CREATING A BUSINESS

PLAN
Chapter 3
 After studying the chapter, you
should be able to:

1. Explain how to write a

LEARNING business plan.
OBJECTIVES 2. Give tips in writing a business
plan.
3. Discuss the parts and key
components of business plan.

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 PURPOSE OF BUSINESS PLAN

Business Plan is a document that outlines the basic concept

underlying a business and describes how that concept will be
realized – specifically, what problem will be solved.

A business plan is an entrepreneur’s game plan; it

crystallizes the dreams and hopes that motivate an
entrepreneur to take the startup plunge.

The business plan should layout your basic idea for the venture and
include descriptions of where you are now, where you want to go,
and how you intend to get there.
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 3 ELEMENTS OF BUSINESS PLAN
According to John Mullins

• A logical statement of a problem and its

solution,

• A significant amount of cold, hard

evidence,

• Candor about the risks, gaps, and other

assumptions that might be proved wrong.

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 DAVID GUMPERT

• Headed-up the MIT Enterprise

Forum, offers a concise and
practical definition of a
business plan, focusing on how
it should lead to action.

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 DAVID GUMPERT

• “It’s a document that convincingly

demonstrates that your business
can sell enough of its product or
service to make a satisfactory profits
and to be attractive to potential
backers”.

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 DAVID GUMPERT

• For him, the business plan is

essentially a selling document
used to convince key individuals,
both inside and outside the firm,
that the venture has real potential.

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 WRITING A BUSINESS PLAN. . .

• is an opportunity to convince yourself,

the entrepreneur, that what appears to
be a good idea is also a good investment
opportunity, both financially and in
terms of your personal goals.

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 WRITING A BUSINESS PLAN. . .

• The issue of your personal aspirations

deserves careful thought: If the business
does not align with personal goals, you
are not likely to succeed and you
certainly will not enjoy the journey.

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 THREE BASIC OBJECTIVES

1. To identify the nature and the context of the

business opportunity – that is, why does such
an opportunity exist?

2. To outline the approach, the entrepreneur

plans to use to exploit the opportunity.

3. To recognize factors that will determine

whether the venture will be successful.

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 A BUSINESS PLAN
S t a t e d d i ff e r e n t l y ,

• A business plan is used to provide a

statement of goals and strategies to
be used by company insiders and to
aid in the development of
relationships with outsiders
(investors and others) who could
help the company achieve its goals.

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 First Group Second Group

• Consist of Internal Users • Consist of Outsiders who

of the plan: are critical to the firm’s

• The entrepreneur; success:

• Its prospective
• The new firm’s
customers;
management; and
• Its suppliers;
• Employees
• Lenders; and

• investors 12
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 THE BUSINESS PLAN . . .
A l s o g o e s b y o t h e r n a m e s ,
d e p e n d i n g o n i t s i n t e n d e d a u d i e n c e .

• Presented to a banker, it may be

called a “loan proposal”.
• A venture capital group might call it
the “venture plan” or “investment
prospectus”.
• Other audiences might be potential
partners or top managers, suppliers,
and distributors, lawyers,
accountants, and consultants.

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DO YOU REALLY NEED A
BUSINESS PLAN?
YES OR NO?

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 THE ANSWER IS . . . “Companies that start-up based
on business plans are no more
successful than those that do
not”.

It is true that studies attempting

to measure the success of
entrepreneurs with business
plans against the success of
those without them have
produced mixed results. Some
findings suggest a relationship,
others find some.
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HOW MUCH
HOW MUCH PLANNING?
PLANNING?

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 • In starting a business, an
FOR MOST ENTREPRENEURS
entrepreneur has to make
some tradeoffs, as preparing
• The issue is not whether to a plan requires time and
prepare a business plan but money, two resources that
are always in short supply. At
how to engage in effective
the extremes, an
planning, given the situation. entrepreneur has two basic
• Different situation lead to choices when it comes to
writing a business plan: the
different needs and, thus, to
dehydrated plan or the
different level of planning. comprehensive plan.

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 THE DEHYDRATED PLAN
• is a short form of a business plan, presenting only the most important
issues and projections for the business. Focusing heavily on market
issues, such as pricing, competition, and distribution channels, the
dehydrated plan provides little in the way of supporting information.

This type of plan will often be adequate for seeking outside financing from
banks, especially if it includes past and projected financial results. In fact,
it is so rare for an entrepreneur to provide any form of a plan when
requesting a loan that a dehydrated plan will probably make a favorable
impression on a banker. Furthermore, a dehydrated plan may be helpful in
trying to gauge investor interest and to determine whether writing a full-
length plan would be worth the time and effort.
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 THE COMPREHENSIVE PLAN

• When entrepreneurs and investors speak of a business plan.

• A full business plan that provides an in-depth analysis of the
critical factors that will determine a firm’s success or failure,
along with all the underlying assumptions.

• Such a plan is beneficial when you are describing a new

opportunity (startup), facing significant change in the business
or the external environment (changing demographics, new
legislation, developing industry trends), or explaining a
complex business situation.
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WHY WRITE A BUSINESS
PLAN?

