Business Plan Document - By Pawan Kumar KGP 94

8/6/2019 Business Plan Document - By Pawan Kumar KGP 94

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Business Plan Document

IMPORTANT

What is given in this is just a guideline and may be modified suitably according to the contextof the business.

The intent in preparing this note was to cover all possible issues a business plan documentshould contain in as much detail as possible. However, for this note to be useful, it had to beas short as can be meaningfully digested without having the need to go through a fat book onbusiness management. With the above contradictory objectives, this note makes an attempt todeal with generic issues in writing a business plan, albeit in differing degree of detail, thatneed to be covered in a business plan. A lot more can be said about each of the topics. Thisnote does not claim to cover all the issues in great detail and in great theoretical rigor forwhich several management books are available. The treatment given to some of the topicsmay be cursory and may not at all be sufficient.

Some of what is written in this note may not appear to be directly relevant. At a very highlevel of abstraction, most of it should be applicable. The entrepreneur would have to think through it to before finally leaving it as not applicable to his/her business.

For some entrepreneurs who have some kind of formal training in management, lot of what iswritten in this note may seem obvious. However, the note is also meant for the consumptionof some of the budding entrepreneurs who do not have such formal training.

It may not be possible to obtain the information required to produce the business plandocument below without external help or without spending inordinate amount of time by theentrepreneurs (which they can ill afford given the multiplicity of the tasks that they need tomanage in parallel). However, the purpose of the note is make the entrepreneur aware aboutthe issues that need to be understood (and covered in a business plan) and that theentrepreneur would need be better off if he has considered these issues while he interacts withthe possible financers or makes his business strategy.

Most of what is prescribed in this note has been done by most of the entrepreneurs who havesubmitted the business plans atleast to some degree of detail. However, it has been included inthis note to enable the entrepreneur to make the business plan in a bit a more systematicmanner. It is also understood that the given the time and other constraints during theEnterprise KGP event, it may not have been possible for the entrepreneurs to cover every

aspect of the business in the business plan they had submitted to the panelists.

Ideally all the aspects of the business that are covered below should be included in a businessplan. However, in the context of the entrepreneurs approaching VCs, the entrepreneurs mayget some advice and inputs from the VCs in some of the general or specific aspects of business (and accordingly the entrepreneur may not fret over them, if they are not able fillthose details in the business plan). For example, elaborate financial or demand modeling maybe desirable but not strictly necessary if the idea is good enough to catch VCs attention.


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Evolving a business plan is a detailed iterative process which is an ongoing activity even oncewhen the business is established. The manner in which a business plan is presented as givenbelow may suggest that it is a linear process but it is not. At every stage one has to revisit theplan made earlier and revalidate the information, analysis and the assumptions made.

The views expressed in this note are personal to the author and do not represent Deloittesviewpoint on the same.

PREPARING FOR QUESTIONS THAT MAY ARISE

Evolving a business plan involves asking yourself hard questions about the question. Some of the general questions are given below. While being convinced yourself would be the first step,preparing for these questions would help you to convince others. And expect counter-arguments.

Who is your customer?

o Why will he use your offering or any similar offering?

o How is your offering different from other offerings?

o When will he use your offering? How many such occasions arise when hethinks your product/offering is useful?

o What alternatives will he consider?

o How does he decide to purchase your or any other offering? Whatinformation does he seek? Who influences the decision? How much does hethink before purchasing? Is it a low involvement purchase or highinvolvement purchase? What does he lose if he does not find the product to

be upto his satisfaction?o How will you spread awareness about your product?

o Where will he access your services?

o Can he afford your service? Alternatively, can he pay a little more?

o Is your offering convenient enough? Are you offering him a small discount inmonetary terms when he has to spend lot more time to use/purchase yourproduct? Is it more convenient to forego the benefit the offering offers ratherthan spend enormous amount of time to avail it (assuming it is cheaper)? Oron the other hand, is it worth the extra premium your consumer pays yourather than avail the alternative solution which is cheaper but has morehassle?

o If the business is online business, does your consumer have access to internetwhen he wishes to avail of the service? Or is it that most often when he willdecide to use the product/service, he is hanging out with his friends when atelephone call is more convenient? Or most often he decides to avail thatservice when at home where he does not have access to internet or even if he


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has, booting the computer/laptop connecting to internet etc. is more hasslethan simply calling the service provider?

o What value does your service bring to him?

