Writing a Business Plan

CHAPTER 4
 LEARNING OUTCOMES
Explain the purpose
of a business plan.
Guidelines for
Writing a
Business Plan

Describe the two

primary reasons for
writing a business plan.
Explain why the executive
summary may be the
Describe who most important section of a
reads a business plan.
business plan and
what
they’re looking
for.
INTRODUCTION
A businessplan is a written narrative, typically 25 to 35 pages long, that describes
what a new business intends to accomplish and how it intends to accomplish it.

For most business ventures, the business plan is a dual-purpose document used both
inside and outside the firm.

theplan helps the company develop a “road map” to follow to execute its strategies
and plans.

it
introduces potential investors and other stakeholders to the business opportunity
the firm is pursuing and how it plans to pursue it

The business plan must be substantive enough and have sufficient details about the
merits of the new venture to convince the reader that the new business is exciting
and should receive support.
INTRODUCTION

The business plan must be substantive enough and have

sufficient details about the merits of the new venture to
convince the reader that the new business is exciting and
should receive support. Much of this detail is accumulated
in the feasibility
Reasons for writing business plan
writing a business plan forces a firm’s founders to systematically think through each aspect of
their new venture- which usually takes several days or weeks to complete a well-developed
business plan—and the founders will usually meet regularly to work on the plan during this
period.

writing a business plan forces a firm’s founders to intently study every aspect of their business,
a process that’s hard to replicate in any other way.
 Twofriends are thinking about opening a seafood restaurant. They
spend the next two months meeting four nights a week to hash out
every detail of the business.

 They study the restaurant industry, identify their target market,

develop a marketing plan, settle on a hiring schedule, identify the type
of people they want to employ, plan their facility, determine what
their startup expenses will be, and put together five years of pro
forma (projected) financial statements.

 After32 meetings and several drafts, they produce a 30-page business

plan that explains every aspect of their business. Regardless of how
conscientious the founders of a business are, it’s difficult to discipline
oneself to cover this level of detail absent writing a business plan.
 The second reason to write a business plan is to
create a selling document for a company. It
provides a mechanism for a young company to
present itself to potential investors, suppliers,
business partners, key job candidates, and others.
 Who Reads the Business Plan—And What
Are They Looking for
 A Firm’s Employees : A clearly written business
plan, which articulates the vision and future plans of a
firm, is important for both the management team and
the rank-and-file employees.

 existence of a business plan is particularly

useful for the functional department heads of a
young firm.
Investors and Other External Stakeholders

 External stakeholders who are being recruited to join a

firm such as investors, potential business partners,
and key employees are the second audience for a
business plan.

 Sophisticated investors, potential business partners,

and key recruits will base their assessment of the
future prospects of a business on facts.
 Guidelines for Writing a Business Plan
 a firm’s business plan is typically the first aspect of
a proposed venture that an investor will see.

 If the plan is incomplete or looks sloppy, it is easy

for an investor to infer that the venture itself is
incomplete and sloppy. It is important to be
sensitive to the structure, content, and style of a
business plan before sending it to an investor or
anyone else who may be involved with the new
firm.
 Structure of the Business Plan
Typically, investors are very busy people and
want a plan where they can easily find
critical information. If an investor has to
hunt for something because it is in an unusual
place or just isn’t there, he or she might
simply give up and move on to the next plan
Content of the Business Plan
 The business plan should give clear and
concise information on all the important aspects of the
proposed new venture. It must be long enough to provide
sufficient information, yet short enough to maintain
reader interest.

 For most plans, 25 to 35 pages (and typically closer to

25 than 35 pages) are sufficient.

 After a business plan is completed, it should be

reviewed for spelling, grammar, and to make sure that
no critical information has been omitted.
 Style or Format of the Business Plan
 The plan’s appearance must be carefully thought out.
It should look sharp but not give the impression that a
lot of money was spent to produce it.

 Those who read business plans know that

entrepreneurs have limited resources and expect them
to act accordingly.
 Exploring Each Section of the Plan

Cover Page and Table of Contents

 The cover page should include the company’s
name, address, phone number, the date, the contact
information for the lead entrepreneur, and the
company’s Web site address if it has one.

 The contact information should include a land-

based phone number, an e-mail address and a cell
phone number
 The contact information should include a
land-based phone number, an e-mail address
and a cell phone number.

