Please read the article and answer about questions. Over the longer term, even w

Question

Please read the article and answer about questions.

Over the longer term, even with a clear competitive advantage, a sound strategy, and a good sales plan, your competitors are not likely to give up the market. They will fight back. When they do that, trying to match your sales plan features or competitive advantage, what are you keeping in reserve to help you fight back? Here is where you want to have several additional strategies that play against in some aspect of business, followed by education. Sometimes giving the specifics of the accom- plishment does the job, even if no award was given. For example, being able to say, “In my five years at Hobbyco, my sales increased an average of 50 percent a year” shows your sales abilities are improving, which is good.

When looking for accomplishments, do not limit yourself to business. Particularly for students and stay-at-home spouses, there are often organizational accomplishments that are relevant. Activi- ties undertaken or managed for schools, churches, social organizations, civic organizations, or com- munity groups are often important indicators of expertise. For example, managing a team during a fund-raising event may help prove your skills in people management and making quick decisions.

Related Service Providers (1/2–1 p.)

These days, small businesses are rarely alone, and the quality of the professionals surrounding you tells people a lot about how good you might be. Taking a paragraph or two to identify your bank and banker, your attorney and legal firm, accountant or bookkeeper, and other consultants can help show that you have high-quality supports. If you have major relationships established with well- known suppliers or customers, list these here also. If you have a board of directors, members can be mentioned here or under key personnel. If you have a board of advisers made up of people who are not owners, they would be listed here.

Location (1/2 p.)

The other major organizational asset of a business is its location. This is given here, along with a description of the facility that focuses on how it meets the strategic and sales goals of the business. Also mention whether you own, lease, or rent the property. If you have investments in the property, either in terms of ownership or improvements made to it, mention those too. If there are plans to expand the facilities, mention them.

The Financials

When you are using a plan to find investors, the financials section starts with a page on critical risks and one on the deal being offered investors. For all types of business plans, a set of financial reports or projections then follows. For either approach, it is always important to develop the financials in the most conservative way possible—never overstate your sales or profits, always explain the assumptions you are making, and provide (or be ready to give) the source for every number you include. It is usually better to include fewer numbers, but ones you understand inside-out, rather than having lots of numbers, but knowing only in a general way how you ar- rived at them.

Critical risks are discussed in more detail below. The deal subsection typically talks about how much money is needed and how the funds will be used. This subsection goes on to address any prior or existing investments and the current ownership situation. Then it explains the equity being offered to investors, giving the price and the kinds of assurances offered (e.g., seats on the board of directors, buy/sell agreements, etc.). Here the plan details how investors will be able to sell or redeem their equity in order to harvest their investment and exit the business. The best plans explain how inves- tors will be assured that management will be responsive to investor concerns. Typically the critical risks and the deal will each take about one page each.

The financial statements expected include: (1) income statements (also called a P&L for profit and loss) and its assumptions, (2) cash flow and its assumptions, and (3) balance sheet and its as- sumptions. For start-up businesses, it is also common to include a listing of the expenses incurred in the start-up process.

For an existing business, the financials report the last two years of actual data, and then offer three-year projections for the income, cash flow, and balance sheet. For a start-up business, the tradition is to offer three years of data projections. If you will take three or more years to show a profit, it makes sense to give projections for five years. In either case, income and cash flow are given monthly for the first year, quarterly for the second year, and annually for the third and any later years. Think in terms of a layout described in Exhibit 8.2.

Note that each of the financial statements also includes its assumptions. Included as endnotes, the assumptions are often considered to be the most important part of the financials. Assumptions explain how the computations are made, which items are included or excluded, and whether there are any special considerations underlying the particular numbers. For example, key assumptions include how sales are computed, which items are expensed versus depreciated, and how inventory and business valuations are made.

A schedule of the major milestones or benchmarks the company plans to achieve is often in- cluded in the financials section, typically after the assumptions page. If significant milestones or benchmarks have already been achieved, these can top off the schedule, so readers can see how the firm has progressed.

