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Chapter 6: Writing a Business Plan

WRITING A BUSINESS PLAN

II. Outline of the Business Plan


A. Exploring Each Section of the Plan
1. Cover Page and Table of Contents
2. Executive Summary
3. Industry Analysis
4. Company Description
5. Market Analysis
6. The Economics of the Business
7. Marketing Plan
8. Product (or Service) Design and Development Plan
9. Operations Plan
10. Management Team and Company Structure
11. Overall Schedule
12. Financial Projections
13. Appendices
14. Putting It All Together
III. Presenting the Business Plan to Investors
A. The Oral Presentation of the Business Plan
B. Questions and Feedback to Expect from Investors

A. Exploring Each Section of the Plan

1. Cover Page and Table of Contents. The cover page should include the name of
the company, its address, its phone number, the date, and contact information
for the lead entrepreneur.

2. Executive Summary. The executive summary is a short overview of the entire


business plan; it provides a busy reader with everything that needs to be
known about the new venture’s distinctive nature.

a. Although the executive summary appears at the beginning of the business


plan, it should be created after the plan is finished. Only then can an
accurate overview of the plan be written.

b. An executive summary shouldn’t exceed two single-spaced pages. The


cleanest format for an executive summary is to provide an overview of the
business plan on a section-by-section basis.

3. Industry Analysis. This section should begin by describing the industry the
new business will enter in terms of its size, growth rate, and sales projections.
It is important to focus strictly on the business’s industry and not its industry

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and target market simultaneously. Before a business selects its target market,
it should have a good grasp on its industry—including where its industry’s
promising areas are and where its points of vulnerability are located.

a. The sections to include in this portion of the plan include: Industry Size,
Growth Rate and Sales Projections, Industry Structure, Nature of
Participants, Key Success Factors, Industry Trends, and Long-Term
Prospects.

b. Industry structure refers to how concentrated or fragmented an industry is.


Fragmented industries are more receptive to new entrants.

c. Industry trends should be discussed, which include both environmental


and business trends. This is arguably the most important section of an
industry analysis because it often lays the foundation for a new business
idea in an industry.

4. Company Description. This section begins with a general description of the


company. Although at first glance this section may seem less critical than the
others, it is extremely important. It demonstrates to your reader that you know
how to translate an idea into a business.

a. The company description should start with a brief introduction, which


provides an overview of the company and reminds the reader of the reason
it is starting.

b. The sections to include in this portion of the plan include: Company


History, Mission Statement, Products and Services, Current Status, Legal
Status and Ownership, and Key Partnerships (if any).

5. Market Analysis. While the industry analysis focuses on the industry that a
firm will participate in, the market analysis breaks the industry into segments
and zeroes in on the specific segment (or target market) to which the firm will
try to appeal.

a. The sections to include in this portion of the plan include Market


Segmentation and Target Market Selection, Buyer Behavior, and
Competitor Analysis.

b. Market segmentation is the process of dividing the market into distinct


segments. Markets can be segmented in many ways, such as by
geography, demographic variables, psychographic variables, and so forth.

c. A competitor analysis is a detailed analysis of a firm’s competitors.

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6. The Economics of the Business. This section begins the financial analysis of
the business, which is further fleshed out in the financial projections. It
addresses the basic logic of how profits are earned in the business and how
many units of a business’s product or service must be sold for the business to
“break even” and then start earning a profit.

a. Revenue drivers and profit margins. Summarize the major revenue drivers
of the business in proportion to where you expect to make your money.
Describe the size of the overall gross margins and margins for each of the
major revenue drivers of the business. Then determine the weighted
average contribution margins.

b. Fixed and variable costs. Provide a detailed summary of fixed and variable
costs for the venture.

c. Operating leverage and its implications. Characterize whether your cost


structure is predominantly fixed or variable and then indicate the
implications.

d. Start-up costs. Distinguish the one-time start-up costs of the business.

e. Overall economic model. Put the pieces above together. Indicate how you
will make money in terms of the combination of margins, volumes,
operating leverage, and revenue source flexibility. How attractive is the
combination?

f. Breakeven chart and calculations. Compute the number of units the


business has to sell to “break even” prior to earning a profit.

g. Profit durability. Address the issue of how solid or vulnerable the profit
stream appears to be.

7. Marketing Plan. The marketing plan focuses on how the business will market
and sell its product or service. It deals with the nuts and bolts of marketing in
terms of price, promotion, distribution, and sales.

a. The sections to include in this portion of the plan include Overall


Marketing Strategy and Product, Price, Promotions, and Distribution.

b. A firm’s marketing strategy refers to its overall approach for marketing its
products and services. A firm’s overall approach typically boils down to
how it positions itself in its market and how it differentiates itself from its
competitors.

c. The next section should deal with your company’s approach to product,
price, promotion, and distribution.

