Management Decision

Emerald Article: Business plans for new or small businesses: paving the
path to success
Amir M. Hormozi, Gail S. Sutton, Robert D. McMinn, Wendy Lucio

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To cite this document: Amir M. Hormozi, Gail S. Sutton, Robert D. McMinn, Wendy Lucio, (2002),"Business plans for new or small
businesses: paving the path to success", Management Decision, Vol. 40 Iss: 8 pp. 755 - 763
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Business plans for new or small businesses: paving
the path to success
Keywords
Business plan, Entrepreneurship,
Marketing planning, Small firms,
New product development
Abstract
Planning plays an important role in
determining the degree of success
realized by a new or small
business. Essential elements to
business success are
identification of goals, followed by
development of strategies to meet
those goals. A business plan is an
effective tool used by businesses
to organize these goals and
objectives into a coherent format.
It can be defined as operating a
company on paper. No matter the
size or stage of development,
companies use business plans to
improve internal operations and to
describe and market the business
to potential outside financiers. A
business plan should not only
reflect the individuality of the new
business but should also follow a
standard format. This format is
comprised of four major sections:
introductory elements, business
section, financial statements, and
the appendix. This paper seeks to
address that utilizing business
planning as a tool will allow new or
small businesses to achieve and
even surpass their goals.
The authors thank their
research assistant,
Stacy McGee, for her
valuable assistance in
gathering information for
this paper.
Management Decision
40/8 [2002] 755±763
# MCB UP Limited
[ISSN 0025-1747]
[DOI 10.1108/00251740210437725]
Amir M. Hormozi
College of Business, Texas A&M University-Corpus Christi, Texas, USA
Gail S. Sutton
Center for Coastal Studies, Texas A&M University-Corpus Christi, Texas, USA
Robert D. McMinn
College of Business, Texas A&M University-Corpus Christi, Texas, USA
Wendy Lucio
Halt, Thrasher & Buzas, LLP, Alexandria, Virginia, USA
Introduction
``If you don't know where you are going, any
path will get you there''. This quotation
illustrates the important role planning plays
in determining the degree of success realized
by a business. Essential elements to business
success are identification of goals, followed
by development of strategies to meet those
goals. A business plan is an effective tool
used by businesses to organize these goals
and objectives into a coherent format
especially for new or small businesses. It can
be defined as operating a company on paper.
No matter the size or stage of development,
companies use business plans to improve
internal operations and to describe and
market the business to potential outside
financiers. This paper seeks to address that
utilizing business planning as a tool will
allow new or small businesses to achieve and
even surpass their goals.
Purpose of a business plan
Who should write a business plan?
. new business owners;
. new business owner seeking outside
financing for start-up;
. existing business owner seeking outside
financing for expansion; and
. any business owner who wants to increase
the success of their business.
The purpose of a business plan is to define
the business and explain in as much detail as
possible how the venture will operate in the
current market. Most business owners are
apprehensive about writing a business plan,
but a well-developed plan provides unlimited
benefits (Arkebauer, 1995). Operating the
company on paper first provides an
opportunity to identify potential problem
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areas and work out solutions without real
world consequences (O'Connor, 1998). A
business plan also communicates goals
throughout the organization and helps the
business stay focused on its objectives. After
implementing the proposed strategies, the
owner or manager can use the plan as a
benchmark to identify both achievements of
goals and areas that need improvement.
However, a business plan should not be
limited to a start-up tool but, instead, used as
a working document to continually
re-evaluate progress and clarify goals for the
future. While a good business plan will not
guarantee success, it can go a long way
toward reducing the odds of failure
(Crawford-Lucas, 1992). The presence of a
business plan is highly correlated with the
performance of the business and contributes
to the growth of the firm (Orser et al., 2000).
Despite the internal benefits, most
entrepreneurs begin to develop a business
plan because of its external function. Such a
plan is a virtual requirement if the business
is attempting to obtain outside financing.