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 The Cost of Planning
• The entrepreneurs must sit still
BECAUSE . . .
long enough to do it.
• Developing and writing the plan
• If the new venture is looking for takes time, money, and energy.
financing from an outside source, • Economic uncertainty and the
it must have a plan. risks that the firm faces –the
psychological strain of
• Writing a plan is not without its admitting everything that can
costs and sacrifices, but overall, go wrong.
the benefits far outweigh the • The fear, real or imagined, of
prematurely closing off the new
costs.
venture’s strategic direction.
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 The Benefits of Business
Planning
BECAUSE . . .
• The entrepreneurial team
reduces the anxieties and
• The business can tensions by confronting them.
• By projecting the risks of the
personally benefit the new venture into the future,
entrepreneurial team. the team comes to grips with
potential negative outcomes
and the possibility of failure.
• The knowledge that comes
from this experience can
reduce the fear of facing an
unknown future.
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 Conflicts
BECAUSE . . . 1. The new firm requires
reinvestment, the more
successful it is, the more
• The entrepreneur is money it will need for
growth.
potentially in conflict with
2. The organization demands
the new business demands the entrepreneur be a
that he or she may find leader and a manager, but
these responsibilities often
imposing.
require tough personnel
decisions.
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 Four reasons:
1. Comprehensiveness
PLANNING AND PERFORMANCE
• The business has to fully and
completely treat all the major
issues facing the new venture. It
• Research shows there is a should leave nothing of
importance out. This
positive relationship between
comprehensiveness enables the
planning and performance in entrepreneur to see where
trouble might come from and to
new and small firms. That is, develop contingent strategies to
firms that plan perform better reduce the effects of these
problems. It forces the
and are more likely to succeed entrepreneur to develop and
than firms that do not. demonstrate industry-related
competence.
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 . . . PLANNING AND • The business plan is a
PERFORMANCE document for communicating
to various audiences the
business’s concept and
potential. An effective plan
succeeds in communicating the
excitement and vision of the
2. Communication founders and can help to
attract resources to the new
venture.

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 • The business plan sets goals and
. . . PLANNING AND milestones for the new venture.
PERFORMANCE It lays out the intentions of the
entrepreneurial team and the
values the founders wish to
preserve in the organization.
3. Guidance Therefore, the plan can be
referred to repeatedly to guide
decisions of the firm’s managers
and employees.
• “When in doubt, consult the
plan” could be the motto of a
new venture.

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 • The process of putting together a
. . . PLANNING AND business plan, consulting it
PERFORMANCE frequently, and reviewing and
revising it periodically can
improve the venture’s
performance even though some
aspects of the plan may become
obsolete before the ink is dry.
4. The Planning Process • This improvement is brought
about by collecting information,
sharing analysis, developing
norms for decision-making within
the organization, reviewing
objectives and linking these with
action – all elements of highly
effective organization.
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 THE CONTENT AND FORMAT OF A BUSINESS PLAN

When considering the content of a The business plan

business plan, continue to think first should give
and foremost about the opportunity, as
thorough
consideration to the
identified by your feasibility analysis.
following basic
Strategies and financial plan will follow
factors:
naturally if the opportunity is a good
one.

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1. The opportunity should reflect the potential and the attractiveness of
the market and industry.

2. Critical resources include not just money, but also human assets
(suppliers, accountants, lawyers, investors, etc.) and hard assets
(accounts receivables, inventories, etc.). An entrepreneur should think
of ways to minimize the resources necessary for startup.

3. The entrepreneurial team must possess integrity and breadth and

depth of experience.

4. The financing structure – how a firm is financed (debt versus equity)

and how the ownership percentage is shared by the founders and
investors will have a significant impact on entrepreneur’s incentive to
work hard. The goal is to find a win-win deal.
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 Entrepreneurial
Team

• The context (or external factors)

of an opportunity includes the
regulatory environment, interest
rates, demographic trends,
Resource
Opportunity Context

inflation, and other factors that

inevitably change but cannot be
controlled by the entrepreneur.
Financing
Structure

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 Entrepreneurial
Team

• The business plan will need to

demonstrate that the
entrepreneur has pulled
together the right opportunity,
Resource
Opportunity Context

the right resources, the right

people, and the right financing
structure, all within the right
context. Financing
Structure

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Reader Principal Objectives Key Areas of Interest
Venture Purely financial 40% or • A profit potential supported by products that
capitalist better return on investment; can generate large revenue.
availability of fast exit • A deal structure proposed to give investors;
 Some cash flow (a market rate of interest
for a portion of the investment)
 Over a period of three or five years, the
ability to get out by selling the
shareholdings either back to the owner
for at least a seat on the board (paid
position)
• A management team acceptable to the
investor.
• Evidence of commitment.
• General business plan requirements with
financial information in some detail.

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Reader Principal Objectives Key Areas of Interest
Banker Financial safety and a • A viable business built on
reasonable short-term  Owner/manager’s personal commitment and
profit plus the possibility financial attitude.
of a long-term business  Owner/manager’s ability to manage.
relationship.  Marketable products and/or services.
Cash flow projections, showing in particular how the
loan would be repaid.
 Future financial needs
•Other comforting factors including
 Securities pledged
 Co-signer(s) for the loan
 Involvement of professionals in financial statements
preparation and as member (s) of the board.
 Disclosure of contingent liabilities
 Disclosure of major commitments.
•Other information deemed necessary to support the loan
application.

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 Reader Principal Key Areas of Interest
Objectives
Government Meeting criteria • The way the project and its stated objective
Program Official specified in the meet with program criteria.
program • Financial commitment of the applicant.
• Involvement by other parties (such as the bank
and/or investors)
• Indication that without the grant, the project
may not be able to start-up or continue.
• Anticipated results (meeting specified
objectives)
• Perceived benefits to the community or society
(i.e., exports)
• General business plan requirements
(particularly financial information)

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