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Making a Risk Management Plan for Your Business
It’s impossible to eliminate all business risk. Therefore, it’s essential for having a plan for its management. You’ll be developing one covering compliance, environmental, financial, operational and reputation risk management. These guidelines are for making a risk management plan for your business.
Developing Your Executive Summary
When you start the risk management plan with an executive summary, you’re breaking apart what it will be compromised of into easy to understand chunks. Even though this summary is the project’s high-level overview, the goal is describing the risk management plan’s approach and scope. In doing so, you’re informing all stakeholders regarding what to expect when they’re reviewing these plans so that they can set their expectations appropriately.
Who Are the Stakeholders and What Potential Problems Need Identifying?
During this phase of making the risk management plan, you’re going to need to have a team meeting. Every member of the team must be vocal regarding what they believe could be potential problems or risks. Stakeholders should also be involved in this meeting as well to help you collect ideas regarding what could become a potential risk. All who are participating should look at past projects, what went wrong, what is going wrong in current projects and what everyone hopes to achieve from what they learned from these experiences. During this session, you’ll be creating a sample risk management plan that begins to outline risk management standards and risk management strategies.
Evaluate the Potential Risks Identified
A myriad of internal and external sources can pose as risks including commercial, management and technical, for example. When you’re identifying what these potential risks are and have your list complete, the next step is organizing it according to importance and likelihood. Categorize each risk according to how it could impact your project. For example, does the risk threaten to throw off timelines or budgets? Using a risk breakdown structure is an effective way to help ensure all potential risks are effectively categorized and considered. Use of this risk management plan template keeps everything organized and paints a clear picture of everything you’re identifying.
Assign Ownership and Create Responses
It’s essential to ensure a team member is overseeing each potential risk. That way, they can jump into action should an issue occur. Those who are assigned a risk, as well as the project manager, should work as a team to develop responses before problems arise. That way, if there are issues, the person overseeing the risk can refer to the response that was predetermined.
Have a System for Monitoring
Having effective risk management companies plans includes having a system for monitoring. It’s not wise to develop a security risk management or compliance risk management plan, for example, without having a system for monitoring. What this means is there’s a system for monitoring in place to ensure risk doesn’t occur until the project is finished. In doing so, you’re ensuring no new risks will potentially surface. If one does, like during the IT risk management process, for example, your team will know how to react.
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What Is a Business Plan?
Understanding business plans, how to write a business plan, elements of a business plan, special considerations.
- Business Plan FAQs
Business Plan: What It Is, What's Included, and How To Write One
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Investopedia / Ryan Oakley
A business plan is a document that defines in detail a company's objectives and how it plans to achieve its goals. A business plan lays out a written road map for the firm from marketing , financial, and operational standpoints. Both startups and established companies use business plans.
A business plan is an important document aimed at a company's external and internal audiences. For instance, a business plan is used to attract investment before a company has established a proven track record. It can also help to secure lending from financial institutions.
Furthermore, a business plan can serve to keep a company's executive team on the same page about strategic action items and on target for meeting established goals.
Although they're especially useful for new businesses, every company should have a business plan. Ideally, the plan is reviewed and updated periodically to reflect goals that have been met or have changed. Sometimes, a new business plan is created for an established business that has decided to move in a new direction.
- A business plan is a document describing a company's core business activities and how it plans to achieve its goals.
- Startup companies use business plans to get off the ground and attract outside investors.
- A business plan can also be used as an internal guide to keep an executive team focused on and working toward short- and long-term objectives.
- Businesses may create a lengthier traditional business plan or a shorter lean startup business plan.
- Good business plans should include an executive summary and sections on products and services, marketing strategy and analysis, financial planning, and a budget.
Want Funding? You Need a Business Plan
A business plan is a fundamental document that any new business should have in place prior to beginning operations. Indeed, banks and venture capital firms often require a viable business plan before considering whether they'll provide capital to new businesses.
Operating without a business plan usually is not a good idea. In fact, very few companies are able to last very long without one. There are benefits to creating (and sticking to) a good business plan. These include being able to think through ideas before investing too much money in them and working through potential obstacles to success.
A good business plan should outline all the projected costs and possible pitfalls of each decision a company makes. Business plans, even among competitors in the same industry, are rarely identical. However, they can have the same basic elements, such as an executive summary of the business and detailed descriptions of its operations, products and services, and financial projections. A plan also states how the business intends to achieve its goals.
While it's a good idea to give as much detail as possible, it's also important that a plan be concise to keep a reader's attention to the end.
A well-considered and well-written business plan can be of enormous value to a company. While there are templates that you can use to write a business plan, try to avoid producing a generic result. The plan should include an overview and, if possible, details of the industry of which the business will be a part. It should explain how the business will distinguish itself from its competitors.
Start with the essential structure: an executive summary, company description, market analysis, product or service description, marketing strategy, financial projections, and appendix (which include documents and data that support the main sections). These sections or elements of a business plan are outlined below.
When you write your business plan, you don’t have to strictly follow a particular business plan outline or template. Use only those sections that make the most sense for your particular business and its needs.
Traditional business plans use some combination of the sections below. Your plan might also include any funding requests you're making. Regardless, try to keep the main body of your plan to around 15-25 pages.
The length of a business plan varies greatly from business to business. Consider fitting the basic information into a 15- to 25-page document. Then, other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and included as appendices.
As mentioned above, no two business plans are the same. Nonetheless, they tend to have the same elements. Below are some of the common and key parts of a business plan.
