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You can’t direct the wind, but you can adjust the sails.
- Anonymous
Learning Objectives
Students will be able to:
1. Explain why every entrepreneur should create a business plan.
2. Describe the elements of a solid business plan.
3. Explain the three tests every business plan must pass.
4. Understand the keys to making an effective business plan presentation.
5. Explain the "5 Cs of Credit" and why they are important to potential lenders and
investors reading business plans.
Instructor’s Outline
I. Introduction
A. Starting a business requires lots of planning.
1. Whatever their size, companies that engage in business planning outperform those
who do not.
B. The plan serves as an entrepreneur's road map on the journey toward building a
successful business.
1. It describes the direction the company is taking
2. its goals are
3. where it wants to be
4. how it's going to get there
C. The business plan is the entrepreneur's best insurance against launching a business
destined to fail or mismanaging a potentially successful company.
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118 Section III - Building the Business Plan: Marketing & Financial Considerations
1. First, it guides the company's operations by charting its future course and
devising a strategy for following it.
a) The plan provides a battery of tools – a mission statement, goals, objectives,
budgets, financial forecasts, target markets, strategies – to help managers lead
the company successfully.
b) It gives managers and employees a sense of direction.
c) It gives everyone targets to shoot for, and it provides a yardstick for
measuring actual performance against those targets, especially in the crucial
and chaotic start-up phase.
d) Plus, writing a plan requires entrepreneurs to get an in-depth understanding of
the industries in which they plan to compete and how their companies fit into
them.
e) Finally, creating a plan forces entrepreneurs to subject their ideas to the test of
reality: Can this business actually produce a profit?
2. The second function of the business plan is to attract lenders and investors.
a) Lenders and investors want to see solid, incisive business plans that
demonstrates an entrepreneur’s creditworthiness and his ability to build and
manage a profitable company.
b) Applying for loans or attempting to attract investors without a solid business
plan rarely attracts needed capital.
c) The quality of the firm's business plan weighs heavily in the decision to lend
or invest funds.
d) It is also potential lenders’ and investors’ first impression of the company and
its managers.
F. An entrepreneur should not allow others to prepare a business plan for him because
1. Outsiders cannot understand the business nor envision the proposed company as
well as he can.
2. The entrepreneur is the driving force behind the business idea and is the one who
can best convey the vision and the enthusiasm he has for transforming that idea
into a successful business.
3. The entrepreneur will make the presentation to potential lenders and investors, he
must understand every detail of the business plan.
Chapter 6 Crafting a Winning Business Plan 119
G. Investors want to feel confident that an entrepreneur has realistically evaluated the
risk involved in the new venture and has a strategy for addressing it.
1. They also want to see proof that a business will become profitable and produce a
reasonable return on their investment.
Entrepreneur Rob Ryan learned two valuable lessons after starting his first company, Softcom,
which he sold to a larger competitor when he ran out of money. "First, never start a company
without a great team," he says. "Second, raise a lot of money."
He established Entrepreneur America, a business boot camp for budding entrepreneurs. His
guests are put through the ringer as he helps them refine their ideas and hone their business
plans. Occasionally, he even saddles them up on some of his horses and takes them out into the
breathtaking beauty of the Bitterroot Mountains. Ryan has coached several companies that have
become hugely successful businesses, including search-engine company LookSmart and Silicon
Spice, a computer chip- and software-maker that was recently sold for $1.2 billion.
Ian Eslick, founder of Silicon Spice, sought Ryan's help when preparing his business plan. After
working through Ryan’s business plan boot camp, Eslick secured financing for his start-up
venture from New Enterprise Associates (NEA), one of the premier venture capital firms in the
world.
