Anatomy of a Business Plan

Chapter 3 Resume
Executive Summary

The Executive Summary is the thesis statement of your business plan. It summarizes who you
are, what your company does, where your company is going, why it is going where it is
going, and how it will get there. If you are seeking funding, it specifies the purpose of the
funding you seek and justifies the financial feasibility of your plan for the lender or investor.

The Purpose of Executive Summary

Internal use Only:

This statement would summarize your business. It would be a brief overview of the
company’s goals and statement of how it will focus to meet its projections.

Seeking Funding:
The Executive Summary specifies the purpose of the funding you seek and justifies the
financial feasibility of your plan for the lender or investor. A lender or investor reading only
the executive summary should quickly see the name, age, legal structure, location, nature, and
uniqueness of your business including strengths and risks. The Executive Summary should
provide a quick overview of your business’ past performance and of its future goals and how
you plan to reach them. Information on the management team is imperative if you are seeking
venture capital. Finally, the executive summary would include the amount and purpose of the
loan or investment request, timing needs, justification for financing, and a repayment
statement (lender) or statement of potential return on investment (venture capitalist).

As you write your business plan and refine your ideas, you will probably discover new ideas
and information that you will want to incorporate into your business plan to make your
business more effective and profitable. For this reason, the Executive Summary is most
effectively written after your plan has been completed. At that time, all the information and
financial data will be available and you can draw it from the written text and financial
spreadsheets. In addition, periodic updates of your business plan may require that you revise
your Executive Summary to reflect the changes that will constantly be taking place in your
business.

Use the keyword approach. The Executive Summary is generally contained on one page if it
is for internal use. If you are trying to approach a lender or investor, it should not exceed two
or three pages. In a concise and clear one- or two-page statement you will sum up the essence
of your business plan by including answers to the following questions: Who? What? Where?
When? Why? How?

The Executive Summary is just that—a summary of your business plan. If you are writing
your plan to serve as a guide for your firm, and not planning to seek a lender or investor,
writing an executive summary will help you to formulate a good overall picture of where you
are planning to go in your business. If you are seeking a lender or investor, the Executive
Summary will be the first introduction to your business and should answer key questions
regarding your company and its potential for growth and profitability.
Modern Entrepreneur
Chapter 3 Resume
Replacement Analysis

The major reasons for replacement are:

(i) Deterioration: Decline in performance due to wear and tear indicated by increase
in maintenance costs; reduction in product quality and rate of production, increase
in labour costs, loss of operating time etc.
(ii) (ii) Obsolescence: It may be due to advancement in technology. This reduces
profits, impairs competition, causes loss in the value of machinery.
(iii) Inadequacy: Equipment's capacity may not be sufficient to meet the demand or it
is not able to increase the production rate to desired level.
(iv) Working conditions: Causing unsafety to workers and leading to accidents,
making the environment noisy and smoky etc.
(v) Economy: The existing units have outlived their effective life and it is not
economical to continue with them.
(vi) The existing units breakdown, perished or destroyed all of a sudden. Some special
characteristics of replacement are:
a. replacement reduces maintenance costs but it involves a high average capital
cost.
b. many people feel that an equipment should not be replaced until it is
physically worn out. But this attitude is never in the interest of the
organisation. On the contrary the equipment's must be constantly reviewed and
updated, otherwise these may become obsolete.

Replacement Models and Their Solutions:

(i) Technical: Deterioration, Obsolescence, Inadequacy.
(ii) Financial: Initial cost; operating costs; labour costs, material costs; maintenance
costs, salvage value, insurance etc.

The different types of replacement problems can be broadly classified in following situations:
(i) Replacement of Items Whose Efficiency Deteriorates with Time: The simplest
replacement model in such cases is one where the deterioration rate is predictable
in terms of increasing maintenance costs and decrease in salvage value with time.
(ii) Replacement of items that fail completely and are expensive to be replaced: In
such situation the items are assumed to have relatively constant level of efficiency
until they completely fail. Here replacement strategy is formulated in anticipation
of failures due to which probability of failures are considered in analysis. A policy
is formulated to balance the wasted life of items replaced before failure against the
costs incurred when items completely fail.
(iii) Staff replacement problem.

Replacement of Items Which Deteriorate with Time: In this situation the efficiency is
measured as the discounted value of all future costs associated with each alternative e.g. the
maintenance cost of a machine always increases with time and at some stage maintenance
cost becomes so large that it is more economical to replace the machine by a new one. The
criteria evolved in such cases can be broadly divided in three categories namely:
 (i) Replacement of items whose maintenance cost increases with time, and (a) the
value of money remains same during the period (b) the value of money changes
with time.
(ii) (ii) Criteria of present value for comparing replacement alternatives.

Case (i) Replacement of fixed asset whose maintenance costs increases with time.

A. The value of money remaining same during the period. Here we use the following
notations

C Purchase price of the item.

S Scrap value of item taken to be same over time.
g (t) : Maintenance / running cost at time '1'.

Now g (t) can be discrete or continuous function of time. In the case of g (t) to be discrete we
can use the summation sign to calculate the total maintenance cost in a given period
otherwise integrals can be used e.g. in some given period 'n' the total maintenance cost will
be

Thus the total cost incurred on the item in some period n is given by Total cost = cost of the
item + total maintenance cost in period 'n'

Thus the average cost incurred per year on the item is given by

Now it is advisable to replace the item when G (n) is maximum. Without going into the
mathematical treatment it can be seen that G (n) will be minimum when

So we get the following replacement criteria in this case. Do not replace the item if the next
year maintenance cost is less than the average cost of the previous year and replace the item
if next years average cost is less than the maintenance cost of next year i.e. when Average
Cost is least.