How much volume do you expect? At those volumes do you expect to break even?

Is the information, on which the business plan is made, right and from reliablesources?

Are the conclusions right? What are the assumptions? How do we know that theassumptions are right? What validation has been done?

Can the business be easily copied? How will one prevent some bigger player withbetter brand recall and more financial muscle not to copy the business model(assuming it is profitable)

Why will the business model work? Has anyone tried and failed before? If it has notworked earlier when someone else tried, why will it will work now?

Is it one of those great ideas which as a consumer you will definitely take it if isoffered free but dont see the need to pay for it?

If it is in a business which is essentially an intermediary between the customer andsome other business, think of what the business partner will say - My customer willcome to me anyway. Why should I pay you to route my own customers to me!There should be strong case for the business partner to use your intermediationservices.

Does the offering complicate the way a customer solves his problem? Instead of availing your offering, if the customer can as well pay a few rupees more or go for aless optimal solution than go for the optimal or only little more optimal solutionthat you offer, why would he come to you?

SOME GENERAL POINTS ABOUT DOCUMENT WRITING

Writing about something also clarifies the thought process. So a well written business planwould also clarify the business plan. It offers you opportunity to ask yourself severalquestions to revalidate the information.

Structure the document so that all the relevant aspects of the business plan are covered andeach of them get appropriate coverage (not necessarily long or short but as per the importanceof the topic). Avoid duplication of the content.

One must be clear about what is an information, what is an analysis/inference and what is anassumption. Though this looks obvious, in reality one often finds, in a not so well writtendocument, (even those written by premier B-School MBA passouts) information is presentedas analysis and assumptions are presented as information. Sources of information have to beprovided and as long as they are from reliable sources, they lend lot more credibility to yourbusiness plan.


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BUSINESS PLAN DOCUMENT STRUCTURE

Executive Summary of the Business Plan

Chapter 1 Need for the offering and overall concept

The need for the offering and the details of the offering should be explained before going onto discuss about the other elements of the business plan. The big idea should emerge fromthis chapter.

Chapter 2 Market Analysis

This chapter should discuss

Overall Market size and growth Relevant Demographic data with sources/Relevant Demographic Trends Competitive scenario

Segmentation Analysis of the market Profile of Target customers Positioning of your product/offering vs. competition - Key differentiators Industry Trends/ Future Outlook Policy environment if applicable Other similar business models

Notes

The overall market could be defined broadly in the sense this may form the universal set (youroffering/other offerings in the market being the subsets of this universal set) This could alsobe offerings which are not a direct competition to the proposed offering.

Demographic trends/data could reveal insights into trends in the consuming population in themarket. Hence these are indicators to broader consumption trends in the overall market.However it is important to use only relevant demographic trends. The relevancy may be withrespect to the geography e.g. If your offering is limited to Metros or top tier cities, the trendsshould be related to these cities only to the extent possible, unless of course, the trends areuniversal and can be easily extended to your target segment. These trends would subsequentlyform inputs to your demand estimation exercise.

Competitive scenario could profile the existing offerings/business models in the market. Thedefinition of competition should be broad enough to include those products/services which,

with some modifications or extension of the functionality of its own product/service caneasily substitute the proposed product/offering. The offerings could be in the same market,same segment within the market or in some other segment of the market. The profiles shouldideally contain all relevant information about the competition such is publicly available orthat can be reasonably inferred from the information available. Some analysis (say SWOTanalysis) about the competition based on the information available is useful here. Profiling thecompetitors can help understand the current positioning of the existing players and the


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existing segmentation in the market. The information presented in this section should beenough to evaluate the threat to the proposed business from the existing players.