- Executive summary: This section outlines the company and includes the mission statement along with any information about the company's leadership, employees, operations, and location.
- Products and services: Here, the company can outline the products and services it will offer, and may also include pricing, product lifespan, and benefits to the consumer. Other factors that may go into this section include production and manufacturing processes, any patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
- Market analysis: A firm needs a good handle on its industry as well as its target market. This section of the plan will detail a company's competition and how the company fits in the industry, along with its relative strengths and weaknesses. It will also describe the expected consumer demand for a company's products or services and how easy or difficult it may be to grab market share from incumbents.
- Marketing strategy: This section describes how the company will attract and keep its customer base and how it intends to reach the consumer. A clear distribution channel must be outlined. The section also spells out advertising and marketing campaign plans and the types of media those campaigns will use.
- Financial planning: This section should include a company's financial planning and projections. Financial statements, balance sheets, and other financial information may be included for established businesses. New businesses will include targets and estimates for the first few years plus a description of potential investors.
- Budget: Every company needs to have a budget in place. This section should include costs related to staffing, development, manufacturing, marketing, and any other expenses related to the business.
Unique Business Plans Help
The best business plans aren't generic ones created from easily accessed templates. A company should entice readers with a plan that demonstrates its singularity and potential for success.
Types of Business Plans
Business plans help companies identify their objectives and remain on track to meet goals. They can help companies start, manage themselves, and grow once up and running. They also act as a means to attract lenders and investors.
Although there is no right or wrong business plan, they can fall into two different categories—traditional or lean startup. According to the Small Business Administration (SBA) , the traditional business plan is the most common. It contains a lot of detail in each section. These tend to be longer than the lean startup plan and require more work.
Lean startup business plans, on the other hand, use an abbreviated structure that highlights key elements. These business plans aren't as common in the business world because they're short—as short as one page—and lack detail. If a company uses this kind of plan, it should be prepared to provide more detail if an investor or lender requests it.
A complete business plan must include a set of financial projections for the business. These forward-looking financial statements are often called pro-forma financial statements or simply the " pro-formas ." They include an overall budget, current and projected financing needs, a market analysis, and the company's marketing strategy.
Other Considerations for a Business Plan
A major reason for a business plan is to give owners a clear picture of objectives, goals, resources, potential costs, and drawbacks of certain business decisions. A business plan should help them modify their structures before implementing their ideas. It also allows owners to project the type of financing required to get their businesses up and running.
If there are any especially interesting aspects of the business, they should be highlighted and used to attract financing, if needed. For example, Tesla Motors' electric car business essentially began only as a business plan.
Importantly, a business plan shouldn't be a static document. As a business grows and changes, so too should the business plan. An annual review of the company and its plan allows an entrepreneur or group of owners to update the plan, based on successes, setbacks, and other new information. It provides an opportunity to size up the plan's ability to help the company grow.
Think of the business plan as a living document that evolves with your business.
A business plan is a document created by a company that describes the company's goals, operations, industry standing, marketing objectives, and financial projections. The information it contains can be a helpful guide in running the company. What's more, it can be a valuable tool to attract investors and obtain financing from financial institutions.
Why Do Business Plans Fail?
Even if you have a good business plan, your company can still fail, especially if you do not stick to the plan! Having strong leadership with a focus on the plan is always a good strategy. Even when following the plan, if you had poor assumptions going into your projections, you can be caught with cash flow shortages and out-of-control budgets. Markets and the economy can also change. Without flexibility built into your business plan, you may be unable to pivot to a new course as needed.
What Does a Lean Startup Business Plan Include?
The lean startup business plan is an option when a company prefers a quick explanation of its business. The company may feel that it doesn't have a lot of information to provide since it's just getting started.
Sections can include: a value proposition, a company's major activities and advantages, resources such as staff, intellectual property, and capital, a list of partnerships, customer segments, and revenue sources.
Small Business Administration. " Write Your Business Plan ."
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- Business Ethics: Definition, Principles, Why They're Important 2 of 46
- Business Plan: What It Is, What's Included, and How To Write One 3 of 46
- Organizational Structure for Companies With Examples and Benefits 4 of 46
- Which Type of Organization Is Best For Your Business? 5 of 46
- What Are the Major Types of Businesses in the Private Sector? 6 of 46
- Corporate Culture Definition, Characteristics, and Importance 7 of 46
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- LLC vs. Incorporation: Which Should I Choose? 9 of 46
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- Bootstrapping Definition, Strategies, and Pros/Cons 12 of 46
- Crowdfunding: What It Is, How It Works, Popular Websites 13 of 46
- Seed Capital: What It Is, How It Works, Example 14 of 46
- Venture Capital: What Is VC and How Does It Work? 15 of 46
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- Capital Funding: Definition, How It Works, and 2 Primary Methods 17 of 46
- Series Funding: A, B, and C 18 of 46
- Small Business Administration (SBA): Definition and What It Does 19 of 46
- Upper Management: What it is, How it Works 20 of 46
- What is the C Suite?: Meaning and Positions Defined 21 of 46
- Chief Executive Officer (CEO): What They Do vs. Other Chief Roles 22 of 46
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- What Is Brand Personality? How It Works and Examples 26 of 46
- What Is Brand Management? Requirements, How It Works, and Example 27 of 46
- What Is Brand Awareness? Definition, How It Works, and Strategies 28 of 46
- Brand Loyalty: What It Is, and How to Build It 29 of 46
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- Affiliate Marketer: Definition, Examples, and How to Get Started 32 of 46
- What Is Commercialization, Plus the Product Roll-Out Process 33 of 46
- Digital Marketing Overview: Types, Challenges, and Required Skills 34 of 46
- Direct Marketing: What It Is and How It Works 35 of 46
- Marketing in Business: Strategies and Types Explained 36 of 46
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- How to Do Market Research, Types, and Example 38 of 46
- Micromarketing Explained: Definition, Uses, and Examples 39 of 46
- Network Marketing Meaning and How It Works 40 of 46
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- Target Market: Definition, Purpose, Examples, Market Segments 42 of 46
- Outside Sales: What They are, How They Work 43 of 46
- What Is a Sales Lead? How It Works and Factors Affecting Quality 44 of 46
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How to Write a Business Plan, Step by Step
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1. Write an executive summary
2. describe your company, 3. state your business goals, 4. describe your products and services, 5. do your market research, 6. outline your marketing and sales plan, 7. perform a business financial analysis, 8. make financial projections, 9. add additional information to an appendix, business plan tips and resources.
