Creating a Business Plan
Entrepreneur Success Series
Resource Note # 1
A business plan is a written document that details out a business idea, how it is going to be pursued and what the expected outcomes are. Normally business plans are associated with independent entrepreneurs seeking funding for their ventures. However, need for new business ideas is increasingly being felt by established organisations as well. In a volatile, uncertain, complex & ambiguous (VUCA) environment, organizations are required to constantly look for newer ways of creating value.
The manner in which a company creates value is affected by the forces in macro & micro business environment. Increased globalization has ameliorated this effect manifold. In a research carried out by Boston Consulting Group, it was found that average lifespan of a western company has come down from above 55 years in early 70s to less than 32 years in 2010 (Reeves, and Pueschel, 2015). Bertolini, Duncan and Waldeck (2015)argue that no business survives over the long term without reinventing itself. In their research the authors found that although more than 80% of executives at large enterprises recognize the need for transformation, only about a third are confident that they can get the job done in five to 10 years. Since business transformation more often than not calls for new business ideas, importance of a comprehensive and carefully thought-out business plan need not be overemphasized. That is why today the corporate managers are expected to dawn the role of entrepreneurs who are willing and capable of developing &implementing business plans successfully.
A Business Plan serves at least five purposes. First, it helps to systematically conceive, develop and implement a business idea. Second, a business plan provides structure to the thinking and helps make sure that all important areas are covered. It provides an operating plan that helps in running the business and improving probability of success. Third, a business plan prompts planners to think about the situations arising in future. Next, a business plan helps to communicate the idea, not only to financers, but also to current & potential employees, suppliers, and customers. As a communication tool, a carefully developed plan provides something that other people can react to. Their insights can be used to develop a more successful venture. Finally, a business plan helps to evaluate the feasibility of a new business idea in an objective & critical manner.
2. Contents of a Business Plan
A business plan should describe the proposed idea accurately and attractively. Even though its subject is a moving target, the plan must detail the company’s &/or the idea’s present status, current needs, and expected future. The plan should present and justify ongoing and changing resource requirements, marketing decisions, financial projections, production demands, and personnel needs in logical and convincing fashion. Although it is a challenge to assemble, organize, describe, and document so much, without this the business plan may fail to convince the investors or top management about the feasibility of business idea.
A typical plan has three sections. Section one is about business idea, its market analysis and the way business is going to be managed. This section should be thorough, but concise and to-the-point. Section two includes financial projections. This section describes in numbers the outcome of planned business strategies. The financial projections are supposed to be based on facts and research, and not “wild guesses.” Section three contains supporting information to reinforce the first two sections. A short Executive Summary is added at the beginning of the business plans.
2.1 Outline of a Business Plan
- Cover page showing Business Name / Title in a crisp yet clear manner
- Executive Summary
- Table of Contents
- Section One: The Business
A. Description of Business
C. Market Analysis
E. Business Environment
F. Marketing Plan
G. Management and Operations
H. Human Resources
- Section Two: Financial Data
A. Projected Financial Statements such as Income& Expenditure Statements, Cash Flow Statements & Balance Sheet etc
B. Break Even Analysis
C. Sources and Uses of Funds
- Section Three: Supporting Documents such as historical financial statements, tax returns, resumes of promoters, facilities diagrams, letters of intent, purchase orders, contracts, etc.
2.2 Detailing of Business Section
A. Description of the Business
- Basic form of business
- Type of ownership : A Branch / Division / SBU / Subsidiary of existing company / Joint Venture / New Company / Private Limited / Public Limited etc
- Who are the promoters?
- Location of the business, its geographic spread
- What are the strengths & weaknesses of existing business?
B. Products / Services
- What products/services will the venture sell?
- What are the features and benefits of what you sell?
- How your products/services differ from the competition?
- What makes your products unique and desirable?
- Why should customers buy from you?
C. Market Analysis
- Who are your potential customers? (Geographic, Demographic and Psychographic characteristics)
- What is the size of the market? Is it growing? What is the industry outlook?
- What market share you are aiming at? How will your share change over time?
- Are there segments of users who are under-served by competition?
