Writing a Business Plan


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Thinking through and writing a business plan

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Writing a Business Plan

  1. 1. WRITIN G of a BUSINE SS PLAN Class Notes Anjana Vivek
  2. 2. The Writing of a Business Plan ©av Class Notes: The Writing of a Business Plan 2
  3. 3. Business plans may be prepared for different purposes such as for fund raising, to show to existing investors or Board Members of a company, or for internal goal setting of the organization for the next three to five years. Business plans may be prepared by the founders of a business, by business advisors and consultants for their clients, or by managers of corporates. They may be brief or detailed. Are you planning to write a business plan? Why do you want to prepare this? The process of planning is the first stage in writing a business plan and is a critical one. In many ways, it is the most important phase. Time needs to be spent on thinking through what one would like the business plan to be used for, the target audience and what one would like to communicate through this. Sometimes one is not willing to write a detailed business plan. You may not want to put all your ideas on paper; for fear that these may be adopted or copied by some of your readers. In such a situation, the solution may not lie in avoiding preparing a plan. You could instead think about preparing a broad level plan, without disclosing finer details. An alternate solution is to prepare a plan with some extra chapters which are not available to all readers. The detailed plan with additional chapters may be disclosed only to select persons. Of course one has to be careful in managing the versions and keep track of differences. In addition the shorter version should be self contained and complete in itself. Why do you want to prepare a plan Think through your reasons for preparing the plan. • Is it to commit your thoughts to paper to get some clarity or understanding of what you want to do with your business in the future? • Is it to be presented to a potential equity investor? • Is it to raise a loan? • Is it to be shown to a potential acquirer of your business? • Is it to showcase to a potential employee? • Is it for a presentation to your Board of Directors? • Is it for a contest? You may require the plan for more than one purpose. For example you may be interested in looking at an option of raising funds through debt or through equity. While it is easier to prepare a single business plan for all purposes; each of your readers would review the plan differently. A lender would want to understand if the project has sufficient cash flow to repay the loan over a period of time along with interest. A lender would also, typically, look for collateral. An equity investor, such as a venture capitalist (VC) would like to understand whether your business has the potential for super normal growth. The VC would not be overly concerned about profits and cash flow in the initial years of the business. The VC would also like to look for an exit plan. Equity investors generally look for a multiple return on their investment, in a time frame of about 3 to 7 years. A potential acquirer would look for the advantages from such an acquisition, which could a combination of increased sales, reduced costs or for strategic reasons. ©av Class Notes: The Writing of a Business Plan 3
  4. 4. If you intend to show the business plan to different kinds of readers who would look at this for differently, one approach could be to create your content for the plan in a modular fashion. Some chapters such as the one on the management team and the business idea would be the same for different kinds of readers. Other chapters could be customized to meet the requirements of the specific reader, since what is of interest to one reader may be irrelevant to another. Here due care has to be taken in managing the different versions and chapters. In one case a banker was given one document with two chapters on finance. One had the detailed cash flow giving interest payment and loan repayment details and the other had details of equity valuation on exit in 5 years, with no information on interest and loan repayment. In the first case, the CEO planned for a loan, in an alternate second scenario, he planned for VC investment in his company. Initial analysis When writing a business plan, it would help to identify the basics that you will articulate in the plan, such as the business idea, the team, the market, the competitive landscape and the financials. Do some initial analysis of what your strengths are and where you have gaps. Think through the SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) as this helps in reviewing and reflecting on the business environment, both internal and external, to the firm. Many persons are not keen to prepare the SWOT analysis, because it forces one to look at the negative points about the business. Some persons may have the view that setting out weaknesses could invite trouble and may be a deterrent to investors or may impact the business valuation. Others do not want any negative thoughts coming in the way of their business plan preparation. The reality is that, in business, there are advantages and disadvantages and there are upsides and downsides. Investors do understand that there are risks in any business and if you do not include this, they will look for the risks and are likely to ask you questions about it. If you are preparing the plan for yourself, then a SWOT analysis becomes a tool for planning – it helps you have an alternate plan of action in case of adversity. So, take time out to examine and list the business idea, its strengths and constraints and then think through how one can address these constraints. The plan structure A business plan is a communication tool. The reader should understand what you are trying to say. The key points to be covered in the plan, include inter-alia, the background and history of the business if this is for an existing business, the business idea, the competition, the business strategy and implementation plan and the profiles of the promoters of the business and the key management team. The implementation plan should include details about the sales and marketing strategy, management team and financials. The financials should include the sources of funding, utilisation plan, expected revenues, expenses and cash flow. For an existing business, the financials of the past three to five years should be included and key points summarised. Practical tips Something that may be overlooked is consistency in writing the plan. This may send wrong signals to the reader who may assume that one who cannot pay attention to preparing a professional document may bring the same careless attitude to running the business. In addition to the grammar and content, one must also pay attention to the style of ©av Class Notes: The Writing of a Business Plan 4
