Chapter Four

The Business Plan

 Learning Objectives

• Explain the purpose and importance of

the business plan
• Describe the components of a business
plan
• Recognize the importance of reviewing
your business plan

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 Business Plan

• Written document describing a

business.
• Used to:
– test the feasibility of a business idea
– raise capital
– serve as a road map for future operations
– help find omissions and flaws in the idea

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 What is a Business Plan?

Gives the Reader

What Where

When Why

Who How

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 Business Planning Process

• When planning you need to:

– define the goals of your business
– determine the actions that need to be
taken to accomplish them
– gather and commit the resources needed
– aim for well-defined targets

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 Three Primary Reasons for
Writing a Business Plan

Prove Feasibility

Provide Direction

Attract Capital

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 Guidelines for Writing a
Business Plan
• Consider your audience
– Show the benefit of your business to your
reader
• Keep it brief
– Just long enough to cover all major issues
facing the business

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 Guidelines for Writing a
Business Plan (continued)
• Point of view
– Try to write your business plan in the third
person
• Create a professional image
– The overall appearance should be
professional and attractive but not
extravagant

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 Where to Get Help in Writing a
Business Plan
• Paperback guides at any bookstore
• Small Business Administration
• Local Small Business Development
Center
• Local SCORE (Service Corp of Retired
Executives)
• Local Chamber of Commerce
• College or university near you

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 Business Plan

• Tailored to fit your particular business

• Write the plan yourself
• Limit to 40 or fewer pages
• Present your strengths clearly and in a
logical order

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 Business Plan Content

• Cover page • Management Team

• Table of contents • Timeline
• Executive summary • Critical Risks &
• Company & Industry Assumptions
• Product or Services • Exit Strategy
• Market Research & • Financial Plan
Evaluation
• Manufacturing & • Appendix
Operations Plan

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 Structure of the Business Plan

• Cover Page:
– Name of the business
– Address and phone number
– Date the plan was issued
• Table of Contents:
– orderly to allow the reader to turn directly
to the sections desired

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Structure of the Business Plan (continued)

• Executive Summary:
– Company information
– Market opportunity
– Financial data
• Company:
– Background
– Business form
– Reason for company’s establishment

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Structure of the Business Plan (continued)

• Environmental Analysis:
– Economic, competitive, legal, political, cultural, and
technological arenas
• Industry Analysis:
– Industry demand?
– Competitive reactions and industrywide trends? major
players?
– Businesses recently entered or exited?
– Why did they leave?
– Industry growing or declining?
– Who are the new competitors?

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Structure of the Business Plan (continued)

• Products or Services:
– Different from those currently on the
market
– Other uses for the product
– Drawings or photos if appropriate
– Patents or trademarks

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Structure of the Business Plan (continued)

• Products or Services:
– Competitive advantage
– Potential for growth
– Manage the product or service through the
product life cycle
– Expand the product line or develop related
products

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 Using the Internet

• Several websites provide helpful

information about writing a business plan
http://www.toolkit.cch.com/text/P02_0001.asp
http://www.bizplanit.com/free.html
http://www.sba.gov/starting_business/plannin
g/basic.html

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 Marketing Research
and Evaluation
• Markets:
– Identify your target markets and
concentrate on these key areas
• Market Trends:
– Explain how you will assess your
customer’s needs over time

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 Marketing Research
and Evaluation (continued)
• Competition:
– Identify price leader, quality leader, and
service leader
• Market Share:
– Estimate the market share you intend to
gain

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 Using the Internet

• The American Marketing Association’s

website is an excellent resource for
marketing information.
http://www.marketingpower.com

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 Marketing Plan

• Pricing:
– The price must be “right” to penetrate the
market, to maintain your market position,
and to make profits
• Promotion:
– How will you attract the attention of and
communicate with your potential
customers?

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 Marketing Plan (continued)

• Place:
– Describe how you intend to sell and
distribute your products
• Service Policies:
– Describe your service and warranty
policies

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 Manufacturing and
Operations Plan
• Geographic Location:
– Describe the planned location
• Facilities:
– What is needed?
• Make or Buy Policy:
– What will be produced and what will be
purchased as components?

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 Manufacturing and
Operations Plan (continued)
• Control Systems:
– What is the approach to controlling quality,
inventory, and production?
• Labor Force:
– Is there a sufficient quantity of skilled
people in the local labor force?

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 Balancing A Good Management Team

Technical Skills Business Skills

Experience

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 Timeline

• Outline the interrelationship and timing

of the major events planned for your
venture
• Timing objectives need to be realistic
and attainable

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 Critical Risks & Assumptions
Possible Contingencies
• Unreliable sales forecasts
• Competitors’ ability to underprice or to
make your product obsolete
• Unfavorable industrywide trends
• Appropriately trained workers not as
available as predicted
• Erratic supply of products or raw
materials

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 Benefits to the Community

Economic
Development

Community
Human Development
Development

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 Exit Strategy
Succession Planning
• How you intend to get yourself (and your
money) out of it
• Do you intend to sell it in 20 years?
• Will your children take it over?
• How will you prepare them for ownership?
• Do you intend to grow the business to the
point of an initial public offering (IPO)
• How will investors get their money back?

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 Financial Plan

• Sources and uses of capital (initial and

projected)
• Cash flow projections for three years
• Balance sheets for three years
• Profit and loss statements for three
years
• Breakeven analysis

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 Financial Plan (continued)

• Show conclusions and important points:

– How much equity and how much debt are
included
– The highest amount of cash needed
– How long the pay-back period for loans is
expected to be

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 The Sources and Uses
of Funds Worksheet

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 Cash Flow Statement

• Shows the amount of money a business

has:
– on hand at the beginning of a time period
– receipts coming into the business
– money going out of the business during the
same period
• Show a cash flow statement:
– by month for the first year of operations
– by quarter for the second and third years

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 Cash-Flow Statement

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 Balance Sheet

• A financial document that shows the assets,

liabilities, and owner’s equity for a business
• Difference between assets and liabilities is
the net worth of the business – also called
“capital”
• Used to calculate key ratios, such as debt to
equity and current ratio to determine the
financial health of the business

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 Balance Sheet

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 Profit and Loss Statement

• Shows sales revenues, expenses, and net

profit or loss
• Objective is to come up with an approximation
of what sales revenues and expenses will be
• Helpful to break sales down by product line (or
services) to determine:
– a best-case scenario
– a worst-case scenario
– a most likely scenario (somewhere between the
two extremes)

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Profit and Loss
Projection

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 Breakeven Analysis

• Point at which sales and costs are equal and

a business is neither making nor losing
money
• Reinforce financial projections by comparing
them to industry averages for your chosen
industry
• Used to compare projected financial ratios to
industry averages to establish a benchmark

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 Breakeven Analysis

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 Appendix

• Supplemental information and documents not

critical to the plan, but of potential interest to
the reader
• Résumés of owners and principal managers,
advertising samples, brochures, organization
charts, floor plans, and any related
information can be included
• Different types of information should be given
a separate appendix labeled with successive
letters of the alphabet

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 Review Process

• The business plan should be carefully

reviewed and revised before being
presented to a potential investor
• After writing the business plan, evaluate
it as you think lenders and investor
might

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 Business Plan Mistakes

• Submitting a “rough copy”

• Depending on outdated financial
information or industry comparisons
• Trying to impress financiers with
technojargon
• Lack of marketing strategies
• Making unsubstantiated assumptions

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 Business Plan Mistakes (continued)

• Being overly optimistic

• Misunderstanding financial information
• Ignoring the macroenvironment
• Avoiding or disguising potential negative
aspects
• Having no personal equity in the
company

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