The Appendixes

With approximately 10 pages used for financials, you have up to 5 pages left for appendixes. The most popular appendix is a one-page version of the owner’s resume (see Skill Module 8.3 and also see an example of a resume for a student starting a business in the appendix at the end of this chap- ter). There are several other useful appendixes, listed below. The ones you select depend on what you are trying to highlight in your business plan. They can include:

          Product or service pictures or specifications (important when you stress features or style, or when your product or service is not familiar to readers).

Copies of signed contracts, letters of intent or commitment, or contingency contracts from customers or investors (useful to show acceptance).

          Results of marketing studies or pilot sales efforts (useful for showing market acceptance). Industry reports (if there is significant information not included in the plan). Price lists for products or services. Floor plans of the location, if it is central to the business (e.g., a manufacturing facility or restaurant).          Advertising copy, such ads, logos, catalog pages, brochures, sales letters, or press releases.

          Customer or spokesperson testimonials.      Letters of opinion from intellectual property attorneys on prospects for patent or trademark

protection or from manufacturers or consulting engineers about the viability of production processes for the product.

If readers want to know more about something that is not in the plan, they can ask you for the additional information. So do not worry too much about the many possible appendixes you cannot include. The goal of appendixes is to provide supporting information that helps detail or support the key selling points of your plan.

At this point, the writing of the classic business plan is done, but there is still work to be done assembling it. Plans are typically delivered as an 8 1/2- by 11-inch document or electronically as an Adobe Acrobat PDF file, which has been carefully and repeatedly checked to eliminate spelling and grammar mistakes. It has been checked to make sure all pages are included and cleanly printed. While your own copy of the plan might be kept in a loose-leaf binder to make insertions and deletions easy, the copies you give out should be spiral bound (so they lay flat when opened). Covers should be sturdy to protect the plan from the inevitable coffee stains of business. Cover letters are typically clipped to the cover, rather than included in the plan itself, so the reader opens the plan to see the title page.

Focusing Your Business Plan

To be successful in telling the firm’s story, a business plan needs to match the needs of the reader. Businesses face four situations in which reader needs are specific enough and distinct enough that it makes sense to write the plan with particular emphases in mind.

          Plans for a pioneering business: When your product or service is truly new to everyone, it is considered a pioneering business. With a pioneering business, your greatest problems are: (1) helping people understand how it works, (2) showing them how they would use it, (3) estimating how many people would want it, and (4) estimating how much they would be willing to pay for it. Anything you can do to help readers experience and understand the prod- uct or service helps demystify it. Plan on a detailed explanation of the product or service and how it works. Make sure you explain the benefits customers would receive, and talk about the customer’s personal experience in trying out, buying, and using the product. The value of pre- selling, pilot tests, or test marketing cannot be stressed enough. If 100 people tried the product and 10 bought it, you have a powerful proof of concept. Pioneering products also face a hurdle around manufacturing—can they be manufactured at a cost that leaves a chance for profit? Let- ters from manufacturers or consulting engineers confirming the viability and production costs of your product go a long way to alleviating fears in this area. Also, if your product is a minor variation on a product already made (for example, a consumer version of an existing industrial product), play this point up, since it means fewer problems are likely for your specific product.

          Plans for a new entrant business: When your product or service already exists but your firm is the first of its kind in your market, it is considered a new entrant business. As such it is always harder to prove that your product or service will work. Just imagine trying to explain the idea of a $5 cup of coffee to people who had never heard of Starbucks! In response, help make the product or service seem more familiar by detailing how it is used by customers, and give more background on how the product or service has done in other markets, especially markets similar to yours. Also emphasize existing operations in your industry analysis. Seeing that it has worked elsewhere takes much of the mystery out of the question of whether it would work where you plan to market it.