  5. 5. presentation. Formats used throughout the document must be consistent. For example, Chapter 1 may have been written in Ariel font and Chapter 2 in Times New Roman. To avoid such inconsistencies, you could use a standard template right from the start of the business plan writing process. This also helps save time in formatting and standardizing the document at a later stage. Documents sent to outside parties must also be carefully scrutinized for internal inconsistencies and errors. For example, the project cost may have been revised downwards from Rs. 60 crores to Rs. 50 crores. This change may not have been made across the document and will send negative signals to a careful or fussy (you may interpret this the way you see it) reader. It is good to systematically and carefully review the final document to minimize such errors. The plan should be self sufficient and self explanatory. Do not get tempted to disclose all that you know. The business plan is not a document where you need to boast about your knowledge and experience. Yes, there is need to show (and perhaps showcase) your experience, but there is no need to go overboard about this! There may be a perception that pages and pages of text demonstrate a great deal of thinking that has gone into planning the business. But, sometimes, excess information overload can reduce the reader’s interest. In fact, in today’s day of twitter and sms, brevity is what many persons seek. Many readers have lost the patience to go through reams of paper. Another way to minimize clutter and information overload in the main report is by moving some details to an annexure. For example, in a chemical plant, the detailed process chart may be in an appendix and not in the main document. While this may not be of interest to a financial expert, it may be of interest to a specialist who is reviewing the proposal. In addition, please do pay attention to providing explanations for any abbreviations and technical terms used. All readers may not be conversant with terminology used. Different aspects of the business should be covered in different sections. Pages, graphs, tables and figures used should be numbered. There are many business plans which have been prepared without attention to basic details such as numbering of pages. This makes it difficult for a reader for cross referencing and analysis. The chapters in the plan Chapters and sections may be organized in a structure that makes sense to you and communicates the key aspects of the business. Some illustrative sections could be: • Table of contents • Executive summary • Sections/chapters, giving information on o Company and background information o Management team and organization structure o Business idea o Marketing strategy o Financial details o Other information, including assumptions made to be indicated where applicable • Annexures of key terms, references and other relevant information Table of contents ©av Class Notes: The Writing of a Business Plan 5
  6. 6. This helps a reader get a broad overview of the project. It also helps in future reviews and referencing. The executive summary An executive summary should convey the key information about the business in a snapshot. Many readers may look at this summary and, if this looks interesting, may read the rest of the document in detail. The summary should touch upon information such as the details of the idea or product or service being offered, the team, the potential market, financials and other key information. Ideally, this may be in one or two pages in the document. If the plan is being prepared in a presentation form, this may take up a couple of slides. Company and background information This should give the industry overview and the expected growth potential of the business. Other points to be covered in this section are the history of the company, with details of when the business was set up and its evolution over a period of time. If this is a new enterprise, the rationale for starting this business must be set out. This section should also give a brief background about the key team and promoters of the business and other additional information, to make this initial section complete. Management team and organization structure Often, readers of the business plan first look at who is promoting the business and then look at the business idea and financials. That would give you an idea of the importance of this section. So write this section well. Write about the team, the strengths brought to the table, the skill sets and experience of the key members, individually and collectively. A good team can make an ordinary idea very successful and, vice versa, a bad team or a team that is not cohesive; can ruin even a great idea. Key employee policies, such as a plan to reward performance with stock options, or other benefits and training plans may also be of interest to the reader. Business idea The business plan exists because of the idea behind it. Do think through your idea carefully and attempt to demonstrate how the business can be commercially successful. This section should address issues such as business strategy and implementation plan including the business model and information on intellectual property associated with the business, if any. Marketing and sales strategy The marketing plan should mention the target market and market size, either existing or expected. Information about the market research or market assessment would help the reader validate your estimates and assumptions. You may also like to give information about the sales and marketing strategy and pricing strategy. The reader would be interested in understanding how you plan to get someone to buy your product or service. Financial details The financial section should give summary information about the past financials and the future forecast, including key financial statements, i.e. the balance sheet, the profit and loss account and the cash flow statement. The reader would also like to know how much money has been contributed by the promoters and sources of funds and the plan to utilise them. ©av Class Notes: The Writing of a Business Plan 6
