Entrepreneurship and Effective Small Business Management, 11e (Scarborough)
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Chapter 8 New Business Planning Process: Feasibility Analysis, Business Modeling, and Crafting a Winning Business Plan
Part One: Learning Objectives
1. Present the steps involved in conducting a feasibility analysis.
2. Identify the components of the business model canvas and explain how to use them to develop a viable business model.
3. Explain the benefits of an effective business plan.
4. Describe the elements of a solid business plan.
5. Explain the three tests every business plan must pass.
6. Explain the "five Cs of credit" and why they are important to potential lenders and investors reading business plans.
7. Understand the keys to making an effective business plan presentation.
The “Chapter Review” on pages 271 summarizes these learning objectives
Part Two: Chapter Outline – Ataglance
Introduction
Conducting a Feasibility Analysis
Feasibility Study
Elements of a Feasibility Analysis
Industry and Market Feasibility Analysis
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
Five Forces Model
Business Prototyping
Product or Service Feasibility Analysis
The Benefits of a Business Plan
A Business Plan: Two Essential Functions:
Three Tests Every Business Plan Must Pass
WhyTake the Time to Build a Business Plan?
Writing a Business Plan
The Key Elements of a Business Plan
Tips on Preparing a Business Plan
The “5 C” of Credit
Presenting the Plan Conclusion
Part Three: Lesson Plan Introduction
Starting a business requires planning. Whatever their size, companies that engage in planning outperform those who do not. For entrepreneurs, a planning is:
A systematic, realistic evaluation of a venture’s chances for success in the market.
A way to determine the principal risks facing the venture.
A game plan for managing the business successfully.
A tool for comparing actual results against targeted performance.
An important tool for attracting capital in the challenging hunt for money.
Entrepreneurs can benefit if they begin their planning with a feasibility analysis and then continue with the creation of a business plan.
Conducting a Feasibility Analysis
For many entrepreneurs, coming up with an idea for a new business concept or approach is easy. The question is if this idea has the potential for a profitable business. A feasibility analysis is the process of determining if the idea is a viable foundation for creating a successful business. If the idea passes, the entrepreneur’s next step is to build a solid business plan for capitalizing on the idea If the idea fails, the entrepreneur drops it and moves on to the next opportunity. A feasibility analysis offers efficiency and the opportunity to increase the chances for success before the entrepreneur invests resources. Conducting a feasibility study reduces the likelihood that entrepreneurs will pursue
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
fruitless business ventures. The feasibility analysis asks the question: “Should we proceed with this business idea?”
Feasibility Analysis
A feasibility analysis explores the viability of the business concept. A feasibility analysis: Is not the same as a business plan
A feasibility analysis is a preliminary step before creating a business plan. Serves as a filter
A feasibility analysis screens out ideas that lack the potential for building a successful business before an entrepreneur commits the necessary resources to build a business plan.
Is an investigative tool
A feasibility analysis investigates and tests the potential of the business concept.
Elements of a Feasibility Analysis
A feasibility analysis consists of three interrelated components:
1. An industry and market feasibility analysis,
2. A product or service feasibility analysis, and
3. A financial feasibility analysis
Elements of a Feasibility Analysis Industry and Market Feasibility
Addressing these questions helps entrepreneurs determine whether the potential for sufficient demand for their products and services exist. We will first explore techniques to assess the “Industry and Market Feasibility” aspect of the feasibility analysis.
CONDUCTING A FEASIBILITY ANALYSIS Industry and Market Feasibility Analysis
When evaluating the feasibility of a business idea, entrepreneurs find a basic analysis of the industry and targeted market segments a good starting point. The focus in this phase is two-fold:
1. To determine how attractive an industry is overall as a “home” for a new business, and
2. To identify possible niches a small business can occupy profitably. Feasibility studies are particularly useful when entrepreneurs have generated multiple ideas for business concepts and must winnow their options down to the “best choice.”
Discussion: What is the potential value of a feasibility study? What are the potential “costs” of conducting a feasibility study?
Facilitate a conversation about the value of the feasibility study Emphasize that not all good ideas are viable business opportunities. The feasibility study requires time and effort and it may save the entrepreneur a tremendous amount of both.
Five Forces Model
Porter’s Five Forces model evaluates five key forces that determine the industry setting in which companies compete. The Five Forces model assesses industry attractiveness by analyzing these five considerations:
1. The level of rivalry among the companies competing within the industry,
2. The bargaining power of suppliers,
3. The bargaining power of buyers,
4. The threat of new entrants, and
5. The threat of substitute products or services
Five Forces Model - continued
The Five Forces illustration shows how the four forces of entrants, suppliers, buyers and substitute products influence the rivalry among the existing firms within the industry. Let’s look at the influence each of these forces has on the competitive landscape within an industry.
