B u s i n e s s P l a n s. P r o j e c t # 3. B u s i n e s s P l a n s. You will be required to hand in a business plan as your final project. This will be a lot of fun ! Personalize your plan (no cookie cutter approach please) Basic Requirement: How are you going to make money ?
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www.sbaonline.sba.gov U.S. Small Business Administration
www.paloaltosoftware.com Business Plan Software
Proceed or Stop Identify warning signals
Why Prepare a
Business Plan ?
Stay on track, anticipate problems, achieve goals
Improve concept & define goals
Improve your odds
the Business Plan ?
Why do some venture capitalists read
the resume section first ?
“Without the right people and the right team, none of the
other parts of the business plan really matter.”
Sahlman (HBR 97409)
Following about the personnel !
Sahlman (HBR 97409)
or is it ?
Can you answer the following basic questions ?
(1) Is the total market for the venture large,
growing, or both ?
(2) Is the industry now, or can it become,
structurally attractive for the venture ?
Entrepreneurs or investors look for rapidly growing
markets because it is often easier to obtain a share
of a growing market than to fight with entrenched
competitors for a small piece of a mature market.
Can your plan answer the following ?
Can your plan answer
the following ?
Opportunities exist in context
Economy, interest rates,
inflation, exchange rates
More than 100 new companies formed when the airline industry deregulated in the late 1970’s.
Recession in early 1990s mad it hard to get venture financing. However, as capital markets in the middle 1990’s heated up, these companies had a high rate of return.
After the Tylenol incident (tampering), the packaging industry flourished. Prior to that the packaging industry was declining.
Every business plan should contain certain pieces of evidence of CONTEXT
- Show heightened awareness of new ventures context
- Demonstrate that you understand that the venture may change and describe how changes can affect the business
- How will management deal with unfavorable changes in context?
“One of the greatest myths about entrepreneurs is that they are risk seekers -- All sane people avoid risk?
William Sahlman (HBS, 79409)
Taking a picture of the unknown -- a business plan is a snapshot of an event in the future.
Form coherent story
Unfold possibilities of action and reaction
“True entrepreneurs want to capture all the reward and give all the risk to others. Yet risk is unavoidable.”
Howard Stevenson (HBS)
Your business plan should confront risk head on
- in terms of people, opportunities and context
Try and understand scenarios:
- what happens if a key team leader leaves?
- what if competition responds more ferociously than expected?
- what happens if there is a revolution in Namibia, a source of key raw material?
Your business plan should address candidly how the investor will get back his / her money
Venture capitalists like a wide range of exit strategies
- sell company outright
- split up company and sell parts
“If you don’t know where you are going, any road will get you there.”
- What is the depth and duration of negative cash flow?
- ideal, cash flow early and often
- possibly generate this curve from a sensitivity spreadsheet
- Flat portion reveals a negligible chance of losing a small amount of money
- There is a significant chance of earning between 15% and 45%
- Small chance of a killer app > 20%
- Possible to predict with Monte Carlo
There are all kinds of help out there, use it!
Also, lots of books:
- “Complete Business Plan” by Adams (ISBN 1-55850-645-7)
- “How to Write a Business Plan” by McKeever (ISBN 0-87337-5440)
- “BusinessPlan.com” by Ross (ISBN 1-55571-455-2)
- “The Business Planning Guide” by Bangs (ISBN 1-547410-099-8)
- “Model Business Plans” by Richter (ISBN 0-7352-0024-6)
It is a good is idea to invest in a business plan book -- go the local bookstores and library and find one you like.
A. Program OverviewB. Management & StrategyC. ProductsD. Market & SalesE. CompetitionF. OperationsG. Risks & RewardsH. Financial Models
A.1. Primary Final Objective
A.2. Supportive Financial Projections
A.3. Historical Financial Data
A. Program OverviewIntroduction History Products Market Marketing and sales Competition Location Funding requirements Financial goals Return to investors
B. Management and StrategiesCorporate mission Business development strategy Goals Management team Consultant
C. ProductsConcept Product approach Product design Product, trademark, and regulatory status Future products
D.Marketing and Sales Marketing plan overview Sales plan overview Market size Marketing research Marketing for the initial
E. Competition Perspective Specific competitive products Anticipated competition
F. OperationPerspective Product R&D Product design Manufacturing Quality
G. Risks and RewardsRisks Benefits Stockholders
H. Financial Models
F. Operations Section con’tInformation on Internal Technical Operations
H. Financial ModelInclude “barebones” of financials hereWhat are your assumptions?
The income, or profit-and-loss (P&L), statement summarizes income versus expenses. To hold this statement to one page, many data are summarized, which often dictates the need for additional statements extending beyond the three primary ones to present supporting detail. Otherwise, readers of the business plan may erroneously judge primary statement numbers as too arbitrary.