Out of the 1,000 or so entrepreneurs who apply to attend Entrepreneur America each year, Ryan
selects about 20 to attend, mostly founders of start-ups with hot new technologies but few
management skills. Every three weeks, a new batch of entrepreneurs arrives to face the
challenge of their business lives. Ryan challenges the entrepreneurs under his tutelage,
questioning the assumptions underlying their plans, criticizing their business models, and
cajoling them into improving the quality of their business plans. His style can be blistering, but
his philosophy is basic: Create a successful business by building a strong management team,
keeping costs low, maintaining focus on the right target market, and grow slowly. Ryan also
teaches his students how to decipher the language of venture capital and how to create a
powerful presentation designed to impress potential lenders and investors.
Another of Ryan's students who has launched a highly successful technology company says,
“There is a saying, ‘There is no progress without the unreasonable man.’ Unless you're
absolutely unreasonable, things become the status quo. That's really the definition of Rob. You
have to ask for the impossible. Certainly, Rob challenges people to do that.”
1. What benefits does Rob Ryan's entrepreneurial boot camp offer aspiring entrepreneurs?
Answer: Student’s answer may vary. However, the most common answers would be:
helping entrepreneurs to refine their ideas and hone their business plans, and show how
to orchestrate a business presentation and highlight key things.
2. Critique the confrontational style that Ryan uses with his entrepreneurial students. What
benefits does it give them?
120 Section III - Building the Business Plan: Marketing & Financial Considerations
Answer: Student’s answer may vary. However, the most common answers would be:
making them to think as to why they are in the camp, and helping them to deal with the
challenge in a motivating structure.
3. Use the resources in the library and on the World Wide Web to develop a list of
suggestions and advice for entrepreneurs presenting their business plans to lenders and
investors.
Answer: Student’s answer may vary.
H. Perhaps the best way to understand the need for a business plan is to recognize the
validity of the “two-thirds rule”
1. only two-thirds of the entrepreneurs with a sound and viable new business
venture will find financial backing.
2. Those that do find financial backing will only get two-thirds of what they initially
requested, and it will take them two-thirds longer to get the financing than they
anticipated.
3. The most effective strategy for avoiding the two-thirds rule is to build a business
plan!
I. The time to find out that a business idea won’t succeed is in the planning stages,
before an entrepreneur commits significant money, time, and effort to the venture.
1. It is much less expensive to make mistakes on paper than in reality.
2. A business plan reveals important problems to overcome before launching a
company.
J. The real value in preparing a plan is not is much in the plan itself as it is in the
process the entrepreneur goes through to create the plan.
1. Although the finished product is useful, the process of building the plan requires
entrepreneurs to subject their ideas to an objective, critical evaluation.
2. What entrepreneurs learn about their industries, target markets, financial
requirements, competition, and other factors is essential to making their ventures
successful.
3. Building a business plan reduces the risk and uncertainty of launching a company
by teaching an entrepreneur to do it the right way!
4. See Table 6.1 which describes the four bases every business plan should cover.
B. Entrepreneurs who invest their time and energy building plans are better prepared to
face the hostile environment in which their companies will compete than those who
do not.
1. Building a business plan does not guarantee success, it does raise an
entrepreneur's chances of succeeding in business.
2. A business plan typically ranges from 25 to 50 pages in length.
a) Like every business venture, every business plan is unique.
(f) How does the planned price compare to those of similar products or
services?
(g) Are customers willing to pay it?
(h) What price tiers exist in the market?
(i) How sensitive are customers to price changes?
(j) Will the business sell to customers on credit?
(k) Will it accept credit cards?
(l) Will the company offer discounts? If so, what kinds and how much?
(6) Distribution:
(a) How will the product or service be distributed?
(b) Will distribution be extensive, selective, or exclusive?
(c) What is the average sale?
(d) How large will the sales staff be?
(e) How will the company compensate its sales force?
(f) What are the incentives for salespeople?
(g) How many sales calls does it take to close a sale?
(h) What can the company do to make it as easy as possible for customers
to buy?
(i) An entrepreneur should summarize the firm's overall pricing strategies
and its warranties and guarantees for its products and services.
