The Business Plan

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  • Please follow along with your handout (Business Plan Assignment). Q: By now all of you have already decided on a product or service. What are your teams planning to sell? Q: What do you still need to do before you can start? Q: What will you do next? The Business Plan will help you organize your ideas. What will help you the most in making your business a success?
  • About 1/2 to 1/3 of the business start-ups fail. What might these business failures be due to?
  • FAILURES DUE TO Managerial incompetence or inexperience: Too much faith in common sense, overestimate own mgrl skills; hard work = not enough to succeed To succeed: Mgrs need to know about making decisions, understanding basic management principles Neglect Spare time: not enough; starting a small business demands an overwhelming time commitment Weak control systems: keeping business on track and alert mgrs to potential trouble E.g. credit collection policies (too liberal)  KEEP TRACK OF ORDERS & PAYMENTS Insufficient capital Start-up costs can be steep for products. When start earning profits? Until then … losses;  TAKE PRODUCT ORDERS; have to absorb those, maybe for months/years Expenses: employee wages and salaries  under/overestimate profits Amazon: no profit for 10 years Suggestion by experts: enough K to operate at least 6 months w/o a profit SUCCESS Hard work, drive, dedication – time and effort; earn start-up money Market demand for product/service: assess needs/wants – conduct surveys/polls Managerial competence: through training or drawing on expertise of others; team work; learn the ropes in successful companies or partnership Luck: Being in the RIGHT PLACE at the RIGHT TIME.
  • It’s a blueprint of a business, a written plan detailing the operations, marketing, management, and financial aspects of a company.
  • Q: Which groups of stakeholders would be interested in your group’s business plan?
  • What contact information do investors need to know about your group’s business?
  • Q: What could be your company’s mission statement? Q: What 3 areas of business do investors want to know about your business?
  • Condense the mission statement into one, short paragraph.
  • In the MANAGEMENT area, what does your audience expect to see?
  • What MARKETING questions does your audience have? What will make the business profitable? Where will there be growth areas? What are the goals? Target Market: Profile of the customer – age, gender, income level Benefits of goods & services: What needs will be met? Why is this product in demand? What will make it attractive? Is this market segment growing (  market share)
  • COMPETITORS: Does your audience want to know about the COMPETITION? How does your product differ from that of competitors? What makes your product unique?
  • The 3 remaining Ps… PRICE: How did you arrive at that price? High price  low volume; low price  high volume PROMOTIONS: Decide on your most effective and efficient strategy (post fliers, send email, go door-to-door; smile/show enthusiasm!) Hold a P/R event (e.g. samples or give-aways in Alliot)
  • What is the CENTRAL QUESTION OF INVESTORS? (Is your business going to make money?) Demand for product: determines volume/number of items to order, based on sales estimates Management characteristics & experience: creativity & experience Point out in resumes Rate of return: Investors want to know How much they will earn back on their investment They have to weigh the RISK against PROJECTED SALES and NET INCOME. They have to consider your growth potential and the competition.
  • Q: What might be the purpose of a business plan for the company your group is starting?
  • Q: What kinds of things will your group need capital ($$$) for in your business? ADVERTISING materials – paper, markers, posters
  • Q: How is your group going to raise money for your business? What sources of financing (capital) can you access? You must be able to tell outsiders what % of the company they are buying. If someone from the team does NOT buy stock in your own company  receives no dividend at the end
  • Q: What is the main difference between the two? (need for capital) Q: Why does the service company not need any capital? Is this typical? What about examples from your groups? Q: Which of these is a better investment for outsiders? (hint: look at the total number of shares issued; in which company does one share represent a greater investment?)
  • VERSUS Actual Income Statement at end of 6-week period
  • Estimate when sales will happen (e.g. Halloween for candy; parents weekend for pictures…) Q: Why is gas on this income statement? (pick up the T-shirts) Q: What if you don’t make any money the first week? Report a loss (in parentheses) Important note: If you are providing a service, you will not have any COGS.
  • VERSUS Actual ROE at the end of the 6-week period, in Shareholders Report Q: Is an ROE of 655% good or bad? Depends on how the industry for your business and the overall (economy) market are doing Q: What is the current interest rate on savings? 3%  Where can you go with a low risk and get 3% return? (bank) VERSUS: risky business of selling water bottles with no experience NOTE: A service company will GENERALLY have a large ROE.
