Chapter 6 Entrepreneurship by Zubair A Khan

Chapter 6 – Crafting a Winning Business PlanThe best way to predict the future is to invent it.

- Alan Kay

You can’t direct the wind, but you can adjust the sails.- Anonymous

Learning ObjectivesStudents will be able to:

1. Explain why every entrepreneur should create a business plan.2. Describe the elements of a solid business plan.3. Explain the three tests every business plan must pass.4. Understand the keys to making an effective business plan presentation.5. Explain the "5 Cs of Credit" and why they are important to potential lenders and

investors reading business plans.

Instructor’s OutlineI. Introduction

A. Starting a business requires lots of planning.1. Whatever their size, companies that engage in business planning outperform those

who do not.

B. For entrepreneurs, a business plan is: 1. a systematic, realistic evaluation of a venture's chances for success in the market.2. a way to determine the principal risks facing the venture.3. a game plan for managing the business successfully.4. a tool for comparing actual results against targeted performance.5. an important tool for attracting capital in the challenging hunt for money.

II. Why Develop a Business Plan?A. A business plan is a written summary of an entrepreneur's proposed business venture,

its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities.

B. The plan serves as an entrepreneur's road map on the journey toward building a successful business. 1. It describes the direction the company is taking2. its goals are3. where it wants to be4. how it's going to get there

C. The business plan is the entrepreneur's best insurance against launching a business destined to fail or mismanaging a potentially successful company.

D. The business plan serves two essential functions.

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118 Section III - Building the Business Plan: Marketing & Financial Considerations

1. First, it guides the company's operations by charting its future course and devising a strategy for following it. a) The plan provides a battery of tools – a mission statement, goals, objectives,

budgets, financial forecasts, target markets, strategies – to help managers lead the company successfully.

b) It gives managers and employees a sense of direction. c) It gives everyone targets to shoot for, and it provides a yardstick for

measuring actual performance against those targets, especially in the crucial and chaotic start-up phase.

d) Plus, writing a plan requires entrepreneurs to get an in-depth understanding of the industries in which they plan to compete and how their companies fit into them.

e) Finally, creating a plan forces entrepreneurs to subject their ideas to the test of reality: Can this business actually produce a profit?

2. The second function of the business plan is to attract lenders and investors.a) Lenders and investors want to see solid, incisive business plans that

demonstrates an entrepreneur’s creditworthiness and his ability to build and manage a profitable company.

b) Applying for loans or attempting to attract investors without a solid business plan rarely attracts needed capital.

c) The quality of the firm's business plan weighs heavily in the decision to lend or invest funds.

d) It is also potential lenders’ and investors’ first impression of the company and its managers.

E. A plan is a reflection of its creator.1. It should demonstrate that an entrepreneur has thought seriously about the venture

and what will make it succeed. 2. Preparing a solid plan demonstrates that an entrepreneur has taken the time

conduct the necessary research and to commit the idea to paper. 3. Building a plan also forces an entrepreneur to consider both the positive and the

negative aspects of the business. 4. In most cases, potential lenders and investors read a business plan before they

ever meet with the entrepreneur behind it. 5. Sophisticated investors will not take the time to meet with an entrepreneur whose

business plan fails to reflect a serious investment of time and energy in defining a promising business opportunity.

6. They know that an entrepreneur who lacks the discipline to develop a good business plan likely lacks the discipline to run a business.

F. An entrepreneur should not allow others to prepare a business plan for him because1. Outsiders cannot understand the business nor envision the proposed company as

well as he can.2. The entrepreneur is the driving force behind the business idea and is the one who

can best convey the vision and the enthusiasm he has for transforming that idea into a successful business.

Chapter 6 Crafting a Winning Business Plan 119

3. The entrepreneur will make the presentation to potential lenders and investors, he must understand every detail of the business plan.

G. Investors want to feel confident that an entrepreneur has realistically evaluated the risk involved in the new venture and has a strategy for addressing it. 1. They also want to see proof that a business will become profitable and produce a

reasonable return on their investment.

IN THE FOOTSTEPS OF AN ENTREPRENEUR . . .Business Plan Boot Camp

Entrepreneur Rob Ryan learned two valuable lessons after starting his first company, Softcom, which he sold to a larger competitor when he ran out of money. "First, never start a company without a great team," he says. "Second, raise a lot of money."

He established Entrepreneur America, a business boot camp for budding entrepreneurs. His guests are put through the ringer as he helps them refine their ideas and hone their business plans. Occasionally, he even saddles them up on some of his horses and takes them out into the breathtaking beauty of the Bitterroot Mountains. Ryan has coached several companies that have become hugely successful businesses, including search-engine company LookSmart and Silicon Spice, a computer chip- and software-maker that was recently sold for $1.2 billion. Ian Eslick, founder of Silicon Spice, sought Ryan's help when preparing his business plan. After working through Ryan’s business plan boot camp, Eslick secured financing for his start-up venture from New Enterprise Associates (NEA), one of the premier venture capital firms in the world.