When approached about potential funding,
either for a start-up business or for
expansion of an existing business, the first
thing a prospective investor or lender will
ask to see is a business plan. It is the primary
tool used by financiers to evaluate the
potential of a business. Information investors
are looking to obtain include specific and
organized information about the company,
an in-depth analysis of the business
opportunity, and most importantly, the
amount of money requested and how the
money will be paid back (Hodges, 1997).
The writing of a business plan
Business plans tend to contain similar
sections and follow an accepted format, but
the length of the plan varies depending on the
enterprise. A business plan should be long
enough to contain the pertinent information,
but not so long as to overwhelm the reader.
[ 755 ]
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
40/8 [2002] 755±763
[ 756 ]
While Arkebauer (1995) suggests that the
average recommended length is 40 pages and
can often take six months to a year to
complete, the Small Business Administration
(SBA) (1993) points out that there is no set
length to a business plan. However, the SBA
indicates that the average length seems to be
30 to 40 pages, including the supporting
documents section.
When determining who will do the writing
of the business plan, either writing the plan
oneself or having a consultant do the writing,
the benefits and drawbacks of each option
must be considered. The American Woman's
Economic Development Corporation advises
that although it is beneficial to have an
expert review your completed business plan,
it is wise to write the plan yourself. By
becoming an expert in your own business,
you will know all of the industry trends, all
about your customers, and all about your
business as a whole (SBA, 1997). The
opportunity for learning that writing your
own business plan provides is worth the time
spent on its development.
While the benefits of writing your own
business plan are numerous, it is definitely
wise to have a consultant examine the
business plan. An expert will be able to
identify areas in the business plan that may
need improvement before attempting to
obtain outside financing. A common
drawback of having a consultant write the
business plan is the expense, since many new
or small businesses do not have the funds
necessary to cover such expenditures.
Sections of a business plan
Introductory elements
The introductory elements of a business plan
include the cover page, table of contents, and
executive summary. These sections provide
the reader with important preliminary
information about the company and where to
locate relevant data within the plan (see the
Appendix for an overview of a business plan
format).
Cover page
The purpose of a cover page is to inform the
reader what they are about to read and
provide information about how to contact the
business. The cover page is the first contact a
potential financier will have with the
business, so it is important to include all the
necessary elements. The cover page should
say the words ``business plan'' and should list
the name of the person submitting the plan,
name of the business, company logo, address,
telephone number, fax number, and
e-mail address.
Table of contents
The table of contents provides the reader
with a convenient way to find specific
sections of the plan. All business plan pages
should be numbered, and the table of
contents needs to include page numbers for
major sections and important subsections.
While the cover page and table of contents
may seem inconsequential relative to other
portions of the plan, their significance should
not be underestimated. Lenders and
investors are inundated with business plans
and if important sections cannot be found
easily, or if there is contact information
missing, the venture may not receive the
attention it deserves.
Executive summary
The executive summary is the first main
section of the business plan. It is designed to
provide a summary for the reader of what
they are about to read. It should first identify
the amount and type of funding sought
(either debt or equity) and then summarize
company objectives, history, and financial
information. The executive summary is
typically between two and three pages long
and should aggressively sell the business
(Arkebauer, 1995). The executive summary is
where many investors start reading. If their
interest is not peaked, they may not read any
further. The goal of the executive summary is
to have the reader, ``read on'' (Brown, 1996).
This section is also the place to note that
back-up information is included in an
appendix. Subsequent sections of the
business plan provide more details on areas
hi-lighted in the executive summary.
The business section
Three main sections remain in the plan
following the introductory elements:
business information, financial statements,
and the appendix. The business section
should provide the reader with information
about the industry, including status and
trends, detailed product and development
information, a description of the
management team, and overall marketing
strategy. This section describes in as much
detail as possible how the business will
actually operate.