- Do any of these under-served segments present opportunities?
- Who are the direct & indirect competitors?
- What are their strengths & weaknesses?
- What market share do they command?
- What will be your competitive strategy?
E. Business Environment
- What are the regulations governing different aspects of your business at different phases from starting, & running the business?
- Which forces in the international, national & regional environment affect different aspects of your business?
- What are the emerging opportunities & threats? How do you plan to deal with it?
F. Marketing Plan
- Which market segments you will be targeting?
- How will you position yourself differently?
- What will be your product mix? What variants will you offer?
- What value preposition will you offer?
- How will you package the product?
- What will be your branding strategy?
- What will be your pricing strategy?
- How will you reach out to your customers? Will it be through trade channels or your ownsales team?
- How will you promote your products?
G. Management and Operations
- What will be your value chain?
- From where will you source the material?
- What will be the manufacturing process?
- What kind of pre & post sales service is involved?
- What infrastructure will be needed?
- What kind of technology will you need?
- What kind of organisation structure you will need?
- What will be your major systems & processes?
- What are the statutory permissions required for starting& conducting the business? How will you obtain all necessary permissions & compliances?
H. Human Resources
- What kind of people will you need at different levels in different functional areas?
- Are the people you need available? If not, what is your alternate plan?
- What will be the likely cost?
- What is the total investment required in terms of Fixed & Working capital?
- How will you raise capital?
- What will be the debt – equity ratio?
- Have you factored in taxation issues?
2.3 Financial Projections
- Fixed asset requirements in first year & there after
- Any start-up or one-time expenses such as legal fees, licenses, and Liaoning expenses etc.
- Sales Revenue Projections (Yearly, Quarterly, Monthly) with necessary assumptions
- Operating Cost
- Sales & Marketing Cost
- Projected Cash Flow
- Gross Profit
- Interest burden
- Depreciation rates
- Taxation of different type & at different levels
- Projected Income & Expenditure Statement (at least three years)
- Amount of inventory (if any) required to support the sales forecast.
- Credit, sales, collections & vendor payment policies.
- Break Even Point (Value & Volume)
- Pay Back Period
- Internal Rate of Return
- Projected Balance Sheet
2.4 Executive Summary
After writing all the sections, the planners should write a brief Executive Summary. The executive summary is a chance to highlight the important aspects of the venture. It should give highlights of the following features:
- Mission and goals
- The product / service
- The market and its potential
- The marketing plan
- The management team
- Key elements of operations
- Funding requirements, and profit and cash forecasts
- Return on Investment.
3. Business Plan -From Good to Great
According to experts in the area of entrepreneurship, standard formats of business plans such as the one described above are necessary but not sufficient for making a great business plan. For instance, Stanley Rich the then Chairman of Massachusetts Institute of Technology’s Enterprise Forum and David Gumpert, then associate editor of Harvard Business Review observe that too many business plans are written solely from the viewpoint of the team which ideates or the producer company. Most business plans describe the underlying technology or creativity of the proposed product or service in glowing terms and at great length while neglecting the constituencies that give the venture its financial viability—the market and the investor (Rich and Gumpert, 1985).
According to Professor Sahlman of Harvard Business School, most business plans talk too much about numbers but devote too little space to the information that really matters. It is very difficult to predict revenues& profits for a new venture correctly. Similarly anticipation of capital and time required to accomplish objective is not an easy task. Most new business plans suffer from padding effect and border on wild optimism (Sahlman, 1997).
Professor Sahlman observes that great businesses have attributes that are easy to identify but hard to assemble. They have an experienced, energetic managerial team consisting of members with skills and experiences directly relevant to the opportunity they are pursuing. The opportunity has an attractive, sustainable business model; it is possible to create a sustainable competitive advantage. Many options exist for expanding the scale and scope of the business, and these options are unique to the enterprise and its team and value can be extracted from the business in a number of ways. The context is favorable both in terms of regulatory & macro business environment. Risk is well understood and ways of mitigation have been thought of. Based on these assumptions Sahlman proposes a framework comprising people, opportunity, context and risks & rewards that tries to answer following questions:
- To what degree do the people have the right experience, skills and attitudes, given the nature of the opportunity& the context?