  • The Business Plan

    1. 1. The Business Plan BU113: Foundations of Business Administration Business Plan BU113: Foundations of Business Administration
    2. 2. Memorable statistics <ul><li>New business start-ups each year: </li></ul><ul><ul><li>150,000-190,000 </li></ul></ul><ul><li>Business failures each year: </li></ul><ul><ul><li>50,000-100,000 </li></ul></ul>
    3. 3. Reasons for Failure and Success of Businesses <ul><li>Failure due to </li></ul><ul><li>Managerial incompetence or inexperience </li></ul><ul><li>Neglect </li></ul><ul><li>Weak control systems </li></ul><ul><li>Insufficient capital </li></ul><ul><li>Success due to </li></ul><ul><li>Hard work, drive, and dedication </li></ul><ul><li>Market demand for product/service </li></ul><ul><li>Managerial competence </li></ul><ul><li>Luck </li></ul>
    4. 4. The Process, the Plan and BU113 <ul><li>Idea </li></ul><ul><li>Test </li></ul><ul><li>Plan </li></ul><ul><li>Execute </li></ul><ul><li>Evaluate </li></ul>
    5. 5. What is a Business Plan? <ul><li>Blueprint of your business </li></ul><ul><li>Written plan detailing operational and financial aspects of your company </li></ul><ul><li>Explanation of the business concept </li></ul><ul><li>Analysis of the market </li></ul><ul><li>Presentation of the strategy </li></ul><ul><li>Outline of projected development of the business </li></ul><ul><li>Definition of capital needs of the business </li></ul><ul><li>Projection of financial performance </li></ul><ul><li>Presentation of management’s credentials/positions </li></ul>
    6. 6. Who needs a Business Plan? <ul><li>Business associates: </li></ul><ul><li>Bankers: </li></ul><ul><li>Other investors: </li></ul><ul><li>Management: </li></ul><ul><li>Potential employees: </li></ul><ul><li>Direction and purpose </li></ul><ul><li>Financing </li></ul><ul><li>Funding for growth </li></ul><ul><li>Internal plans </li></ul><ul><li>Join the company? </li></ul>
    7. 7. Concerns of Investors <ul><li>How are you unique? </li></ul><ul><ul><li>Proprietary technology </li></ul></ul><ul><ul><li>Unique product </li></ul></ul><ul><li>Management track record </li></ul><ul><ul><li>Great ideas won’t go anywhere without good management. </li></ul></ul><ul><ul><li>Depth of management </li></ul></ul><ul><li>Rate of Return </li></ul><ul><ul><li>High risk requires potential for high return </li></ul></ul><ul><ul><li>Where on the growth curve is the business? </li></ul></ul><ul><ul><li>Are financial projections reasonable? </li></ul></ul><ul><li>Exit Strategy </li></ul><ul><ul><li>How to get out with mega profit (go public, sell out) </li></ul></ul><ul><ul><li>When? </li></ul></ul>
    8. 8. Cover Page <ul><li>Company XYZ </li></ul><ul><li>October, 200_ </li></ul><ul><li>Business Plan Copy Number 5 </li></ul><ul><li>This document contains confidential and proprietary information belonging exclusively to XYZ Company </li></ul><ul><li>John Smith </li></ul><ul><li>Chief Executive Officer </li></ul><ul><li>123 Executive Drive </li></ul><ul><li>Maple Valley, VT 55555 </li></ul><ul><li>(802)555-555 </li></ul><ul><li>This is a business plan. It does not imply an offering of securities. </li></ul>
    9. 9. Business Plan—Format & Components <ul><li>Cover Page </li></ul><ul><li>Table of Contents (with page numbers) </li></ul><ul><li>Your company’s mission statement </li></ul><ul><li>The business: </li></ul><ul><ul><li>Management : Management Structure/Background </li></ul></ul><ul><ul><li>Marketing Plan </li></ul></ul><ul><ul><li>Financial Plan </li></ul></ul><ul><ul><li>Supporting documents </li></ul></ul><ul><ul><ul><li>Revised resumes </li></ul></ul></ul><ul><ul><ul><li>Company logo </li></ul></ul></ul><ul><ul><ul><li>Organization chart </li></ul></ul></ul><ul><ul><ul><li>PowerPoint slides in handout form </li></ul></ul></ul>
    10. 10. Mission Statement <ul><li>A mission statement is a brief description of a company’s fundamental purpose. A mission statement answers the questions, “Why do we exist?” “What do we hope to achieve in the future?” </li></ul><ul><li>The mission statement articulates the company’s moral/ethical position, public image, the target market, products/services, the geographic domain and expectations of growth and profitability (Center for Business Planning: http:// www.businessplans.org ). </li></ul>