Rivalry Among Companies
Rivalry among companies competing in the industry is the strongest of the five forces. In most industries, this assesses the rivalry that exists among the businesses competing in a particular market. This force can create markets that are dynamic and highly competitive. An industry is generally more attractive and holds greater promise for profitability when these conditions exist:
The number of competitors is large, or, at the other extreme, fewer than five.
Competitors are not similar in size or capability.
The industry is growing at a fast pace.
The opportunity to sell a differentiated product or service is present.
Bargaining Power of Suppliers
The greater the influences of suppliers of key raw materials or components have, the less attractive is the industry. An industry is generally more attractive when:
Many suppliers sell a commodity product to the companies in it.
Substitute products are available for the items suppliers provide.
Companies find it easy to switch suppliers or to substitute products
When the items suppliers provide the industry account for a relatively small portion of the cost of the industry’s finished products.
Bargaining Power of Buyers
Buyers have the potential to exert significant power over businesses. When the number of customers is mall and the cost of switching to competitors product is low, buyers have a high level of influence. An industry is generally more attractive when these conditions exist:
Industry customers “switching costs” are high
The number of buyers is large
Customers demand differentiated products
Customer find it difficult to gain access to information about buyers
The products companies sell account for a small portion of the cost of their customers’ finished goods.
Threat of New Entrants
The larger the pool of potential new entrants to an industry, the greater is the threat to existing companies in it. This is particularly true in industries where the barriers to entry, such as capital requirements, specialized knowledge, access to distribution channels, and others are low. An industry is generally more attractive to new entrants when these conditions exist:
Absence of economies of scale
Capital requirement to enter are low
Cost advantages are not related to company size
Buyers are not brand-loyal
Governments do not restrict new companies from entering the industry
Threat of Substitutes
Substitute products or services can turn an entire industry on its head. An industry is generally more attractive when these conditions exist:
Quality substitutes are not readily available
Prices of substitute products are not significantly lower that those of the industry’s products
Buyer’s switching costs are high
Five Forces Matrix
After surveying the power these five forces exert on an industry, entrepreneurs can evaluate the potential for their companies to generate reasonable sales and profits in a particular industry to answer the question, “Is this industry a good one for my business?”
Note that the lower the score for an industry, the more attractive it is.
Refer to Table 8.1: Five Forces Matrix on page 240 in the text.
Discussion: Select an example industry, such as the soft drink beverage industry, and work through Porter’s Five Forces Model in class. How might these five factors assess the attractiveness of the industry?
For example:
The high level of rivalry
The two major players, Coke and Pepsi, have a contentious relationship in an industry where soft drink sales are declining.
The low power of suppliers
Product supplies are readily available through easily accessible ingredients with low switching costs.
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
The high power of the buyers
The primary buyers are the grocery and retail stores that seek to meet the needs of their customers.
The moderate ease of entry
Regional bottlers often have excess capacity to produce new products on a contract basis. However, buyer loyalty is high.
The high power of substitute products
Virtually any other beverage, including bottled water and juices, is a substitute product with low switching costs.
Jones Soda (www.jonessoda.com) is an interesting example of a successful entrance and survival in this industry.
Product or Service Feasibility: Is There a Market?
A product or service feasibility analysis determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce the product or provide the service. This portion of the feasibility analysis addresses these two important questions:
1. Are customers willing to purchase our goods and services?
2. Can we provide the product or service to customers at a profit?
Product or Service Feasibility Analysis
Collecting that feedback to assess the feasibility of a new product or service might involve using engaging in primary research. This may include customer surveys and focus groups, gathering secondary customer research, building prototypes, and conducting inhome trials can help answer these questions. Information gained through primary or secondary research may also be valuable.
Financial Feasibility Analysis: Is There Enough Margin?
The financial feasibility of a venture is the final component of the feasibility analysis. This involves these three elements:
1. Capital requirements – What are financial resources need to get everything in place? This may include the costs associated with acquiring office or manufacturing space, equipment and people.
2. Estimated earnings – What are the projected earnings of the venture? A threeyear earnings forecast will be a part of this step. Are those earnings acceptable?
3. Time out of cash – Can the business survive before it breaks even?
4. Return on investment – Based on these anticipated expenses and earnings, what is the return on the investment? Is that return attractive? Does it merit the risk?
If the analysis demonstrates that the idea has potential as a profitable business, the entrepreneur should pursue it, using the information gathered during the feasibility analysis as the foundation for building a sound business plan. If not, the entrepreneur should dismiss the business concept.
Entrepreneur Feasibility: Is This Idea Right for Me?
Starting a new business requires the entrepreneur to have certain knowledge, experience, and skills. This is called entrepreneurial readiness. The individual must determine how much time the venture will require and whether or not he or she truly possesses the background to make it successful.