  7. 7. The breakeven point and the return on investment are other important parameters which could be of interest. In uncertain or new markets, some persons are of the view that financial forecasting is a meaningless exercise. Their view is that the numbers are based on assumptions about the future, which is itself, unpredictable. While the future is uncertain, forecasting is a tool that helps in planning. In fact this is not a onetime exercise, but a continuous process. Comparing actual performance with the forecasts, studying the variance and trying to understand the reason for the variance helps one get an in depth understanding of business. Spreadsheets are useful tools to work with for preparing forecast models. Use of features in the spreadsheet such as formulas and functions - to automatically add, subtract and link sheets helps. For example you may create a cell in which you may input raw material cost increase as a percentage. By changing the number in the cell (say from 5% to 10%), you can immediately see the impact of escalation in raw material costs, on the business profits, on the cash flow and on the net worth of the company. Please note that spreadsheet generated numbers are of no use if the underlying assumptions behind them do not have a foundation. Sometimes promoters do not give sufficient thought as to the actual sales that they can achieve. At other times, all costs may not be factored in. In such cases, the spreadsheet will not help create possible scenarios in the business and may be meaningless, despite time being spent on preparing templates. Other information There may be some additional points that you may like to convey in the plan, such as time lines for project implementation, expected date of commercialization, regulatory aspects etc. This may be provided in a section or in the appendix. Alternate scenarios The reality is that the future is not completely predictable. There are two common techniques to address future uncertainty. In one case, financial forecasts are prepared for different scenarios, such as an optimistic scenario, a pessimistic scenario and a normal expected scenario. The forecasts in these three situations help one think through a range of possibilities and these get factored into the numbers. For example the possible revenue in the best case scenario, may be 1.25 times the revenue in the worst case scenario. The costs incurred would also differ in these cases. Another tool used to factor uncertainty in the business is to do a sensitivity analysis of key parameters. For example, an increase of 20% in the fuel cost, may significantly impact the profitability and cash flow of an airline company. In summary The business plan must stand up to scrutiny and must be internally consistent. The better the quality of the planning process, the better will be the quality of the business plan. Further, if you believe in what you are writing, you will be able to communicate this belief much easier. Time and effort spent on the business planning process - from idea planning to writing a detailed document - will help you in creating a believable business plan, that you can proudly show to others … and … perhaps help you get the funding you want. ©av Class Notes: The Writing of a Business Plan 7
  8. 8. CASELET 1) Three friends established a company in Bangalore, to work in the areas of IT services. Their company, ThreeForce, was started with Rs.30 lakhs invested in by the promoters, who each had about 12 years of work experience, in India as well as overseas. Midway through the first year of operations, one of the key customers also invested Rs.20 lakhs in the ThreeForce, for a minor stake in the company. Towards the middle of the second year of operations, the promoters decided to go in for a round of private equity investment. The initial funding and the revenue generated was not sufficient to achieve the ambitious growth targets they had set for themselves. The promoters decided to approach a venture capitalist or strategic investor for funding. 2) Vijaya, Kannan, James and Rehana are good friends from school days. Vijaya, who has completed her MBA and has 5 years of work experience in the IT industry, is currently unemployed. She has two children of school going age. Kannan is an engineer, who is working in a software company and now wants to start his own business. His wife has a steady job in a multi national company and he is willing to take a risk of losing his steady income. James, an architect is currently managing his own architect’s firm. He is interested in exploring the opportunity to develop technology tools for the infrastructure industry. Rehana is a graduate, who has been working in the BPO industry for 6 years now. She has no family commitments and is comfortable with the job. She is excited at the idea of starting a business with her friends. After a great deal of brainstorming, the four have decided to create a company which will address the technology needs of the infrastructure industry. They have heard that there is a lot of interest in investment in this area and are keen to look for equity investment in the new venture as they do not want to go to a bank and take a loan at this start up stage. 