8. Competitor Analysis.
a) Entrepreneurs should assess honestly their new ventures’ competition.
b) Trade associations, customers, industry journals, sales representatives, and
sales literature are valuable sources of data.
c) It should focus on demonstrating that the entrepreneur's company has an
advantage over its competitors.
(1) Who are the company's key competitors?
(2) What are their strengths and weaknesses?
(3) What are their strategies?
(4) What images do they have in the marketplace?
(5) How successful are they?
(6) What distinguishes the entrepreneur's product or service from others
already on the market, and how will these differences produce a
competitive edge?
9. Owners’ and Managers’ Resumes.
a) The most important factor in the success of a business venture is its
management, and financial officers and investors weight heavily the ability
and experience of the firm's managers in financing decisions.
b) A plan should include the resumes of business officers, key directors, and any
person with at least 20 percent ownership in the company.
c) This is the section of the plan where entrepreneurs have the chance to sell the
qualifications and the experience of their management team.
d) Ideally, lenders and investors look for managers with at least two years’ of
operating experience in the industry they are targeting.
e) A resume should summarize each individual's education, work history
(emphasizing managerial responsibilities and duties), and relevant business
experience.
126 Section III - Building the Business Plan: Marketing & Financial Considerations
f) This portion of the plan should show that the company has the right people
organized in the right fashion for success.
g) One experienced private investor advises entrepreneurs to remember the
following:
(1) Ideas and products don't succeed; people do.
(2) Show the strength of key employees and how you will retain them.
(3) A board of directors or advisers consisting of industry experts lends
credibility and can enhance the value of the management team.
10. Plan of Operation.
a) An entrepreneur should construct an organizational chart identifying the
business's key positions and the people occupying them.
b) The entrepreneur should describe briefly the steps taken to encourage
important officers to remain with the company.
c) Employment contracts, shares of ownership, and perks are commonly used to
keep and motivate key employees.
d) A description of the form of ownership (partnership, joint venture, S
Corporation, LLC) and of any leases, contracts, and other relevant agreements
pertaining to the operation is helpful.
11. Financial Forecasts.
a) A business owner should supply copies of the firm's major financial
statements from the past 3 years.
b) Ideally, these statements should be audited ore reviewed by a certified public
accountant.
c) An entrepreneur should carefully prepare monthly projected (or pro forma)
financial statements for the venture for one year and by quarter for the next 2
to 3 years.
(1) Income statement shows the company’s revenues, expenses, and the
resulting profit.
(a) Investors and lenders expect to see positive trends in earnings.
(b) They look to see if the gross-, operating-, and net-income margins on
the forecasted income statements are consistent with industry
averages.
(2) Cash flow statement to judge whether or not the company is viable over
time.
(a) Staying in business requires a company to generate positive cash flow.
(b) Entrepreneurs must make sure that they have accumulated enough
capital to carry the company until it generates enough cash to support
itself.
(3) Balance sheet where they see the company’s assets (everything it owns),
its liabilities (everything it owes), and its net worth (the difference in
assets and liabilities).
d) There should be forecasts under pessimistic, most likely, and optimistic
conditions to reflect the uncertainty of the future.
(1) Entrepreneurs must avoid the tendency to “fudge the numbers” since some
venture capitalists automatically discount an entrepreneur's financial
projections by as much as 50 percent.
(2) Include break-even analysis and a ratio analysis on the projected figures.
Chapter 6 Crafting a Winning Business Plan 127
How can you create a plan that will help your business become more successful? By integrating
the following ten characteristics into your plan:
g) A business plan is usually the tool that an entrepreneur uses to make a first
impression on potential lenders and investors. To make sure that impression
is a favorable one, an entrepreneur should follow these tips:
(1) Make sure the plan is free of spelling and grammatical errors and “typos.”
(2) Make it visually appealing.
