Entrepreneurship and Small Business Management Chapter 4 The Business Plan: Road Map to Success

Ch. 4 Performance Objectives Know what a feasibility analysis is and when to create one. Know what a business plan is and how to describe it. Explain the various purposes for a business plan and the audience for it. Understand the components of a business plan. Be able to demonstrate proper development and formatting of a business plan.

What Is a Feasibility Analysis? A study to assist in making the “go/no go” decision Used to test a business concept in three areas: Product and/or service feasibility Market and industry feasibility Financial feasibility

Analyzing Product and/or Service Feasibility Can the product or service be produced and delivered at a profit, in an ongoing manner? Is there sufficient customer demand for the product or service?

Analyzing Market and Industry Feasibility How attractive is the opportunity in the proposed industry? Do any strategic, defensible niches exist in the proposed market?

Porter’s Five Forces Analysis Competitive Rivalry Among Existing Firms Bargaining Power of Suppliers Threat of Substitute Products Bargaining Power of Customers Threat of New Entrants

Competitive Rivalry Factors More Attractive If… Number of firms Size of firms Industry size/trend Differentiation Larger or fewer than five Varied Growing rapidly Differentiation matters

Barriers to Entry Factors More Attractive If… Low for entry Capital requirements Cost advantage Economies of scale Switching costs Brand loyalty Distribution channels Public policies Low for entry Not based on firm size Minimal or absent Low cost to change suppliers Customer resistance to change is low Channels established, but open Policies do not impede entry; may facilitate entry

Threat of Substitutes Factors More Attractive If… Convenience Substitute pricing Supply of substitutes Switching costs Public policies Not readily available Prices not significantly lower Supply is uneven or limited High cost to change suppliers Make substituting difficult or illegal

Supplier Power Factors More Attractive If… Brand reputation Substitutes for supplies Switching costs Impact of individual supplier on costs Not critical Easy substitution Relatively low Small portion of overall costs of finished products

Buyer Power Factors More Attractive If… Variable Buyer size Number of buyers Product importance Delivery demands Switching costs Product differentiations Information availability Variable Large number of buyers Small part of costs of goods Restricted geographic area Relatively high More differentiation, fewer commodities Hard for customers to compare features and prices

Analyzing Financial Feasibility How much start-up capital is required? How much revenue is expected (based on anticipated pricing and volume)? What are the expected costs? Projected revenues, less projected costs, equals potential profit. Evaluate the return on the capital invested to make a “go/no go” decision.

What Is a Business Plan? Document that thoroughly explains a business idea and how it will be carried out Story of what the business is and will be All costs and a marketing plan Description of financing Estimate of projected earnings

Why Create a Business Plan? Saves time and money Key to raising capital Serves as an operations guide

Business Plan Components Cover page Table of contents Executive summary Mission, vision, and culture Company description Opportunity analysis Marketing strategy and plan Management and operations Financial analysis and projections Funding request Exit strategy Appendices

Cover Page and Table of Contents Name of the business Name of the principals Date Contact information Confidentiality statement Include enough detail to easily find a section. Avoid excessive detail which uses too many pages.

Executive Summary Should Be: Clear—identify concept and purpose Concise—one to two pages long Comprehensive—answer basic who, what, when, where, and how questions Compelling—generate enthusiasm Written last

Mission, Vision, and Culture Mission—concise communication of strategy with a business definition and competitive advantage; expressed in a statement Vision—broad “picture” of what you want the organization to become Culture—beliefs, values, and behavioral norms of the organization which will form the business “environment”

Company Description If company is already established… Summary of company’s founding Overview of track record: business progress and financial success If a start-up venture… Brief background story What has been done so far, and why Legal form of the business

Opportunity Analysis Industry analysis—definition, size, and growth/decline of the industry Environmental analysis—how community, region, nation, world relates to the business Proof of market—evidence of opportunity in terms of dollars and units

Opportunity Analysis (continued) Target market segments—groups defined by common factors such as demographics, psychographics, age, and geography Competitive analysis—comparison of the business to direct and indirect competitors

Marketing Strategy and Plan Marketing mix (the Four P’s) Products/Services Pricing Promotion Place Marketing plan—statement of marketing goals and the strategies to achieve them

Management and Operations Management team and employees Research and development Physical location(s) of facilities with emphasis on logistics and workforce Production processes Inventory control systems Quality assurance methods

Financial Analysis and Projections Sources and uses of capital Cash flow projections Cash flow statement shows cash receipts less cash disbursements over a time period Balance sheet projections Assets = Liabilities + Owner’s Equity

Financial Analysis and Projections (continued) Income statements for three years Also called profit and loss statements (P&L) Summarize income and expense activity Breakeven analysis Fixed Cost ($) ÷ Gross Profit per Unit ($) = Breakeven Units Ratio analysis Risks and assumptions

Funding Request & Exit Strategy Amount of funds needed Type of financing, including terms Proposed exit scenarios, such as: Buyout plan Initial public offering (IPO) Sold when benchmarks or date reached Succession plan Implementation schedule (milestones)

Appendices Management resumes Specifications/photos/diagrams of products and packaging Advertising and promotional samples Detailed financial projections Other supportive materials

Business Plan Suggestions Write for your audience. Show that you have “skin in the game.” Be clear and concise. Use current industry data and reports. Select a “voice” and stick with it. Use a consistent, easy-to-read format. Number and label items throughout the plan. Present the plan professionally.

Presenting the Business Plan Presentations may be formal or informal. Presentation time may be limited to between 5 and 20 minutes. Prepare an “elevator pitch” (15-30 sec.) Multimedia formats work well in formal situations. Business plan competitions may provide cash prizes and access to capital.