3) GooDBuzz Technologies Private Limited was promoted by Amar Ramesh and Rahul Gupta to offer services to the telecom industry. The customers were from India, Europe and Asia. The company received two rounds of financing from a VC in India, who appointed a Board Member to the company. In a Board meeting, the nominee Director of the VC, expressed his view that GoodDBuzz should expand its existing portfolio of offerings by providing services to other industry verticals, as this would help the company grow at a faster pace. The other Board members were also keen to explore this possible opportunity. This however needed additional investment, which the existing promoters and investors could not bring in. The Board members of GooDBuzz were now looking at alternate options before them and how they should proceed. They decided to look for private equity investment in the company. TO TRIGGER THINKING You are an advisor to these three companies, who have approached you for help in writing their business plan. • How would you proceed to write the business plan? • Would the approach to writing the plan and questions asked by you be similar in each of the above cases, or different? • What are the key points in the business plan in each of the above cases? • In each case, identify what could be a key deal issue. o Look for both key deal drivers and key deal breaker issues. o Are they similar or identical in all the three cases? o Does your business plan address these issues, directly or indirectly? ©av Class Notes: The Writing of a Business Plan 8
  9. 9. Financial Forecasts in a Business Plan - The process in summary • Financial Statements to be prepared on a monthly basis - for 3 to 5 years: o Profit & Loss Account o Balance Sheet o Cash Flow Statement • The statements should be separately prepared for different divisions, if any (ie if there are two separate India offices, UK office and any other office, these should be separately prepared). These should then be consolidated to get overall company statements, month-wise. Excel spreadsheets are useful, if one uses the formulas and features to automatically add, subtract as required. Please do use spreadsheet features for calculations and linking of sheets. This is important, as otherwise one will spend too much time with manual calculations. Further, this reduces the possibilities of arithmetical error, if used correctly and with care. • Profit & Loss Account o The different heads are to be considered separately for each office as mentioned earlier. o Please note that this list that follows is not exhaustive and one has to clearly put down any possible revenue and expenditure item. o The basis and assumptions behind these expenditure/revenue calculations may be indicated for easy verification and clarification. This also helps when one wants to make some changes in assumptions and when numbers are to be verified. o Wherever possible one should get some data from existing organizations for example for revenue per employee, product pricing etc. on the income side and on the expense side, salary, per diem cost on travel, rental, telephone, water and electricity etc. o The illustrative key heads are described below:  Revenue expected - what is the basis for this. The contracts on hand are to be examined and clauses to be read carefully, to see whether they can be met, post proposed transaction/ investment.  Types of revenue – product revenue, licence fee (number of units into rates etc), services revenue, in detailed with assumptions stated about target customers (with number & details of possible customers), other income  Employee costs - monthwise no of employees and salaries to be indicated. Year 2, add any expected salary increment (10 or 15%). Plus you would be having different salary structures for different offices, India & UK, for example. These have to be stated. To include all salary costs.  Raw material costs  Water and power costs  Communication costs - connectivity, internet, phone lines (including deposits, rentals, running costs, based on no. of land lines and no. of cell phones)  Travel, in India, UK, other countries - no. of trips for different employees to be estimated and costs input, based on approximate travel costs and per diem.  Food/ staff welfare, entertainment  Rent (Deposits for rent to come in Balance Sheet). If any service apartments, guest houses are taken in US or India, these costs are to be included, again based on no. of sq feet, based on no of persons etc. Here again, one should take existing comparative numbers to get some idea of what actual costs are and what one expects them to be in the future  Postage expected, courier etc.  Stationery and other office supplies ©av Class Notes: The Writing of a Business Plan 9
  10. 10.  Books, newspapers, periodicals  Professional fees, consultancy, legal charges, tax consultancy charges, audit fees  PR and marketing costs  Rental charges for office equipment,lease charges or hire charges  Security charges  Training charges  Recruitment charges  Repairs and maintenance  Freight  Insurance  Finance charges  LC charges  Depreciation  Taxes, if any  Miscellaneous • Balance Sheet o Current assets, inventory and debtors on hand, based on revenues expected and time given to debtors to pay the money, ie credit period on sales (30 days, 45 days etc.) o Liabilities due based on credit period availed o Capex and long term assets - based on production expected, plant capacity, no. of work stations, research tools and equipment, vehicles etc. as applicable o To take these capex items monthwise, based on requirement. Again to make assumptions for payments, ie in some cases 50% is paid upfront. This will come as an advance paid in the balance sheet, till such time the item is received and commissioned, when it will move to a capex item. • Cash Flow o Detailed monthwise cash flow statement to be prepared, based on actual cash received and paid out from and to  Creditors for capex, revenue expenditure  Debtors for advances paid for capex and for income earned but not received till close of credit period in invoice.  Deposits made for rentals, telephone etc  Other payments for expenses  Receipts from sales, interest earned from bank if any etc. • Details of IP costs, product development and research costs to be quantified One way to cross check if you have captured all items of income and expenses, assets and liabilities and cash flow, in the forecasts, is to check this against all the heads of account in your previous audited financial statements, if any. Another way to cross check this is to look at the financial statements of listed companies in similar industries and look through all the listed heads of income and expense. These are illustrative items. Basically, the idea is to put numbers for a story that is consistent through the document. ©av Class Notes: The Writing of a Business Plan 10