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Lecture 8 : Lecture 8 : Business Business PlanningPlanning

Our Definition of a Our Definition of a Business PlanBusiness Plan

• The business plan is not abstract, The business plan is not abstract, uninformative, theoretical or uninformative, theoretical or mysteriousmysterious

• It’s a document that convincingly It’s a document that convincingly demonstrates that your business can demonstrates that your business can sell enough of its product or service sell enough of its product or service to make a satisfactory profit and be to make a satisfactory profit and be attractive to potential backersattractive to potential backers

• it is a selling documentit is a selling document

Goals of Business PlanGoals of Business Plan

• 1) consider important aspects and decide 1) consider important aspects and decide whether to “go or no go”whether to “go or no go”

• 2) initial planning document for a new 2) initial planning document for a new businessbusiness

• 3) serves as a tool to communicate the idea 3) serves as a tool to communicate the idea of the new venture to potential investors, of the new venture to potential investors, bankers, key employeesbankers, key employees

• 4) serves as a record to monitor and 4) serves as a record to monitor and compare resultscompare results

Problem with Problem with definition/Goaldefinition/Goal

• These are only spin-off issues These are only spin-off issues • Real goal is Real goal is to convince!to convince!• Who are you convincing? Yourself!Who are you convincing? Yourself!• Once you convince yourself, Once you convince yourself,

everything else is “downhill”everything else is “downhill”

Who Needs to Who Needs to Write/See the Business Write/See the Business

Plan?Plan?• Most banks loaning money, especially if Most banks loaning money, especially if

the business does not have a track recordthe business does not have a track record• Farmers, to insure they have considered Farmers, to insure they have considered

everythingeverything• Investors or partners who have some Investors or partners who have some

doubts about your abilities/integritydoubts about your abilities/integrity• Highly required or important potential Highly required or important potential

employeesemployees• Anyone wondering if they should take the Anyone wondering if they should take the

riskrisk

How can a business How can a business plan help a company?plan help a company?

1)1) obtain bank financing (separates you from the obtain bank financing (separates you from the run-of-the-mill competition, you are serious run-of-the-mill competition, you are serious enough to do formal planning, those that plan enough to do formal planning, those that plan are better risks)are better risks)

2)2) seeking investment funding: this is the seeking investment funding: this is the document most venture capitalists first ask fordocument most venture capitalists first ask for

3)3) arranging strategic alliances: small/large arranging strategic alliances: small/large companiescompanies

4)4) obtaining large contracts: proof of recognition obtaining large contracts: proof of recognition to large companies checking out small onesto large companies checking out small ones

How can a business How can a business plan help a company?plan help a company?

5)5) attracting key employees: can help an attracting key employees: can help an executive come over to your sideexecutive come over to your side

6)6) completing mergers and acquisitions: completing mergers and acquisitions: for selling and buying companies, buyers for selling and buying companies, buyers seldom look at only one companyseldom look at only one company

7)7) motivating management team: causes motivating management team: causes everyone to be working toward the same everyone to be working toward the same goal, reduces customer confusion, lays goal, reduces customer confusion, lays out financial, marketing and production out financial, marketing and production goalsgoals

Next QuestionsNext Questions

• Which type of plan is best for you?Which type of plan is best for you?• What should the plan look like?What should the plan look like?• How should it be arranged?How should it be arranged?• What should be included in each What should be included in each

section?section?• How long should it be?How long should it be?

Three Fundamental Three Fundamental Types of PlansTypes of Plans

• First Type:First Type: The Summary PlanThe Summary Plan• contains only the most important contains only the most important

information about a business and its information about a business and its directondirecton

• 10-15 pages, concise, terse in style10-15 pages, concise, terse in style• business strategy stated in one sentencebusiness strategy stated in one sentence• works best when applying for a loan, if works best when applying for a loan, if

you are well-known, not seeking funding you are well-known, not seeking funding from other investors, need money from other investors, need money quicklyquickly

Three Fundamental Three Fundamental Types of PlansTypes of Plans

• Type 2:Type 2: the Full Business Planthe Full Business Plan• standard issue, 30-50 pages in lengthstandard issue, 30-50 pages in length• from 10-30 pages of support documentationfrom 10-30 pages of support documentation• I.e., resumes, letters of support, I.e., resumes, letters of support,

promotional materialspromotional materials• introduction detailed, explanatoryintroduction detailed, explanatory• works best when you want to explain key works best when you want to explain key

issues fully, looking for a lot of money, issues fully, looking for a lot of money, looking for a strategic partnerlooking for a strategic partner