 A table of contents should follow the cover

letter. It should list the sections and page
numbers of the business plan and the
appendices
 Executive summary
 The executive summary is a short
overview of the entire business plan.

 it is meant to be a summary of the plan itself.

 An executive summary shouldn’t exceed two

single-spaced pages.
 Industry Analysis

 The main body of the business plan begins by

describing the industry the business will
enter in terms of its size, growth rate, and
sales projections.

 focus strictly on the business’s industry

 it should have a good grasp of its industry—

including where its industry’s promising areas
are and where its points of vulnerability are
located.
 Industry structure refers to how concentrated
or fragmented an industry is. Fragmented
industries are more receptive to new entrants
than industries

 The most important environmental trends are

economic trends, social trends, technological
advances, and political and regulatory changes
 Company’s description

 The company history section should be brief, but

should explain where the idea for the company
came from and the driving force behind its
inception.

 A mission statement defines why a company exists

and what it aspires to become. mission statement
can define the path a company takes and act as
its financial and moral compass.

 A tagline is a phrase that a business plans to

use to reinforce its position in the marketplace.
 Company’s description

 The products and services section should include an

explanation of your product or service.

 A service’s position is how it is situated relative

to its rivals. If you plan to open a new type of
smoothie shop…

 This section is the ideal place for you to start

reporting the results of your feasibility analysis.

 If the concept test, buying intentions survey, and

library, Internet, and gumshoe research produced
meaningful results, they should be reported here.
 A milestone is a noteworthy or significant event. If you have
selected and registered your company’s name, completed a
feasibility analysis, written a business plan, and established
a legal entity, you have already cleared several important
milestones.

 A milestone is a noteworthy or significant event. If you have

selected and registered your company’s name, completed a
feasibility analysis, written a business plan, and established
a legal entity, you have already cleared several important
milestones.
 the market analysis breaks the industry into segments and
zeroes in on the specific segment (or target market) to
which the firm will try to appeal.

 market segmentation- which is the process of dividing the

market into distinct segments. Markets can be segmented in
many ways, such as by geography (city, state, country),
demographic variables (age, gender, income), psychographic
variables (personality, lifestyle, values), and so forth…

 Daisy Rock Guitar, a company that makes guitars just for

women, the guitar industry had not been segmented by
gender. Daisy Rock Guitar’s competitive advantage is that
it makes guitars that accommodate a woman’s smaller hands
and build.
 A competitor analysis, which is a detailed
analysis of a firm’s competitors should be
included.
 The Economics of the Business
 This section begins the financial analysis of a
business, which is further fleshed out in the
financial projections.

 It addresses the basic logic of how profit are

earned in the business and how many units of a
business’s product or service must be sold for
the business to “break even” and then start
earning a profit.

 The major revenue drivers, which are the ways a

business earns money, should be identified. If
a business sells a single product and nothing
else, it has one revenue driver.
 The gross margin for a revenue driver is the selling price minus the cost
of goods sold or variable costs.

 The costs of goods sold are the materials and direct labor needed
to produce the revenue driver. So, if a product sells for $100 and the
cost of goods sold is $40 (labor and materials), the gross margin is $60
or 60 percent.

 A firm’s variable costs vary by sales, while its fixed costs are costs a
company incurs whether it sells something or not. The company’s
operating leverage should be discussed next.
 Marketing Plan
 The marketing plan focuses on how the business will
market and sell its product or service. It deals with
the nuts and bolts of marketing in terms of price,
promotion, distribution, and sales.

 The best way to describe a company’s marketing plan is

to start by articulating its marketing strategy,
positioning, and points of differentiation, and then
talk about how these overall aspects of the plan will
be supported by price, promotional mix and sales
process, and distribution strategy.
 A firm’s marketing strategy refers to its overall
approach for marketing its products and
services. A firm’s overall approach typically boils
down to how it positions itself in its market and
how it differentiates itself from its competitors.
Financial Controls
 Every business wants to increase profits through
financial controls.

 They might analyze quarterly income statements for

excessive ongoing expenses; to look over the financial
ratios to ensure sufficient cash is available to pay off
debts; or that assets are being utilized efficiently.
Financial Controls
 Managers might use traditional financial measures
such as ratio analysis and budget analysis.

 Liquidity ratios measure an organization’s ability to

meet its current debt obligations.

 Leverage ratios examine the organization’s use of debt

to finance its assets and whether it’s able to meet the
interest payments on the debt.

 Activity ratios assess how efficiently a company is

using its assets.
Financial Controls