Industry
The first portion of the business section
should provide an overview of the industry
the firm is entering. According to Sahlman
(1997), the information investors want from
this section is whether or not the total
market for the venture's product or service is
large or rapidly growing and whether the
industry is structurally attractive. Investors
look for large or rapidly growing markets
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
40/8 [2002] 755±763
because it is easier to break into a growing
market than it is to struggle against
competitors in a stationary market. Ideally,
financiers would like to invest early in a
market that has high growth potential. If the
industry has high potential, the business
plan should state explicitly how and why this
is the case. Negative information about the
industry should not be excluded. Discussing
possible future challenges indicates a
realistic view of the market. However, if the
market is not growing, the business plan
needs to convince the reader that the venture
will still be able to make sufficient profit,
making it beneficial for investors to
participate (Sahlman, 1997).
The company
Specific information about the company
follows industry information. This section
should begin with the overall company vision
or mission statement. A mission statement is
a one to two sentence description of the type
and purpose of the business (O'Hara, 1995). A
precise mission statement should show a
clear purpose, because a business that is
focused has a higher probability of success in
the marketplace. Also included in this
section is the overall business objective:
either to purchase an existing business, start
a new company, or expand existing
operations. A period for completion of the
objective is included, as well as the planned
legal structure. Legal structure options
include a sole proprietorship, partnership,
corporation, and other hybrid combinations.
The product or service
The next aspect to address in-depth is the
actual product or service to be marketed. To
succeed in obtaining capital the
entrepreneur must be able to clearly and
succinctly describe the product or service
with the prospective audience in mind
(Crawford-Lucas, 1992). This is especially
necessary if the product is highly technical,
and the reader needs a background to
understand industry jargon. Also in the
product/service section, investors look for
identification of a core competency, which is
the characteristic that sets the business apart
from the competition. For example, IBM is
not known by their users for technical
superiority or low prices. Their core
competency is ``customer service''
(Arkebauer, 1995). Because the business
environment is constantly changing, the
business plan should address how the
business will retain its unique advantage if
competitors begin offering products with the
same features. The essential question for
financiers in this section is: ``Why will the
product or service be successful in the
marketplace?''.
Pricing
Pricing is another subject addressed in the
business section: how much will be charged
for a product or service and how that price
was derived (American Express Website for
Small Businesses, 1998). Investors will
naturally look for opportunities in markets
with value pricing; i.e. markets where the
costs of production are low and consumers
will still pay a lot for it (Sahlman, 1997).
However, if value pricing is not evident in
the product or service described in the
business plan, this does not mean financing
is unattainable. Value pricing is rare and
profits are still attainable in low margin
industries. The most important
characteristic of the pricing section is where
the pricing strategy realistically places the
business in comparison to the competition.
Business owners should not determine
pricing to impress investors. For example,
plans that describe a product or service as
higher in quality than the competition but
lower in price are unrealistic and damage
credibility. Making it clear to investors that
pricing has been well thought through can be
more important than actual figures.
The market
The section on market description expands
on the points mentioned in the industry
portion and includes an evaluation of target
customers and competition. The central
question in customer evaluation is: ``Who is
the market?'' (Arkebauer, 1995). Investors are
looking for businesses that know their
customers and the problems they are solving
for them (Elkins, 1996). Important customer
data includes, target market, economic
make-up of customers, where they live or
work, and why and where they purchase.
Regardless of industry, all businesses will
have competitors. The competitor section
indicates where the product or service fits in
the current environment. An analysis of this
environment indicates to investors that the
entrepreneur has a solid understanding of
the industry and is realistic about the
obstacles the business will face in the
marketplace. Competitor information
includes annual sales, market share, and how
the competitors are or are not meeting
customer needs (American Express Website
for Small Businesses, 1998).
Marketing plan
After defining the product, pricing,
competition, and customers it is necessary to
incorporate aspects of each category into a
marketing plan. Marketing is, ``the process of
planning and executing the conception,
[ 757 ]
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
40/8 [2002] 755±763
[ 758 ]
pricing, promotion and distribution of ideas,
goods and service to create exchanges that
satisfy individual and organizational
objectives'' (Hisrich, 1992). A marketing plan
explains to the reader how the business plans
to attract, educate, and retain customers.
Attracting customers or advertising includes
detailing how the target market will be
informed about the product. A business plan
includes the selected medium; for example,
direct marketing, advertising, or special
promotions (Brown, 1996). Educating
customers is the content of the information
provided through advertising and includes
the core competency of the product or
service.