Segmentation of the market and Targeting the right segment and Positioning your offering(STP, in marketing jargon) is one of the most important activities in evolving a marketstrategy. This exercise leads to answers to several fundamental questions about a business. Amarket can be segmented across several parameters or dimensions. Some of the parametersused frequently to segment a consumer (B2C) market often are gender, socio economic class,age, occupation, attitude towards life, and several other parameters. Similarly in a B2Bmarket, there are several segments e.g. organized, small, medium, large etc. Segmenting themarket is the first step to evolving a marketing strategy in a given market. In a market wherethere are existing players, analyzing their offering and positioning would also throw somelight on the existing segmentation in the market. This is not to mean that one has to follow theexisting segmentation in the market. Many successful products/offerings both by newentrepreneurs as well by existing players have redefined the segmentation in the market.

Once the market is segmented, and the existing players profiled and their positioning in therespective segments identified, an analysis of the players and the segments can be done toassess the relative attractiveness of the segments. This would involve, identifying whichsegments are crowded, have competition with deeper pockets, segments with entrenchedcompetition (better brand name), high and low growth segments, underserved segments,profitable segments, segments with high and low barriers etc. Once the SegmentationAnalysis is done, defining your strategy for the chosen segment becomes relatively easier.This is not to suggest that the segmentation exercise should be done before you dream aboutthe big idea. But it is extremely important to know which segment will find your offeringattractive enough to pay for it.

It is important to profile the target customers. This is one of the most important phases of evolving a market strategy. Profiling should be done to as much detail as possible. Profilingshould contain all the details which will help you to put the customer in one segment or in adifferent segment. If this is carefully done, you may realize that your customers come fromtwo or more distinctly different segments. In such a case you may have to have a differentstrategy for each segment. Profiling the customers also helps understanding the wholepurchase process right from the felt need, to awareness about offerings in the market, topurchase decision, payment, repeat purchase, after sales support, if applicable. In a B2Bmarket the whole process would be different than from a B2C business. For example in a B2Bbusiness, one has to understand who in the organization will be initiating the purchase order,

who will approve and who will place the order and who will pay. What are the priorities of these people who will be involved? If the problem you are solving is not high amongst hispriorities, the attention he pays you will be to that extent diluted and the effort will have to bethat much more. All these aspects have to be factored into the strategy at some point in somemanner.

Uniquely positioning your product/service differently is the next step in evolving the marketstrategy. Typically for VC fundable projects, uniqueness in the positioning is highly desirable,


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though lack of unique positioning does not mean that is not a profitable business idea. (Thisperhaps only mean that it wont satisfy VCs (normally higher) return expectations.) TheSegmentation Targeting and Positioning exercise allows you to identify who is your customerand more importantly who is not thus allowing you to find out what he wants and fine tuneyour offering. In other words, it allows you to firm up the Unique Selling Proposition (USP)

of your offering. Offerings without a USP generally tend to be low margin/slowgrowth/commoditized businesses unless backed by other organizational strengths which foran upcoming entrepreneur is difficult to achieve. Or alternatively in a commoditized business,players try to differentiate through better service, better quality, relationships, better designand so on.

Industry trends and future outlook could be in terms of shifts in consumption trends,demographic trends, technology trends and any other trends. These trends are very critical tobe analyzed to ensure that you have the right offering and the right strategy. These trends arealso useful inputs the demand estimation.

It is necessary to study the legal framework that could be applicable for the business. Atleastidentify the laws that could be applicable and if necessary fine tune your strategy based onany legal restrictions. For some businesses, (say for example energy saving devices) studyingthe regulatory framework is necessary so that the entrepreneur can suitably avail of theincentives offered by the government.

