Chapter 11

Crafting a Business Plan

 There are two kinds of businesses, as follows :

 Those who have a business plan
 Those who do not have a business plan
 Most of the small businesses ignore the business plan
 Those businesses who follow a business plan, have their chances of growth and success
high, are able to handle better the business and market risks.
 Business Plan : A written summary of an entrepreneur’s proposed business venture, its
operational and financial details, its marketing opportunities and strategy, and its
managerial skills and abilities.
 The plan is a guidance as well as it serves as a standard against which you can measure
your business performance later.
 The plan is a written proof that the entrepreneur has performed the necessary research
and has studied the business opportunity adequately.

Business Plan Serves Three Essential Functions

1. It guides the company’s operations in the form of future targets for the company in terms
of its mission statement, goals, objectives, market analysis, budgets, financial forecasts,
target markets, strategies. For each of the targets mentioned you can measure your actual
performance against those targets.
2. It attracts lenders and investors. A solid and detailed business plan with its projected
revenues and profits would attract the investors for giving loans and funds.
 A business plan must prove to potential lenders and investors that the company will be
able to repay the loans and produce an attractive rate of return.
3. Building a business plan forces potential entrepreneurs to look at their business ideas in
the harsh light of reality. It makes the owners assess their ventures chances of success
more objectively.

External Financing

 To get external financing, an entrepreneur’s plan must pass three tests for potential
lenders and investors.
1) Reality test
2) Competitive test
3) Value test

The first two tests have both external and internal components.

1. Reality Test : The external component of the reality test revolves around proving that a
market for the product or service really does exist. It focuses on industry attractiveness,
 market niches, potential customers, market size etc. Entrepreneurs who pass this part of
the reality test prove that there is a demand for their business idea.
 The internal component of the reality test focuses on the product or service itself. Can the
company build the product within the cost estimates.
2. Competitive Test : The external part of the competitive test evaluate the company’s
relative position to its key competitors. How do the company’s strengths and weaknesses
match up with those of the competition.
 The internal factor focus on management’s ability to create a company that will gain and
edge over existing competitors. To pass this test, a plan must prove that it has the quality,
skill and experience of the company’s management team.
3. Value Test : To convince lenders and investors to put their money into the venture, a
business plan must prove to them that it offers a high probability of repayment or an
attractive rate of return. This should be in terms of numerical amounts, consist of
following :
1. Supplies and all related cost of goods
2. Unit labor costs
3. Market-determined selling price and Gross Profit Margins.
4. Break-Even Point

 The importance of business plan is more in the research, the entrepreneur has done for
building the plan. It would point out the weaknesses and flaws in the original idea of the
entrepreneur.

The Elements of a Business Plan :- As entrepreneur has the real idea so he should make the
plan himself but he can have help from accountants, business professionals, attorneys and
consultants. They can also use Business Plan Softwares available on internet like
www.sba.gov/SBDC

 A Business Plan typically ranges from 25 to 50 pages and consist of the following :

1. The Executive Summary :- The executive summary is a summarized from of the

business plan. It should explain the basic business model and briefly describe the owners
and key employees, target markets and financial highlights (e.g. sales projections, dollar
amount requested, how the funds will be used, and how and when loans will be repaid)
 The executive summary must capture the reader’s attention otherwise nobody would be
interested to read the whole business plan.
2. Mission Statement :- What the company is what it is to become.
3. Company’s History :- The owner of an existing small business should prepare a brief
history of the operations, highlighting the significant financial and operational events in
the company’s life. Describe why the company was formed, how it is at present and the
future plans. It should give goals, objectives and strategies for future of the business.
 Describe the present condition of industry and how the business will succeed in the
market segment it wants to compete.
  Describe the current applications of the product or service in the market and future
projections.
 It mentions the market segment, market size, growth trends and the relative strength of
competitors
 Ease of market entry.

Business Strategy :- Strategies to achieve the business goals and objectives. How the business
would achieve the targets of business goals and objectives.

 How he plans to get a competitive edge in the market.

 What makes the company unique in the eyes of the customers.

Description of Firm’s Product/Service

 Write product or service description

 Comparison of this product as compared to competitors. It should mention distinctive
features of the products
 It should mention distinctive benefits the customers will receive with the product or
service.

Marketing Strategy

Company’s Target Market and its characteristics :

 Who are the most promising customers or prospects

 What are their characteristics
 Where do they live
 What do they buy
 When do they buy
 What expectations do they have about product or service

Showing Customer Interest

 Mention the unfulfilled needs and wants of customers that the company wants to target.
 It should indicate some kind of interests shown by the customers for the offered product.

Marketing Considerations

 Documenting Market Claims

 Entrepreneurs must support claims of market size and growth rates with facts, and that
requires market research.
 Market Surveys
 Customer questionnaires
 Demographic studies

Are used for sales projections

  Also are used Financial Models
 Business prototyping is also used for final projections. Entrepreneurs test their models on
a small scale to find what results they get before starting a full scale production.
 Channels of distribution are also mentioned in this e.g. mail, sales agent, retailers.
 Also pricing and promotion strategies.
 Company’s warranties and guarantees for its products and services.
 Competitor Analysis :
 Analysis of each of the significant competitor
 Competitor’s market shares, products and strategies
 Competitive advantage of company over competitors.
 Description of Management Team :-
 The most important factor in the success of a business venture is the quality of
management team.
 Investors give it high importance
 Business plan should describe the qualifications and expertise of the management
team.
 Plan of Operation :
 Construct an organizational chart identifying the business’s key positions and the
personnel occupying them.
 Employment contracts, shares of ownership to motivate employees
 Description of the form of ownership (Sole Proprietorship, partnership, joint
venture etc.)
 Leases, contracts and relevant agreements.

 Forecasted or Pro-forma Financial Statements

 Create a successful Financial Plan
 Cover Pessimistic, Most Likely and Optimistic conditions.

 Loan or Investment Proposal

 Purpose of Financing
 The amount requested
 Plan for repayment

What Lenders and Investors Look For in a Business Plan :-

Investors look for five C’s i.e. Capital, Capacity, Collateral, Character and Conditions.

1. Capital :- Entrepreneur must have adequate capital to start with, otherwise investors see
as a risk to invest.
2. Capacity :- Entrepreneur must convince investor or lenders that you would have cash to
repay loans (a company can show profit but not have cash is possible).
3. Collateral :- It includes any assets an entrepreneur pledges to a lender as security for
repayment of a loan.
4. Character :- Entrepreneur’s character should be good so that investor trust.
5. Conditions :-
 Business potential growth in the market
 Competition
 Location
 Strengths and weaknesses of business
 Opportunities and threats of business.