Discussion: Business Feasibility Plan Pro is software designed to walk through a feasibility study and it is available with this text. (If this software was not included with the text, contact your Pearson Prentice Hall representative for more information.) This software addresses the overall feasibility of your product or service, conducts an industry assessment, reviews management skills and steps through a preliminary financial analysis.
Students can use the software either individually or in groups. It may also serve as an effective class demonstration of the process of creating a feasibility study.
DEVELOPING AND TESTING A BUSINESS MODEL
In their groundbreaking study of how successful entrepreneurs develop business models, Osterwalder and Pigneur found that most entrepreneurs use a visual process, such as whiteboarding, when developing their business models.9 They do not start writing text; rather, they create a visual map of the key components required to make their businesses successful. A business model adds more detail to the feasibility analysis by graphically depicting the “moving parts” of the business and ensuring that they are all working together. In their study, Osterwalder and Pigneur found a pattern in the way that entrepreneurs used a visual representation of their business models to answer these questions. They used these findings to develop a business model canvas that is comprised of nine segments that help guide entrepreneurs through the process of developing a business model (depicted in Figure 8.5):
Value Proposition – what are the products/services the business offers to meet customers’ needs?
Customer Segments – who is the target market?
Customer Relationships – how do customers want to interact with the business?
Channels – what are the communication and distribution channels?
Key Activities – what needs to be done?
Key Resources – what are the human, capital, and intellectual resources needed?
Key Partners – what other stakeholders are involved in the business?
Revenue Streams – how will revenue be generated?
Cost Structure – what are the fixed and variable costs?
Entrepreneurship in Action: The Evolution of CoolPeopleCare’s Business Model
Questions and Answers pages 250
1. Why did the business model of CoolPeopleCare change over time. Explain why each of the changes in the business model was successful. Students should be able to identify the need for additional revenue streams and cite specific examples from the case.
2. Develop a business model canvas for the current operations of CoolPeopleCare. Though student responses will vary, they should be able to present information for all nine of the components in the business model canvas.
3. What specific recommendations would you make to change the business model of CoolPeopleCare going forward? What is your rationale for each of these recommendations?
Student responses will vary. Have them act as if they were a consultant to this company.
THE BENEFITS OF CREATING A BUSINESS PLAN
A Business Plan Is …
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. The plan serves as an entrepreneur’s “road map” on the journey toward building a successful business.
The business plan describes the direction the company is taking. The business plan states:
What its goals are
Where it wants to be.
How it’s going to get there.
The business plan:
Is a systematic evaluation of the venture’s chances for success
A way to determine risk
A “game plan” for managing a business
A tool for comparing actual performance to the targeted results
A tool for attracting capital
The business plan is the entrepreneur’s best insurance against launching a business destined to fail or mismanaging a potentially successful company.
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
A Business Plan: Two Essential Functions
The business plan serves two essential functions.
1. The business plan guides the company’s operations by charting its future course and devising a strategy for following it
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
It gives managers and employees a sense of direction
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.
In addition, 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.
Finally, creating a plan forces entrepreneurs to subject their ideas to the test of reality: Can this business actually produce a profit?
1. The second function of the business plan is to attract lenders and investors.
1. Lenders and investors want to see solid and incisive business plans that demonstrate an entrepreneur’s creditworthiness and his ability to build and manage a profitable company.
2. Applying for loans or attempting to attract investors without a solid business plan rarely attracts needed capital.
3. The quality of the firm’s business plan weighs heavily in the decision to lend or invest funds.
4. The business plan also creates the first impression to potential lenders and investors of the company and its managers.
THE THREE TESTS OF AN EFFECTIVE BUSINESS PLAN
Your Plan Must Pass Three Tests
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. To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors:
The Reality Test
The external component of the reality test revolves around proving that a market for the product or service really does exist. It focuses on industry attractiveness, market niches, potential customers, market size, degree of competition, and
similar factors. The internal component of the reality test focuses on the product or service itself. The reality text poses these questions:
- Can the company really build it for the cost estimates in the business plan?
- Is it truly different from what competitors are already selling?
- Does it offer customers something of value?
The Competitive Test
The external part of the competitive test evaluates the company’s relative position to its key competitors. The competitive test asks these questions:
- How do the company’s strengths and weaknesses match up with those of the competition?
- How are existing competitors likely to react when the new business enters the market?
- Do these reactions threaten the new company’s success and survival?
- The internal competitive test focuses on management’s ability to create a company that will gain an edge over existing rivals.
- What other resources does the company have that can give it a competitive edge in the market?
The Value Test
A business plan must prove to them that it offers a high probability of repayment or an attractive rate of return. A plan must convince lenders and investors that they will earn an attractive return on their money.
