Essential Guide to Business Plans for Success in Ventures

Seem 3600/3810 Tutorial on Business Plan WANG, Hao hwang@se.cuhk.edu.hk

Table of Content 1. What is Business Plan? 2. Who needs a Business Plan? And Why? 3. Finding the right plan for you 4. How will you use your plan 5. Elements of Business Plan 6. Steps to a Great Business Plan 7. What to avoid in your Business Plan 8. Does your plan include the following factors? 9. Top 10 Do s and Don ts A business plan is so vital to the health of your business 2

What is Business Plan? A written description of your business s future A document describes what you plan to do and how you plan to do Used by Investment-seeking entrepreneurs to convey vision to investors Firms are trying to attract key employees, prospect for new business, deal with suppliers or simply to understand how to manage their companies better 3

What is Business Plan? Simply stated Conveys your business goals The strategies to meet Potential problems may confront and way to solve Organizational structure The amount of capital required to finance your venture 4

Who needs a Business Plan? And Why? Anybody beginning or extending a venture will consume resources and expected to return a profit Should take time to draft some kind of plan For startups Seeking funds to help start a new venture Most books on business planning seem to be aimed at startup business owners Since like guidance Business plans are useful at all stages For established firms seeking help Middle stage Help them find funding for growth Help manage an already fast growing business Convey the miss and prospects of the business to customers, suppliers or others 5

Finding the right plan for you (1) Plans differ widely in their length, their appearance, the detail of their contents, and the varying emphases they place on different aspects of the business Roughly, business plans can divided into four different types Mini-plan Working plan Presentation plan Electronic plan 6

Finding the right plan for you (2) Mini-plan 1 to 10 pages At least cursory attention to such key matters Business concept, financing needs, marketing plan and financial statement Quickly test business concept and measure the interest of others It's not intended to substitute for a full-length plan Working plan Used to operate your business Internal using 7

Finding the right plan for you (3) Presentation plan Suitable for showing to bankers, investors and others outside the company Use standard business vocabulary Omitting the informal jargon and slang Reader will not be familiar with your operation Competitive threats and risks High-quality printer with color Make to be booklet, durable and easy to read Included graphics 8

Finding the right plan for you (4) Electronic plan more business information that once was transferred between parties only on paper is now sent electronically An electronic plan can be handy for presentations to a group using a computer-driven overhead projector, for example, or for satisfying the demands of a discriminating investor who wants to be able to search deeply into the underpinnings of complex spreadsheets 9

How will you use your plan Do you intend to use your plan to help you raise money? Clearly focused vision of how your company is going to make money Do you intend to use your plan to attract talented employees? Stock options and other aspects of compensation Do you expect showing your plan to suppliers to demonstrate that you're a worthy customer? Convince a supplier of some precious commodity to favor you over your rivals 10

Elements of a Business Plan 7 major sections of a business plan 1. Executive Summary 2. Business Description 3. Market Strategies 4. Competitive Analysis 5. Design and Development Plan 6. Operations and Management Plan 7. Financial Components 11

Executive Summary Tell readers what you want Keep short and businesslike 1. Business concept 2. Financial features 3. Financial requirement 4. Current business position 5. Major achievements 12

Business Description Short description of the industry Provide information on all the various markets within industry, including new products or developments Investor will want to know how dependable your information is and will not risk money on assumptions 1. Concentrate on its structure State whether business is new or already established 2. Legal form should be showed again Sole, partnership or corporation 3. Describe the products/services 4. Competitive Edge 5. How will you profit? If for financial purposes, how to expand your business and make more profitable 13

Market Strategies Define your market Projecting Market share Positioning your business Pricing Distribution Promotion Plan Sales Potential 14

Competitive Analysis (1) Identify and analyze the competition A statement of the business strategy and how it relates to the competition Purpose To determine the strengths and weaknesses of the competitors within your markets Your distinct advantage The barriers to prevent competition Weaknesses can be exploited with the product development cycle Identify the current and potential competition To look at the market from the customer's viewpoint To group competitors according to their various competitive strategies 15

Competitive Analysis (2) From Developing Business Strategies , David A. Aaker Suggests concentrating your efforts in 4 areas: The reasons behind successful as well as unsuccessful firms Prime customer motivators Major component cost Industry mobility barriers Competitive advantage Create a Competitive Strength table Product, Distribution, Pricing, Promotion and Advertising 16

Design and Development Plan Purpose Provide investors with a description of the product s design Chart its development with the context of production, marketing and the company itself Create a development budget 1. Product development 2. Market development 3. Organizational development 4. Assessment of risks 17

Operations and Management Plan Purpose Describe how the business functions on a continuing basis The logistics of the organization Different responsibilities of the management team The tasks assigned to each division Financial Table The operation expense table The capital requirements table The cost of goods table 18