Management team
The most important section of the business
plan is the section describing the
management team, since most investors feel
that without the right team none of the other
parts of the business plan really matter
(Sahlman, 1997). Even a mediocre product
can make a successful company if there is
excellent management. Conversely, bad
management can make the best product a
failure (Elkins, 1996). Investors prefer to deal
with a management team that has proven
industry experience because it is considered
a lower risk investment when compared to a
less experienced management team. A
typical professional venture capital firm
receives over 2,000 business plans a year,
filled with new and innovative ideas that the
majority of venture capitalists believe are a
dime a dozen (Sahlman, 1997). They are more
concerned about execution skills than
product. According to notable venture
capitalist Arthur Rock, who was involved
with the formation of companies including
Apple, Intel, and Teledyne, ``I invest in
people, not ideas''. Important factors about
these people include where they are from, the
level and place of education, work history,
and special skills.
Financial statements
Essential to the success of any new or small
business enterprise is the management of
resources. According to the SBA, each year
thousands of potentially successful
businesses fail because of poor financial
management. Providing financial data in a
business plan is necessary for all businesses,
including start-ups and just-formed
companies that have not processed any
transactions. The financial section of a
business plan begins with a brief narrative
summarizing the projections, addressing key
figures including those for sales, expenses,
net income, and total growth in assets and
net worth (Arkebauer, 1995). The narrative is
then substantiated with financial statements
including an income statement, balance
sheet, statement of cash flows, and break-
even analysis. Typically, five-year
projections are used, with month-to-month
projections for the first year, quarterly for
the second and third year, and annual
projections for the fourth and fifth years.
Readers of business plans realize that
projections are a ``best guess'' but similar to
the pricing of products or services. If the
assumptions are realistic and logically
developed they are more believable. Before
presenting a business plan to a prospective
financier, it is recommended that the owner
have the financials reviewed by a certified
accountant.
Income statement
The principal purpose of the income
statement is to report whether or not the
entity operated at a profit for the reporting
period. The income statement begins by
stating revenues from operating activities.
Revenues are measured by the amount of
cash received or expected to be received from
a transaction. To calculate net income, the
costs and expenses incurred in generating
those revenues are subtracted. Gains and
losses are also included in an income
statement. These items result from
nonoperating rather than the day-to-day
operating activities that generate revenues
and expenses. Because of the importance of
the net income figure to potential financiers,
it is important to focus on presenting the
appropriate form and content of this
statement.
The income statement is also valuable as a
planning tool to control business operations
(Brown, 1996). Using sales and expense
estimates, target monthly income can be
forecasted. After calculation, projections are
useful as goals for business operations and
later for comparison purposes. Examining
any large differences between estimated and
actual income can help identify problem
areas and assist in future budget
development.
Balance sheet
A balance sheet reports what assets,
liabilities, and owners' equity an entity has
at a given point in time. The definition of an
asset is anything of value owned or legally
due the business. Assets are further
classified as current assets, long-term assets,
and fixed assets. Current assets are those
assets the company intends to liquidate
within the next 12 months and include cash,
accounts receivable, inventory, and
short-term investments (SBA, 1998).
Long-term investments or long-term assets
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
40/8 [2002] 755±763
are those holdings the business intends to
keep for longer than one year and typically
include stocks, bonds, and savings accounts.
Fixed assets, the final category, are those
assets that the business owns or has acquired
for use in operations and do not intend to
resell. These include land, buildings,
improvements, equipment, and automobiles
(SBA, 1998).
The liability portion of the balance sheet
lists debts and other outstanding obligations.
Similar to assets, liabilities are divided into
current and long-term liabilities. Current
liabilities are those liabilities due within the
next 12 months. Long-term liabilities, such as
long-term debt, are obligations that extend
longer than 12 months. The final component
of the balance sheet is owner's equity or net
worth. Net worth is the claim of the owners
on the assets of the business (SBA, 1998). The
business plan should include a current
balance sheet in addition to a projected
balance sheet showing the expected growth.