A Business Plan
The business plan is a reflection of its creator, is further tests the business idea, and its real value come from the process of creating the plan. As a reflection of its creator, a business plan:
Documents that an entrepreneur has thought seriously about the venture and what will make it succeed.
Demonstrates that an entrepreneur has taken the time conduct the necessary research and to commit the idea to paper.
Forces an entrepreneur to consider both the positive and the negative aspects of the business
In most cases, potential lenders and investors read a business plan before they ever meet with the entrepreneur behind it. 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. They know that an entrepreneur who lacks the discipline to develop a good business plan likely lacks the discipline to run a business.
An entrepreneur should not allow others to prepare a business plan for him or her because:
Outsiders cannot understand the business nor envision the proposed company as well as he can.
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.
The entrepreneur will make the presentation to potential lenders and investors, he must understand every detail of the business plan.
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. Investors also want to see proof that a business will become profitable and produce a reasonable return on their investment.
One 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 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!
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.
A business plan is much less expensive to make mistakes on paper than in reality.
A business plan reveals important problems to overcome before launching a company.
The real value in preparing a plan is not as 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 the plan requires entrepreneurs to subject their ideas to an objective, critical evaluation.
What entrepreneurs learn about their industries, target markets, financial requirements, competition, and other factors is essential to making their ventures successful.
Building a business plan reduces the risk and uncertainty of launching a company by teaching an entrepreneur to do it the right way!
Discussion: Illustrate through examples how a business plan can save an entrepreneur time and money as it reduces the risk and uncertainly that is a part of the entrepreneurial experience.
For example, one entrepreneur stated, “I saved $107,000 by doing my business plan. After working through the plan, I realized that the business was not a fit before I stared the business. I almost wrote that check!”
Why Take the Time to Build a Business Plan?
A business plan can increases chances of success and provide a road map for direction.
A plan is a reflection of its creator
Sometimes the primary benefit of preparing a plan is the realization that a business idea just won’t work!
The real value in preparing a plan is not as much in the plan itself as it is in the process of creating it
The result is that the business plan may provide valuable insight to a journey that is going to be unfamiliar and uncertain.
Writing a Business Plan
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. The business plan is typically 25-50 page and this varies with the nature and complexity of the business and the purpose of the plan Every plan is as unique as the business itself and tells a story about the vision for the business
In the Entrepreneurial Spotlight — The Battle of the Plans
Questions and Answers page 253
1. What benefits do entrepreneurs who compete in business plan competitions such as the one at Rice University gain?
Entrepreneurs gain valuable experience and exposure through these competitions. This type of competitive experience requires them to defend their plan and the ability to meet and network with judges and investors can prove invaluable to the future of viable business opportunities.
2. Work with a term of your classmates to brainstorm ideas for establishing a business plan competition on your campus. How would you locate judges? What criteria would you use to judge the plans? What prizes would you offer winners?
Expect students to be creative in devising a business plan competition and identify how they would locate judges and establish criteria for judging the business plans. Awards and prizes should be included in this discussion.
3. Using the ideas you generated in question 2, create a two-page proposal for establishing a business plan competition at your school.
The two-page proposal should clearly outline the process to launch a business plan competition and include people, location and time frames for that experience.
THE ELEMENTS OF A BUSINESS PLAN
Key Elements of a Business Plan
Every business plan is unique and must be tailor-made to tell the story of the business.
The elements of a business plan may be standard, but how an entrepreneur tells the story should be unique and reflect her personal excitement about the new venture.
If this is a first attempt at writing a business plan, the entrepreneur should seek the advice of individuals with experience in this process. This list of resources may include consultants with Small Business Development Centers, accounts, business professors, business planning professionals, and attorneys.
There are many resources available as a guide to create a business plan. The seemingly overwhelming task is easily broken down into workable parts that any entrepreneur or student can undertake. Most business plans begin by including these keyelements:
Title Page and Table of Contents
The bound business plan should have a title page and a table of contents. Each section of the plan has a purpose to accomplish a specific objective.
The Executive Summary
This section summarizes the presentation to each potential financial institution or investors. It should be concise a maximum of two pages summarizing the relevant points of the proposed deal. The executive summary is not an introduction, it is a synopsis of the entire plan, capturing its essence in a capsulized form. An effective executive summary enables the readers to understand the entire business concept and what differentiates the company from the competition.
The executive summary should:
- Explain the basic business model,
- Describe the problem the business will solve for customers,
- 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), and
- Present the company’s competitive advantage through key points.
Mission & Vision Statement
A mission statement expresses an entrepreneur’s vision for what the company is,
what it is to become, and what it stands for. It is the broadest expression of a company’s purpose. The mission statement defines the direction in which it will move and serves as the thesis statement for the entire business plan.