Out of the 1,000 or so entrepreneurs who apply to attend Entrepreneur America each year, Ryan selects about 20 to attend, mostly founders of start-ups with hot new technologies but few management skills. Every three weeks, a new batch of entrepreneurs arrives to face the challenge of their business lives. Ryan challenges the entrepreneurs under his tutelage, questioning the assumptions underlying their plans, criticizing their business models, and cajoling them into improving the quality of their business plans. His style can be blistering, but his philosophy is basic: Create a successful business by building a strong management team, keeping costs low, maintaining focus on the right target market, and grow slowly. Ryan also teaches his students how to decipher the language of venture capital and how to create a powerful presentation designed to impress potential lenders and investors.

Another of Ryan's students who has launched a highly successful technology company says, “There is a saying, ‘There is no progress without the unreasonable man.’ Unless you're absolutely unreasonable, things become the status quo. That's really the definition of Rob. You have to ask for the impossible. Certainly, Rob challenges people to do that.”

1. What benefits does Rob Ryan's entrepreneurial boot camp offer aspiring entrepreneurs?Answer: Student’s answer may vary. However, the most common answers would be: helping entrepreneurs to refine their ideas and hone their business plans, and show how


to orchestrate a business presentation and highlight key things.

2. Critique the confrontational style that Ryan uses with his entrepreneurial students. What benefits does it give them?Answer: Student’s answer may vary. However, the most common answers would be: making them to think as to why they are in the camp, and helping them to deal with the challenge in a motivating structure.

3. Use the resources in the library and on the World Wide Web to develop a list of suggestions and advice for entrepreneurs presenting their business plans to lenders and investors.Answer: Student’s answer may vary.

H. Perhaps the best way to understand the need for a business plan is to recognize the validity of the “two-thirds rule” 1. only two-thirds of the entrepreneurs with a sound and viable new business

venture will find financial backing.2. Those that do find financial backing will only get two-thirds of what they initially

requested, and it will take them two-thirds longer to get the financing than they anticipated.

3. The most effective strategy for avoiding the two-thirds rule is to build a business plan!

I. The time to find out that a business idea won’t succeed is in the planning stages, before an entrepreneur commits significant money, time, and effort to the venture.1. It is much less expensive to make mistakes on paper than in reality. 2. A business plan reveals important problems to overcome before launching a

company.

J. The real value in preparing a plan is not is much in the plan itself as it is in the process the entrepreneur goes through to create the plan. 1. Although the finished product is useful, the process of building the plan requires

entrepreneurs to subject their ideas to an objective, critical evaluation. 2. What entrepreneurs learn about their industries, target markets, financial

requirements, competition, and other factors is essential to making their ventures successful.

3. Building a business plan reduces the risk and uncertainty of launching a company by teaching an entrepreneur to do it the right way!

4. See Table 6.1 which describes the four bases every business plan should cover.

III. The Elements of a Business PlanA. Eevery business plan is unique and must be tailor-made.

1. The elements of a business plan may be standard, but how an entrepreneur tells her story should be unique and reflect her personal excitement about the new venture.


2. If this is a first attempt at writing a business plan, seek the advice of individuals with experience in this process such as:a) consultants with Small Business Development Centers, accounts, business

professors, business planning professionals, and attorneys.

B. Entrepreneurs who invest their time and energy building plans are better prepared to face the hostile environment in which their companies will compete than those who do not.1. Building a business plan does not guarantee success, it does raise an

entrepreneur's chances of succeeding in business. 2. A business plan typically ranges from 25 to 50 pages in length.

a) Like every business venture, every business plan is unique.

C. Elements of a business plan as a starting point.1. The Executive Summary.

a) To summarize the presentation to each potential financial institution or investors.

b) It should be concise--a maximum of two pages--and should summarize all of the relevant points of the proposed deal.

c) After reading the executive summary, anyone should be able to understand the entire business concept and what differentiates the company from the competition.

d) It is a synopsis of the entire plan, capturing its essence in a capsulized form.e) It should explain:

(1) the basic business model(2) the problem the business will solve for customers(3) briefly describe the owners and key employees, target market(s), financial

highlights (e.g. sales and earnings projections, the dollar amount requested, how the funds will be used, and how and when any loans will be repaid),

(4) the company’s competitive advantage. f) Key points that you can communicate in a matter of one or two minutes.

2. Mission Statement.a) A mission statement expresses an entrepreneur's vision for what the company

is, what it is to become, and what it stands for.b) It is the broadest expression of a company's purpose c) It defines the direction in which it will move. d) It serves as the thesis statement for the entire business plan.