In writing a business plan for a start-up
business a personal balance sheet for the
owner, outlining personal assets and
liabilities, is also included (Arkebauer, 1995).
Statement of cash flows
The statement of cash flows is the most
important of the financial statements
because the single thing that distinguishes a
business that is going to make it from one
that is not is the capacity of the entrepreneur
to manage the cash flow (Gracie, 1997). This
is because one of the greatest threats to start-
up businesses is lack of liquidity. Using
expected cash inflows and outflows can help
management determine when additional
cash will be needed throughout the year and
plan accordingly. It is possible for
businesses, especially new or expanding
businesses, to be profitable on paper but not
have enough cash to pay suppliers or
employees. The need for cash can start a
downward spiral of having to borrow
additional money to meet current expenses,
which then leads to greater interest
payments. A larger interest payment further
restricts cash flow and puts the owner in a
position where they would need to borrow
again. When drafting a cash flow statement,
this scenario can be avoided by not
underestimating costs and overstating cash
flow. In addition to benefits received by the
business, the cash flow statement is also
critical because of its importance to the
readers of business plans. Bankers use it to
determine how the loan will be repaid, and
an equity investor uses it to determine the
compensation expected from the investment
(O'Hara, 1995).
Appendix of a business plan
Writing a business plan requires an
entrepreneur to use a variety of assumptions
in order to forecast future events. These
assumptions range from how fast the market
will grow, to how the competition will react
to a new entrant into the marketplace.
Assumptions contained in the business plan
must be documented and explained. This will
provide a common frame of reference for the
management team and an audit trail for use
in future planning (Meloy, 1998). Challenging
the assumptions and providing information
on contingency plans should the assumptions
prove false, enhances a business plan.
Formulating plans for what-if scenarios
indicates to investors that the business has a
realistic view of the market and will be more
prepared when the reality differs from
projections. Substantiation for assumptions
is included in the final sections of the
business plan, the appendix. The appendix
also includes any information to supplement
important references in the business plan.
Appendix information typically includes
research data, additional financial
information, diagrams, and personal
testimonials.
Additional information for investors
A good business plan will address two
additional concerns of investors, the risks
associated with investment and those with
harvesting. While the future is difficult to
predict, it is possible to give investors a sense
of the type of risk and reward they would be
assuming in the venture (Sahlman, 1997). No
business is without risks and when owners
identify what these risks are along with
possible solutions, it increases the credibility
of the writer. The opposite is also true. If an
investor discovers negative information that
the owner did not disclose, credibility is lost
(American Express Website for Small
Businesses, 1998).
Prospective financiers will also be
interested in harvesting. Harvesting is the
ultimate objective of the business and the
point where investors get money out of the
business (Sahlman, 1997). Harvesting can
include development and sale of the business
or making a public stock offering. Harvesting
is a particular concern to venture capitalists
in determination of return on investment.
Sources of capital
One of the biggest challenges of starting and
operating a business is financing. Financing
options vary, depending on the current stage
of the business and the entrepreneur's
[ 759 ]
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
40/8 [2002] 755±763
[ 760 ]
acceptable level of external involvement.
New business owners rarely have many
financing options. Most start with ``bootstrap
financing'': launching ventures with modest
personal funds (Bhide, 1992). Personal funds
typically include personal savings,
investment by family and friends, second
mortgages, and credit cards. According to a
survey conducted by Winborg and
Landstrom (2000), six other methods of
bootstrap financing are acknowledged. These
methods include:
1 buying used equipment as an alternative
to buying it new;
2 seeking out the best possible conditions
with suppliers;
3 withholding the salary of the manager;
4 delaying payments made to suppliers;
5 developing a routine to speed up
invoicing; and
6 finding other businesses that will lend
their equipment.
The advantages of bootstrap financing
include not having to answer to a creditor or
outside investor, and it can help new
businesses increase their efficiency. Working
with lower levels of cash flow will reveal
hidden problems and force the company to
find solutions. When external financing is
used and problems arise, the solution tends
to be ``more money'' rather than addressing
the underlying problem (Bhide, 1992).