Company History
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. It should describe when and why the company was formed, how it has evolved over time, and what the owner envisions for the future. The company history should highlight the successful accomplishment of past objectives and should convey the firm’s image in the marketplace.
In the Entrepreneurial Spotlight – Business Plan: Don’t Launch Without It
Questions and Answers pages 256
3. Some entrepreneurs claim that creating a business plan is not necessary for launching a successful business venture. Do you agree? Explain. Students may offer a variety of responses. Creating a business plan can prove to be a tremendous resource. The process involved in creating a business plan is where the value lies. Having to think through the detail and put them on paper can be a tremendous benefit to create a more efficient and thorough process to launch the business. Why wouldn’t you invest the time to create a useful business plan?
4. What benefits do entrepreneurs who create business plans before launching their companies reap?
A business plan serves two essential functions that benefit the entrepreneur. 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. An entrepreneur will benefit from developing a business plan through the insight the planning process offers and through the “story” the plan can tell about the business to others, particularly investors. The value in preparing a business plan is in the process the entrepreneur goes through to create the plan. Although the finished document 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 or her company, its target market, its financial requirements, and other factors can be essential to making the venture a success
3. Suppose a friend who has never taken a course in entrepreneurship tells you about a business that he or she is planning to launch. When you ask about a business plan, the response is, “Business plan” I don’t have time to write a business plan! I know this business will succeed.” Write a one-page response to your friend’s comment.
The one-page response should highlighting the primary benefits a business plan including:
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
- Creating a “road map” for the direction of the business
- Describing the mission, vision and purpose for the business
- Establishing the key success factors for the business.
- Refining the business model and developing the strategic focus
- Describing the products and services the business will offer
- Determining the financial requirements for start-up and beyond
- Outlining marketing and promotional efforts
- Having a “communication” piece for future partners, investors and employees to capture and share the essence of the business.
Description of Firm’s Product/Service
This section should describe the company’s overall product line, giving an overview of how customers use its goods or services. Drawings, diagrams, and illustrations may be required if the product is highly technical. It is best to write product and service descriptions so that laypeople can understand them. A statement of a product’s position in the product life cycle might also be helpful. It should include a summary of any patents, trademarks, or copyrights protecting the product or service from infringement by competitors.
Manufacturers should describe their production process, strategic raw materials required, sources of supply they will use, and their costs. Explain the company’s environmental impact and degree of sustainability. If necessary, explain how the entrepreneur plans to mitigate any negative consequences the manufacturing process may produce.
The description of the products and services 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.
- What competitive advantage does the venture’s product or service offer?
- Avoid dwelling on the features of their products or services.
Business and Industry Profile
This section should provide with an overview of the industry or market segment in which the new venture will operate It should include information regarding:
- 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.
- 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.
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
The business and industry section also should describe significant industry trends and an overall outlook for its future. The U.S. Industrial Outlook Handbook is an excellent reference that profiles a variety of industries and offers projections for future trends. Another useful resource of industry and economic information is the Summary of Commentary on Current Economic Conditions, known as the Beige Book
The industry analysis should also address the profitability of the businesses in the targeted market segment It should spell out what the business plans to accomplish, how, when, and who will do it
Goals and Objectives
- Goals are broad, long-range statements of what a company plans to do in the distant future that guide its overall direction. Goals answer the question: “Why am I in business?”
- Objectives are short-term, specific performance targets that are attainable, measurable, and controllable. Every objective should include a technique for measuring progress toward its accomplishment. An objective must have a timeframe for achievement.
Both goals and objectives should relate to the company’s basic mission.
- They 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.
- They should then identify the current applications of the product or service in the market and include projections for future applications.
Business Strategy
This section presents the owner’s view of the strategy needed to meet and exceed the competition. It addresses the question of how to “get there.” An entrepreneur must explain how he or she plans to gain a competitive edge in the market and what sets his business apart from the competition. The entrepreneur should comment to how he or she plans to achieve business goals and objectives in the face of competition and government regulation and should identify the image the business will project. An important theme is what makes the company unique in the eyes of its customers. It should outline the methods the company can use to meet the key success factors.
Competitor Analysis
An entrepreneur should describe the new venture’s competition and how his or her chosen business strategy will allow him or her to effectively compete with key competitors. Failing to assess competitors realistically makes entrepreneurs appear to be poorly prepared, naive, or dishonest, especially to potential lenders and investors. The plan should include an analysis of each significant competitor and how well they are meeting the important criteria that target customers are currently using to make their decisions among the various companies.
Marketing Strategy
One of the most important tasks a business plan must fulfill is proving that a viable market exists for a company’s goods or services.
Key Elements of a Business Plan Marketing Strategy
The marketing strategy section of a business plan identifies and describes the company’s target customers and their characteristics and habits. Defining the target audience and its potential is one of the most important parts of building a business plan.