3. Company History. a) The manager of an existing small business should prepare a brief history of

the operation, highlighting the significant financial and operational events in the company's life.

b) It should describe when and why the company was formed, how it has evolved over time, and what the owner envisions for the future.

c) It should highlight the successful accomplishment of past objectives and should convey the firm's image in the marketplace.


4. Business and Industry Profile. a) This section should begin with a statement of the company's general business

goals and a narrower definition of its immediate objectives. b) It should spell out what the business plans to accomplish, how, when, and

who will do it. (1) Goals are broad, long-range statements of what a company plans to do in

the distant future that guide its overall direction.(a) they answer the question: “Why am I in business?”

(2) Objectives are short-term, specific performance targets that are attainable, measurable, and controllable. (a) Every objective should include a technique for measuring progress

toward its accomplishment.(b) An objective must have a time frame for achievement.

c) Both goals and objectives should relate to the company's basic mission.(1) It should describe the present state of the art in the industry and what they

will need to succeed in the market segment in which their businesses compete.

(2) They should then identify the current applications of the product or service in the market and include projections for future applications.

d) This section should provide with an overview of the industry or market segment in which the new venture will operate.

e) Industry data such as market size, growth trends, and the relative economic and competitive strength of the major firms in the industry all set the stage for a better understanding of the viability of the new product or service.

f) Strategic issues such as ease of market entry and exit, the ability to achieve economies of scale or scope, and the existence of cyclical or seasonal economic trends further help the reader evaluate the new venture.

g) This part of the plan also should describe significant industry trends and an overall outlook for its future. (1) The U.S. Industrial Outlook Handbook is an excellent reference that

profiles a variety of industries and offers projections for future trends. (2) Another useful resource of industry and economic information is the

Summary of Commentary on Current Economic Conditions, known as the Beige Book.

5. Business Strategy. a) It is the owner's view of the strategy needed to meet – and beat – the

competition. b) This section addresses the question of how to get there.c) An entrepreneur must explain how he plans to gain a competitive edge in the

market and what sets his business apart from the competition. d) He should comment on how he plans to achieve business goals and objectives

in the face of competition and government regulation and should identify the image the business will project.

e) An important theme is what makes the company unique in the eyes of its customers.


f) It should outline the methods the company can use to meet the key success factors.

6. Description of Firm's Product/Service.a) It should describe the company's overall product line, giving an overview of

how customers use its goods or services.b) Drawings, diagrams, and illustrations may be required if the product is highly

technical.c) It is best to write product and service descriptions so that laypeople can

understand them.d) A statement of a product's position in the product life cycle might also be

helpful. e) It should include a summary of any patents, trademarks, or copyrights

protecting the product or service from infringement by competitors.f) It should include an honest comparison of the company's product or service

with those of competitors, citing specific advantages or improvements that make its goods or services unique and indicating plans for creating the next generation of goods and services that will evolve from the present product line. (1) What competitive advantage does the venture's product or service offer?(2) Avoid to dwell excessively on the features of their products or services. (3) A feature is a descriptive fact about a product or service.(4) A benefit is what the customer gains from the product or service feature. (5) Table 6.2 offers transforming features into benefits.

g) Manufacturers should describe their production process, strategic raw materials required, sources of supply they will use, and their costs. (1) Explain the company's environmental impact and how the entrepreneur

plans to mitigate any negative environmental consequences the process may produce.

7. Marketing Strategy. a) A business plan must identify and describe the company's target customers

and their characteristics and habits. b) Defining the target audience and its potential is one of the most important

parts of building a business plan. c) Creating a successful business depends on an entrepreneur's ability to attract

real customers who are willing and able to spend real money to buy its products or services.

d) Perhaps the worst marketing error an entrepreneur can commit is failing to define his target market and trying to make his business “everything to everybody.”

e) Small companies usually are much more successful focusing on a specific market niche where they can excel at meeting customers' special needs or wants.

f) Every other aspect of marketing depends on their having a clear picture of their customers and their unique needs and wants.

g) Proving that a profitable market exists involves two steps: (1) showing customer interest


(a) must be able to prove that their target customers need or want their goods or services and are willing to pay for them.

(b) offer the prototype to several potential customers in order to get written testimonials and evaluations to show to investors.

(c) Or the owner could sell the product to several customers at a discount.(2) documenting market claims.

(a) Entrepreneurs must support claims of market size and growth rates with facts.

(b) Results of market surveys, customer questionnaires, and demographic studies lend credibility of an entrepreneur's frequently optimistic sales projections.

(c) One technique involves business prototyping.h) An effective market analysis should identify the following:

(1) Target market: (a) Who are the company’s target customers?(b) How many of them are in the company’s trading area? (c) What are their characteristics (age, gender, educational level, income,

and others)? (d) What do they buy? (e) Why do they buy? (f) When do they buy?(g) What expectations do they have about the product or service?(h) Will the business focus on a niche?(i) How does the company seek to position itself in the market(s) it will

pursue?(j) Knowing my customers needs, wants, and habits, what should be the

basis for differentiating my business in their minds? (2) Advertising and promotion:

(a) Which media are most effective in reaching the target market?(b) How will they be used? (c) How much will the promotional campaign cost? (d) How will the promotional campaign position your company's products

or services? (e) How can the company benefit from publicity? (f) How large is the company's promotional budget?