    11. 11. Mission -- Examples <ul><li>“ It is the mission of Saint Michael’s College to contribute through higher education to the enhancement of the human person and to the advancement of human culture in the light of the Catholic faith.” (SMC Catalogue) </li></ul><ul><li>The Home Depot is in the home improvement business and our goal is to provide the highest level of service, the broadest selection of products and the most competitive prices. We are a values-driven company and our eight core values include the following: </li></ul><ul><ul><li>Excellent customer service </li></ul></ul><ul><ul><li>Taking care of our people </li></ul></ul><ul><ul><li>Giving back </li></ul></ul><ul><ul><li>Doing the &quot;right&quot; thing </li></ul></ul><ul><ul><li>Creating shareholder value </li></ul></ul><ul><ul><li>Respect for all people </li></ul></ul><ul><ul><li>Entrepreneurial spirit </li></ul></ul><ul><ul><li>Building strong relationships </li></ul></ul><ul><ul><li>Source: Home Depot – Our Company – Values </li></ul></ul>
    12. 12. Components of the Plan: Management <ul><li>Type of organization / form of business ownership / Background </li></ul><ul><li>Organization chart </li></ul><ul><li>Management team </li></ul><ul><ul><li>Roles in the business </li></ul></ul><ul><ul><li>Experience </li></ul></ul><ul><ul><li>Skills </li></ul></ul><ul><ul><li>Supporting documents: Resumes </li></ul></ul>XYZ Company General Manager Marketing Manager 1 Finance Manager Marketing Manager 2
    13. 13. Components of the Plan: Marketing <ul><li>Product / Service </li></ul><ul><ul><li>Key characteristics, uniqueness </li></ul></ul><ul><ul><li>Picture, design / model </li></ul></ul><ul><ul><li>Supplier </li></ul></ul><ul><ul><li>Amount of inventory to be ordered </li></ul></ul><ul><li>Target market </li></ul><ul><ul><li>Users -- demographics </li></ul></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Economic / social / cultural characteristics </li></ul></ul><ul><ul><li>Projected sales (revenue): calculated </li></ul></ul>
    14. 14. Components of the Plan: Marketing (cont’d) <ul><li>Competitive Environment </li></ul><ul><ul><li>Competitors </li></ul></ul><ul><ul><li>Competitors’ Strengths </li></ul></ul><ul><ul><li>Competitors’ Weaknesses </li></ul></ul>
    15. 15. Components of the Plan: Marketing (cont’d) <ul><li>Price </li></ul><ul><ul><li>Pricing strategy </li></ul></ul><ul><ul><li>Pricing strategy vs. competition </li></ul></ul><ul><li>Promotion </li></ul><ul><ul><li>Promotional strategy: developing demand for product </li></ul></ul><ul><li>Place / distribution </li></ul><ul><ul><li>Getting the product from production to the consumer </li></ul></ul>
    16. 16. Supporting documents <ul><li>List of Shareholders: Attach a table with the information about your shareholders’ investment. </li></ul><ul><ul><li>name </li></ul></ul><ul><ul><li>contact information </li></ul></ul><ul><ul><li>number of shares invested </li></ul></ul><ul><ul><li>percent ownership in the company based on the number of shares owned </li></ul></ul><ul><li>Revised resume of each manager </li></ul><ul><li>Company logo </li></ul><ul><li>PowerPoint slides in handout form (6 slides per page) </li></ul>
    17. 17. Shareholder List Outside or Management Shareholders # Shares Bought Contact Info Name
    18. 18. Business Plan—Finance <ul><li>Concerns of investors </li></ul><ul><ul><li>Demand for product </li></ul></ul><ul><ul><li>Management characteristics and experience </li></ul></ul><ul><ul><ul><li>Innovation </li></ul></ul></ul><ul><ul><ul><li>Track record </li></ul></ul></ul><ul><ul><li>Rate of return </li></ul></ul><ul><ul><ul><li>Amount of risk </li></ul></ul></ul><ul><ul><ul><li>Financial projections </li></ul></ul></ul><ul><ul><ul><li>Outlook for competitiveness of business </li></ul></ul></ul><ul><ul><ul><li>Growth curve of business </li></ul></ul></ul><ul><ul><li>Future plans </li></ul></ul>
    19. 19. Financial Plan BU113: Foundations of Business Administration BU113: Foundations of Business Administration Financial Plan
