NEW ENTERPRISE ANDINNOVATION MANAGEMENT NE & IM - Dhaval Motwani, MEFGISESSION 7:BUSINESS PLAN: CONCEPT,METHODS, ANALYSIS ANDINTERPRETATIONPrepared by: Dhaval Motwani
BUSINESS PLAN: INTRODUCTION A written document describing all relevant internal and external elements and strategies for starting a new venture NE & IM - Dhaval Motwani, MEFGI Integration of various functional plans like marketing plan, financial plan, manufacturing plan and human resources plan Addresses both short term and long term decision making for the venture. Integrates and co ordinates business objectives and strategies when venture contains a variety of products and services. Important to potential investors and even customers Helps to keep in mind external factors like new regulations, competition, social changes, new technology, changes in customer needs etc.
WHO WRITES A PLAN? Entrepreneur himself Lawyers, accountants, marketing consultants, NE & IM - Dhaval Motwani, MEFGI engineers help in writing a plan with their inputs Internet also helps provide good inputs Also inputs from partners whose core competence are in a specific area, ie. Those competencies that an entrepreneur doesn’t possess
SCOPE AND VALUE OF BUSINESSPLAN Who reads...? Employees, investors, bankers, venture capitalists, suppliers, customers, advisors and consultants NE & IM - Dhaval Motwani, MEFGI All the issues and concerns must be addressed as all the above groups will read it from different perspectives Three perspectives to be considered while preparing the plan Entrepreneurs perspective: who understands the creativity and technology involved in the new venture Clear articulation about what the venture is all about
Marketing perspective: the viewpoint of the customer to be kept in mind Investors perspective: the viewpoint of the investor to be kept in the mind Sound financial projections required, assistance from external sources to be taken if the requisite skills missing Size and scope of the plan depends on the nature of business and product. Eg: new e-commerce venture will require a different focus than for a NE & IM - Dhaval Motwani, MEFGI retail video shop Size of market, competition and potential growth also affect the scope A business plan Determines the viability of venture in a designated market Provides guidance to the entrepreneur in organizing his/her planning activities Serves as an important tool in helping obtaining finance Potential investors look at a business plan with great interest and detail It also forces an entrepreneur to assess things like cash flow, cash requirements and makes him think about the future Also a self assessment for the entrepreneur and makes him/her think about the various scenarios and obstacles that might prevent the venture from being a success
EVALUATION OF THE PLAN BY THE LENDERSAND INVESTORS The plan needs to focus on all the target groups and purposes of use Suppliers look at the plan before committing to supply materials on consignment Customers review the plan before buying a product that may require significant long term commitment like high-technology telecommunications NE & IM - Dhaval Motwani, MEFGI system. Attention on the entrepreneur’s experience and projection of the market place Lenders are interested in the ability of the new venture to pay back debt including interest within a stipulated time period Banks want objectives analysis of the business opportunity and potential risks
EVALUATION OF THE PLAN BY THELENDERS AND INVESTORS The 4 Cs that lenders look at Character: entrepreneur’s credit history Cash flow: the ability of the entrepreneur to meet the debt and NE & IM - Dhaval Motwani, MEFGI interest payments Collateral: tangible assets being secured for the loan Contribution of Equity: amount of personal equity that entrepreneur has invested Investors emphasize on the entrepreneur’s character and spend much time in conducting background checks. Investors play an important part in the management of the business so want to make sure that the entrepreneur is compliant and willing to accept the involvement, high rate of interest
PRESENTING THE PLAN Oral presentation of the plan before an audience of potential investors is important. Entrepreneurs are expected to “sell” the business NE & IM - Dhaval Motwani, MEFGI plan, invite queries and solve them so as to invite investments In specific forums, the entrepreneurs can present the plan in front of more than one investors who can request negotiations and can lead to final investment Likely that venture capitalists or angel group would ask the entrepreneur to present to their partners before the final investment Typically the focus is on Why is this a good opportunity An overview of the marketing program which addresses how the opportunity will be converted into reality Results of this efforts in terms of sales and profits
INFORMATION NEEDS A proper feasibility study of the business concept required NE & IM - Dhaval Motwani, MEFGI Helps to identify possible barriers to success Information about various facets like marketing, finance, production and operations Clearly defined goals and objectives would prove a good guide Also provide a good framework for the business plan, marketing plan and financial plan
UPSIDE-DOWN PYRAMID APPROACH TOGATHERING MARKET INFORMATION General environment and demographic trends National industry trends Local environmental and NE & IM - Dhaval Motwani, MEFGI demographic trends Local industry trends Local competition : strengths & weaknesses Market positioning Market objectives