Key Elements of a Business Plan Marketing Strategy
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. One of the most blatant marketing errors an entrepreneur can commit is failing to define his target market and trying to make his business “everything to everybody.” Small companies usually are much more successful focusing on a specific market niche where they can excel at meeting customers’ special needs or wants. Every other aspect of marketing depends on their having a clear picture of their customers and their unique needs and wants.
Proving that a profitable market exists involves two steps:
1. Showing customer interest: The plan must be able to prove that their target customers need or want their goods or services and are willing to pay for them. It should offer the prototype to several potential customers in order to get written testimonials and evaluations to show to investors. Another alternative is that the owner could sell the product to several customers at a discount.
Document market claims with research. The plan should document market claims and avoid vague generalizations such as, “This market is so huge that if we get just one percent of it, we will break even in eight months.” These statements usually reflect nothing more than an entrepreneur’s unbridled optimism, and in most cases, are quite unrealistic! Entrepreneurs must support claims of market size and growth rates with facts. Results of market surveys, customer questionnaires, and demographic studies lend credibility of an entrepreneur’s frequently optimistic sales projections. This may be an opportunity for business prototyping.
Target market
An effective market analysis should identify the following:
- A clear description of the target market:
- Who are the company’s target customers?
- How many of them are in the company’s trading area?
- What are their characteristics (age, gender, educational level, income, and others)?
- What do they buy?
- Why do they buy?
- When do they buy?
- What expectations do they have about the product or service?
- Will the business focus on a niche?
- How does the company seek to position itself in the market(s) it will pursue?
- Knowing my customers needs, wants, and habits, what should be the basis for differentiating my business in their minds?
Advertising and promotion
The next step is to identify which media are most effective in reaching the target market. This will involve addressing these questions:
- How will the media selections be used?
- How much will the promotional campaign cost?
- How will the promotional campaign position your company’s products or services?
- How can the company benefit from publicity?
- How large is the company’s promotional budget?
Market size and trends
Assessing the size of the market and relevant trends provide scope and perspective for revenue potential. Questions to ask in this area include:
- How large is the potential market?
- Is it growing or shrinking? Why?
- Are the customer’s needs changing?
- Are sales seasonal?
- Is demand tied to another product or service?
Location
For many businesses, choosing the right location is a key success factor. These questions may help in that process.
- Which specific sites put the company in the path of its target customers?
- Do zoning regulations restrict the use of the site?
- For manufacturers, the location issue often centers on finding a site near its key raw materials or near its major customers.
- Using demographic reports and market research to screen potential sites takes the guesswork out of choosing the “right” location for a business.
Pricing
Pricing is an important decision and will have a significant impact on total revenue
and profits. These questions may help in determining pricing of products and services.
- What does the product or service cost to produce or deliver?
- What is the company’s overall pricing strategy?
- What image is the company trying to create in the market?
- Will the planned price support the company’s strategy and desired image?
- Can it produce a profit?
- How does the planned price compare to those of similar products or services?
- Are customers willing to pay it?
- What price tiers exist in the market?
- How sensitive are customers to price changes?
- Will the business sell to customers on credit?
- Will it accept credit cards?
- Will the company offer discounts? If so, what kinds and how much?
Distribution
Distribution determines how customers will have access to the goods and services they purchase. Questions that help with this decision include:
- How will the product or service be distributed?
- Will distribution be extensive, selective, or exclusive?
- What is the average sale?
- How large will the sales staff be?
- How will the company compensate its sales force?
- What are the incentives for salespeople?
- How many sales calls does it take to close a sale?
- What can the company do to make it as easy as possible for customers to buy?
- An entrepreneur should summarize the firm’s overall pricing strategies and its warranties and guarantees for its products and services
Description of the Management Team
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. A plan should include the resumes of business officers, key directors, and any person with at least 20 percent ownership in the company. This is the section of the plan where entrepreneurs have the chance to sell the qualifications and the experience of their management team.
Ideally, lenders and investors look for managers with at least two years’ of operating experience in the industry they are targeting. A resume should summarize each individual’s education, work history (emphasizing managerial responsibilities and duties), and relevant business experience. This portion of the plan should show that the company
has the right people organized in the right fashion for success. One experienced private investor advises entrepreneurs to remember the following: Ideas and products don’t succeed; people do. The marketing plan also documents the strengths of key employees and what will be in place to retain them. In addition, a board of directors or advisers consisting of industry experts lends credibility and can enhance the value of the management team.
Plan of Operation
An entrepreneur should construct an organizational chart identifying the business’s key positions and the people occupying them. The entrepreneur should describe briefly the steps taken to encourage important officers to remain with the company. Employment contracts, shares of ownership, and perks are commonly used to keep and motivate key employees. 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.