Cost of Goods Sold Contract manufacturing Purchased materials Manufactured materials Labor Total COGS Gross margin
Direct Selling CostsSales expenses Commissions Ads/meetings/shows Selling costsGeneral and Administrative Administration labor Administration expense Technology labor Technology expense Marketing/sales labor Marketing/sales expense Rent, utilities, phone Legal, insurance, accounting Other Total G&AProfit & Loss Profit before tax Less tax @ 37%
Profit after tax
Total of all money received A net sales breakdown by component is possible Total of all money to the company
Whole product or subassembliesAll purchased parts and materialsAll parts or materials made in-houseAll direct/support labor involved in manufacturingTotal of all COGSTotal revenue less total COGSAll direct expenses of sellingSales commissions and bonusesSelf-explanatory; add rows for finer breakdownTotal of all direct selling costsLabor + personnel overhead for admin. DivisionAll non-labor expenses for administration divisionsLabor + personnel overhead for technology divisionAll non-labor expenses for technology divisionLabor + personnel overhead for marketing divisionAll non-labor expenses for marketing divisionInclude equipment under appropriate divisionSelf-explanatoryBreak into additional line items as needed for clarityTotal of all G&A expensesAlgebraic sum of all category headingsConsult an accounting professional for the correct percentageThe infamous “bottom line”
Presented immediately after the income statement, the balance sheet shows the relative balance among assets, liabilities, and company equity. A balance sheet is organized to equate assets with the sum of liabilities and equity, the latter term being the company’s net worth. Thus the balance sheet summarizes the company’s general financial health, its history, and its projected future evolution.
Current AssetsCash Accounts receivable Raw materials inventory Work-in-progress inventory Finished product inventory Short-term notes receivable Total current assets
Long-Term and Fixed AssetsTechnological rights Equipment Less depreciation Improvements Long-term-notes receivable total L/T&F Assets total assets Current and Long-Term LiabilitiesAccounts payable Short-term loans Tax, payroll Tax, other Total current liabilities Long-term liabilities total L-T liabilities Total liabilitiesEquity Common stock Preferred stock Retained earnings total equity Total liability & equity
Cash, typically the checking account balanceMoney due the company in normal business conductInventory as parts and materialsInventory of partially assembled goodsInventory of finished product fully ready for saleShort-term notes payable to the companySelf-explanatoryNon-cash value conveyed by founders, for stockPurchased large-ticket itemsDepreciation of equipment (a negative entry)Improvements made to facilitiesLong-term notes payable to the companySelf-explanatoryTotal of all assets; equals liabilities + equityMoney owed by company in normal commerceShort-term loans received by the companyPayroll taxesOther taxes; break down if needed for clarityTotal current liabilitiesLong-term liabilities owed by the companyTotal current + total long-term liabilitiesFounders stock + stock in return for investmentOften this is zero for all time periodsCumulated excess earnings, per income statementAlgebraic sum of all equityAlgebraic sum of all liabilities and equity
What They Say …
And What They Really Mean
We conservatively project …
We read a book that said we had to be a $50 million
company in five year, and we reverse-engineered the
We took our best guess and divide by 2
We accidentally divide by 0.5.
We project a 10% margin.
We did not modify any of the assumptions in the business
plan template that we downloaded form the Internet.
The project is 98% complete.
To complete the remaining 2% will take as long as it took to
create the initial 98% but will cost twice as much.
Our business model is proven …
If you take the evidence form the past week for the best of
our 50 locations and extrapolate it for all the others.
We have a six-month lead.
We tried not to find out how many other people have a six-
We only need 10% market share.
So do other 50 entrants getting funded.
are clamoring for our product.
We have not yet asked them to pay for it. Also, all of our
current customers are relatives.
We are the low-cost producers.
We have not produced anything yet, but we are confident that
we will be able to.
We have no competition.
Only IBM, Microsoft, Netscape, and Sun have announced
plans to enter the business.
Our management team has a great deal of
Consuming the product or services.
A select group of investors is considering the
We mailed a copy of the plan to everyone in the Pratt’s
We seek a value-added investor.
We are looking for a passive, dumb-as-rock investor.
If you invest on our terms, you will earn a 68%
If everything that could ever conceivably go right does go
rate of return.
right, you might get your money back.