- To what degree does the opportunity make sense, given the people involved& the context?
- To what degree is the context favorable for the venture, given the people involved& the nature of the opportunity?
- To what degree the risks & rewards and relevant strategies been identified?
These questions highlight the fact that excellence in any single dimension is not sufficient. The people, opportunity, context and risks & rewards are all likely to change over time as the business evolves. To focus attention on the dynamic aspects of the entrepreneurial process, three related questions can be asked to guide the analysis of any business venture:
- What can go wrong?
- What can go right?
- What decisions can management make today and in the future to ensure that “what can go right” does go right, and “what can go wrong” is avoided, or failing that, is prevented from critically damaging the enterprise? What decisions can be made to tilt the reward to risk ratio in favor of the venture?
|Example:Rich & Gumpert (1985) cite the case of five executives seeking financing to establish their own engineering consulting firm. In their business plan, they listed a dozen types of specialized engineering services and estimated their annual sales and profit growth at 20%. But the executives did not determine which of the proposed dozen services their potential clients really needed and which would be most profitable. By neglecting to examine these issues closely, they ignored the possibility that the marketplace might want some services not among the dozen listed.Moreover, they failed to indicate the price of new shares or the percentage available to investors. The expected sales and profit growth rates of 20% could not provide the necessary return unless the founders gave up a substantial share of the company.In fact, the executives had only considered their own perspective—including the new company’s services, organization, and projected results. Because they had not convincingly demonstrated why potential customers would buy the services or how investors would make an adequate return (or when and how they could cash out), their business plan lacked the credibility necessary for raising the investment funds needed.|
Professor Sahlman suggests that a Business Plan should elaborate the following aspects.
According to Myra Hart, successful venture founders have two characteristics: they are “known” and they “know.” The founders know the industry in which they wish to launch a venture – they know the key suppliers, the customers, and the competitors. They also know who the talented individuals are who can contribute to the team. At the same time, they are known in the industry: people can comment on their capabilities and can provide objective referrals to resource suppliers like professional venture capitalists. Suppliers, customers, and employees are willing to work with them in spite of the obvious risks of dealing with a new company (Sahlman, 1996).
While evaluating a business plan following questions can help.
- Who are the founders?
- What have they accomplished in the past?
- What directly relevant experience do they have for the opportunity they are pursuing?
- What skills do they have?
- Whom do they know and who knows them?
- What is their reputation?
- How realistic are they?
- Can they adapt as circumstances warrant?
- Who else needs to be on the team? Are the founders prepared to recruit high quality people?
- How will the team respond to adversity?
- Can they make the inevitable hard choices that have to be made?
- What are their motivations?
- How committed are they to this venture?
- What are the possible consequences if one or more of the team members leaves?
Opportunity exploration begins with assessment of the overall market potential and its characteristics. Two key initial questions are: Is the total market for the venture’s product or service large and/or rapidly growing? Is the industry one that is now or can become structurally attractive?
One of the ways to asses attractiveness of industry is to ask: What are the appropriate analogies from other industries? If a venture is successful, what will it look like? Attractive industries are the ones that have lots of potential to create and protect value.
Following questions need to be answered to understand market for an opportunity:
- Who is the customer?
- How does the customer make decisions?
- To what degree is the product or service a compelling purchase for the customer?
- How will the product or service be priced?
- How will the venture reach the identified customer segments?
- How much does it cost (time and resources) to acquire a customer?
- How much does it cost to produce and deliver the product or service?
- How much does it cost to support a customer?
- How easy is it to retain a customer?
Often, asking and answering these kinds of questions will reveal a fatal flaw in a plan. For example, it may be too costly to find the customers and convince them to buy the product. Economically viable access to customers is the key to business, yet many a times these questions are over looked.
Following additional questions help to assess the cash flow implications of pursuing an opportunity:
- When do you have to buy resources (supplies, people, etc.)?
- When do you have to pay for them?
- How long does it take to acquire a customer?
- How long before the customer sends you a check?
- How much capital equipment is required to support a dollar / rupee of sales?