(3) Leave ample “white space” in margins.
(4) Create an attractive (but not extravagant) cover that includes the
company's name and logo.
(5) Include a table of contents to allow readers to navigate the plan easily.
(6) Write in a flowing, conversational style and use “bullets” to itemize points
in lists.
(7) Support claims with facts and avoid generalizations.
(8) Avoid overusing industry jargon and acronyms with which readers may
not be familiar.
(9) Make it interesting.
(10) Use computer spreadsheets to generate financial forecasts. They allow
entrepreneurs to perform valuable “what if” (sensitivity) analysis in just
seconds.
(11) Alwyas include cash flow projections.
(12) The ideal plan is “crisp” – long enough to say what it should but not so
long that it is a chore to read.
(13) Tell the truth. Absolute honesty is always critical in preparing a business
plan.
B. To get external financing, an entrepreneur's plan must pass three tests with potential
lenders and investors:
1. Reality test
a) The external component of the reality test revolves around proving that a
market for the product or service really does exist.
(1) It focuses on industry attractiveness, market niches, potential customers,
market size, degree of competition, and similar factors.
b) The internal component of the reality test focuses on the product or service
itself.
(a) Can the company really build it for the cost estimates in the business
plan?
(b) Is it truly different from what competitors are already selling?
(c) Does it offer customers something of value?
2. Competitive test
a) The external part of the competitive test evaluates the company's relative
position to its key competitors.
Chapter 6 Crafting a Winning Business Plan 129
(1) How do the company's strengths and weaknesses match up with those of
the competition?
(2) How are existing competitors likely to react when the new business enters
the market?
(3) Do these reactions threaten the new company's success and survival?
b) The internal competitive test focuses on management's ability to create a
company that will gain an edge over existing rivals.
(1) What other resources does the company have that can give it a
competitive edge in the market?
3. Value test.
a) A business plan must prove to them that it offers a high probability of
repayment or an attractive rate of return.
b) A plan must convince lenders and investors that they will earn an attractive
return on their money.
4. Appendix A at the end of this book contains a sample business plan for a
company.
B. Entrepreneurs who are successful in raising the capital their companies need to grow
have solid business plans and make convincing presentations of them.
C. Some helpful tips for making a business plan presentation to potential lenders and
investors include:
1. Prepare.
2. Demonstrate enthusiasm about the business, but don't be overemotional.
3. Focus on communicating the dynamic opportunity your idea offers and how you
plan to capitalize on it.
4. “Hook” investors quickly with an up-front explanation of the new venture, its
opportunities, and the anticipated benefits to them.
5. Use visual aids.
6. Hit the highlights; specific questions will bring out the details later. Don't get
caught up in too much detail in early meetings with lenders and investors.
7. Keep the presentation “crisp” just like your business plan
8. Avoid the use of technological terms that will likely be above most of the
audience.
130 Section III - Building the Business Plan: Marketing & Financial Considerations
9. Remember that every potential lender and investor you talk to is thinking “What's
in it for me?”
10. Close by reinforcing the nature of the opportunity.
11. Be prepared for questions.
12. Anticipate the questions the audience is most likely to ask and prepare for them in
advance.
13. Be sensitive to the issues that are most important to lenders and investors by
“reading” the pattern of their questions.
14. Follow up with every investor you make a presentation to.
Camp $tart-UP in Wellesley, Massachusetts, young women between the ages of 13 and 17 work
in teams to develop business plans for businesses they hope to launch. In addition to learning the
details of writing business plans, these aspiring entrepreneurs also have a chance to network with
women entrepreneurs. Like the participants in Camp $tart-UP, college students across the
United States are creating business plans for companies they hope to start, or, in some cases,
have already launched. For some, more than just a good grade is at stake. They are competing
for real start-up funding and valuable feedback from experienced judges in business plan
competitions.