GATHERING INFORMATION One of the most important information is about the market potential for the product or service Well defined market makes it easier to project NE & IM - Dhaval Motwani, MEFGI the market size and set goals for the venture. Information required on industry and environment The best way is to visualise the process as an inverted pyramid Start with a broad based data and information and work down until a positioning strategy is developed Setting of quantifiable goals and objectives All this information can be used in the industry analysis and marketing planning sections
OPERATIONAL INFORMATION NEEDS Entrepreneur can need information on the following as far as operational needs are concerned Location: company’s location and accessibility to customers, suppliers, distributors Manufacturing operations: basic machine and assembly NE & IM - Dhaval Motwani, MEFGI and the subcontractors etc Raw materials: raw materials required and suppliers name address and costs Equipment: basic equipment and its cost (purchase cost or lease cost) Labour skills: the unique skills needed, personnel, pay rate and where and how these skills will be obtained Space: space needed and cost (owned or leased) Overhead: each support item like tools, supplies, utilities and salaries
FINANCIAL INFORMATION NEEDS Before preparing a financial plan, the entrepreneur needs to prepare a budget listing all possible expenditures and all revenue sources The budget includes capital expenditures, direct operating expenses and cash expenditures for non expense items NE & IM - Dhaval Motwani, MEFGI Entrepreneur needs to identify the benchmarks in the industry that can be used in preparing the final pro forma statements in the financial plan Such benchmarks help in establishing reasonable assumptions regarding expenditures based on industry history and trends Expenditures like rent, utilities, insurance, personnel costs etc need to be ascertained Data for financial information can be found from sources like Financial Studies of the Small Business, Annual Statement Studies, various trade associations and trade magazines. Pro forma statements need to be prepared as per the investors requirements (monthly in the first year, then quarterly or annually for the next two years)
INTERNET AS A RESOURCE TOOL A very important and cost effective tool Search engine and source of information on NE & IM - Dhaval Motwani, MEFGI almost everything like industry analysis, competitor analysis, market potential Competitors websites help gain knowledge about their strategy Also helps to distribute, advertise and sell company products and services
WRITING THE BUSINESS PLAN Very important phase Time consuming NE & IM - Dhaval Motwani, MEFGI Depends on the experience and knowledge of the entrepreneur and the purpose it intends to serve
Introductory page Titlepage which provides a brief summary of the business plans contents Should contain the following Name and address of the company NE & IM - Dhaval Motwani, MEFGI Name of the entrepreneur(s), telephone number, fax number, email address and website Paragraph about the company and nature of business Amount of financing needed Statement of confidentiality of the report
Executive summary Written after the total plan is written Stimulates the interest of the potential investor 2-3 pages in length Investors use this to determine if the entire business plan is worth reading NE & IM - Dhaval Motwani, MEFGI Should highlight in a concise and convincing manner the key points in the plan Issues answered by an executive summary What is the business concept or model? How is this business concept or model unique? Who are the individuals starting this business? How will they make money and how much? Should highlight the key factors and provide a strong motivation to the person holding the plan to read it Eg: if one of the entrepreneurs has been successful in other start- ups, this persons introduction and background needs to be emphasized on.
Environmental and Industry analysis Assessment of externally uncontrollable variables that may impact the business plan Economy: trends in GNP, unemployment by geographic area, disposable income, stage of NE & IM - Dhaval Motwani, MEFGI economic development Culture: cultural variables, changes or shifts in cultural trends etc Technology: prevalent standards in technology aspect, potential developments, resources committed by major industries or government etc Legal concerns: legal issues, future legislations, deregulation of prices, restrictions on media advertising etc
Reviews industry trends and competitive strategies Industry demand: helps ascertain whether market is growing or declining, number of competitors, possible changes in consumer needs Competition: awareness about the competitors, their strengths and weaknesses, NE & IM - Dhaval Motwani, MEFGI
Description of venture Provides complete overview of products, services, and operations of new venture Begins with mission statement or company mission of new venture NE & IM - Dhaval Motwani, MEFGI Next comes a number of important factors that provide a clear description and understanding of the business venture Key elements to be described are the product/service, location and size of the business, personnel, office equipment, background of the entrepreneurs, history of the venture etc. Proper description of the location of the office building, space it will occupy, parking, access from roadways to facility, access to customers, suppliers, distributors, delivery rates and town regulations, etc Issues regarding legalities of the space, whether owned or rented or leased
Production plan Should describe the complete manufacturing process If some part or full process is subcontracted then details like the name and address of the subcontractor, location, reasons for his selection, costs, contracts etc need to be described NE & IM - Dhaval Motwani, MEFGI In case of self manufacturing, a plant layout, machinery, equipment, raw material, suppliers of raw materials, their names, addresses, terms, costs, contracts, etc need to be described.