(3) Market size and trends:(a) How large is the potential market?(b) Is it growing or shrinking? Why? (c) Are the customer's needs changing?(d) Are sales seasonal?(e) Is demand tied to another product or service?

(4) Location: (a) Which specific sites put the company in the path of its target

customers?(b) Do zoning regulations restrict the use of the site?


(c) For manufacturers, the location issue often centers on finding a site near its key raw materials or near its major customers.

(d) Using demographic reports and market research to screen potential sites takes the guesswork out of choosing the “right” location for a business.

(5) Pricing:(a) What does the product or service cost to produce or deliver?(b) What is the company's overall pricing strategy?(c) What image is the company trying to create in the market?(d) Will the planned price support the company's strategy and desired

image?(i) See Figure 6.1. – The link between pricing, perceived quality, and

company image.(e) Can it produce a profit? (f) How does the planned price compare to those of similar products or

services? (g) Are customers willing to pay it? (h) What price tiers exist in the market? (i) How sensitive are customers to price changes? (j) Will the business sell to customers on credit? (k) Will it accept credit cards? (l) Will the company offer discounts? If so, what kinds and how much?

(6) Distribution: (a) How will the product or service be distributed? (b) Will distribution be extensive, selective, or exclusive? (c) What is the average sale? (d) How large will the sales staff be? (e) How will the company compensate its sales force? (f) What are the incentives for salespeople? (g) How many sales calls does it take to close a sale? (h) What can the company do to make it as easy as possible for customers

to buy? (i) An entrepreneur should summarize the firm's overall pricing strategies

and its warranties and guarantees for its products and services. 8. Competitor Analysis.

a) Entrepreneurs should assess honestly their new ventures’ competition.b) Trade associations, customers, industry journals, sales representatives, and

sales literature are valuable sources of data. c) It should focus on demonstrating that the entrepreneur's company has an

advantage over its competitors. (1) Who are the company's key competitors? (2) What are their strengths and weaknesses? (3) What are their strategies? (4) What images do they have in the marketplace? (5) How successful are they?


(6) What distinguishes the entrepreneur's product or service from others already on the market, and how will these differences produce a competitive edge?

9. Owners’ and Managers’ Resumes.a) The most important factor in the success of a business venture is its

management, and financial officers and investors weight heavily the ability and experience of the firm's managers in financing decisions.

b) A plan should include the resumes of business officers, key directors, and any person with at least 20 percent ownership in the company.

c) This is the section of the plan where entrepreneurs have the chance to sell the qualifications and the experience of their management team.

d) Ideally, lenders and investors look for managers with at least two years’ of operating experience in the industry they are targeting.

e) A resume should summarize each individual's education, work history (emphasizing managerial responsibilities and duties), and relevant business experience.

f) This portion of the plan should show that the company has the right people organized in the right fashion for success.

g) One experienced private investor advises entrepreneurs to remember the following:(1) Ideas and products don't succeed; people do. (2) Show the strength of key employees and how you will retain them. (3) A board of directors or advisers consisting of industry experts lends

credibility and can enhance the value of the management team.10. Plan of Operation.

a) An entrepreneur should construct an organizational chart identifying the business's key positions and the people occupying them.

b) The entrepreneur should describe briefly the steps taken to encourage important officers to remain with the company.

c) Employment contracts, shares of ownership, and perks are commonly used to keep and motivate key employees.

d) A description of the form of ownership (partnership, joint venture, S Corporation, LLC) and of any leases, contracts, and other relevant agreements pertaining to the operation is helpful.

11. Financial Forecasts. a) A business owner should supply copies of the firm's major financial

statements from the past 3 years. b) Ideally, these statements should be audited ore reviewed by a certified public

accountant.c) An entrepreneur should carefully prepare monthly projected (or pro forma)

financial statements for the venture for one year and by quarter for the next 2 to 3 years.(1) Income statement shows the company’s revenues, expenses, and the

resulting profit.(a) Investors and lenders expect to see positive trends in earnings.


(b) They look to see if the gross-, operating-, and net-income margins on the forecasted income statements are consistent with industry averages.

(2) Cash flow statement to judge whether or not the company is viable over time.(a) Staying in business requires a company to generate positive cash flow. (b) Entrepreneurs must make sure that they have accumulated enough

capital to carry the company until it generates enough cash to support itself.

