Business Planning Overview
The purpose of a business plan is to recognize and define a business opportunity, describe how that opportunity will be seized by the management team, and to demonstrate that the business is feasible and worth the effort. One size does not fit all; the length of an effective business plan can vary widely based on the complexity of the opportunity, familiarity of the industry, financing details, etc.
“Specificity is what differentiates excellent from poor business plans. The more facts that you can provide, the better. Fill your business plan with certitude! Reduce conjecture! When developing models for emerging markets, base the model on well established data points and benchmarks. Cite your sources. Define your market segments with specificity, rather than presenting data at the industry level.” Dr. Jenny C. Servo, www.dawnbreaker.com
The business plan is used in two primary ways:
Among the organizers of the venture, it provides a plan for early corporate development. This includes guiding the organization toward meeting its objectives, keeping the business and its principals headed in a predetermined direction, and explaining how the company will be run for the next 3 to 5 years.
Its second application is as a device for securing financing for the venture.
As a developmental tool, the plan simulates operating the company on paper. The aim is to validate an idea and challenge every aspect of the business. A well-conceived business plan can serve as a management tool to settle major policy issues, identify “keys to success,” establish goals and check-points, and consider long-term prospects.
“Rather like life itself, your business will benefit enormously if you can stand back and create a vision for where it is going, what you want from it, and how you plan to get there. Discovering and maintaining this vision is what business planning is all about – it shouldn’t be an activity performed only under duress…” The Sydney (Australia) Morning Herald, 9/16/97
The discipline of writing a plan forces us to think through the steps we must take in getting the business started, and, to “flesh out ideas, to look for weak spots and vulnerabilities,” according to business consultant Eric Siegel.
Many entrepreneurs insist that their business concept is so clear in their heads that the written plan can be produced after start-up; this attitude “short-circuits” one of the major benefits of producing the plan, that is, serving as a reality check. “A realistic business plan might save you from yourself by persuading you to abandon a bad idea while your mistakes are still on paper,” says Roger Thompson in Nation’s Business.
“I once had a job that required me to read and evaluate a constant stream of business plans… the great majority of the plans projected spending $1 million to $3 million in start-up costs, with the business breaking even in the third year… I would check the business plans’ spread sheets, mostly examining the expense side. That’s because while projected revenues might or might not materialize, planned expenses surely will.” William S. Rukeyser, CNNfn, cnnfn.com
“If we react to a Business Plan with incredulity (“It is too good to be true” or “some of the assumptions are non realistic”) – then …the Business Plan is a failure. …we must respond with a modicum of awe and fascination (“That’s right ! – I never thought of it” or “This way it makes sense”). The Business Plan is supposed to resonate within the mind of the reader and to elicit the reaction : “How very true !!!” Dr. Sam Vaknin
The business plan is also a vital sales tool for approaching and capturing financial sources, be they investors or lenders. It is used to convince prospective stakeholders that the idea is promising, the market is accessible, the firm’s management is capable, serious and disciplined, and that the return on investment is attractive.
Sources of financing need to be assured that the entrepreneurial team has carefully thought out the plan. They want to be convinced that the team has the skills and expertise needed to manage the company effectively, and that it is prepared to seize opportunities and solve the problems that arise. These goals are best accomplished with a business plan that is well prepared, professional in tone, and persuasive in conveying the company’s potential.
“Use your business plan as if it were a brochure as well as a tool to coach the loan rep to sell your company internally. Believe it or not, bankers want to know about your market so include a strong analysis of your market as well as a sensible marketing plan.” John F. Bousquet, www.jfbdtp.com
For maximum effectiveness, the business plan should be specifically directed to the funding source and satisfy its particular concerns. For example, you would orient and write the plan differently for presentation to a lender than you would for an investor. The lender is primarily interested in collateral, and the ability of the venture to make debt payments. The investor would be more concerned about what risks are involved, the rate of return on the investment, and methods for liquidating the investment at a later stage.
“It cannot be stressed too strongly that a good business plan is the cornerstone of successful financing. If you want investors’ money, you’ve got to give them good reasons to buy in. The business plan is where you lay out the reasons. It doesn’t have to be unduly lengthy or complicated, but it must be informative and relevant. It needs to maintain logic and order, and show the company as effectively positioned as a good investment.” James B. Arkebauer, Venture Associates
Before getting into the details of preparing a business plan, Jack Kaplan of the Columbia Business School suggests that we ask ourselves a series of “warm-up” questions:
Consultants Venture Associates, on their Web site (www.venturea.com), offer advice on writing the plan in the form of what they term the nine guiding principles:
Make It Easy to Read
With all the competition for the interest of investors, your plan will have to be well formatted and easily understood. Your introductory statement summarizing your operation must capture readers’ attention and motivate them to read the balance of your plan. Construct a glossary if you have to use technical terms.
Be Sure Your Approach Is Market Driven (Rather Than Product Driven)
Investors are primarily interested in how the product or service will be received in the marketplace. Before they buy into your plan, they want to see your research demonstrating and substantiating how the customer will benefit and be motivated to purchase.
Qualify the Competition
Qualify your product according to cost or time savings and revenue generation. Show projections for sales growth, how your product is superior to others, and how you intend to exploit the competitive advantage.
Present Your Distribution Plan
Be specific as to how the company will sell and distribute its product or service. Clearly describe the methods and what it will cost to get the product or service into the ultimate customer’s hands.
Exploit Your Company’s Uniqueness
Explain what will give your company a competitive edge in the marketplace–special attributes like a patent, trade secrets, or copyrights.
Emphasize Management Strength
Show proof that the company is comprised of highly qualified people who can cover all the bases. Show how the management team, the directors, and the advisers possess the necessary credibility. Indicate the incentives that will keep them together.
Present Attractive Projections
Paint a realistic picture–substantiated by assumptions–of where your company is going with the requested funding. Be detailed and keep it credible. Projections and forecasts validated by market data and expert opinions are impressive.
Zero In on Possible Funding Sources
Design versions of the plan to fit the idiosyncrasies of each financing source you plan to approach. A banker’s interest lies in stability, security, cashflow coverage, and sound returns, whereas a venture capitalist is more interested in high leverage resulting in outrageous returns. Both want to know how the proceeds are going to be spent.
Close with a Bang
Drive home the point that you’re offering a good deal. Specify the return rates. Be definite about how investors will get their money back and when. For lenders, show that their funds are adequately secured and that your cashflow more than covers their interest and principal payments.
After you have drafted your business plan, solicit feedback on it. Ask a cross section of people whose judgment you respect to review it. Make revisions where they add to its accuracy or clarity.
Wishing you success,
John B. Vinturella, Ph.D.
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