The offerings present in some other market (say internationally) which are in no way acompetition to your service but could be used to learn about the business model due tosimilarity can be profiled. The information presented in this section should lead to learningsfrom their business models.

Chapter 3 Market Research

An entrepreneur generally begins with an idea with a hunch that it will succeed in the marketplace the way he has conceived. It may be a good idea and a workable proposition but notnecessarily in the manner the entrepreneur has conceived. Hence it is important that thebusiness plan is backed by adequate market research. Market research is a vast subject byitself but the fundamental principles are

Construction of the hypothesis

Adequate sample size

Proper design of the survey instrument and choice of the method Questions that give unambiguous answers

Use of statistical tools

Skilled interviewers

Questions that support or refute the hypothesis

No bias in the sample


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An entrepreneur may not have the time or the resources to conduct a rigorous market researchexercise but whatever research has been done, it may be useful to document. Moreimportantly, it is necessary that research is done. If the entrepreneur is doing this himself, it isimportant that he meets as many unknown people/parties as possible. People who know youmay be inclined to give you a biased feedback. Or worse, they may be from the same socio-

economic segment of the population that you are from and this segment may not be whatyour offering is targeted at. In such case such research has limited utility.

In this section it is also useful to document of customer feedbacks obtained through websites,direct mails, appreciation letters etc.

In this section, it is also important to document the feedback of your important businesspartners e.g. if you are engaging a large number of small retailers, you have to document theirfeedback. This feedback should not only include their view of how the product/offering willfare in the market but also about their terms of business i.e. in terms of margins, responsibilityand liability, investments to be made by them, their concerns if any, as applicable.

Chapter 4 Demand Estimation Model

This chapter should deal with:

Key Parameters Key Assumptions Research methodology used to validate the concept/assess demand Feedback on the product/service offering

Notes

Demand estimation essentially involves capturing the market segments in terms of size,

growth, in terms of value and in physical numbers/units sold etc. It must be noted that thatdemand estimation would be only for the relevant market. For example, if your offering isonly being launched in the metros, it should capture only metro demand. It involves usingsome input parameters about the market and some reasonable assumptions to convert theinput parameters to arrive at the potential demand.

For existing offerings in the market, if the data is available, this is relatively easier. However,for new offerings/concepts, demand estimation is more difficult and surrogate demandparameters have to be relied upon. Demand estimation using surrogates could mean makingthe assumption say y% of the consumers of product X will purchase my product. So definingthe X becomes more crucial both from the point of view of getting demand data for X as

well as from the point of the assumption that y% of the consumers of X will purchase yourproduct. Some market research can also be directed at finding the percentage conversion y%through actual research.

Alternatively, demand estimation could involve making an assumption that y% of type of population (say IT employees) between say of age between 22 and 40 would use your producttwice a day. Here it is important to be clear about what an IT employee means and whethertheir population is the right parameter. Does it also include Call center workers? Does it also


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include IT enabled engineering services people? Does it also include HR/Admin staff of ITcompanies? Should it also include employees with families, if yes what is the family size? Isthe term IT employee is loosely being used for young people with higher disposableincome? If yes, then in that case should it also include employees in other industries sayfinancial services? Should it be limited to employees or it could include other walks of life?

Say housewives or small time businessmen or students? All these answers are also will lead toclarity about the offering as well as clarity about the segment. In the above example, it mightbe difficult to get the IT employees in a city like Bangalore. Even if this is available, it wouldbe difficult to get data about the population within that age. And it would be even moredifficult to validate the fact that an average customer who is in this segment will use it twice aday. So one has to make assumptions based on several factors and data obtained fromdifferent sources and doing some primary research.

It is true that demand estimation is based on several assumptions and validating them beyonda point appears difficult, given the limited resources at disposal. However, it is important thatyou must be clear of the assumptions made. And as long as the assumptions are reasonable, it

is good enough. At the end of the day a demand estimate is just that an estimate. One canargue this way or that way but as long as it is reasonable it is fine.