Financial Components (1) 1. Income Statement 2. Cash Flow Statement 3. Balance Sheet Income statement A simple and straightforward report Business s card-generating ability Draws information from the various financial models Monthly basis in 1styear, quarterly in 2ndand annually for each year thereafter Income; Cost of goods; Gross Profit Margin; Operating expenses; Total expenses; Net profit; Depreciation; New Profit before interest; Interest; Net Profit before tax; Taxes; Profit after taxes 19

Income Statement 1. 2. 3. Income. Includes all the income generated by the business and its sources. Cost of goods. Includes all the costs related to the sale of products in inventory. Gross profit margin. The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue. Operating expenses. Includes all overhead and labor expenses associated with the operations of the business. Total expenses. The sum of all overhead and labor expenses required to operate the business. Net profit. The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities. Depreciation. Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital. Net profit before interest. The difference between net profit and depreciation. Interest. Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company. Net profit before taxes. The difference between net profit before interest and interest. Taxes. Includes all taxes on the business. Profit after taxes. The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company. 4. 5. 6. 7. 8. 9. 10. 11. 12. 20

Financial Components (2) Cash Flow Statement Showing how much cash will be needed, when it is going to be required and from where it will come Shows a schedule of the money coming into business and expenses need to be paid 21

Cash Flow Statement 1. 2. 3. Cash sales. Income derived from sales paid for by cash. Receivables. Income derived from the collection of receivables. Other income. Income derived from investments, interest on loans that have been extended, and the liquidation of any assets. Total income. The sum of total cash, cash sales, receivables, and other income. Material/merchandise. The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service. Production labor. The labor required to manufacture a product (for manufacturing operations only) or to perform a service. Overhead. All fixed and variable expenses required for the production of the product and the operations of the business. Marketing/sales. All salaries, commissions, and other direct costs associated with the marketing and sales departments. R&D. All the labor expenses required to support the research and development operations of the business. G&A. All the labor expenses required to support the administrative functions of the business. Taxes. All taxes, except payroll, paid to the appropriate government institutions. Capital. The capital required to obtain any equipment elements that are needed for the generation of income. Loan payment. The total of all payments made to reduce any long-term debts. Total expenses. The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments. Cash flow. The difference between total income and total expenses. This amount is carried over to the next period as beginning cash. Cumulative cash flow. The difference between current cash flow and cash flow from the previous period. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 22

Financial Components (3) Balance Sheet Generated solely on an annual basis for the business plan and is more or less a summary of all the preceding financial information Assets Cash; Accounts receivable; Inventory; Total current assets Liabilities Shareholder s Equity 23

Steps to a Great Business Plan 8 steps to produce a plan 1. Review two sample plans furnished. 2. Focus and refine your concept based on the data you have compiled. 3. Gather all the data you can on the feasibility and the specifics of your business concept. 4. Outline the specifics of your business. Using a what, where, why, how approach might be useful. 5. Include your experience, education and personal information. 6. Fill in the templates at the end of each session with clear language and realistic projections. 7. Print off the business plan templates into an MS Word document. 8. You may wish to enhance your presentation with bar charts, pie charts and graphics. 24

What to avoid in your Business Plan Place some reasonable limits on long-term, future projections Avoid optimism Avoid language or explanations that are difficult to understand Don't depend entirely on the uniqueness of your business or even a patented invention 25

Does your plan include the following factors? A Sound Business Concept Understanding of Your Market A Healthy, Growing and Stable Industry Capable Management Able Financial Control Financial Management Skills A Consistent Business Focus A Mind set to Anticipate Change Include Plans for Conducting Business Online 26

Top 10 Dos and Donts THE TOP TEN DO'S THE TOP TEN DON'TS Prepare a complete business plan for any business you are considering Be optimistic in estimating future sales Use the business plan templates supplied Be optimistic in estimating future costs Your business plan as you proceed through the course Disregard or discount weaknesses in your plan Research (use search engines) to find business plans that are available on the Internet Stress long-term projections. Better to focus on projections for your first year. Package your business plan in an attractive kit as a selling tool Depend entirely on the uniqueness of your business or the success of an invention Submit your business plan to experts in your intended business for their advice Project yourself as someone you're not. Be brutally realistic. Spell out your strategies on how you intend to handle adversities Be everything to everybody. Highly focused specialists usually do best. Spell out the strengths and weaknesses of your management team Proceed without adequate financial and accounting know-how Include a monthly one-year cash flow projection Base your business plan on a wonderful concept Freely and frequently modify your business plans to account for changing conditions Pursue a business not substantiated by your business plan analysis 27

The End Thank you ! 28