(3) Balance sheet where they see the company’s assets (everything it owns), its liabilities (everything it owes), and its net worth (the difference in assets and liabilities).

d) There should be forecasts under pessimistic, most likely, and optimistic conditions to reflect the uncertainty of the future.(1) Entrepreneurs must avoid the tendency to “fudge the numbers” since some

venture capitalists automatically discount an entrepreneur's financial projections by as much as 50 percent.

(2) Include break-even analysis and a ratio analysis on the projected figures. e) It is also important to include a statement of the assumptions on which these

financial projections are based. (1) Potential lenders and investors want to know how the entrepreneur

derived forecasts for sales, cost of goods sold, operating expenses, accounts receivable, collections, inventory, and other such items.

12. The Request for Funds. a) The loan proposal section of the business plan should state the purpose of the

loan or investment, the amount requested, and the plans for repayment or cash-out.

b) When describing the purpose of the loan, entrepreneurs must specify the planned use of the funds.(1) Entrepreneurs should state the precise amount of money they are

requesting and include relevant backup data, such as vendor estimates of costs or past production levels.

c) Another important element of the loan or investment proposal is the repayment schedule and exit strategy. (1) A lender's main consideration in granting a loan is the reassurance that the

applicant will repay, whereas an investor's major concern is earning a satisfactory rate of return.

GAINING THE COMPETITIVE EDGE:The Right Way to Build a Business Plan

How can you create a plan that will help your business become more successful? By integrating the following ten characteristics into your plan:

1. Detailed market research2. Clear and realistic financial projections


3. A detailed competitor analysis4. A description of the management team5. A distinct vision6. An understanding of financial options7. Proper format and a flowing writing style8. Crisp9. A killer summary10. Customized

(2) It is necessary to produce tangible evidence showing the ability to repay loans or to generate attractive returns.

d) It is beneficial to include an evaluation of the risks of a new venture.(1) The best strategy is to identify the most significant risks the venture faces

and then to describe the plans the entrepreneur has developed to avoid them altogether or to overcome the negative outcome if the event does occur.

e) An entrepreneur should have a realistic timetable for implementing the plan. f) There is a difference between a working business plan – one the entrepreneur

is using to guide her business – and the presentation business plan – the one she is using to attract capital.

g) A business plan is usually the tool that an entrepreneur uses to make a first impression on potential lenders and investors. To make sure that impression is a favorable one, an entrepreneur should follow these tips: (1) Make sure the plan is free of spelling and grammatical errors and “typos.” (2) Make it visually appealing. (3) Leave ample “white space” in margins.(4) Create an attractive (but not extravagant) cover that includes the

company's name and logo. (5) Include a table of contents to allow readers to navigate the plan easily.(6) Write in a flowing, conversational style and use “bullets” to itemize points

in lists. (7) Support claims with facts and avoid generalizations.(8) Avoid overusing industry jargon and acronyms with which readers may

not be familiar. (9) Make it interesting. (10) Use computer spreadsheets to generate financial forecasts. They allow

entrepreneurs to perform valuable “what if” (sensitivity) analysis in just seconds.

(11) Alwyas include cash flow projections. (12) The ideal plan is “crisp” – long enough to say what it should but not so

long that it is a chore to read.(13) Tell the truth. Absolute honesty is always critical in preparing a business

plan.

IV. Can Your Plan Pass These Tests?


A. Building the plan forces a potential entrepreneur to look at her business idea in the harsh light of reality. 1. It also requires the owner to assess the venture's chances of success more

objectively.2. A well-assembled plan helps prove to outsiders that a business idea can be

successful.

B. To get external financing, an entrepreneur's plan must pass three tests with potential lenders and investors:1. Reality test

a) The external component of the reality test revolves around proving that a market for the product or service really does exist.(1) It focuses on industry attractiveness, market niches, potential customers,

market size, degree of competition, and similar factors.b) The internal component of the reality test focuses on the product or service

itself. (a) Can the company really build it for the cost estimates in the business

plan? (b) Is it truly different from what competitors are already selling? (c) Does it offer customers something of value?

2. Competitive test a) The external part of the competitive test evaluates the company's relative

position to its key competitors. (1) How do the company's strengths and weaknesses match up with those of

the competition? (2) How are existing competitors likely to react when the new business enters

the market? (3) Do these reactions threaten the new company's success and survival?

b) The internal competitive test focuses on management's ability to create a company that will gain an edge over existing rivals. (1) What other resources does the company have that can give it a competitive

edge in the market? 3. Value test.

a) A business plan must prove to them that it offers a high probability of repayment or an attractive rate of return.

b) A plan must convince lenders and investors that they will earn an attractive return on their money.

4. Appendix A at the end of this book contains a sample business plan for a company.

V. Making the Business Plan PresentationA. When entrepreneurs try to secure funding from lenders or investors, the written

business plan almost always precedes the opportunity to meet “face-to-face.” 1. Usually, the time for presenting a business opportunity is short, often no more

than just a few minutes, usually 15 to 20 minutes, 30 minutes at the maximum. 2. A business plan presentation should cover five basic areas:


a) The company's background and its products or services.b) A market analysis and a description of the opportunities it presents.c) The company’s competitive edge and the marketing strategiesd) The management team and its members’ qualifications and experience. e) A financial analysis that shows lenders and investors an attractive payback or

payoff.