A business plan is a document that outlines your business’s financial goals and explains how you’ll achieve them. A strong, detailed plan will provide a road map for the business’s next three to five years, and you can share it with potential investors, lenders or other important partners.
Here’s a step-by-step guide to writing your business plan.
» Need help writing? Learn about the best business plan software .
This is the first page of your business plan. Think of it as your elevator pitch. It should include a mission statement, a brief description of the products or services offered, and a broad summary of your financial growth plans.
Though the executive summary is the first thing your investors will read, it can be easier to write it last. That way, you can highlight information you’ve identified while writing other sections that go into more detail.
» MORE: How to write an executive summary in 6 steps
Next up is your company description, which should contain information like:
Your business’s registered name.
Address of your business location .
Names of key people in the business. Make sure to highlight unique skills or technical expertise among members of your team.
Your company description should also define your business structure — such as a sole proprietorship, partnership or corporation — and include the percent ownership that each owner has and the extent of each owner’s involvement in the company.
Lastly, it should cover the history of your company and the nature of your business now. This prepares the reader to learn about your goals in the next section.
» MORE: How to write a company overview for a business plan
The third part of a business plan is an objective statement. This section spells out exactly what you’d like to accomplish, both in the near term and over the long term.
If you’re looking for a business loan or outside investment, you can use this section to explain why you have a clear need for the funds, how the financing will help your business grow, and how you plan to achieve your growth targets. The key is to provide a clear explanation of the opportunity presented and how the loan or investment will grow your company.
For example, if your business is launching a second product line, you might explain how the loan will help your company launch the new product and how much you think sales will increase over the next three years as a result.
In this section, go into detail about the products or services you offer or plan to offer.
You should include the following:
An explanation of how your product or service works.
The pricing model for your product or service.
The typical customers you serve.
Your supply chain and order fulfillment strategy.
Your sales strategy.
Your distribution strategy.
You can also discuss current or pending trademarks and patents associated with your product or service.
Lenders and investors will want to know what sets your product apart from your competition. In your market analysis section , explain who your competitors are. Discuss what they do well, and point out what you can do better. If you’re serving a different or underserved market, explain that.
Here, you can address how you plan to persuade customers to buy your products or services, or how you will develop customer loyalty that will lead to repeat business.
» MORE: R e a d our complete guide to small business marketing
If you’re a startup, you may not have much information on your business financials yet. However, if you’re an existing business, you’ll want to include income or profit-and-loss statements, a balance sheet that lists your assets and debts, and a cash flow statement that shows how cash comes into and goes out of the company.
You may also include metrics such as:
Net profit margin: the percentage of revenue you keep as net income.
Current ratio: the measurement of your liquidity and ability to repay debts.
Accounts receivable turnover ratio: a measurement of how frequently you collect on receivables per year.
This is a great place to include charts and graphs that make it easy for those reading your plan to understand the financial health of your business.
» NerdWallet’s picks for setting up your business finances:
The best business checking accounts .
The best business credit cards .
The best accounting software .
This is a critical part of your business plan if you’re seeking financing or investors. It outlines how your business will generate enough profit to repay the loan or how you will earn a decent return for investors.
Here, you’ll provide your business’s monthly or quarterly sales, expenses and profit estimates over at least a three-year period — with the future numbers assuming you’ve obtained a new loan.
Accuracy is key, so carefully analyze your past financial statements before giving projections. Your goals may be aggressive, but they should also be realistic.
List any supporting information or additional materials that you couldn’t fit in elsewhere, such as resumes of key employees, licenses, equipment leases, permits, patents, receipts, bank statements, contracts and personal and business credit history. If the appendix is long, you may want to consider adding a table of contents at the beginning of this section.
Here are some tips to help your business plan stand out:
Avoid over-optimism: If you’re applying for a business loan at a local bank, the loan officer likely knows your market pretty well. Providing unreasonable sales estimates can hurt your chances of loan approval.
Proofread: Spelling, punctuation and grammatical errors can jump off the page and turn off lenders and prospective investors, taking their mind off your business and putting it on the mistakes you made. If writing and editing aren't your strong suit, you may want to hire a professional business plan writer, copy editor or proofreader.
Use free resources: SCORE is a nonprofit association that offers a large network of volunteer business mentors and experts who can help you write or edit your business plan. You can search for a mentor or find a local SCORE chapter for more guidance.