          Plans for an existing business: Occasionally, entrepreneurs start a business before they write a plan for it. When writing a plan for an existing business, you have the benefit of knowing the his- tory, the existing market, and the financial track record of the firm. These form a foundation for the plan, so the projections about future markets, sales, and profits should clearly build on these historical facts. It can make sense to gather information on existing customers to help clearly de- fine the market, and often suppliers and trade associations can provide more in-depth information on market shares and competitors. Existing firms have assets to protect, such as the customer list, the firm’s name, and any intellectual properties it has developed (e.g., a patented way of perform- ing work, a trademark, a copyrighted report, a recipe protected as a trade secret). Showing how you plan to protect and perhaps even make additional profits from your intellectual property (e.g., through licensing patents or trademarks) strengthens the plan, as does talking about new ideas for increasing sales, which typically appears in the research and development section.

          Plans for a business with significant government involvement: Some businesses depend on government approvals to go forward. Examples include salvage yards, garbage dumps, companies using toxic chemicals, nursing homes, service stations, and even in many places, day care centers. When government gets involved in a major way, for example, having to approve the business license, zoning, or environmental impact, delays are inevitable. You need to build a plan that anticipates delays and either works around the parts of the business requiring approvals or is able to go into a type of sleep mode, using as few resources as pos- sible until approval arrives. Working around approvals usually hinges on selling services or products that are part of the business but do not require specific approval. For someone start- ing a service station, it may be possible to do minor car repairs such as oil changes, detailing, or tune-ups at the customer’s home or workplace. This helps spread word, build a customer base, improve skills, and keep cash flowing until approval for the service station comes.

Once you have written the complete business plan, you are positioned to create special-purpose versions of the plan to meet the needs of a wide variety of people important to your business. Usu- ally these special-purpose plans use a subset of the total plan. In addition to the full business plan described above, there are seven other special-purpose types of plan:26

If you intend to send your plan to professional funding sources such as private banks, in- vestment clubs, or venture capital firms, it is common to send what is called a mini-plan or a screening plan. The idea is to give the basic overview of the firm and a detailed look at the financials. This is because funding sources typically start their decision process with clear ideas about the industry and the profit levels they want to pursue. Screening plans usu- ally consist of the cover letter, title page, executive summary, and financials sections of the business plan. The only time any appendixes would be included is when it is important to prove the viability of contracts, intellectual property protection, or the product’s ability to be manufactured. A screening plan can also be a useful way to get into the planning process. Michael McMyne won one of the Global Student Entrepreneur Awards for his consulting

business. When he started, all he used was his executive summary and the financials.27             You may find that the business plan has a lot of information you would like to share with po- tential customers or suppliers, but you do not want them to see your financials. One variant of the traditional business plan is called the informational plan. Informational plans typically consist of company and organization sections. The cover letter, title page, executive summary, and table of contents are typically revised to reflect the differences. Relevant appendixes

might also be included, such as detailed product descriptions or price lists.             A special form of informational plan posted on the Internet is the proof-of-concept website. This kind of site is designed to solicit information on customer interest. They are particularly useful for demonstrating a technology or service that is new or novel (see VividSky’s site on the Online Learning Center), or to reach a market that is very widely spread out, making conventional promo- tional techniques too expensive. The goal is to inform customers and partners about the firm and the product, so proof-of-concept websites consist of the vision and mission statements, the product/ service description, and often an animated or interactive demonstration of the product or service. Short biographies of the key personnel replace resumes, and the site may also have price or product lists or testimonials. The site itself tracks information about the viewers. Visitors are asked for feed- back on the concept and are offered the chance to be kept up to date as the product nears the market.         In seeking a marketing or joint venture partner or a key employee, you need to provide more of an idea about your market and approach to it. In the early stages of finding a partner, how- ever, it is usually too soon to share your detailed financial information. As a result, a key employee/partner plan (also called a summary plan, concept plan, or idea plan) can be drawn up to include all the materials of an informational plan, plus the market section and

critical risks subsection of the regular business plan.          An invention plan focuses on the market and operationalization of a new invention. Inven-

tions are typically licensed to others, so the organization section simply describes the inven- tor and any business the inventor runs, to provide background. The product or service being invented is given a very detailed description, with diagrams or pictures to help the licensee understand it. While the plan helps to explain the market and competition to the prospective licensee, the marketing strategy is not typically included. Legal issues tend to focus on intel- lectual property protection (e.g., patents, trademarks, etc.) instead of on the legal form of or- ganization, and the financials are limited to the prospective deal and risks, since the invention does not come with a firm that creates sales.