Opportunity description also involves looking for ways in which a company can expand the range of products or services being offered to the same customer base. Often, companies are able to create virtual “pipelines” which support the economically viable creation of new revenue streams. Opportunity section of the business plan should also talk about geographic expansion possibilities.
A business plan must address the current and the potential competitors. Among the specific issues a plan should cover are the following:
- Who are the current competitors?
- What resources do they control? What are their strengths and weaknesses?
- How will they respond to our decision to enter the business?
- How can we respond to their response?
- Who else might be able to observe and exploit the same opportunity?
- Are there ways to co-opt potential or actual competitors by forming alliances?
Opportunities exist in a context. At one level, there is the macroeconomic environment, including the level of economic activity, inflation, exchange rates, and interest rates. There are also a wide range of rules and regulations that affect opportunity and how resources are marshalled to exploit it. Examples range from tax policy to the rules concerning raising capital for a private or public company. Then, there are factors like technology, which affect what a business or its competitors can accomplish. Context often has a tremendous impact on every aspect of the entrepreneurial process, from identification of opportunity to harvest. In some cases, changes in some contextual factor create opportunity, while at other times a shift in context turns an unattractive business into an attractive one.
The business plan should provide evidence that the business founders have understood the context thoroughly and how it helps or hinders their specific proposal. The plan should show clearly the dynamic aspects of venture’s context and describe how those changes might affect the business. The business plan should also throw some light on management’s response in the event the context growing unfavorable.
3.5 Risk/Reward Management
People, opportunity, & context and the relationship among them are likely to change over time as the business evolves. A business plan must assess the risks and find mechanisms to manage them. There are a myriad of things that can go wrong or right in a venture. A risk is simply the set of factors outside the control of the entrepreneur which can negatively affect the business. For example, an increase in interest rate might have greater impact on ventures with high debt equity ratio than others.
A business plan should try to point out risks ahead – in terms of people, opportunity, and context. What happens if one of the new venture’s leaders leaves? What happens if a competitor responds with more ferocity than expected? What happens if there is a change in government in country where new plant is to be set up? How will we react?
One specific area of importance in the realm of risk/reward management relates to harvesting. Businesses differ in terms of their harvest potential i.e. the ability to reap the rewards of the investment process. One important task for entrepreneurs is to think hard at the beginning about the end of the process. Specifically, how will you get money out of the business, assuming it is successful, or even if it is only marginally successful? Some businesses are rife with harvest potential: they involve products or services that are worth a great deal to many potential buyers.
3.6 Financial Projections
Most business plans contain detailed financial projections. Though such projections help, they need to be taken with a pinch of salt. For instance, every business plan contains the following phrase: “we conservatively project.” But in reality very few plans are conservative in the sense that the company comes even close to meeting its plan. Financial projections should provide for evidence of a business model that makes sense. One has to think through the key drivers that will determine success or failure. The critical drivers vary from one business to other. Common to all business models is the issue of break-even: at what level does the business begin to make a profit? at what level does the company turn cash flow positive?
Financial estimates section should also include sensitivity analysis. What would happen, for example, if sales revenue of the new venture were 20% lower than projected? What would happen if the project implementation took 20% longer than estimated?
4. Strategic Fit – An additional component in case of ‘Intrapreneurial’ Business Plans
Practice of developing a new venture within an existing organization, to exploit a new opportunity and create economic value is called as intrapreneurship (Mair and Zwnovia, 2011).Unlike an independent entrepreneurial venture, an intrapreneurial venture is created in a pre-existent setting (Parker, 2009).Such a setting has its own heritage, legacy, culture, strategy, structure, value chain and value networks. While developing a business plan an intrapreneur needs to factor in the additional consideration of how well the new idea fits the existing setting. We can term this consideration as ‘Strategic Fit.’
Professor John Mullins of London Business School has proposed a framework for evaluation of new business opportunity (Mullins, 2003). This is very similar to Professor Sahlman’s business plan framework with the only difference that Mullin’s framework also examines a business opportunity in terms of its fit with the mission, personal aspirations and risk propensity of team pursuing the opportunity. This is relevant in the context of intrapreneurial business plans. The Strategic Fit component of intrapreneurial business plan should specifically answer following questions:
- Does the opportunity fit the company’s mission, vision, and broad strategic direction?