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d. The final section should describe the company’s sales process or cycle and
specific sales tactics it will employ.

8. Product (or Service) Design and Development Plan. If you’re developing a


completely new product or service, you need to include a section in your
business plan that focuses on the status of your development efforts.

a. The sections to include in this portion of the plan include: Development


Status and Tasks, Challenges and Risks, and Intellectual Property.

b. Most products follow a logical path of development that includes product


conception, prototyping, initial production, and full production. You
should describe specifically the point that your product or service is at and
provide a timeline that describes the remaining steps.

c. A prototype is the first physical depiction of a new product. A virtual


prototype is a computer-generated 3-D image of an idea. It displays an
invention as a 3-D model that can be viewed from all sides and rotated 360
degrees.

9. Operations Plan. The operations plan outlines how your business will be run
and how your product or service will be produced.

a. The sections to include in this portion of the plan include: General


Approach to Operations, Business Location, Facilities, and Equipment.

b. A useful way to illustrate how your business will be run is to first


articulate your general approach to operations in terms of what’s most
important and what the make-or-break issues are. You can then frame the
discussion in terms of “back stage,” or behind the scenes and “front
stage,” or what the customer sees and experiences.

10. Management Team and Company Structure. This is a critical section of a


business plan. Many investors and others who read business plans look first at
the executive summary and then go directly to the management team section
to assess the strength of the people starting the firm.

a. The sections to include in this portion of the plan include: Management


Team, Board of Directors, Board of Advisors, and Company Structure.

b. A board of directors is a panel of individuals elected by a corporation’s


shareholders to oversee the management of the firm, as explained in more
detail in Chapter 9.

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c. A board of advisors is a panel of experts asked by a firm’s management to


provide counsel and advice on an ongoing basis. (Also covered in more
detail in Chapter 9.)

d. An organizational chart, which is often included in this section of the


business plan, is a graphic representation of how authority and
responsibility are distributed within the company.

11. Overall Schedule. A schedule should be prepared that shows the major events
required to launch the business. The schedule should be in the format of
milestones critical to the business’s success.

12. Financial Projections. The final section of a business plan presents a firm’s
pro forma (or projected) financial projections. Having completed the previous
sections of the plan, it’s easy to see why the financial projections come last.
They take the plans you’ve developed and express them in financial terms.

a. The sections to include in this portion of the plan include: Sources and
Uses of Funds Statement, Assumptions Sheet, Pro Forma Income
Statements, Pro Forma Balance Sheets, Pro Forma Cash Flows, and Ratio
Analysis.

b. A sources and uses of funds statement is a document that lays out


specifically how much money a firm needs, where the money will come
from, and what the money will be used for.

c. Pro forma (or projected) financial statements are the heart of the financial
section of a business plan. A firm’s pro forma financial statements are
similar to the historical statements an established firm would normally
prepare, except they look forward rather than track the past.

d. Ratio analysis—Most business plan writers interpret or make sense of a


firm’s historical and/or pro forma financial statements through ratio
analysis. Ratios, such as return on assets (ROA) and return on sales
(ROS), are computed by taking numbers out of financial statements and
forming ratios with them.

13. Appendix. Any material that does not easily fit into the body of a business
plan should appear in an appendix.

14. Putting It All Together. In evaluating and reviewing the completed business
plan, the writers should put themselves in the reader’s shoes to determine if
the most important questions about the viability of their business venture have
been answered.

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a. Table 6.4 lists the 10 most important questions a business plan should
answer. It’s a good checklist of any business plan writer.

III. Presenting the Business Plan to Investors

A. The Oral Presentation of a Business Plan

1. When asked to meet with an investor, the founders of a new venture should
prepare a set of PowerPoint slides that will fill the time slot allowed for the
presentation portion of the meeting.

2. The first rule in making an oral presentation is to follow instructions. If an


investor tells an entrepreneur that he or she has one hour and that the hour will
consist of a 30-minute presentation and a 30-minute question-and-answer
period, the presentation shouldn’t last more than 30 minutes.

3. The presentation should be smooth and well-rehearsed. The slides should be


sharp and not cluttered with material.

B. Questions and Feedback to Expect from Investors

1. Whether in the initial meeting or on subsequent occasions, an entrepreneur


will be asked a host of questions by potential investors. The smart
entrepreneur has a good idea of what to expect and is prepared for these
queries.

2. In the first meeting, investors typically focus on whether a real opportunity


exists and whether the management team has the experience and skills to pull
off the venture.

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