    20. 20. Purpose—Financial Plan <ul><li>Determine feasibility of business </li></ul><ul><li>Determine capital needed to start business </li></ul><ul><li>Estimate return to shareholders </li></ul>
    21. 21. Capital Needed to Start Business <ul><li>Determine total amount of capital needed to start the business </li></ul><ul><li>Do you need to: </li></ul><ul><ul><li>Buy equipment? </li></ul></ul><ul><ul><li>Buy product/raw materials for product to sell? (Include in product cost: transportation & packaging) </li></ul></ul><ul><ul><li>Buy supplies for advertising </li></ul></ul><ul><ul><li>Pay taxes? </li></ul></ul>
    22. 22. Financing Sources: How to Raise Money <ul><li>Sources : Selling stock or borrowing money </li></ul><ul><li>Stock sales: 25 cents/share </li></ul><ul><ul><li>Inside shareholders (management team). What percent of company do you want to own? </li></ul></ul><ul><ul><li>Outside shareholders (sell to others at marketplace) </li></ul></ul><ul><ul><li>You must offer at least 20 shares to outside shareholders. </li></ul></ul><ul><ul><li>Specify what percent ownership 1 share represents </li></ul></ul><ul><ul><ul><li>EX: If you plan to sell 100 total shares to management and outsiders, 1 share = 1% ownership in the company. </li></ul></ul></ul>
    23. 23. Financing Sources: Examples <ul><li>Sale of Product </li></ul><ul><li>Capital needed: $100 </li></ul><ul><ul><li>Outside 20 shares: $5 = 5% </li></ul></ul><ul><ul><li>Inside 380 shares (calculated as: remaining $95 / $.25 per share = 380 shares) : $95 = 95% </li></ul></ul><ul><ul><li>Total Raised: $100 = 100% </li></ul></ul><ul><ul><li>Total Shares Issued: 400 shares </li></ul></ul><ul><li>Sale of Service </li></ul><ul><li>No capital needed </li></ul><ul><li>Outside 20 shares: $5 = 20% </li></ul><ul><li>Inside 80 shares (calculated as: remaining 80 shares * $.25 per share = $20) : $20 = 80% </li></ul><ul><li>Total Raised: $25 = 100% </li></ul><ul><li>Total Shares Issued: 100 shares </li></ul>
    24. 24. Projected Income Statement <ul><li>Sales = Number of units of product/service expected to be sold per week X sales price </li></ul><ul><li>Less: Cost of Goods Sold ( COGS ) = number of units of product expected to be sold each week X cost to buy including taxes, shipping, etc. (no COGS with a service) </li></ul><ul><li>Less: Advertising and other expenses = actual amount expected to be spent during a particular week </li></ul><ul><li>Less: Taxes = 10% of profit before taxes (EBT) </li></ul><ul><li>Note : You cannot pay management wages. </li></ul>
    25. 25. ABC Company Projected Income Statement For the Six-Week Period Ending ____ , 200_ 163.8 18 18 19.8 88.20 18 1.8 Net Income 18.20 2 2 2.20 9.80 2 .20 Taxes (10%) 182 20 20 22 98 20 2 EBT 108 10 10 18 52 10 8 Total Expenses 12 6 6 Gas 4 2 0 Advertising 92 10 10 12 50 10 2 Cost of Goods Sold Expenses $290 $30 $30 $40 $150 $30 $10 Sales Total WK 6 WK 5 WK 4 WK 3 WK 2 WK 1
    26. 26. Projected Return on Equity <ul><li>As a start up business, consider your equity to be the money you raise from selling stock to inside and outside shareholders </li></ul><ul><li>Projected ROE: tells shareholders what they expect to earn on their investment in terms of % return </li></ul><ul><ul><li>ROE = Total Projected Net Income / $ Raised from sale of stock to management and outside shareholders </li></ul></ul><ul><ul><li>EX: $ 163.8 projected NI / $25 Common stock proceeds </li></ul></ul><ul><ul><ul><ul><ul><li>ROE = 655% </li></ul></ul></ul></ul></ul>
    27. 27. Liquidating Dividend <ul><li>Liquidating Dividend to be paid at end of semester </li></ul><ul><li>Different from a regular dividend real companies pay </li></ul><ul><li>= Distribution of all the cash of the company after payment of all liabilities. </li></ul><ul><li>Purpose: to close the business down </li></ul><ul><li>Liquidating Dividend Per Share = </li></ul><ul><li>Ending cash (= $ from sale of stock to managers and outsiders + Net Income) </li></ul><ul><li> - Liabilities (including taxes payable) d ivided by total # Shares outstanding </li></ul>

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