For existing firms that have proven their
viability, external financing is often sought
to fund company expansions. There are two
broad categories of external financing: debt
financing and equity financing. Debt
financing is money borrowed from a creditor
that is paid back over a period with interest.
Equity financing is capital permanently
invested in the business. While the business
has no legal obligation to repay the money,
the investor shares ownership and risk in the
business (O'Hara, 1995).
Debt financing for small businesses
typically consists of bank loans. To ensure
protection in case of default, banks will
generally require collateral for loan
approval. The collateral requirement
excludes most start-up businesses from bank
loans because the business is not operational
and has not accumulated sufficient equity for
the bank to consider making the loan.
However, banks will loan to start-up
businesses if the loan is guaranteed by the
SBA. The SBA guarantees loans for small
firms that meet certain financial and
documentation criteria. SBA loans usually
require at least one third of the required
capital be supplied by the owner (Hodges,
1997). SBA loans are typically administered
by the lending bank.
Two of the largest sources of equity
financing are venture capital firms and
financing ``angels''. Venture capital is money
invested by a professional management
group or individual, seeking a higher than
average rate of investment return
(Arkebauer, 1995). They invest in young
liquid high-growth companies expecting to
provide a 25 per cent to 50 per cent annual
return on investment (O'Hara, 1995). Because
of these requirements, this source of funding
is usually not appropriate or available to
start-up businesses. Instead, firms fund a
small per cent of projects considered, provide
guidance and management advice and hope
to have one or two highly profitable ventures
to meet their expectations (O'Hara, 1995).
Venture Economics, Inc. found that only 7
per cent of (its?) investments accounted for 60
per cent of (its?) total profit (Bhide, 1992).
Obviously, in order to find that one success,
venture capitalists must be very selective
about the businesses they fund. The
necessary criteria include a distinct product
that targets hundred million-dollar markets,
well-defined plans and an experienced
management team. These characteristics are
rarely present in the majority of smaller
start-up businesses. According to the Global
Entrepreneurship Monitor (GEM), 1999 was
an incredible year for the venture capital
industry. In the USA, $46 billion in ``classic''
venture capital was invested (classic venture
capital excludes investments in acquisitions
and buyouts), which is a 150 per cent increase
over the 1998 investments and more than
eight times the amount invested in 1995
(Ewing Marion Kauffman Foundation, 2000).
The other common types of equity
investors are private investors, known as
financing ``angels''. Angels do not have the
same strict profit producing criteria as
venture capitalists but still target higher
than average risk investments. Angels
typically require at least a 20 per cent or
greater compounded annual return on
investment (O'Hara, 1995). Angels are less
concerned with total return than venture
capitalists because angels are typically
wealthy enough that the investment returns
are not critical to their income. Any losses
are tax deductible and will not significantly
affect their lifestyle (Mason and Harrison,
1996). Investments are often made for
personal reasons; for example, continued
involvement in the business community and
entrepreneurial process, or financing a
business that produces socially useful
products or brings economic benefits to a
local community. Studies have indicated that
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
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business angels are willing to trade some
financial returns for other non-financial
benefits (Mason and Harrison, 1996). Angels
also tend to be experienced investors and
when selecting investments rely more on
personal instinct rather than extensive
business evaluation (Mason and Harrison,
1996). Because the evaluation is less
thorough, angels assume more risk and
usually make faster investment decisions
than venture capitalists.
According to the SBA (2001), lenders often
evaluate the ``six C's'' when considering a
request for a loan:
1 Character ± resumeÂs and references are
checked to see if management has the
experience and determination necessary
to successfully run the business.
2 Credit ± personal and business credit
reports are reviewed to see if the
individuals are willing to repay debts.
This is also an indication of an
individual's character.
3 Capital ± how much money are you
putting into the deal? Lenders will not
finance 100 per cent of your business. You
should expect to put in 20-40 per cent of the
project.
4 Capacity ± the ability of the business and
management to operate at a level
sufficient to make debt payments.
5 Collateral ± assets pledged to secure the
loan. This will include personal as well as
business assets.