Chapter 5 Market Strategy

This chapter should include the 4 Ps of marketing strategy

Product

Price

Place

Promotion

Once the Segmentation, Targeting and Positioning is completed and the offering, the four Psof marketing strategy viz., Product, Price, Place, Promotion need to be fine-tuned. Withoutclarity on the segments to be targeted and positioning of your offering, finalizing themarketing strategy could be counterproductive or plainly ineffective. The subsequentmarketing strategy can be evolved on this basis.

The product can be fine-tuned based on the market feedback and the dynamics of the chosensegment. It is necessary that the offering contains all (or most) the attributes/features that arenecessary to operate in the segment. The offering attributes/features often determine the cost

of the offering and hence the price. Hence it is also necessary, that the offering does notcontain attributes which that targeted particular segment of customer may not pay for andwhich may make the offering costlier.

Pricing a product should take into account several factors. Some of the factors are price of theother competing offerings in the market, economic benefit delivered, saving to the customer,cost of offering, willingness to pay. While pricing a product one must have an idea of thefixed and the variable costs. One must also have an idea of the sensitivity of the demand for


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the product/offering with respect to price. This has to be backed by adequate research as thiswill also feed into breakeven analysis. Needless to say, the pricing has to suit the targetconsumer and his spending habits.

Place refers to the distribution channel through which your offerings will reach the customer.Depending upon the nature of the product and your strategy, it could be online, it could have abrick and mortar interface, or it could be telephonic. If you are planning to use franchiseeformats or any other formats where business partners will be play an important role, yourmarketing strategy should recognize the value they bring to your business, identify the risksthey take vs. the risks taken by you and how you will reward them. You should have a plan onhow you will convince them to stock your products and to promote your products to endconsumers. If any investment is required at a distributors/ place, you should plan theinvestment required and your business plan should provide a clear answer to what is theinvestment required, who makes the investment, and what are the returns on that marginalinvestment. How the risks and rewards are shared between you and the business partner needsto be clearly delineated. Investment need not be limited to capital investment it could also be

in terms of training of resources to explain your offering to the customer. Here also, asmentioned earlier it is just not adequate to conceptualize the whole thing. It is important that itshould be validated through market research.

Promotion Strategy should clearly address how the awareness will be created and thefinancial implications/assumptions made. For a promotional campaign to be cost - effective, ithas to be provide as much awareness within the target population while minimizing the spendoverflow to non target segments. The link between the target segment, promotional spendand your revenues should be understood. Initial promotional offers should be given

Chapter 6 Operations Strategy

The operations strategy could widely vary depending upon the business. It could include anyor all the following, as relevant:

Manufacturing/service setup and network as applicable Choice/Suitability of location Facility and technology requirements including key equipment Technology Choices and comparison Quality aspects Outsourcing of manufacturing/services Utilities, power, water, sanitation, effluent, if relevant Environmental aspects, if relevant Raw Material Availability, if relevant Capital requirements (project costs)

Anything that has an explicit or implicit cost implication has to be discussed. Similarlyanything that relates to physical infrastructure that is needed to execute the whole idea of thebusiness plan needs to be discussed in detail in the operation strategy. Importantly, any


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outsourcing arrangements/contracts you propose to enter into have to be discussed in detail.The key inputs to the business, such as raw materials, need to be discussed in detail if applicable.

How you propose to keep tab on the quality of the product/service is a crucial aspect you needto discuss. If there are several outsource partners, the overall experience of the customer willbe greatly influenced by the quality of output of your outsourcing partners. Hence it is crucialto have a clear strategy on this. If too many aspects of your business are outsourced, one mustbe clear about the value one is adding in between and whether this is a sustainable position.Assuming that the business offers good margins, it is possible that the outsourcing partnerseat into your customer base by offering the same service in which case your position is notsustainable.