          There are only two types of plans that actually add material to a full business plan. Operational plans are designed to be used as working documents within a business. So in addition to all the material typically included in a full business plan, an operational plan includes detailed specifications of the major techniques, methods, recipes, formula, and sources used by the firm to do its work.

          The other type of plan which adds to a business plan is a private placement memo or PPM. PPMs are the official version of a business plan offered to potential investors. As such, it is a legal document, and should be drafted by a lawyer. PPMs build on a business plan, using information about the company, products and services, strategy and operations, and competition. There are also sections on the risks facing the business, the people and partnerships, the deal being offered, the financial statements, and the planned use of the investment money, although these are often longer (for the risks section, much longer) than in a business plan. There are also sections unique to a PPM such as a plan for the description and distribution of shares, compensation of managers and offi- cials, and even the articles and bylaws of the corporation. In short, PPMs are complex and exacting, and should be left to lawyers. However, the basis for a PPM is the business plan that you create.

Table 8.3 provides an easy way to compare the different types of special-purpose plans and the components they take from the full business plan. Even though the table shows the business plan sections and subsections usually included, it is important to keep the specifics of your business and your readers in mind. If sections of the business plan seem inappropriate for your type of business or for the specific readers who will see the plan, it makes sense to leave them out. The business plan is first and foremost a sales document, and tailoring the plan’s “pitch” to the specifics of your business and the readership is always a smart move. The Most Common Critical Risks in a Plan

Every business faces risks in the real world, so every business plan needs to spend some time ad- dressing them.28 The exact issues raised by business experts, bankers, lawyers, and investors are often specific to your plan, but the themes they consider in assessing risks are actually quite com- mon. Knowing these risk themes, you can go through your business plan, identify the risks, and determine how you want to handle them, the way Dan Watkins of DigitalFirst Productions did (see Small Business Insight box on page 239). Each of the risks can be handled, but the best test is to have people in your target audiences give you feedback on your plan.

1.         Overstated numbers: Examples include sales or profits that are too optimistic, owner salaries above the minimum needed to live.

2. Numbers that are wrong: Examples include balance sheets that do not balance, numbers in the financials that do not flow from one section to the next (look at Figure 13.1 to see which numbers “flow” from one of the financial reports to another), no assumptions given for the financials, and ratios that do not match RMA or other standards (Standard & Poors, BizMiner), with no explanation given for the differences.

3. Inadequate cushion: The number one killer of young firms? Not enough money. Having enough cash to survive three months goes a long way to avoiding this risk.

4. Inadequate payback: There are always opportunities out there; is yours worth someone’s time, energy, and (maybe) money? Any plan that does not clearly specify the key paybacks to readers will fail to sell them on the idea. Don’t offer an investor a 10 percent return when cor- porate bonds offer nearly that with little risk of default.

5. Narrative and financials do not fit: If you have a plan that calls for a large marketing cam- paign, but financials do not show costs for one, there is a problem.

6. No direct customer connection: If it sounds like you have not actually talked to potential customers about your product/service, readers will consider that a major problem.

7. Uncertain sales (especially conversion rates): You need to prove your sales estimate. The best way is to know your conversion rate (alias hit rate), which is the percentage of people who buy out of the total population of people you approach. You get this from test marketing or preselling (introducing your product to potential customers and taking orders for later delivery).

8. Overlooked competition: You do not want to overlook a major player in your industry. If a search on the Web or in a phonebook can turn one up you could be in trouble. Also be broad in your search for competitors. For example, a student claimed there was no competition for his wireless cell phone headset because he didn’t use Bluetooth, but the Bluetooth headset makers could quickly change radio types if it made business sense. Recall Porter’s five forces (rivals, substitutes, etc.) to find competitors.