Pro Forma (Projected) Financial Statement
One of the most common reasons for creating and reading a business plan relates for financing. In those cases, this section is critical. 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
Projected financial statements
A business owner should supply copies of the firm’s major financial statements from the past 3 years. Ideally, these statements should be audited ore reviewed by a certified public accountant. 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.
Income statement
The income statement shows the company’s revenues, expenses, and the resulting profit. Investors and lenders expect to see positive trends in earnings. They look to see if the gross-, operating-, and net-income margins on the forecasted income statements are consistent with industry averages.
Balance sheet statement
The balance sheet provides a projected view of the company’s assets (everything it owns), its liabilities (everything it owes), and its net worth (the difference in assets and liabilities).
Cash flow statement
The cash flow statement will project whether or not the company is viable over time. Staying in business requires a company to generate positive cash flow. Entrepreneurs must make sure that they have accumulated enough capital to carry the company until it generates enough cash to support itself.
Capital expenditures
A detailed account of anticipated capital expenditures should reinforce and add credibility to the financial information.
Financial Forecasts
The financial forecast should:
Offer three forecasts
There should be forecasts under pessimistic, most likely, and optimistic conditions to reflect the uncertainty of the future.
Be Realistic!
Offer the most objective assessment of the situation and provide the most realistic projection of future performance. 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.
Include assumptions on which forecasts are based
A statement of the assumptions on which these financial projections are based adds credibility and perspective to the financials.
Including a break-even analysis and a ratio analysis on the projected figures. A common mistake among entrepreneurs creating plans for business startups is devoting too much space to financial forecasts that are uncertain at best and spending too little time on the people, the marketing research, and the strategies that will generate the financial results.
Loan/investment Proposal
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. When describing the purpose of the loan, entrepreneurs must specify the planned use of the funds. Entrepreneurs should state the precise amount of money they are requesting. This information should include relevant backup data, such as vendor estimates of costs or past production levels Inflating the amount of a loan request in anticipation of the financial officer trying to “talk them down” is a mistake.
Another important element of the loan or investment proposal is the repayment schedule and exit strategy. 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. It is necessary to produce tangible evidence showing the ability to repay loans or to generate attractive returns. It is beneficial to include an evaluation of the risks of a new venture. 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.
An entrepreneur should have a realistic timetable for implementing the plan. There is a difference between a working business plan one the entrepreneur is using to guide the business and the presentation business plan the plan written to attract capital.
Visualizing a Venture’s Risk and Rewards
There is a difference between a working business plan the one the entrepreneur is using to guide her business and the presentation business plan the one he or she is using to attract capital. Business plans are forecasts about the future that an entrepreneur plans to create, something that one expert compares to “taking a picture of the unknown,” which is a challenging feat! As uncertain and difficult to predict as the future may be, an entrepreneur who launches a business without a plan arguing that “trying to forecast the future is pointless” is misguided.
WHAT LENDERS AND INVESTORS LOOK FOR IN A BUSINESS PLAN
The “5 Cs” of Credit
Bankers and other lenders include the “five Cs” of credit as a part of their evaluation of the credit-worthiness of loan applications. The higher a business scores on the evaluation, the greater its chance will be of receiving a loan based on these five criteria:
The five Cs of credit include:
1. Capital
A small business must have a stable capital base before any lender will grant a loan. The most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt.
2. Capacity
A synonym for capacity is cash flow. 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. Lenders expect a business to pass the test of liquidity, especially for short-term loans
3. Collateral
Collateral includes any assets an entrepreneur pledges to a lender as security for repayment of the loan. Banks make very few unsecured loans (those not backed by collateral) to business start-ups. 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. Character
An evaluation of character frequently is based on intangible factors such as honesty, competence, polish, determination, intelligence, and ability. 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
The conditions surrounding a loan request also affect the owner’s chance of receiving funds. Banks consider factors relating to the business operation such as potential growth in the market, competition, location, form of ownership, and loan purpose. 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.
Bankers score the small business in terms of the five Cs the greater the score, the higher probabilitythat the small business will receive the loan.
THE PITCH:MAKING THE BUSINESS PLAN PRESENTATION
Presenting the Plan
When entrepreneurs try to secure funding from lenders or investors, the written business plan usually precedes the opportunity to meet “face-to-face.” Usually, the time for presenting a business opportunity is short, often no more than just a few minutes, usually less than 20 minutes, 30 minutes at the maximum.
A business plan presentation should cover five basic areas:
● Your company and its products and services. The presentation should answer in simple terms the first question that every potential lender and investor has: What does your company do?
● The problem to be solved, preferably told in a personal way through a compelling story. Is it eliminating the time, expense, and anxiety of waiting for the results of medical tests with a device that instantly reads blood samples or making hearing aids more effective at filtering out background noise while enhancing the dominant sound for the user?