Three Fundamental Three Fundamental Types of Business PlansTypes of Business Plans

• Type 3:Type 3: the Operational Business Planthe Operational Business Plan• internal planning document of an internal planning document of an

operational companyoperational company• usually much longer because it takes usually much longer because it takes

more time to describe ongoing businessmore time to describe ongoing business• more history, products, peoplemore history, products, people• heavy on the quantitative analysisheavy on the quantitative analysis• meant to inspire managers, best for fast-meant to inspire managers, best for fast-

growing company, gives order to growthgrowing company, gives order to growth• used as part of an annual reviewused as part of an annual review

Various Parts of the Various Parts of the Business PlanBusiness Plan

1)1) cover pagecover page2)2) executive summary - small version of BPexecutive summary - small version of BP3)3) company strategy - what’s your identity?company strategy - what’s your identity?4)4) marketing issues - who are the buyers?marketing issues - who are the buyers?5)5) product/services issues: What are you product/services issues: What are you

selling?selling?6)6) sales and promotion: How will you sell?sales and promotion: How will you sell?7)7) financial issuesfinancial issues

Part 1: Part 1: Cover PageCover Page

• Name of companyName of company• addressaddress• phone number, fax, e-mailphone number, fax, e-mail• chief executive’s namechief executive’s name• Hints:Hints: don’t make the banker look up don’t make the banker look up

your name and phone numberyour name and phone number• number the copy of the plannumber the copy of the plan• follow-up with non-disclosure agreementfollow-up with non-disclosure agreement

Part 2: Part 2: Executive Executive SummarySummary

• Stands alone as a business plan within a Stands alone as a business plan within a business planbusiness plan

• logical, clear, interesting and excitinglogical, clear, interesting and exciting• requires less than 4 minutes to readrequires less than 4 minutes to read• no more than 2 pages (so that’s what no more than 2 pages (so that’s what

they’re up to!)they’re up to!)• not an abstract, introduction, preface, not an abstract, introduction, preface,

random collection of highlightsrandom collection of highlights• it’s the BP in miniatureit’s the BP in miniature

The The Bad Bad Executive Executive SummarySummary

• Says little about company strategySays little about company strategy• Barely touches on marketing issuesBarely touches on marketing issues• Emphasizes company’s financial Emphasizes company’s financial

needsneeds• Internally directed vs. externallyInternally directed vs. externally• Little explanation of competition and Little explanation of competition and

where the company will go in where the company will go in marketplacemarketplace

The The BetterBetter Executive Executive SummarySummary

• Explains why the timing is right for Explains why the timing is right for the company to be formedthe company to be formed

• Establishes its strategyEstablishes its strategy• Explains how it will compete Explains how it will compete

effectively, concise, to the pointeffectively, concise, to the point• Emphasizes marketing aspectsEmphasizes marketing aspects• Positive in nature, says what a Positive in nature, says what a

prospective investor wants to hearprospective investor wants to hear• Synthesizes talents of team; Synthesizes talents of team;

written,re-writtenwritten,re-written

Homework Assignment Homework Assignment #5#5

For the aquaculture business you are For the aquaculture business you are interested in developing or expanding:interested in developing or expanding:

• Write a 1-2 page Executive SummaryWrite a 1-2 page Executive Summary• Identify which product(s) you would Identify which product(s) you would

generate.generate.• Due next week. Due next week.

Part 3: Part 3: Company Company StrategyStrategy

• Asks: What is your company’s Asks: What is your company’s identity?identity?

• Every company has an underlying Every company has an underlying philosophy and logic (examples):philosophy and logic (examples):• decentralization of decision-makingdecentralization of decision-making• interest in funding expansion of the interest in funding expansion of the

company via earnings as opposed to company via earnings as opposed to outside investmentoutside investment

Four Principle Strategy Four Principle Strategy IssuesIssues

1)1) overall company strategyoverall company strategy: overall approach : overall approach to producing and selling products and to producing and selling products and services, goals for maximizing success, what services, goals for maximizing success, what is your guiding principle?is your guiding principle?