9. Experience deficits: Do you (or someone else in your firm) have experience in (a) the line of business, (b) the industry, (c) the locality, (d) managing?29 Have it, find it, or say how you’ll learn it.

10. “What” problems: For the product or service, make sure it is explained clearly enough so anyone could understand it. Also make sure the plan (or cover letter) is clear about what is being asked of the reader (e.g., invest, make a loan, give feedback, partner, etc.).

11. Deadly aggravations: Looking and sounding professional is key. A plan with misspellings looks amateurish. Lacking a table of contents or page numbers in the plan makes life harder for people you want to impress. Selling instead of summarizing in the Executive Summary comes across as hucksterism.

Ideally, you should have a circle of advisers who can review the plan and help identify the critical risks and your coverage of them. This circle might include successful entrepreneurs you know, lawyers, or accountants. Other good resources include the free consultants from the Service Corps of Retired Executives (SCORE), available via www.score.org, or your local Small Business Development Center (www.sba.gov/sbdc). There are even websites that make it possible for you to get a preliminary analysis of your plan. One of the most complete is Ibis Associates checklist at www.ibisassoc.co.uk/quiz/start-up-business-questionnaire.htm. The SBA also has an online self-assessment (http://web.sba.gov/sbtn/sbat/index.cfm?Tool=4) that is keyed to their resources

and is suitable for a wide range of businesses. A very popular self-assessment for Internet-based businesses is the Startup Genome Project (www.startupcompass.co). To get a quick check of your major financial measures, you can use the BizStats website (www.bizstats.com), and the Small Business Threat Index (www.entrepreneur.com/i/images/misc/threatquiz/threatquiz.swf). The key is to get as much feedback as possible before sending it out in hopes of money, sales, or people.

Presenting Your Plan

When it works, a written business plan is the way to get on the schedule of someone who can pro- vide the money, the expertise, or the markets you seek. In such cases, the written plan is followed by a chance for you to make a formal presentation of your plan and answer questions about it. The business plan presentation, like the plan itself, has a very clear tradition about how it is supposed to be done. Knowing this tradition can help you quickly learn what is expected when presenting a plan to others.

A business plan presentation usually lasts 10–15 minutes, followed by 15 or more minutes for questions. Usually the presentation provides an overview of key points of the business plan—a chance to sell your ideas and, most of all, a chance to sell yourself.

A major part of any business plan presenta- tion is a chance for the listener to form an opinion about you as an entrepreneur. The key things an influential person looks for in you are: (1) your passion for the business, (2) your expertise about the business and the plan, (3) how professional you are in your work, and (4) how easy it would be to work with you. How do you show these?

          Passion for the business: When presenting, do not read. Think of yourself as telling a story— a fascinating story—about your business. Help listeners understand why you are excited about the business, proud of it, and ready to stake your reputation and assets on it. Learn your presentation so well that it comes out as an often-repeated, beloved story, not as a prepared statement.

          Expertise about the business and the plan: Practice answering questions about the plan. Ex- pect really tough questions. Assume people do not trust your assumptions when they first read them. Be ready to explain where you get your assumptions, your numbers, and your ideas. Be ready to mention sources. Be ready with comparisons to competitors and their offerings. Know how every number in the plan came about and what it means. For example, it is not uncommon for a banker to ask, “In your cash flow statement for April in the first year, you say you will be spending $1,140 on sales promotion expenses. How did you get that number—and isn’t it a bit high?” It is better to have less material and know it backwards and forwards than to have material in the plan you do not totally understand.

How professional you are in your work: Your plan should look professionally done. It should be neat and orderly, with perfect spelling and grammar. When you present it, you should be in a business suit or dress, clean and pressed. Carry copies of your presentation slides to give the listeners. And have copies of your slides on acetates and on disk so that you can present no matter what technology is available. Have business cards ready, and bring a couple extra copies of the plan in case someone unexpected comes to the presentation. Meet all those attending the presentation with a smile and a firm handshake. Give them your card and take theirs if they offer one in return. Make sure you know the names of all the people in the room, and their position, so if there is a part of the plan you think might be of interest to them, you can mention it.