The U.S. Small Business Administration’s Small Business Development Centers , which provide free business consulting and help with business plan development, can also be a resource.
On a similar note...
- Business plan development
A business plan lays the foundation for your business. Especially if you are a start-up, or if your company or consortium is developing new products or services, a business plan is your roadmap. Having a solid business plan improves your chances of being successful by giving you direction, visualising potential risks, assessing viability, and assisting with planning. It can also help you get funding from external parties. We can help you compile the necessary information and set up a comprehensive business plan. Interested? Feel free to contact us.
Business plan development: our services
Our business plan development service consists of helping you set up a comprehensive business plan for your organisation. We have several levels of service. Which services we render depends on your need. A business plan will consist of the following:
- your vision, mission and company objectives
- the type of business you are running and the products or services you provide
- your strengths, weakness, opportunities and threats or risks (SWOT analysis)
- your (potential) market (competitors, market size, and unique selling points)
- your (potential) market strategy needed
- existing personnel and management competences
- financial needs and planning
- business case (cost/benefit analysis)
You will be able to use this business plan when you need to share strategy, priorities and specific action points with any stakeholder, or share and explain business objectives with the management team, employees and new hires. You can also use it to develop new business alliances or seek external funding.
How does our service work?
We offer several levels of service in business plan development:
- developing a full business plan
- reviewing an existing business plan (for example: when your current business plan is outdated)
- providing a business case for a product
Our services are delivered to you in the form of a written report. They start by defining your needs: the purpose of the business plan, its target audience and the type of service needed. Then we start gathering information on your company, the sector, and so on. We will perform desk research or hold interviews where information is missing. From this information, we give a thorough review, set up a concise business case or develop a comprehensive business plan. We will benchmark with you on a regular basis.
Interested in business plan development?
Whether you are a start-up, company, consortium or SME, feel free to contact us. Our experts would be glad to make time for an informal chat. Please leave your information in our contact form. Or get in touch with your nearest country office .
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Developing a Business Plan
An important task in starting a new venture is to develop a business plan. As the phrase suggests, a business plan is a "road map" to guide the future of the business or venture. The elements of the business plan will have an impact on daily decisions and provide direction for expansion, diversification, and future evaluation of the business.
This publication will assist in drafting your own business plan. It includes a discussion of the makeup of the plan and the information you need to develop a business plan. Business plans are traditionally developed and written by the owner with input from family members and the members of the business team. Business plans are "living" documents that should be reviewed and updated every year or if an opportunity for change presents itself. Reviews reinforce the thoughts and plans of the owner and the business, and aid in the evaluation process. For an established venture, evaluation determines if the business is in need of change or if it is meeting the expectations of the owners.
Using the Proper Format
The presentation of the plan should be as professional as possible to portray your business in a positive manner. When dealing with a lender or possible investor, the plan will be reviewed for accuracy and suggestions for changes to the plan may be offered. The decision to recommend the loan to the appropriate committee or reject the proposal will be largely based on your business plan. Often loan officers will not know a great deal about the proposed venture, but they will know the correct structure of a business plan. Investors will make their decision based on the plan and the integrity of the owner. For this reason, it is necessary to use a professional format. After loan officers complete their evaluations, the loan committee will further review the business plan and make a decision. The committee members will often spend limited time reviewing the document, focusing on the message of the executive summary and financial statements to make their determination. Because of this, these portions need to be the strongest parts of the plan and based on sound in-depth research and analysis.
Sections of the Business Plan
A business plan should be structured like a book with the title or cover page first, followed by a table of contents. Following these two pages, the main parts of the plan normally appear in this order: executive summary, business mission statement, goals and objectives, background information, organizational matters, marketing plan, and financial plan.
The executive summary is placed at the front of the business plan, but it should be the last part written. The summary describes the proposed business or changes to the existing business and the sector of which the business is (or will be) a part. Research findings and recommendations should be summarized concisely to provide the reader with the information required to make any decisions. The summary outlines the direction and future plans or goals of the business, as well as the methods that will be used to achieve these goals.
The summary should include adequate background information to support these recommendations. The final financial analysis and the assumptions used are also a part of the executive summary. The analysis should show how proposed changes will ensure the sustainability of the current or proposed business. All challenges facing the existing business or proposed venture should also be discussed in this section. Identifying such challenges shows the reader that you have explored and taken into account all considerations during the research process.
Mission, Goals, and Objectives
This section has three separate portions. It begins with a brief, general description of the existing or planned business. The overview is followed by the mission statement of the business. You should try to limit the mission statement to three sentences if possible and include only the key ideas about why the business exists. An example of a mission statement for a produce farm might be: "The mission of XYZ Produce is to provide fresh, healthy produce to our customers, and to provide a safe, friendly working environment for our employees." If you have more than three sentences, be as concise as possible.
The third (and final) portion sets the business's goals and objectives. There are at least two schools of thought about goals and objectives. One is that the goals are the means of achieving the objectives, and the other is exactly the opposite--that the objectives are the means of achieving the goals. Whichever school you follow, this is a very important part of the business plan. These goals and objectives should show the reader what the business wishes to accomplish and the steps needed to obtain the desired results. Goals or objectives should follow the acronym SMART , which stands for S pecific, M easurable, A ttainable, R easonable, and T imed, to allow for evaluation of the entire process and provide valuable feedback along the way. The business owner should continually evaluate the outcomes of decisions and practices to determine if the goals or objectives are being met and make modifications when needed.