B. Entrepreneurs who are successful in raising the capital their companies need to grow have solid business plans and make convincing presentations of them.

C. Some helpful tips for making a business plan presentation to potential lenders and investors include:1. Prepare. 2. Demonstrate enthusiasm about the business, but don't be overemotional. 3. Focus on communicating the dynamic opportunity your idea offers and how you

plan to capitalize on it. 4. “Hook” investors quickly with an up-front explanation of the new venture, its

opportunities, and the anticipated benefits to them.5. Use visual aids. 6. Hit the highlights; specific questions will bring out the details later. Don't get

caught up in too much detail in early meetings with lenders and investors.7. Keep the presentation “crisp” just like your business plan8. Avoid the use of technological terms that will likely be above most of the

audience. 9. Remember that every potential lender and investor you talk to is thinking “What's

in it for me?”10. Close by reinforcing the nature of the opportunity. 11. Be prepared for questions. 12. Anticipate the questions the audience is most likely to ask and prepare for them in

advance. 13. Be sensitive to the issues that are most important to lenders and investors by

“reading” the pattern of their questions. 14. Follow up with every investor you make a presentation to.

VI. What Lenders and Investors Look For in a Business PlanA. Entrepreneurs must be aware of the criteria lenders and investors use to evaluate the

credit-worthiness of entrepreneurs seeking financing. They are the five Cs of credit: 1. Capital

a) A small business must have a stable capital base before any lender will grant a loan.

b) The most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt.

2. Capacitya) A synonym for capacity is cash flow. b) Lenders and investors must be convinced of the firm's ability to meet its

regular financial obligations and to repay bank loan, and that takes cash.


IN THE FOOTSTEPS OF AN ENTREPRENEUR . . .Behind the Scenes: A Business Plan Competition

Camp $tart-UP in Wellesley, Massachusetts, young women between the ages of 13 and 17 work in teams to develop business plans for businesses they hope to launch. In addition to learning the details of writing business plans, these aspiring entrepreneurs also have a chance to network with women entrepreneurs. Like the participants in Camp $tart-UP, college students across the United States are creating business plans for companies they hope to start, or, in some cases, have already launched. For some, more than just a good grade is at stake. They are competing for real start-up funding and valuable feedback from experienced judges in business plan competitions.

1. If your school does not already have a business plan competition, work with a team of your classmates in a brainstorming session to develop ideas for creating one. How would you finance the competition? Whom would you invite to judge it? How would you structure the competition?Answer: Student’s answers may vary.

2. Use the World Wide Web to research business plan competitions at other colleges and universities across the nation. Using the competitions at these schools as benchmarks and the ideas you generated in question #1, develop a format for a business plan competition at your school. Answer: Student’s answers may vary.

3. Assume that you are a member of a team of entrepreneurial students entered in a prestigious business plan competition. Outline your team’s strategy for winning the competition. Answer: “Suggested Business Plan Format” listed at the end of this chapter would be a good outline.

c) Lenders expect a business to pass the test of liquidity, especially for short-term loans.

3. Collaterala) Collateral includes any assets an entrepreneur pledges to a lender as security

for repayment of the loan. b) Banks make very few unsecured loans (those not backed by collateral) to

business start-ups. c) Bankers view the owner's willingness to pledge collateral (personal or

business assets) as an indication of dedication to making the venture a success.

4. Charactera) An evaluation of character frequently is based on intangible factors such as

honesty, competence, polish, determination, intelligence, and ability.


b) Lenders and investors know that most small businesses fail because of incompetent management, and so they try to avoid extending loans to high-risk entrepreneurs.

5. Conditions. a) The conditions surrounding a loan request also affect the owner's chance of

receiving funds. b) Banks consider factors relating to the business operation such as potential

growth in the market, competition, location, form of ownership, and loan purpose.

c) Another important condition influencing the banker's decision is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money.

VII. ConclusionA. A good plan serves as a strategic compass that keeps a business on course as it travels

into an uncertain future. 1. A olid plan is essential to raising the capital needed to start a business; lenders

and investors demand it. 2. Building a plan is just one step along the path to launching a business.

VIII. Suggested Business Plan Format

A. Executive Summary (not to exceed two pages)1. Company name, address, and phone number2. Name(s), addresses, and phone number(s) of all key people3. Brief description of the business, its products and services, and the customer

problems they solve4. Brief overview of the market for your products and services5. Brief overview of the strategies that will make your firm a success 6. Brief description of the managerial and technical experience of key people 7. Brief statement of the financial request and how the money will be used8. Charts or tables showing highlights of financial forecasts

B. Vision and Mission statement1. Entrepreneur’s vision for the company2. What business are we in?”3. Values and principles on which the business stands4. What makes the business unique? What is the source of its competitive

advantage?

