© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 4 The Business Plan

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 2 Learning Objectives Explain the purpose and importance of the business plan Describe the components of a business plan Recognize the importance of reviewing your business plan

4| 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Explain the purpose and importance of the business plan

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 4 Business Plan Document describing a business which is used to: Examine the feasibility of a business idea Raise capital Act as a road map for future operations

4| 5 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Guidelines for Writing a Business Plan Consider the audience Maintain a brief length covering major issues Create a professional image Include a third person point of view

4| 6 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Writing a Business Plan Local Chamber of Commerce College or university Paperback guides written on business plans Sources for assistance Small Business Administration home page at Small Business Administration Local SCORE chapter

4| 7 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Describe the components of a business plan

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 8 Guidelines for Writing a Business Plan Create a plan tailored to fit the particular business Owner of the business needs to write the plan Limit the plan length to 40 or fewer pages Present firm’s strengths in a logical order

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 9 Sections in a Business Plan Cover page Includes name of the business, its address, phone number, and issue date of the plan Table of contents Enables the reader to turn to the sections desired Executive summary: Helps to ignite the reader’s interest in the business and highlights crucial information Company information Market opportunity Financial data

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 10 Sections in a Business Plan Company information Includes firm’s background, choice of legal business form, and reasons for firm’s establishment Environmental analysis Presents identified trends and changes happening at national and international levels which may influence the future of the small business Involves introducing environmental categories

4| 11 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Sections in a Business Plan Describing industry demand Identifying industry wide trends Researching the growth or decline of the industry Identifying new competitors in the industry Industry analysis Noticing businesses that have entered or exited

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 12 Sections in a Business Plan Describe differentiating features Show additional uses that increase sales Include drawings or photos Refer to patents or trademarks held Present the competitive advantage Represent potential for growth Manage the product or service through the product life cycle Expand the product line or develop related products Products

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 13 Marketing Research and Evaluation Identify markets that share certain identifiable need that is to be satisfied Target markets Performed using demographic characteristics, psychographic, geographic, and other variables Market segmentation Involves assessing consumer needs over a period of time to improve market lines and aid new product development Market trends

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 14 Marketing Research and Evaluation Involves comparing products with competitors’ products based on price, performance, and other attributes Competition Percentage of total industry sales The marketing-research section of a business plan should illustrate that a sufficient market exists for the company’s product Market share Explains overall marketing strategy by identifying potential markets and ways to reach the markets Includes marketing objectives and the strategies to be used to accomplish the objectives Marketing plan

4| 15 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Marketing Research and Evaluation Pricing Promotion Place Service Policies Components of a marketing plan

4| 16 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Manufacturing and Operations Plan Geographic location Facilities and make-or-buy policy Control systems Labor force Outlined elements

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 17 Sections in a Business Plan Needs to show team balance in terms of experience, technical, and business skills States the ways of compensation for key managers Discusses management training needed and received by key people Identifies other people needed for professional assistance Management team

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 18 Sections in a Business Plan Outlines the interrelationship and timing of the major events planned for the venture Indicates to the investors that potential problems have been researched and deadlines are noted Time plan

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 19 Sections in a Business Plan Possible contingencies to be anticipated Variable sales forecasts Underpricing ability of the competitor Unfavorable industry-wide trends Scarcity of appropriately trained workers Inconsistent supply of products or raw materials Unexpected events

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 20 Sections in a Business Plan Indicates economic, community, and human development provided by the formation of the business Benefits to the community Needs to explain the ways that are intended to be used for getting out of the business Selling, takeover, initial public offering, or payback to investors Exit strategy

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 21 Financial Plan Indicates where capital comes from and what it will be used for Sources and uses of funds Shows sum of money on hand, receipts coming into the business, and money going out of the business during the beginning of a time period Cash flow statement Indicates the assets, liabilities, and owner’s equity for a business Balance sheet Presents sales revenues, expenses, and net profit or loss Profit-and-loss statement Depicts the point where sales and costs are equal and a business is neither making nor losing money Break-even point

4| 22 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Sources and Uses of Funds Worksheet

4| 23 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Sample Components of a Cash Flow Statement

4| 24 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Balance Sheet

4| 25 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Profit-and-Loss Statement

4| 26 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Break-even Analysis

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 27 Sections in a Business Plan Appendix Gathers supplemental information and documents of interest to the reader Includes résumés of owners and principal managers, advertising samples, brochures, and related information

4| 28 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. LO Recognize the importance of reviewing your business plan

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 29 Review Process Involves reviewing and revising the business plan sufficiently before presenting it to a prospective investor Includes evaluating the plan from the lenders’ and investors’ point of view

4| 30 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Business Plan

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 31 Business Plan Mistakes Presenting a rough copy Relying on outdated financial information or industry comparisons Unnecessary use of technojargonLacking marketing strategiesMaking false assumptions

© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4| 32 Business Plan Mistakes Exhibiting an overly optimistic natureMisunderstanding financial dataDisregarding the macroenvironmentEluding negative aspectsLacking personal equity in the company