Background information should come from the research conducted during the writing process. This portion should include information regarding the history of the industry, the current state of the industry, and information from reputable sources concerning the future of the industry. This portion of the business plan requires the most investment of time by the writer, with information gathered from multiple sources to prevent bias or undue optimism. The writer should take all aspects of the industry (past, present, and future) and business into account. If there are concerns or questions about the viability of the industry or business, these must be addressed. In writing this portion of the plan, information may be obtained from your local public library, periodicals, industry personnel, trusted sources on the Internet, and Penn State Extension. Industry periodicals are another excellent source of up-to-date information. The more varied the sources, the better the evaluation of the industry and the business, and the greater the opportunity to have an accurate plan.
The business owner must first choose an appropriate legal structure for the business. The business structure will have an impact on the future, including potential expansion and exit from the business. If the proper legal structure is not chosen, the business may be negatively impacted down the road. Only after the decision is made about the type of business can the detailed planning begin.
This section of the plan describes the current or planned business structure, the management team, and risk management strategies. There are several forms of business structure to choose from, including sole proprietorship, partnership, corporations (subchapter S or subchapter C), cooperative, and limited liability corporation or partnership (LLC or LLP). These business structures are discussed in Starting or Diversifying an Agricultural Business .
The type of business structure is an important decision and often requires the advice of an attorney (and an accountant). The business structure should fit the management skills and style(s) of the owner (or owners) and take into account the risk management needs (both liability and financial) of the business. For example, if there is more than one owner (or multiple investors), a sole proprietorship is not an option because more than one person has invested time and/or money into the business. In this case, a partnership, cooperative, corporation, LLC, or LLP would be the proper choice.
If the business is not a sole proprietorship, the management team should be described in the business plan. The management team should consist of all parties involved in the decisions and activities of the business. The strengths and backgrounds of management team members should be discussed to highlight the positive aspects of the team. Even if the business is a sole proprietorship, usually more than one person (often a spouse, child, relative, or other trusted person) will have input into the decisions and therefore should be included as team member(s).
Regardless of the business structure, all businesses should also have an external management support team. This external management support team should consist of the business's lawyer, accountant, insurance agent or broker, and possibly a mentor. These external members are an integral part of the management team. Many large businesses have these experts on staff. For small businesses, the external management team replaces full-time experts; the business owner(s) should consult with this external team on a regular basis (at least once a year) to determine if the business is complying with all rules and regulations. Listing the management team in the business plan allows the reader to know that the business owner has developed a network of experts to provide advice.
The risk management portion of the business plan provides a description of how the business will handle unexpected or unusual events. For example, if the business engages in agricultural production, will the business purchase crop insurance? Does the business have adequate liability insurance? Is the business diversified to protect against the unexpected, rather than "putting all its eggs in one basket"? If the business has employees, does the business carry adequate workers' compensation insurance? All of these questions should be answered in the risk management portion of the business plan. More information how liability can affect your business and on the use of insurance as a risk management tool can be found in Agricultural Business Insurance and Understanding Agricultural Liability . The business structure will also determine a portion of the risk management strategy since the way that a business is structured carries varying levels of risk to the owner and/or owners. All marketing strategies (or objectives) carry a degree of risk and must be evaluated, and mitigation strategies should be included in this portion of the plan.
Every purchase decision that a consumer makes is influenced by the marketing strategy or plan of the company selling the product or service. Products are usually purchased based on consumer preferences, including brand name, price, and perceived quality attributes. Consumer preferences develop (and change) over time, and an effective marketing plan takes these preferences into account. This makes the marketing plan an important part of the overall business plan.
In order to be viable, the marketing plan must coincide with production activities. The marketing plan must address consumer desires and needs. For example, if a perishable or seasonal crop (such as strawberries) will be produced, the marketing plan should not include sales of locally grown berries in January if the business is in the northeastern United States. If the business plans to purchase berries in the off-season from other sources to market, this information needs to be included. In this way, the marketing plan must fit the production capabilities (or the capability to obtain products from other sources).
A complete marketing plan should identify target customers, including where they live, work, and purchase the product or service you are providing. Products may be sold directly to the consumer (retail) or through another business (wholesale). Whichever marketing avenue you choose, if you are starting a new enterprise or expanding on an existing one, you will need to decide if the market can bear more of what you plan to produce. Your industry research will assist in this determination. The plan must also address the challenges of the marketing strategy proposed. This portion of the plan contains a description of the characteristics and advantages of your product or service. Identifying a "niche" market will be of great value to your business.
Other variables to consider are sales location, market location, promotion and advertising, pricing, staffing, and the costs associated with all of these. All of these aspects of the marketing plan will take time to develop and should not be taken lightly. Further discussion on marketing fruits and vegetables can be found in Fruit and Vegetable Marketing for Small-scale and Part-time Growers.
An adequate way of determining the answers to business and marketing issues is to conduct a SWOT analysis. The acronym SWOT stands for S trengths, W eaknesses, O pportunities, and T hreats. Strengths represent internal attributes and may include aspects like previous experience in the business. Experience in sales or marketing would be an area of strength for a retail farm market. Weaknesses are also internal and may include aspects such as the time, cost, and effort needed to introduce a new product or service to the marketplace. Opportunities are external aspects that will help your business take off and be sustained. If no one is offering identical products or services in your immediate area, you may have the opportunity to capture the market. Threats are external and may include aspects like other businesses offering the same product in close proximity to your business or government regulations impacting business practices and costs.