1. If your school does not already have a business plan competition, work with a team of
your classmates in a brainstorming session to develop ideas for creating one. How
would you finance the competition? Whom would you invite to judge it? How would
you structure the competition?
Answer: Student’s answers may vary.
2. Use the World Wide Web to research business plan competitions at other colleges and
universities across the nation. Using the competitions at these schools as benchmarks and
the ideas you generated in question #1, develop a format for a business plan competition
at your school.
Answer: Student’s answers may vary.
prestigious business plan competition. Outline your team’s strategy for winning the
competition.
Answer: “Suggested Business Plan Format” listed at the end of this chapter would be a
good outline.
c) Lenders expect a business to pass the test of liquidity, especially for short-
term loans.
3. Collateral
a) Collateral includes any assets an entrepreneur pledges to a lender as security
for repayment of the loan.
b) Banks make very few unsecured loans (those not backed by collateral) to
business start-ups.
c) Bankers view the owner's willingness to pledge collateral (personal or
business assets) as an indication of dedication to making the venture a
success.
4. Character
a) An evaluation of character frequently is based on intangible factors such as
honesty, competence, polish, determination, intelligence, and ability.
b) Lenders and investors know that most small businesses fail because of
incompetent management, and so they try to avoid extending loans to high-
risk entrepreneurs.
5. Conditions.
a) The conditions surrounding a loan request also affect the owner's chance of
receiving funds.
b) Banks consider factors relating to the business operation such as potential
growth in the market, competition, location, form of ownership, and loan
purpose.
c) Another important condition influencing the banker's decision is the shape of
the overall economy, including interest rate levels, inflation rate, and demand
for money.
VII. Conclusion
A. A good plan serves as a strategic compass that keeps a business on course as it travels
into an uncertain future.
1. A olid plan is essential to raising the capital needed to start a business; lenders
and investors demand it.
2. Building a plan is just one step along the path to launching a business.
E. Industry Analysis
1. Industry background and overview
2. Significant trends
3. Growth rate
4. Key success factors in the industry
5. Outlook for the future
F. Business Strategy
1. Desired image and position in market
2. SWOT analysis
a) Strengths
b) Weaknesses
c) Opportunities
d) Threats
Chapter 6 Crafting a Winning Business Plan 133
G. Competitive strategy
1. Cost-leadership
2. Differentiation
3. Focus
I. Marketing Strategy
1. Target market
a) Complete demographic profile
b) Other significant customer characteristics
2. Customers’ motivation to buy
3. Market size and trends
a) How large is the market?
b) Is it growing or shrinking? How fast?
4. Advertising and promotion
a) Media used – reader, viewer, listener profiles
b) Media costs
c) Frequency of usage
d) Plans for generating publicity
5. Pricing
a) Cost structure
(1) Fixed
(2) Variable
b) Desired image in market
c) Comparison against competitors’ prices
6. Distribution strategy
a) Channels of distribution used
b) Sales techniques and incentives
2. Layout
a) Size requirements
b) Americans with Disabilities compliance
c) Ergonomic issues
d) Layout plan (suitable for an appendix)
K. Competitor Analysis
1. Existing competitors
a) Who are they? Create a competitive profile matrix.
b) Strengths
c) Weaknesses
2. Potential competitors: Companies that might enter the market
a) Who are they?
b) Impact on your business if they enter
M. Plan of Operation
1. Form of ownership chosen and reasoning
2. Company structure (organization chart)
3. Decision making authority
4. Compensation and benefits packages
Chapter Summary
5. Explain the "5 Cs of Credit" and why they are important to potential lenders and investors
reading business plans.
• Small business owners need to be aware of the criteria bankers use in evaluating the
credit-worthiness of loan applicants - the five Cs of credit: capital, capacity, collateral,
character, and conditions.
136 Section III - Building the Business Plan: Marketing & Financial Considerations
• Capital - Lenders expect small businesses to have an equity base of investment by the
owner(s) that will help support the venture during times of financial strain.