6 Conditions ± refers to outside influences
that will affect the business such as the
local economy and competitors.
Online businesses
Financing has become an important issue for
online businesses in the dot-com era.
Investors for online businesses have become
more cautious following the dot-com crash,
which is making it more difficult for these
businesses to obtain financing. Michael
Linnert, a general partner at Technology
Crossover Ventures, a venture capital firm,
comments that companies which are unable
to obtain financing are left with the challenge
of either shutting their doors, finding a
buyer, or taking cash at any price (Hamilton,
2000). Inc. (2001) reports that the number of
dot-coms which submitted business plans to
venture capitalists between 1994 and the first
quarter of 2000 was 500,000. During this time,
3,000 to 5,000 dot-coms actually received
venture capital funding and only 600 went
public or were acquired. However, the
amount of venture capital investment in
Internet companies went from $19.9 billion in
1999 to $35.2 billion in 2000.
According to Mills (2001), venture
capitalists, investment banks, and brokerage
houses share in the blame for the dot-com
crash. By offering so much money to the
dot-coms and being impatient for large
returns, entrepreneurs were tempted to
disregard fiscal responsibility. The article
advises investors to resist the temptation to
search for traditional business plans, clearly
identified customers, and foreseeable cash
flows and profits because e-commerce
remains a new area where flexibility,
imagination, and patience will be rewarded.
Conclusion
As research by Crawford-Lucas (1992) and
Orser et al. (2000) indicate, businesses that
utilize business plans are typically more
successful than others. Crawford-Lucas
(1992) mention that while a good business
plan will not guarantee success, it can go a
long way toward reducing the odds of failure,
and Orser et al. (2000) comment that the
presence of a business plan is highly
correlated with the performance of the
business and contributes to the growth of the
firm. Therefore, for future research, we
challenge practitioners and academicians to
get together and create practical documents
that can be used as guidelines for
entrepreneurs, managers, as well as
executive MBA students, to improve the
understanding of how a business should
operate.
The purpose of a business plan is to define
the business and explain in as much detail as
possible how the venture will operate in the
current market. A business plan is used for
both internal and external purposes. For
external purposes, a business plan is a
requirement if a new or small business hopes
to obtain external financing. It is the primary
tool used by financiers to evaluate the
potential of a business. For internal
operations, a business plan will help the
entrepreneur to clarify short and long-term
objectives and the means by which to achieve
those objectives.
A business plan should reflect the
individuality of the new business but follow a
standard format. Business plans are
comprised of four major sections:
1 introductory elements;
2 business section;
3 financial statements; and
4 the appendix.
First, the introductory elements provide the
reader with important preliminary
information about the business and where to
locate relevant data within the plan. Second,
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Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
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small businesses: paving the
path to success
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the business section describes in as much
detail as possible how the business will
actually operate. Third, according to the
SBA, each year thousands of potentially
successful businesses fail because of poor
financial management, therefore, timely and
accurate financial statements can improve
the chances of success for a business. Fourth,
the appendix includes substantiation for
assumptions along with any information to
supplement important references contained
in the business plan. To ensure business
success, a business plan serves as a
comprehensive road map that focuses the
business on both the destination and the
consequent path.
References
American Express Website for Small Businesses,
available at: www.americanexpress.com/
smallbusiness/resources/starting/biz_plan
(accessed 28 May 1998).
Arkebauer, J.B. (1995), Guide to Writing a
High-Impact Business Plan, McGraw-Hill,
New York, NY.
Bhide, A. (1992), ``Bootstrap finance, the art of
start-ups'', Harvard Business Review,
November-December, pp. 109-17.
Brown, C. (1996), ``The do's & don'ts of writing a
winning business plan'', Black Enterprise,
April, pp. 114-22.
Crawford-Lucas, P.A. (1992), ``Providing business
plan assistance to small manufacturing
companies'', Economic Development Review,
Winter, pp. 54-8.
Elkins, L. (1996), ``Tips for preparing a
business plan'', Nations Business, June,
pp. 60R-61R.