C. Company History (for existing businesses only)1. Company founding2. Financial and operational highlights3. Significant achievements

D. Business and Industry Profile


1. Stage of growth (start-up, growth, maturity) 2. Company goals and objectives

a) Operationalb) Financialc) Other

E. Industry Analysis

1. Industry background and overview 2. Significant trends 3. Growth rate 4. Key success factors in the industry5. Outlook for the future

F. Business Strategy1. Desired image and position in market2. SWOT analysis

a) Strengthsb) Weaknessesc) Opportunitiesd) Threats

G. Competitive strategy1. Cost-leadership2. Differentiation3. Focus

H. Company Products and Services1. Description

a) Product or service featuresb) Customer benefitsc) Warranties and guaranteesd) Uniqueness

2. Patent or trademark protection3. Description of production process (if applicable)

a) Raw materialsb) Costsc) Key suppliers

4. Future product or service offerings

I. Marketing Strategy1. Target market

a) Complete demographic profileb) Other significant customer characteristics

2. Customers’ motivation to buy3. Market size and trends

a) How large is the market?


b) Is it growing or shrinking? How fast? 4. Advertising and promotion

a) Media used – reader, viewer, listener profilesb) Media costsc) Frequency of usaged) Plans for generating publicity

5. Pricinga) Cost structure

(1) Fixed(2) Variable

b) Desired image in marketc) Comparison against competitors’ prices

6. Distribution strategya) Channels of distribution usedb) Sales techniques and incentives

J. Location and Layout1. Location

a) Demographic analysis of location vs. target customer profileb) Traffic countc) Lease/Rental ratesd) Labor needs and supplye) Wage rates

2. Layouta) Size requirementsb) Americans with Disabilities compliancec) Ergonomic issuesd) Layout plan (suitable for an appendix)

K. Competitor Analysis1. Existing competitors

a) Who are they? Create a competitive profile matrix. b) Strengthsc) Weaknesses

2. Potential competitors: Companies that might enter the marketa) Who are they?b) Impact on your business if they enter

L. Description of management team1. Key managers and employees

a) Their backgroundsb) Experience, skills, and know-how they bring to the company

2. Resumes of key managers and employees (suitable for an appendix)


M. Plan of Operation1. Form of ownership chosen and reasoning2. Company structure (organization chart)3. Decision making authority4. Compensation and benefits packages

N. Financial Forecasts (suitable for an appendix)

1. Financial statementsa) Income statementb) Balance sheetc) Cash flow statement

2. Break-even analysis3. Ratio analysis with comparison to industry standards (most applicable to existing

businesses)

O. Loan or Investment Proposal1. Amount requested2. Purpose and uses of funds3. Repayment or “cash out” schedule (exit strategy)4. Timetable for implementing plan and launching the business

P. Appendices – Supporting documentation, including market research, financial statements, organization charts, resumes, and other items.

Chapter Summary

1. Explain why every entrepreneur should create a business plan. A business plan serves two essential functions. First and most important, it guides

the company's operations by charting its future course and devising a strategy for following it. The second function of the business plan is to attract lenders and investors. Applying for loans or attempting to attract investors without a solid business plan rarely attracts needed capital. Rather, the best way to secure the necessary capital is to prepare a sound business plan.

2. Describe the elements of a solid business plan. Although a business plan should be unique and tailor-made to suit the particular needs

of a small company, it should cover these basic elements: an executive summary, a mission statement, a company history, a business and industry profile, a description of the company's business strategy, a profile of its products or services, a statement explaining its marketing strategy, a competitor analysis, owners' and officers' resumes, a plan of operation, financial data, and the loan or investment proposal.

3. Explain the benefits of preparing a plan. Preparing a sound business plan clearly requires time and effort, but the benefits

greatly exceed the costs. Building the plan forces a potential entrepreneur to look at


her business idea in the harsh light of reality. It also requires the owner to assess the venture's chances of success more objectively. A well-assembled plan helps prove to outsiders that a business idea can be successful.

The real value in preparing a business plan is not so much in the plan itself as it is in the process the entrepreneur goes through to create the plan. Although the finished product is useful, the process of building a plan requires an entrepreneur to subject his idea to an objective, critical evaluation. What the entrepreneur learns about his company, its target market, its financial requirements, and other factors can be essential to making the venture a success.

4. Understand the keys to making an effective business plan presentation. Entrepreneurs who are informed and prepared when requesting a loan or investment

favorably impress lenders and investors. Tips include: Demonstrate enthusiasm about the venture, but don't be overemotional;

"hook" investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them; use visual aids; hit the highlights of your venture; don't get caught up in too much detail in early meetings with lenders and investors; avoid the use of technological terms that will likely be above most of the audience; rehearse your presentation before giving it; close by reinforcing the nature of the opportunity; and be prepared for questions.