- Does the opportunity fit the management’s risk propensity?
- Is the opportunity connected with the value chain of sister organisations within the larger corporate group?
- Does the opportunity offer any functional or regional synergies?
Organisations often have certain preconceived preferences, which can be defined in terms of: markets they wish to serve; industries in which they are willing to compete; their own aspirations (how big a venture? how soon, if at all, do they wish to exit? are they committed to this opportunity or are they buying an option to see whether it pans out?); risks they are willing to undertake (with how much money? how certain must they be of a successful venture? must they have control, or are they willing to share it?). Opportunities that do not match these preferences may be seen as unattractive, even though other observers having different sets of preferences and dreams might view them more favourably.
Like individual team members, organisations possess unique characteristics that make them better prepared to execute on some sets of critical success factors than on others. Understanding the critical success factors relevant to a particular opportunity and the industry within which it will compete and matching them against the organisation’s ability to perform on them is among the most compelling questions that should be answered by the business plan.
5. From Business Idea to Business Plan
An idea evolves through certain stages before it gets converted into a business. By understanding each stage,one can systematically generate information related to various components of a Business Plan. Although the stages are mentioned below in a sequence, in reality multiple iterations take place up & down. Following stages are adapted from Kotler & Keller’s (2009) prescription for developing new products.
(i) Idea Generation & Screening
Several new business ideas can be generated by systematically looking at the internal &/or external environment of an organisation. After ideas are screened a few are converted into concepts.
(ii) Concept Development & Testing
A concept is an elaborated version of an idea. For instance, ‘environmentally friendly means of transport’ is an idea whereas ‘an electric car which can accommodate four people’ is a concept. This stage looks not only at a product or technology but also the target customers.
(iii) Business Analysis
This stage involves revenue, cost and capital requirement projections and analysis of business viability. Risk analysis is an integral part at this stage.
(iv) Business Strategy
Business strategy answers two major questions: what should be short term & long term goals and how will it be achieved? The business strategy encompasses all functional areas such as operations, marketing & sales, human resources, risk mitigation etc.
(v) Commercialization Plan
At this stage plans need to be made for launching the new business and its scaling up in a phased manner.
In order to convert the information related to each stage into a business plan following steps may be followed.
6. Steps in Writing a Business Plan
Ernst & Young (1997) proposes following steps in writing a business plan.
Step I: Set the Objectives
Before writing the business plan, one must be clear about who is going to read the plan, who is the target audience, what do they know about the proposed business idea, what they would like to know and how they may use the information. Answer to these questions should set the objectives while writing a business plan.
Step II: Prepare an Outline
Once the objectives are set, an outline of business plan should be decided. The planners should carefully decide the contents and areas that are to be emphasized. Depth at which each item is to be covered will depend on the intended audience & objectives. It helps to bounce off the broad outline with some intended readers & get their feedback. This helps in reviewing the outline.
Step III: Write the Plan
In order to provide flesh to the skeleton outline it is necessary to carry out desk and field research. This helps in validating the assumptions and exploring alternative courses of action. Generally first draft of financial projections is made after completion of necessary financial and market research. Preparing projected financial statements helps in understanding which alternative strategies may work and which may not. Detailed notes on assumptions made and the manner in which estimates have been prepared help in revising the plan. Last step in writing is preparing an executive summary.
Step IV: Get the Plan Reviewed
It helps to get the initial draft reviewed by someone who is familiar with the business environment and also the mind set of target readers. The review should cover aspects like completeness, clarity, logic, length, objectivity and effectiveness as a communication tool. The plan should be revised based on these reviews.
Step V: Update the Plan
Business plans need to be periodically updated so that they remain relevant. At times it is necessary to revise the plans as the business environment changes &/or if there is a change in the objectives of planners or readers.
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Ernst & Young (1997). Outline for a Business Plan.Available: http://isites.harvard.edu/fs/docs/icb.topic944195.files/Outline%20for%20a%20business%20plan.pdf
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