Ewing Marion Kauffman Foundation (2000),
``Global entrepreneurship monitor 2000'',
available at: www.emkf.org (accessed
13 July, 2001).
Gracie, S. (1997), ``Don't underestimate costs and
overstate cash flow'', Management Today,
October, pp. 108-9.
Hamilton, D.P. (2000), ``Angels of death: reality
bites hard as string of dot-coms sees funding
dry up . . .'', Wall Street Journal, 25 May.
Hisrich, R.D. (1992), ``The need for marketing in
entrepreneurship'', Journal of Consumer
Marketing, Summer, pp. 43-7.
Hodges, S. (1997), ``One giant step toward a loan'',
Nations Business, August, pp. 34-6.
Inc. (2001), ``The dot-com riches-to-rags index'',
Inc., Vol. 23, 29 May, pp. 30-1.
Mason, C. and Harrison, R. (1996), ``Why `business
angels' say no: a case study of opportunities
rejected by an informal investor syndicate'',
International Small Business Journal,
January-March, pp. 35-51.
Meloy, R.G. (1998), ``Business planning'', The CPA
Journal, March, pp. 74-5.
Mills, D.Q. (2001), ``Who's to blame for the
bubble?'', Harvard Business Review, Vol. 79
No. 5, May, p. 22.
O'Connor, T. (1998), ``Take the initiative to write a
viable business plan'', Denver Business
Journal, February, p. 21A.
O'Hara, P. (1995), The Total Business Plan,
John Wiley & Sons, New York, NY.
Orser, B.J., Hogarth-Scott, S. and Riding, A.L.
(2000), ``Performance, firm size, and
management problem solving'', Journal of
Small Business Management, October,
pp. 42-58.
Sahlman, W.A. ( 1997) ``How to write a great
business plan'', Harvard Business Review,
July/August, pp. 98-108.
SBA (1993), ``How to write a business plan'', Small
Business Administration, available at:
www.sba.gov/library/pubs/mp-32.doc
(accessed 7 March 2002).
SBA (1998), ``Financial management'', Small
Business Administration available at:
gopher://www.sba.gov:70/00/business . . . on-
Training/Business-Plan (accessed 25 June,
1998).
SBA (2001), ``North Dakota small business
resource guide'', Small Business
Administration available at: www.sba.gov/
nd/ndguide11.html (accessed 5 July, 2001).
SBA Online Women's Center ± American
Woman's Economic Development
Corporation (1997), ``General guidelines for
developing your business plan'', Small
Business Administration, June, available at:
www.onlinewbc.gov/DOCS/starting/
bp_sample.html (accessed 7 March, 2002).
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bootstrapping in small businesses'', Journal
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Appendix: summary of business plan
sections
1. Introductory elements
This should include the cover page, table of
contents, and executive summary. Provides
the reader with preliminary information.
. Cover page ± contains information on how
to contact the business.
. Table of contents ± shows the reader where
to find specific information.
. Executive summary ± provides a summary
of the business and is designed to create
reader interest.
2. The business section
This should describe in detail how the
business will actually operate.
. Industry ± provides information on
market growth stage and industry
potential.
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn and
Wendy Lucio
Business plans for new or
small businesses: paving the
path to success
Management Decision
40/8 [2002] 755±763
. Company ± includes company mission
statement and comprehensive business
objective.
. Product or service ± describes the product
or service in depth including
identification of a core competency.
. Pricing ± includes the price of the
product/service and how the price was
derived.
. The market ± evaluates target customers
and competitors.
. Marketing plan ± explains how the
business plans to attract, educate and
retain customers.
. Management team ± description of
management team includes level and
place of education, work history and years
of experience in the industry.
3. Financial statements
This should outline the present financial
situation and outlook for the future. Current
financial data is provided in addition to five
year projections.
. Income statement ± provides a summary of
revenues and expenses.
. Balance sheet ± contains information on
the company's assets and liabilities.
. Statement of cash flows ± shows the reader
how the business plans to manage cash
flow.
4. Appendix
This section is where the writer can
supplement portions of the business plan
with additional material if necessary.
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