Chapter 7 Human Resource Strategy Founding Team Board of Directors/ Advisors

Management Team (if applicable) Organization Structure, Staffing, skill sets, compensation, and other HumanResource aspects if applicable to the scale of business

Notes

This chapter should contain brief writeups/CVs of the founding team/advisory team and keymanagement personnel, if applicable. This section should strive to give confidence to theinvestor that the team is right. Even if the idea is right, VCs would also love to see if the teamcan actually deliver- they wont put their money on a team who they think may not deliver.Advisors should be those who are ready to formally spend time on the business and are

involved.

Any relevant details of organization structure, staffing compensation etc. that is applicableand clear at the stage of business as going to the financer, can be provided in the chapter. Themanpower required to be hired, if necessary, has to be identified.

Chapter 8 Financial Analysis Break even analysis Projected Balance Sheet, Profit and Loss and Cash flow Statement for the

next five years IRR, RoE, ROCE, NPV, payback period and other return benchmarks

Proposed capital structure if applicable Phasing of investment, if applicable Sensitivity analysis Burn Rate

Notes

The financial model, like the demand model, will also be subject to various assumptionsabout various one-time and recurring costs. It may not be possible to get quotations for all the


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project costs and reasonable approximations would suffice. However, needless to say, moreaccurate estimates are more desirable. However it is more important to capture all the costelements even if some accuracy is compromised. Though the financer will anyway thoroughlyscrutinize your assumptions in case he is convinced about the idea, reasonably accurateprojections will help you to plan better.

Break even analysis will give insights to whether the volumes are adequate to cover the fixedcosts and whether the pricing of the products is appropriate enough to cover the overall costsand make a reasonable profit.

A well built financial model will be truly reflective of the business. The financial model couldbe used to analyze the sensitivity of various demand, price and cost assumptions and assessthe (quantitative) key success and risk factors for the business. In order to analyze thesensitivity of the project return parameters to various business parameters, the financial modelshould parameterize the various aspects of the business and feed it into the financial model inthe form of a quantifiable input parameter.

A critical aspect of the financial planning, which is an integral part of the overall businessplan, will be to see if the investment into the business can be phased over installments. Thisreduces the risks for the investor. The form of the investment should also be looked into i.e.debt vs. equity vs. quasi equity. However for startups, which anyway do not have the assets toserve as collateral for debt, this may not be a great issue. However, valuation of the equity andthe percent the entrepreneur is willing to share for a given quantum of funds is an issue onehas to give adequate thought to.

Chapter 9 Present Status and Way Forward Present status

Way forward and Time frame for key milestones Risk factors and mitigating strategies identified by the entrepreneur Critical success factors identified by the entrepreneur Any other issue like legal form of the entity, clearances etc. Expectations from Financiers

Notes

The present status should discuss in detail on what stage each of the elements of the overallstrategy that have been described earlier are. This could include the cash invested in thebusiness, sources of cash, time invested in the business, the market acceptance, businessvolume, state of the product development, market research findings etc.

The timelines for the key milestones need to be identified by the entrepreneur and have to berealistic enough and should gel with the market realities and the overall strategy, keeping inview the constraints faced by the entrepreneur. To the extent possible, an attempt should bemade to link the level of funding necessary in order to reach a specific milestone. Themilestones should also define the volume of business that should get achieved for a particularinvestment. It would also be useful to have some plan on when you will say quits and stopfurther investment in the business should the critical milestones not be reached.


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This concluding chapter would also talk about the risk factors and success factors as theentrepreneur sees them. The risk and success factors as identified by the entrepreneur, of course, will be suitably supplemented by the VCs experience and insights but an attempt hasto be made by the entrepreneur. The risk mitigating measures could include developingstandard terms and conditions for product use. It would be advisable to take professional help

for technology related risks particularly if your offering contains payment gateways etc. Risksand threats arising out of business partners, if applicable, need to be assessed. A concludingsection on expectations from VCs would be useful.

Documents

Business Plan Document - By Pawan Kumar KGP 94