The financial plan and assumptions are crucial to the success of the business and should be included in the business plan. One of the foremost reasons new businesses fail is not having enough startup capital or inadequate planning to cover all expenses and be profitable. The scope of your business will be determined by the financial resources you can acquire. Because of this, you will need to develop a financial plan and create the supporting documents to substantiate it.
The financial plan has its basis in historical data (for an existing business) or from projections (for a proposed business). The first issue to address is recordkeeping. You should indicate who will keep the necessary records and how these records will be used. Internal controls, such as who will sign checks and handle any funds, should also be addressed in this section. A good rule to follow for businesses other than sole proprietorships is having at least two people sign all checks.
The next portion of the financial plan should be assumptions concerning the source of financing. This includes if (and when) the business will need additional capital, how much capital will be needed, and how these funds will be obtained. If startup capital is needed, this information should be included in this portion. Personal contributions should be included along with other funding sources. The amount of money and repayment terms should be listed. One common mistake affecting many new businesses is underfunding at startup. Owners too often do not carefully evaluate all areas of expense and underestimate the amount of capital needed to see a new business through the development stages (including living expenses, if off-farm income is not available).
Typically, a balance sheet, income statement, cash flow statement, and partial budget or enterprise budgets are included in a business plan. More information on agricultural budgets can be found in Budgeting for Agricultural Decision Making . These documents will display the financial information in a form that lending institutions are used to seeing. If these are not prepared by an accountant, having one review them will ensure that the proper format has been used.
Financial projections should be completed for at least two years and, ideally, for five years. In agricultural businesses, five-year projections are sometimes difficult to make because of variability in prices, weather, and other aspects affecting production. One way to illustrate these risks is to develop several scenarios covering a range of production assumptions. This attention to detail will often result in a positive experience with lenders because they realize that the plan covers several possible circumstances and provides insight into how the business plans to manage risk. More information on financing agricultural businesses can be found in the publication Financing Small-scale and Part-time Farms.
A balance sheet is a snapshot of a business's assets and liabilities and its owner's equity at a specific point in time. A balance sheet can be prepared at any time but is usually done at the end of the fiscal year (for many businesses, this is the end of the calendar year). Evaluating the business by using the balance sheet requires several years of balance sheets to tell the true story of the business's progress over time. A balance sheet is typically constructed by listing assets on the left and liabilities and owner's equity on the right. The difference between the assets and liabilities of the business is called the "owner's equity" and provides an estimate of how much of the business is owned outright. Owner's equity provides the "balance" in a balance sheet.
Assets are anything owned by or owed to the business. These include cash (and checking account balances), accounts receivable (money owed to the business), inventory (any crops or supplies that the business has stored on farm), land, equipment, and buildings. This may also include machinery, breeding stock, small fruit bushes or canes, and fruit trees. Sometimes assets are listed as current (those easily converted to cash) and fixed (those that are required for the business to continue). Assets are basically anything of value to the business.
Balance sheets may use a market basis or a cost basis to calculate the value of assets. A market-basis balance sheet better reflects the current economic conditions because it relies on current or market value for the assets rather than what those assets originally cost. Market values are more difficult to obtain because of the difficulty in finding accurate current prices of assets and often results in the inflation of the value of assets. Cost-basis balance sheets are more conservative because the values are often from prior years. For example, a cost-basis balance sheet would use the original purchase price of land rather than what selling that land would bring today. Because purchase records are easily obtained, constructing a cost-basis balance sheet is easier. Depreciable assets, such as buildings, tractors, and equipment, are listed on the cost-basis balance sheet at purchase price less accumulated depreciation. Most accountants use the cost-basis balance sheet method. Whether you choose to use market basis or cost basis, it is critical that you remain consistent over the years to allow for accurate comparison.
Liabilities are what the business owes on the date the balance sheet is prepared. Liabilities include both current liabilities (accounts payable, any account the business has with a supplier, short-term notes, operating loans, and the current portion of long-term debt, which are payable within the current year) and non-current liabilities (mortgages and loans with a term that extends over one year).
Owner's equity is what remains after all liabilities have been subtracted from all assets. It represents money that the owner has invested in the business, profits that are retained in the business, and changes caused by fluctuating market values (on a market-basis balance sheet). Owner's equity will be affected whenever changes in capital contributed to the business or there are retained earnings; so, if your practice is to use all earnings as your "paycheck" rather than reinvesting them in the business, your owner's equity will be impacted. On the balance sheet, owner's equity plus liabilities equals assets. Or, stated another way, all of the assets less the amount owed (liabilities) equals the owner's equity (sometimes referred to as "net worth").
The income statement is a summary of the income (revenue) and expenses for a given accounting cycle. If the balance sheet is a "snapshot" of the financial health of the business, the income statement is a "motion picture" of the financial health of the business over a specific time period. An income statement is constructed by listing the income (or revenue) at the top of the page and the expenses (and the resulting profit or loss) at the bottom of the page.
Revenue is any income realized by the sale of crops or livestock, government payments, and any other income the business may have (including such items as fuel tax refunds, patronage dividends, and custom work). Other items affecting revenues are changes in inventory and accounts receivable between the start of the time period and the end, even if these changes are negative. Expenses include any expense the business has incurred from the production of the products sold. Examples of expenses include feed, fertilizer, pesticides, fuel, labor, maintenance and repairs, insurance, taxes, and any changes in accounts payable. Depreciation, which is calculated wear and tear on assets (excluding land), is included as an expense for accounting purposes. Interest is considered an expense, but any principal payments related to loans are not an expense.