5. Explain the "5 Cs of Credit" and why they are important to potential lenders and investors reading business plans.

Small business owners need to be aware of the criteria bankers use in evaluating the credit-worthiness of loan applicants - the five Cs of credit: capital, capacity, collateral, character, and conditions.

Capital - Lenders expect small businesses to have an equity base of investment by the owner(s) that will help support the venture during times of financial strain.

Capacity - A synonym for capacity is cash flow. The bank must be convinced of the firm's ability to meet its regular financial obligations and to repay the bank loan, and that takes cash.

Collateral - Collateral includes any assets the owner pledges to the bank as security for repayment of the loan.

Character - Before approving a loan to a small business, the banker must be satisfied with the owner's character.

Conditions – refers to interest rates, the health of the nation's economy, industry growth rates, etc. - surrounding a loan request also affects the owner's chance of receiving funds.

Discussion Questions

1. Why should an entrepreneur develop a business plan?Answer: A business plan serves two essential functions. First and most important, it guides the company's operations by charting its future course and devising a strategy for following it. The second function of the business plan is to attract lenders and investors.


2. Why do entrepreneurs who are not seeking external financing need to prepare business plans? Answer: The real value in preparing a business plan is in the process the entrepreneur goes through to create the plan. Although the finished product is useful, the process of building a plan requires an entrepreneur to subject his idea to an objective, critical evaluation. What the entrepreneur learns about his company, its target market, its financial requirements, and other factors can be essential to making the venture a success.

3. Describe the major components of a business plan.Answer: Although a business plan should be unique and tailor-made to suit the particular needs of a small company, it should have these major components: an executive summary, a mission statement, a company history, a business and industry profile, a description of the company's business strategy, a profile of its products or services, a statement explaining its marketing strategy, a competitor analysis, owners' and officers' resumes, a plan of operation, financial data, and the loan or investment proposal.

4. How can an entrepreneur seeking funds to launch a business convince potential lenders and investors that a market for the product or service really does exist?Answer: To get external financing, an entrepreneur's plan must pass three tests with potential lenders and investors: Reality test, Competitive test, and Value test. Reality test revolves around proving that a market for the product or service really does exist and it focuses on industry attractiveness, market niches, potential customers, market size, degree of competition, and similar factors. It also focuses on the product or service itself. The Competitive test evaluates the company's relative position to its key competitors and it focuses on management's ability to create a company that will gain an edge over existing rivals. The Value test must prove that it offers a high probability of repayment or an attractive rate of return and must convince lenders and investors that they will earn an attractive return on their money.

5. How would you prepare to make a formal presentation of your business plan to a venture capital forum?Answer: A formal presentation often is no more than just a few minutes, usually 15 to 20 minutes, 30 minutes at the maximum. A business plan presentation should cover five basic areas: (1) The company's background and its products or services; (2) A market analysis and a description of the opportunities it presents; (3) The company’s competitive edge and the marketing strategies; (4) The management team and its members’ qualifications and experience; and (5) A financial analysis that shows lenders and investors an attractive payback or payoff.

6. What are the 5 C’s of credit? How do lenders and investors use them when evaluating a request for financing?Answer: Small business owners need to be aware of the criteria bankers use in evaluating

the credit-worthiness of loan applicants - the five Cs of credit: capital, capacity, collateral, character, and conditions. Capital - lenders expect small businesses to have an equity base of investment by the owner(s) that will help support the venture during times of financial strain. Capacity is cash flow. The bank must be convinced


of the firm's ability to meet its regular financial obligations and to repay the bank loan, and that takes cash. Collateral includes any assets the owner pledges to the bank as security for repayment of the loan. Character - before approving a loan to a small business, the banker must be satisfied with the owner's character. Conditions refers to interest rates, the health of the nation's economy, industry growth rates, etc. - surrounding a loan request also affect the owner's chance of receiving funds.

Step Into the Real World . . .

1. Interview a local banker or investor who has experience in making loans to or investments in small businesses. Ask him or her the following questions.a. How important is a well-prepared business plan?b. How important is a smooth presentation?c. How do you evaluate the owner's character?d. How heavily do you weigh the five Cs of credit?e. What percentage of small business owners are well prepared to request loan or

investment?f. What mistakes do entrepreneurs most commonly make when creating their business

plans? When presenting them? g. What are the major reasons for rejecting a business plan?

2. Interview a small business owner who has requested a bank loan or an equity investment from external sources. Ask him or her these questions:a. Did you prepare a written business plan before approaching the financial officer?b. If the answer is “yes” to part a, did you have outside or professional help in preparing

it?c. How many times have your requests for additional funds been rejected? What reasons

were given for the rejection?

Documents

Chapter 6 Entrepreneurship by Zubair A Khan