Developing A Business Plan Part Deux Alan Barefield Southern Rural Development Center Mississippi State University Extension Service (662)

Let’s back up for a moment… Why are we here? Why are we here? Who is our clientele? Who is our clientele? What types of businesses are they wanting to start? What types of businesses are they wanting to start? Where are they at on an entrepreneurial timeline? Where are they at on an entrepreneurial timeline? What are we willing to do for them? What are we willing to do for them? How far are we willing to go? How far are we willing to go?

What Worries Small Business Owners? 4% 6% 7% 19% 25%

What do lenders & investors consider important? The Company – 15% The Company – 15% The Product or Service – 15% The Product or Service – 15% The Market and Marketing Strategy – 35% The Market and Marketing Strategy – 35% Management – 25% Management – 25% Financial Summary – 10% Financial Summary – 10%

What do lenders & investors consider important? The Company (15% Weight) The Company (15% Weight) –What business are you in? –Purpose of the business –Brief summary of the company, history, legal organization, publicly or privately held –Overall strategy and objectives

What do lenders & investors consider important? The Product or Service (15%) The Product or Service (15%) –Important features and user benefits –Relationship between the products and/or services supplied and market needs –Pricing strategies –Present status – current stage of develop- ment, expected life cycle –Proprietary position –Products and projects planned

What do lenders & investors consider important? The Market and Marketing Strategy (35% Weight) The Market and Marketing Strategy (35% Weight) –Who buys the product and why? –Comprehensive market description –Competition characteristics –What market needs are satisfied? –Unique characteristics –Marketing plans and penetration

What do lenders & investors consider important? Management (25% Weight) Management (25% Weight) –Background and abilities of key individuals –How can they do this job? –What do they bring to the company? –History of management working together as a team –Immediate personnel needs and costs –Organizational structure, decision making framework, who holds the authority?

What do lenders & investors consider important? Financial Summary (10% Weight) Financial Summary (10% Weight) –Funds required –Uses of funds –Projections of sales revenues, income, and expenses over a three to five year period –Security offerings planned (if any) –Payback period estimation for investor –Funding needs at developmental stages

The Business Plan Many potential business people focus too much on the numbers Many potential business people focus too much on the numbers Focus on these factors: Focus on these factors: –The People – Management Team –The Opportunity – Marketing Plan & Research –The Context – Overall Macroeconomic Environment and Marketplace –Risk and Reward – Acknowledgement of risk, how to deal with it, financial plan William A. Sahlman, Harvard University

The People Who are the “people?” Who are the “people?” –The men and women starting and running the business –Includes outside parties who provide key services or resources »Accountants »Lawyers »Suppliers –Also needs to include key labor needs

Management Information Names of Directors and Officers Names of Directors and Officers Personal Information Personal Information –Financial statements, Other income sources, etc. Statement of Integrity Statement of Integrity Experience in running this (or any other) type of business Experience in running this (or any other) type of business Goals with regard to the business Goals with regard to the business

Key Labor Needs What jobs (tasks) need to be performed? What jobs (tasks) need to be performed? What are the labor requirements for these jobs? What are the labor requirements for these jobs? –Education, previous training, experience, age, lifting capability Hiring, retention, evaluation, and dismissal policies Hiring, retention, evaluation, and dismissal policies

Operations Plan Should be the best understood part of the plan Should be the best understood part of the plan Writing this for a “lay” audience may be extremely difficult Writing this for a “lay” audience may be extremely difficult Important to let your audience know that you know what you are doing Important to let your audience know that you know what you are doing Include equipment, raw material, labor and time requirements Include equipment, raw material, labor and time requirements Expansion plans and opportunities Expansion plans and opportunities

Financial Plan Why Not Numbers? Entrepreneurs are wildly optimistic Entrepreneurs are wildly optimistic Numbers are usually padded Numbers are usually padded Investors know about this and discount the numbers Investors know about this and discount the numbers Leads to a cycle of inaccuracy Leads to a cycle of inaccuracy Plan should contain some numbers that demonstrate a business model such as manufacturing yield Plan should contain some numbers that demonstrate a business model such as manufacturing yield

Financial Plan But It Is Still Important Financing Sought Financing Sought Existing Capital Structure Existing Capital Structure Collateral Collateral Guarantees Guarantees Financial Objectives Financial Objectives Financial Statements Financial Statements –Actual or estimated –Pro Forma

Financial Plan Basic financial statements Basic financial statements –Balance sheet, income statement, cash flow statement, budget Types of financing needed Types of financing needed –Startup versus operational Sources of funds Sources of funds Reinvestment strategies Reinvestment strategies Family living expenses Family living expenses

Risk and Reward All sane people want to avoid risk All sane people want to avoid risk Entrepreneurs want to capture the reward and give the risk to others Entrepreneurs want to capture the reward and give the risk to others Need to show people, opportunity, and context from both good and bad perspectives Need to show people, opportunity, and context from both good and bad perspectives Talk about the end of the business process Talk about the end of the business process Unaware to Aware Early Stage Pre-launch & Launch Operating Start-up Growth Harvest or Exit

Attributes of Success  Decisions are made on the bottom line

Attributes of Success  Decisions are made on the bottom line  Gross revenue is not treated like manna from heaven

Attributes of Success  Decisions are made on the bottom line  Gross revenue is not treated like manna from heaven  If a task can’t be accomplished in- house in a cost effective manner, outsource it

Attributes of Success  Employ quality, trainable individuals: don’t become a residual employer for otherwise unemployable relatives

Attributes of Success  Employ quality, trainable individuals: don’t become a residual employer for otherwise unemployable relatives  Constantly seek out new products and services

Attributes of Success  Employ quality, trainable individuals: don’t become a residual employer for otherwise unemployable relatives  Constantly seek out new products and services  Grow a new market or diversify into other enterprises

Attributes of Success  Employ quality, trainable individuals: don’t become a residual employer for otherwise unemployable relatives  Constantly seek out new products and services  Grow a new market or diversify into other enterprises

Attributes of Success  They are not timid about tooting their own horn about their products and/or services

Attributes of Success  They are not timid about tooting their own horn about their products and/or services  Does not dwell on the challenges of the competition; realizes that some have it and some don’t

Entrepreneurial Study Beginning financial position is important Beginning financial position is important Entrepreneurs recognize that quality products and marketing skills are essential Entrepreneurs recognize that quality products and marketing skills are essential Their overall managerial ability is above average Their overall managerial ability is above average Owner time requirements are worse than milking cows Owner time requirements are worse than milking cows

Warning Signs of Pending Financial Difficulties Significant increase in the level of accounts payable Significant increase in the level of accounts payable Significant increase in the frequency and amount of impulse purchases Significant increase in the frequency and amount of impulse purchases Decrease in the level of available working capital Decrease in the level of available working capital Record keeping practices become less important Record keeping practices become less important

Warning Signs of Pending Financial Difficulties Hides a large portion of financial activities from other family members and lenders Hides a large portion of financial activities from other family members and lenders Diversion of sales proceeds Diversion of sales proceeds Living expenses increase rapidly and expenditures for capital assets increase Living expenses increase rapidly and expenditures for capital assets increase Works less and plays harder Works less and plays harder Domestic situation changes Domestic situation changes