As the income statement is created, the desired outcome is to have more income than expenses, so the income statement shows a profit. If not, the final number is shown in parentheses (signifying a negative number). Another name for this financial record is a "profit and loss statement." Income statements are one way to clearly show how the farm is making progress from one year to the next and may provide a much more optimistic view of sustainability than can be seen by looking at a single year's balance sheet.
Cash Flow Statement
A cash flow statement is the predicted flow of cash into and out of a business over a year. Cash flow statements are prepared by showing the total amounts predicted for each item of income or expense. This total is then broken down by month to show when surpluses and shortfalls in cash will occur. In this way, the cash flow statement can be used to predict when additional cash is needed and when the business will have a surplus to pay back any debt. This monthly prediction allows the owner(s) to better evaluate the cash needs of the business, taking out applicable loans and repaying outstanding debts. The cash flow statement often uses the same categories as the income statement plus additional categories to cover debt payments and borrowing.
After these financial statements are completed, the business plan writer will have an accurate picture of how the business has performed and can project how the business will perform in the coming year(s). With such information, the owner--and any readers of the business plan--will be able to evaluate the viability of the business and have an accurate understanding of actions and activities that will contribute to its sustainability. This understanding will enable the owner(s) to make better informed decisions regarding loans or investments in the business.
Putting It All Together
After the mission, background information, organization, and marketing and financial plans are complete, an executive summary can then be prepared. Armed with the research results and information from the other sections, the business will come alive through this section. The next step is to share this plan with others whose opinions you respect. Have them ask you the hard questions, making you defend an opinion you have expressed or challenging you to describe what you plan to do in more detail. Often people are hesitant to share what they have written with their families or friends because they fear the plan will not be taken seriously. However, it is much better to receive constructive criticism from family and friends (and gain the opportunity to strengthen your plan) than it is to take it immediately to the lender, only to have any problems pointed out and receive a rejection.
Once all parts of the business plan have been written, you will have a document that will enable you to analyze your business and determine which, if any, changes need to be made. Changes on paper take time and effort but are not as expensive as changing a business practice only to find that the chosen method is not viable. For a proposed venture, if the written plan points to the business not being viable, large sums of money have not been invested and possibly lost. In short, challenges are better faced on paper than with investment capital.
Remember, a business plan is a "road map" that will guide the future of the business. The best business plan is a document in continual change, reacting to the influence of the outside world on the business. Having the basis of a writ¬ten plan will give you confidence to consider changes in the business to remain competitive. Once the plan is in place, the business will have a better chance of future success.
For More Information
Abrams, R. The Successful Business Plan: Secrets and Strategies (Successful Business Plan Secrets and Strategies) . Palo Alto, Calif.: Planning Shop, 2014.
Becker, J. C., L. F. Kime, J. K. Harper, and R. Pifer. Understanding Agricultural Liability . University Park: Penn State Extension, 2011.
Dethomas, A., and L. and S. Derammelaere. Writing a Convincing Business Plan (Barron's Business Library) . Hauppauge, N.Y.: Barron's Educational Series. 2008.
Dunn, J., J. K. Harper, and L. F. Kime. Fruit and Vegetable Marketing for Small-scale and Part-time Growers. University Park: Penn State Extension, 2009.
Harper, J. K., S. Cornelisse, L. F. Kime, and J. Hyde. Budgeting for Agricultural Decision Making . University Park: Penn State Extension, 2013.
Kime, L. F., J. A. Adamik, E. E. Gantz, and J. K. Harper. Agricultural Business Insurance. University Park: Penn State Extension, 2004.
Kime, L. F., S. Roth, and J. K. Harper. Starting or Diversifying an Agricultural Business. University Park: Penn State Extension, 2004.
Lesonsky, R. Start Your Own Business: The Only Start-Up Book You'll Ever Need. 5th ed . Irvine, Calif.: Entrepreneur Media Inc., 2010.
Peterson, S. D., P. E. Jaret, and B. Findlay. Business Plan Kit for Dummies. For Dummies: Book and CD-ROM edition . Indianapolis, Ind.: Wiley Publishing, 2013.
Shelton, H. The Secrets to Writing a Successful Business Plan: A Pro Shares a Step-by-Step Guide to Creating a Plan That Gets Results. Rockville, Md.: Summit Valley Press, 2014.
Stokes, J. S., G. D. Hanson, J. K. Harper, and L. F. Kime. Financing Small-scale and Part-time Farms . University Park: Penn State Extension, 2005.
- American Agriculturist Farm Progress Companies Inc. 5482 Wilshire Blvd, Suite 260 Los Angeles, CA 90036
- Kiplinger's Personal Finance
- BizPlanit (Virtual Business Plan)
- A Guide to Farming in Pennsylvania
- Penn State Extension Farm Management
- SCORE (Volunteer Business Assistance)
- Small Business Administration
- Small Business Learning Guide for Entrepreneurs with a Disability
Prepared by Lynn F. Kime, senior extension associate; Winifred W. McGee, extension educator; Steven M. Bogash, former extension educator; and Jayson K. Harper, professor of agricultural economics.
Additional financial support for this publication was provided by the Risk Management Agency of the United States Department of Agriculture and the Pennsylvania Department of Agriculture.