          How easy it would be to work with you: Typically when you are presenting a business plan, you are doing it with the goal of establishing an ongoing relationship with the listener. All relationships carry an element of liking. It is easier to see yourself establishing a relationship with someone you like than with someone you do not like. Part of the goal in the presenta- tion is to get the listeners to like you. How? The techniques are simple—use eye contact, use peoples’ names, remember what they might be interested in or in what they have shown an interest before, smile, and above all, be honest. When they ask tough questions, try not to get nervous, upset, angry, or defensive. If you do not have the answer, tell them so honestly, make a note about their question and name, and tell the person you will get back to him or her with the answer. Recognize that tough questions are the listeners’ way of making sure they—and you—are protected from risks.

It may be hard to accept it when you are presenting, but no matter what the outcome, there are two points in the presentation where your listeners will be giving you value: in the questions they ask you and in the feedback they give you at the end of the session. Make sure you have someone taking notes for you (you will be busy answering questions) or ask if you can record the Q&A ses- sion. Knowing what kinds of questions are being asked can help you prepare for the next time, and can also inform you on how best to revise the plan. Recalling what the feedback was regarding you and your plan also gives you a powerful leg up for your next presentation.

Typically the presentation follows the content of the business plan. For different audiences, for example, potential partners or customers, you delete slides—just as you delete sections in the busi- ness plans for partnering or customer information plans.

Business, and the understanding of business you get from business plan writing, changes. Some- times it changes quickly as you achieve new things or learn new things (including errors that crept into the plan you just finished). This means that parts of your plan may change from week to week. You handle this by creating handouts with the new information. These can be mailed to people read- ing your plan, or handed to them at the presentation. If there are detailed parts of your plan that you have left out, such as a market survey or a detailed cost breakdown, it makes a lot of sense to make copies to use as handouts during a presentation or question-and-answer period.

Dwight Eisenhower was not only the 34th U.S. President, but he was the general who planned the most daring effort in all of World War II, the D-Day landing. A master planner, Eisenhower said, “I have always found that plans are useless, but planning is indispensable.” The best way to think about the business plan is as a way to get yourself to think through your entire business. Some parts will be so easy that you can instantly know how everything works. Things in the business you imitate from others are classic examples. For other aspects of the business, planning may become the way you get a handle on the complexities and risks you face.30 Some results of the planning process you will write down. Other parts will be kept in your head, ready to be used or amended as circumstances require. Many of the parts of the plan will quickly become outdated or need to be changed or adapted as the business is in operation.31 In fact, the Eisenhower quote makes sense in another way too—business planning is a process you continue throughout your firm’s life. Plans, once done, get revisited. Some- times this is done formally, but more often you informally compare reality with the plan.

However you approach it, the idea of business planning is a powerful one, helping you imagine and then realize the business the way you want it to be. The techniques that contribute to creating a business plan—forming vision and mission statements, elevator pitches, financials, and marketing plans—can be used as stand-alone activities that help you meet the many demands you face as an aspiring entrepreneur. Whether you become an avid business planner or not, the process of business planning goes a long way to helping firms survive and prosper.

1. According to this chapter, what is the definition of a business plan?

2. According to this chapter, what are the nine major outline headings for a business plan?

3. According to this chapter, what are the eleven most common critical risks that are common in business plans?

4. According to this chapter, what are the four key things that an influential person looks for in your business plan presentation?

5. According to this chapter, what are the seven slides of a classic business plan presentation?

Explanation / Answer

1. A business plan is a document which is designed to talk in details about the characteristics of the product/service offered, the target market and the target industry, the manner in which the business would operate and the financial outcomes focusing on the business’ current and future aspirations.

2. The nine major outline headings for a business plan are:

3. The most common critical risks in business plan are:

4. The four key things that an influential person looks for in your business plan presentation are:

5. The seven slides of a classic business plan presentation are:

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