2)2) mission statementmission statement: a statement that : a statement that encapsulates your company’s values and encapsulates your company’s values and overall purpose in lifeoverall purpose in life

3)3) technology/information assessmenttechnology/information assessment: ability : ability to use technology and manage informationto use technology and manage information

4)4) management teammanagement team: who determines and : who determines and implements strategy (must have credibility)implements strategy (must have credibility)

1) Overall Strategy: 1) Overall Strategy: past, present and past, present and

future issuesfuture issues

• Discuss your company’s history, when it Discuss your company’s history, when it was started, by whom, has strategy was started, by whom, has strategy changed from that of the past, if so, why?changed from that of the past, if so, why?

• Include fundamentals: sales, profits, Include fundamentals: sales, profits, number of employees, locationsnumber of employees, locations

• What is status of company today What is status of company today (snapshot)? (snapshot)?

• Strengths and Weaknesses:Strengths and Weaknesses: mention these, mention these, you will appear more honest, open-mindedyou will appear more honest, open-minded

Overall Strategy: Overall Strategy: future prospectsfuture prospects

• Also known as the Also known as the “objectives”“objectives” section section• easy to project good growth, harder to make it easy to project good growth, harder to make it

believablebelievable• if you had a history of growth, then it is more if you had a history of growth, then it is more

believablebelievable• can sometimes use external trends (e.g., growth can sometimes use external trends (e.g., growth

in another area) to justify new directionin another area) to justify new direction• start-up companies can more easily speak to start-up companies can more easily speak to

growth because they have bad experiences to growth because they have bad experiences to dispel optimismdispel optimism

• people starting the business can lend credibility people starting the business can lend credibility to the plan if they, themselves, are credibleto the plan if they, themselves, are credible

2) The Mission 2) The Mission StatementStatement

• Represents a more generalized and idealistic Represents a more generalized and idealistic vision of the company’s purpose in lifevision of the company’s purpose in life

• often, these visions are a little too loftyoften, these visions are a little too lofty• many times it is more than adequate just to many times it is more than adequate just to

improve people’s livesimprove people’s lives• mission statements also establish achievable mission statements also establish achievable

goals goals • often focus on three issues: product, often focus on three issues: product,

economic and social objectiveseconomic and social objectives

3) 3) Technology/Information Technology/Information

AssessmentAssessment

• Greater or higher technology allows Greater or higher technology allows small companies to compete on an even small companies to compete on an even playing field with larger onesplaying field with larger ones

• used to achieve competitive advantagesused to achieve competitive advantages• with proper technology, customers can with proper technology, customers can

be serviced more quickly and efficiently be serviced more quickly and efficiently than competitorsthan competitors

• technology must be integrated into the technology must be integrated into the company’s most important operationscompany’s most important operations

• examples?examples?

4) The Management 4) The Management TeamTeam

• This is the critical link in making the This is the critical link in making the strategy section believablestrategy section believable

• quality of the management team should quality of the management team should speak for itself because people are the speak for itself because people are the key to determining successkey to determining success

• two most common problems: one-man-two most common problems: one-man-band syndrome, everyone from same band syndrome, everyone from same backgroundbackground

• hard to expand if you have a dictatorhard to expand if you have a dictator• successful management teams require successful management teams require

diversity of training and expertisediversity of training and expertise

Management Team Management Team SuggestionsSuggestions

1)1) emphasize real-life business emphasize real-life business accomplishmentsaccomplishments

2)2) academic accomplishments only hold academic accomplishments only hold value for technology businessesvalue for technology businesses

3)3) identify evidence of special knowledge identify evidence of special knowledge and creativityand creativity

4)4) make the most of your human make the most of your human resources: describe all team members resources: describe all team members in positions of authorityin positions of authority

5)5) describe your board of directorsdescribe your board of directors

Part 4: Part 4: Marketing Marketing Issues (Who are the Issues (Who are the

Buyers?)Buyers?)

• Everyone engages in marketing, whether they Everyone engages in marketing, whether they believe it or notbelieve it or not

• obtaining clients through referrals and word of obtaining clients through referrals and word of mouth is still marketingmouth is still marketing

• marketing:marketing: identifying your customer identifying your customer prospects and determining how best to reach prospects and determining how best to reach them (this is a BP-style definition)them (this is a BP-style definition)

• now-a-days marketing is not selling or now-a-days marketing is not selling or promotingpromoting

• selling and promoting are the implementation selling and promoting are the implementation of the marketing planof the marketing plan

What are you Selling?What are you Selling?