• Capacity - A synonym for capacity is cash flow. The bank must be convinced of the
firm's ability to meet its regular financial obligations and to repay the bank loan, and
that takes cash.
• Collateral - Collateral includes any assets the owner pledges to the bank as security for
repayment of the loan.
• Character - Before approving a loan to a small business, the banker must be satisfied
with the owner's character.
• Conditions – refers to interest rates, the health of the nation's economy, industry
growth rates, etc. - surrounding a loan request also affects the owner's chance of
receiving funds.
Discussion Questions
2. Why do entrepreneurs who are not seeking external financing need to prepare business
plans?
Answer: The real value in preparing a business plan is in the process the entrepreneur
goes through to create the plan. Although the finished product is useful, the process of
building a plan requires an entrepreneur to subject his idea to an objective, critical
evaluation. What the entrepreneur learns about his company, its target market, its financial
requirements, and other factors can be essential to making the venture a success.
4. How can an entrepreneur seeking funds to launch a business convince potential lenders and
investors that a market for the product or service really does exist?
Answer: To get external financing, an entrepreneur's plan must pass three tests with
potential lenders and investors: Reality test, Competitive test, and Value test. Reality test
revolves around proving that a market for the product or service really does exist and it
focuses on industry attractiveness, market niches, potential customers, market size, degree
of competition, and similar factors. It also focuses on the product or service itself. The
Competitive test evaluates the company's relative position to its key competitors and it
focuses on management's ability to create a company that will gain an edge over existing
rivals. The Value test must prove that it offers a high probability of repayment or an
attractive rate of return and must convince lenders and investors that they will earn an
attractive return on their money.
Chapter 6 Crafting a Winning Business Plan 137
5. How would you prepare to make a formal presentation of your business plan to a venture
capital forum?
Answer: A formal presentation often is no more than just a few minutes, usually 15 to 20
minutes, 30 minutes at the maximum. A business plan presentation should cover five basic
areas: (1) The company's background and its products or services; (2) A market analysis
and a description of the opportunities it presents; (3) The company’s competitive edge and
the marketing strategies; (4) The management team and its members’ qualifications and
experience; and (5) A financial analysis that shows lenders and investors an attractive
payback or payoff.
6. What are the 5 C’s of credit? How do lenders and investors use them when evaluating a
request for financing?
Answer: Small business owners need to be aware of the criteria bankers use in evaluating
the credit-worthiness of loan applicants - the five Cs of credit: capital, capacity,
collateral, character, and conditions. Capital - lenders expect small businesses to
have an equity base of investment by the owner(s) that will help support the venture
during times of financial strain. Capacity is cash flow. The bank must be convinced
of the firm's ability to meet its regular financial obligations and to repay the bank
loan, and that takes cash. Collateral includes any assets the owner pledges to the
bank as security for repayment of the loan. Character - before approving a loan to a
small business, the banker must be satisfied with the owner's character. Conditions
refers to interest rates, the health of the nation's economy, industry growth rates, etc.
- surrounding a loan request also affect the owner's chance of receiving funds.
1. Interview a local banker or investor who has experience in making loans to or investments
in small businesses. Ask him or her the following questions.
a. How important is a well-prepared business plan?
b. How important is a smooth presentation?
c. How do you evaluate the owner's character?
d. How heavily do you weigh the five Cs of credit?
e. What percentage of small business owners are well prepared to request loan or
investment?
f. What mistakes do entrepreneurs most commonly make when creating their business
plans? When presenting them?
g. What are the major reasons for rejecting a business plan?
2. Interview a small business owner who has requested a bank loan or an equity investment
from external sources. Ask him or her these questions:
a. Did you prepare a written business plan before approaching the financial officer?
b. If the answer is “yes” to part a, did you have outside or professional help in preparing
it?
c. How many times have your requests for additional funds been rejected? What reasons
were given for the rejection?