● A description (again in simple terms) of your company’s solution to the problem. Ideally, the solution your company has developed is unique and serves as the foundation of your company’s competitive edge in the marketplace.
● Your company’s business model. This part of the presentation explains how your company makes money and includes figures such as revenue per sale, expected gross profit and net profit margins, and other relevant statistics. This is your opportunity to show lenders and investors how your company will produce an attractive payback or payoff.
● Your company’s competitive edge. Your presentation should identify clearly the factors that set your company apart from the competition. Entrepreneurs who are successful in raising the capital their companies need to grow have solid business plans and make convincing presentations of them.
Some helpful tips for making a business plan presentation to potential lenders and investors include:
Prepare.
Practice your delivery and then practice some more.
Demonstrate enthusiasm about the business, but don’t be overemotional.
Focus on communicating the dynamic opportunity your idea offers and how you plan to capitalize on it.
“Hook” investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them.
Presenting the Plan – continued
Use visual aids.
Use 10/20/30 rule.
Explain how your idea is unique.
Offer proof.
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.
Keep the presentation “crisp” just like your business plan and focus in on 2 or 3 major points.
Avoid the use of technological jargon and terms that will likely be above most of the audience.
Presenting the Plan – continued
Answer every lender or investor’s question of: “What’s in it for me?”
Close by reinforcing the nature of the opportunity.
Be prepared for questions.
Anticipate questions.
Be sensitive to issues facing investors.
Follow up with every investor.
Conclusion
A good plan serves as a strategic compass that keeps a business on course as it travels into an uncertain future. A solid plan is essential to raising the capital needed to start a business; lenders and investors demand it. Building a plan is just one step along the path to launching a business.
Chapter 8: Conducting a Feasibility Analysis and Crafting a Winning Business Plan
Part Four: Discussion Questions
1. What does a feasibility analysis encompass and what value might it provide? (LO 1: Present the steps involved in conducting a feasibility analysis)
A feasibility analysis encompasses the process of determining if the idea is a viable foundation for creating a successful business. If the idea passes, the entrepreneur’s next step is to build a solid business plan for capitalizing on the idea. If the idea fails, the entrepreneur drops it and moves on to the next opportunity.
A feasibility analysis consists of three interrelated components:
1. An industry and market feasibility analysis,
2. A product or service feasibility analysis, and
3. A financial feasibility analysis
A feasibility analysis provides value through the efficiency it offers. It increases the chances for success before the entrepreneur invests resources. Conducting a feasibility study reduces the likelihood that entrepreneurs will pursue fruitless business ventures The feasibility analysis asks the question: “Should we proceed with this business idea?”
2. Explain the nine components of the business model canvas. (LO 2: Identify the components of the business model canvas and explain how to use them to develop a viable business model)
Students should be able to explain the following: value proposition, key partners, key activities, key resources, cost structure, customer segments, customer relationships, channels, and revenue streams.
3. Why should an entrepreneur develop a business plan? (LO 3: Explain the benefits of an effective business plan)
A business plan serves two essential functions that benefit the entrepreneur.
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. An entrepreneur will benefit from developing a business plan through the insight the planning process offers and through the “story” the plan can tell about the business to others, particularly investors.
4. Why do entrepreneurs who are not seeking external financing need to prepare business plans? (LO 3: Explain the benefits of an effective business plan)
The real value in preparing a business plan is in the process the entrepreneur goes through to create the plan. Although the finished document 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 or her company, its target market, its financial requirements, and other factors can be essential to making the venture a success.
5. Describe the major components of a business plan. (LO 4: 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 include these major components:
Executive summary
Mission statement
Company history (For an existing business)
Business and industry profile
Description of the company’s business strategy
Product and service description
Marketing strategy
Competitor analysis
Owners’ and officers’ resumes
Operation plan
Financial data
Loan or investment proposal.
6. 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?
(LO 5: Explain the three tests every business plan must pass)
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
The 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.
Competitive Test
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
Value Test
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.
7. What are the 5 C’s of credit? How do lenders and investors use them when evaluating a request for financing? (LO 6: Explain the five Cs of credit and why they are important to potential lenders and investors)
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.
1. 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.
2. Capacity
This addresses 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
3. Collateral
Any assets the owner pledges to the bank as security for repayment of the loan is considered collateral to provide a form of security for the loan
4. Character
Before approving a loan to a small business, the banker must be satisfied with the owner’s character.
5. Conditions
The conditions include 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.
8. How would you prepare to make a formal presentation of your business plan to a venture capital forum? (LO 7: Understand the keys to making an effective business plan presentation; AACSB: Reflective thinking, application of knowledge)
A formal presentation often is no more than just a few minutes, usually 15 to 20 minutes, and 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.