTAL

APPLICATION OF FUNDS

Rent & Security Deposits

Equipment/ Fixtures

Leasehold Improvements

Initial Inventory

Working CapitalInsurance

Professional Fees

Advertising

Signage

Contingency Reserve

TOTAL

CASH FLOW PROJECTION


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CASH FLOW PROJECTION Year OneMonth 1 2 3 4 5 6 7 8 9 10 11 12 Total

Cash In-Flows

Sales

Other Income

Total In-Flows

Cash Out-Flows

Cost of Goods Sold

Rent/ Mortgage

Owner's Salary

Other Salaries

Advertising/ Promotion

Utilities

Loan Payments (current)

Loan Payments (previous)

TelephoneOffice Expense

Dues/ Subscriptions

Accounting

Insurance

Professional Fees

Internet

Repairs/ Maintenance

Licenses/ Permits

Travel/ Entertainment

Legal FeesBank Charges

Miscellaneous

Total Out-Flows

Beginning Cash Balance

Ending Cash Balance


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Pro-Forma Income Statement

Year 1 2 3

Sales

Less: Cost of Goods Sold

Gross Profit

Operating Expenses

Rent/ Mortgage

Owner's Salary

Other Salaries

Payroll Taxes

Advertising & Promotion

Telephone

Office ExpenseDues and Subscriptions

Accounting

Insurance

Professional Fees

Internet

Repairs & Maintenance

Licenses & Permits

Travel & Entertainment

Legal FeesBank Charges

Miscellaneous

Depreciation

Amortization

Interest

Total Operating Expenses

Net Profit Before Taxes

P F B l Sh t


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Pro-Forma Balance Sheet(Opening Day of Business)

CURRENT ASSETS

Cash

Accounts Receivable

Inventories

Prepaid Expenses

Other Current Assets

TOTAL CURRENT ASSETS

FIXED ASSETS

Land

Leasehold Improvements

Equipment

Vehicles

Other Fixed Assets

Subtotal Fixed Assets

Less: Accumulated Depreciation

TOTAL FIXED ASSETS

TOTAL ASSETS

CURRENT LIABILITIES

Accounts Payable

Short-Term Debt

Accrued Expenses

Other Current Liabilities

TOTAL CURRENT LIABILITIES

LONG-TERM DEBT

OWNER'S EQUITY

Paid-In Capital

Retained Earnings

TOTAL OWNER'S EQUITY

TOTAL LIABILITIES & OWNER'S EQUITY


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Appendices

May Contain Short CVs of team and profiles of partners

Contracts, patents, correspondence

Pictures of product

Market research details

Rollout schedule

Pro-formas, assumptions and sensitivities

state fully sources of each data item Reader should be able to trace logic from rawdata in appendix to statements in body

Summary Slide


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planning

Summary Slide

C l i


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Conclusion

Entrepreneurship is a profession

Execute, Execute, Execute

Mediocrity fails Excellence scales

Tenacity gets rewarded

Be determined, but flexible

session 4 -1preparing a business plan

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