• You might think this is an easy question to You might think this is an easy question to answer -- it isn’tanswer -- it isn’t

• the real question: What is the customer buying?the real question: What is the customer buying?• If you answered “shrimp” to the first question, If you answered “shrimp” to the first question,

you really might want to answer: “the best you really might want to answer: “the best possible selection of shrimp at the lowest possible selection of shrimp at the lowest possible price.”possible price.”

• What is the problem with this type of answer? What is the problem with this type of answer? Everyone else uses it.Everyone else uses it.

• In building a business, you want to emphasize In building a business, you want to emphasize benefits as part of marketingbenefits as part of marketing

Emphasize the Best Emphasize the Best BenefitsBenefits

• ““best benefits”best benefits” are those that make are those that make people feel better or fill their walletspeople feel better or fill their wallets

• benefit 1: benefit 1: convenienceconvenience• products and services that save people products and services that save people

time can often charge moretime can often charge more• benefit 2: benefit 2: added valueadded value• important, no matter how simpleimportant, no matter how simple• if product is boring, you must figure out if product is boring, you must figure out

ways to add valueways to add value• benefit 3: benefit 3: saving both time and moneysaving both time and money• example: purchasing over the internetexample: purchasing over the internet

Marketing: Marketing: getting the getting the answers you needanswers you need

• Much information for market research is Much information for market research is public domainpublic domain

• many marketing surveys begin using on-line many marketing surveys begin using on-line data basesdata bases

• doing it yourself is generally better than doing it yourself is generally better than hiring someone elsehiring someone else

• it’s cheaper and you’ll learn moreit’s cheaper and you’ll learn more• consumer tests, as opposed to marketing consumer tests, as opposed to marketing

surveys, are best done by someone elsesurveys, are best done by someone else

Assessing the Assessing the CompetitionCompetition

• No businesses are carried out in a No businesses are carried out in a vacuumvacuum

• if there is no apparent competition, do if there is no apparent competition, do not take that as a good signnot take that as a good sign

• maybe the market isn’t receptivemaybe the market isn’t receptive• maybe you need to look deepermaybe you need to look deeper• your competitor may not be another your competitor may not be another

business, but another way of doing itbusiness, but another way of doing it• list your competitors and their list your competitors and their

weaknesses + strengthsweaknesses + strengths• how will you stay ahead of competition?how will you stay ahead of competition?

Part 5: Part 5: Product/Service Product/Service Issues (What are you Issues (What are you

selling?)selling?)

• The value of a product determines a The value of a product determines a company’s successcompany’s success

• there are really only two issues that there are really only two issues that come to mind in selling a product:come to mind in selling a product:

• 1) the market should determine the 1) the market should determine the particulars of a productparticulars of a product

• 2) if the market exists, can you deliver 2) if the market exists, can you deliver in a timely and cost-effective manner?in a timely and cost-effective manner?

Part 6: Part 6: Sales and Sales and Promotion (How do you Promotion (How do you

Sell?)Sell?)• This is the key to everything else in your This is the key to everything else in your

businessbusiness• without it, you cannot sell your productwithout it, you cannot sell your product• most poorly-managed firms take the most poorly-managed firms take the

“sales” approach: they do what everyone “sales” approach: they do what everyone else does, know what is acceptableelse does, know what is acceptable

• that’s not enough in today’s worldthat’s not enough in today’s world• in this plan, you must show how sales will in this plan, you must show how sales will

be cost-effective and get people’s attentionbe cost-effective and get people’s attention

How a Project is Typically Put How a Project is Typically Put TogetherTogether

“Sweat Equity” BUSINESS PLAN “Seed Capital”

COMPANY FORMED

LAND PURCHASED

PLAN GOESTO BANK

CREDIT APPROVALCOMMITTEE

FUNDING APPROVAL

ACCOUNTS SET UPCASH INVESTORS FUNDS RELEASED

$$$$

Feasibility Study

Site Selection

Pre-feasibility

collateral

Wrap-up on Business Wrap-up on Business PlanningPlanning

• The last section is the “Financial” The last section is the “Financial” SectionSection

• Contains financial projectionsContains financial projections• Hardest part of the Plan to Hardest part of the Plan to

organize and finishorganize and finish• Subject of our next lectureSubject of our next lecture