Operations plan Description of flow of goods/services from production to customer Might include inventory or storage of manufactured products, shipping details, inventory and control procedures, customer support services NE & IM - Dhaval Motwani, MEFGI Retail service providers need this section in business pan to explain the chronological steps in completing a business transaction Helps to highlight the help of technology in the overall process
Marketing plan Describes market conditions and strategy related to how products and services will be distributed, priced and promoted Any market research evidence to support any critical marketing decision strategy to be described NE & IM - Dhaval Motwani, MEFGI Specific forecasts for products/services included here to project profitability of the venture Also includes budget and appropriate control steps Potential investors generally look to this section as critical to success A road map for short term decision making
Organizational plan Describes form of ownership and lines of authority and responsibility of members of new venture Forms of ownership Proprietorship Partnership NE & IM - Dhaval Motwani, MEFGI Corporation For partnership, details and terms of partnership need to be described For corporation, the details of stocks, share options, name and addresses and resumes of directors and officers of the corporation, organizational chart indicating the line of authority and responsibilities of the members of the organization, etc need to be described Provides the investor with a clear idea about who will control and how will the interaction between different members be
Assessment of risk Identifies potential hazards and alternative strategies to meet business plan goals and objectives First the entrepreneur should indicate the potential risk to the new venture NE & IM - Dhaval Motwani, MEFGI Next he should discuss what might happen if these risks become a reality Finally the strategy to either prevent, minimize or respond to the risks should be discussed All potential major risks and minor risks to be described
Financial plan Describes projections of key financial data that determine economic feasibility and necessary financial investment commitment Summary of forecasted sales and approximate expenses for NE & IM - Dhaval Motwani, MEFGI the first three years with first years projections monthly Cash flow figures Projected balance sheet
Appendix Any backup material that is not necessary in the text of the document Letters from customers, distributors, subcontractors to be included here NE & IM - Dhaval Motwani, MEFGI Leases, contract or any other types of agreements that have been initiated to be included Price lists from suppliers, competitors etc
USING AND IMPLEMENTING THEBUSINESS PLAN Designed to guide the entrepreneur through its first year of operations NE & IM - Dhaval Motwani, MEFGI Implementation should contain control points to ascertain progress and initiate contingency plans if necessary Important that the business plan does not end up in a drawer somewhere but actually implemented Proper planning ensures proper implementation Effective implementation can occur by developing schedules to measure progress and to institute contingency plans
MEASURING PLAN PROGRESS Points or time intervals should be fixed at the introductory phases as to when to carry out the check on the schedules A frequent check on profit and loss statement, cash flow projections, information on inventory, production, quality, sales, collection of accounts receivable etc NE & IM - Dhaval Motwani, MEFGI Inventory control: helps in maximising service to the customer. Better inventory control helps in better rotation of money Production control: helps match cost figures with day-to- day operations costs. Also helps to control machine time, worker hours, process time, delay time and downtime costs Quality control: helps to make sure that the product performs satisfactorily Sales control: gives information on units, price of sales, meeting of delivery dates, credit terms etc. Also helps to control bad debts
UPDATING THE PLAN Plans can become out-of-date due to changes in technology, government regulations, competitors, changing customer preferences, key employees, NE & IM - Dhaval Motwani, MEFGI etc. Being sensitive to changes in the company, industry, and market help the entrepreneur to decide what revisions are required.
WHY SOME BUSINESS PLANSFAIL??? Unreasonable goals Non measurable goals NE & IM - Dhaval Motwani, MEFGI Lack of total commitment to the business Lack of experience in planned business No sense of potential threats and weaknesses Non establishment of customer needs for proposed product/service