This publication was developed by the Small-scale and Part-time Farming Project at Penn State with support from the U.S. Department of Agriculture-Extension Service.
- Agricultural Economics, Sociology, and Education
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How to Develop and Use a Business Plan
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A well-prepared business plan is more than a necessary tool to seek funding. It should also be a functional road map for your growth strategyI
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How to Write a Winning Business Plan
- Stanley R. Rich
- David E. Gumpert
The business plan admits the entrepreneur to the investment process. Without a plan furnished in advance, many investor groups won’t even grant an interview. And the plan must be outstanding if it is to win investment funds. Too many entrepreneurs, though, continue to believe that if they build a better mousetrap, the world will beat […]
The Idea in Brief
You’ve got a great idea for a new product or service—how can you persuade investors to support it? Flashy PowerPoint slides aren’t enough; you need a winning business plan. A compelling plan accurately reflects the viewpoints of your three key constituencies: the market , potential investors , and the producer (the entrepreneur or inventor of the new offering).
But too many plans are written solely from the perspective of the producer. The problem is that, unless you’ve got your own capital to finance your venture, the only way you’ll get the funding you need is to satisfy the market’s and investors’ needs.
Here’s how to grab their attention.
The Idea in Practice
Emphasize Market Needs
To make a convincing case that a substantial market exists, establish market interest and document your claims.
Establish market interest. Provide evidence that customers are intrigued by your claims about the benefits of the new product or service:
- Let some customers use a product prototype; then get written evaluations.
- Offer the product to a few potential customers at a deep discount if they pay part of the production cost. This lets you determine whether potential buyers even exist.
- Use “reference installations”—statements from initial users, sales reps, distributors, and would-be customers who have seen the product demonstrated.
Document your claims. You’ve established market interest. Now use data to support your assertions about potential growth rates of sales and profits.
- Specify the number of potential customers, the size of their businesses, and the size that is most appropriate to your offering. Remember: Bigger isn’t necessarily better; e.g., saving $10,000 per year in chemical use may mean a lot to a modest company but not to a Du Pont.
- Show the nature of the industry; e.g., franchised weight-loss clinics might grow fast, but they can decline rapidly when competition stiffens. State how you will continually innovate to survive.
- Project realistic growth rates at which customers will accept—and buy—your offering. From there, assemble a credible sales plan and project plant and staffing needs.
Address Investor Needs
Cashing out. Show when and how investors may liquidate their holdings. Venture capital firms usually want to cash out in three to seven years; professional investors look for a large capital appreciation.
Making sound projections. Give realistic, five-year forecasts of profitability. Don’t skimp on the numbers, get overly optimistic about them, or blanket your plan with a smog of figures covering every possible variation.
The price. To figure out how much to invest in your offering, investors calculate your company’s value on the basis of results expected five years after they invest. They’ll want a 35 to 40% return for mature companies—up to 60% for less mature ventures. To make a convincing case for a rich return, get a product in the hands of representative customers—and demonstrate substantial market interest.
The business plan admits the entrepreneur to the investment process. Without a plan furnished in advance, many investor groups won’t even grant an interview. And the plan must be outstanding if it is to win investment funds.
Too many entrepreneurs, though, continue to believe that if they build a better mousetrap, the world will beat a path to their door. A good mousetrap is important, but it’s only part of meeting the challenge. Also important is satisfying the needs of marketers and investors. Marketers want to see evidence of customer interest and a viable market. Investors want to know when they can cash out and how good the financial projections are. Drawing on their own experiences and those of the Massachusetts Institute of Technology Enterprise Forum, the authors show entrepreneurs how to write convincing and winning business plans.
A comprehensive, carefully thought-out business plan is essential to the success of entrepreneurs and corporate managers. Whether you are starting up a new business, seeking additional capital for existing product lines, or proposing a new activity in a corporate division, you will never face a more challenging writing assignment than the preparation of a business plan.
Only a well-conceived and well-packaged plan can win the necessary investment and support for your idea. It must describe the company or proposed project accurately and attractively. Even though its subject is a moving target, the plan must detail the company’s or the project’s present status, current needs, and expected future. You must present and justify ongoing and changing resource requirements, marketing decisions, financial projections, production demands, and personnel needs in logical and convincing fashion.
Because they struggle so hard to assemble, organize, describe, and document so much, it is not surprising that managers sometimes overlook the fundamentals. We have found that the most important one is the accurate reflection of the viewpoints of three constituencies.
1. The market, including both existing and prospective clients, customers, and users of the planned product or service.
2. The investors, whether of financial or other resources.
3. The producer, whether the entrepreneur or the inventor.
Too many business plans are written solely from the viewpoint of the third constituency—the producer. They describe the underlying technology or creativity of the proposed product or service in glowing terms and at great length. They neglect the constituencies that give the venture its financial viability—the market and the investor.
Take the case of five executives seeking financing to establish their own engineering consulting firm. In their business plan, they listed a dozen types of specialized engineering services and estimated their annual sales and profit growth at 20%. But the executives did not determine which of the proposed dozen services their potential clients really needed and which would be most profitable. By neglecting to examine these issues closely, they ignored the possibility that the marketplace might want some services not among the dozen listed.
Moreover, they failed to indicate the price of new shares or the percentage available to investors. Dealing with the investor’s perspective was important because—for a new venture, at least—backers seek a return of 40% to 60% on their capital, compounded annually. The expected sales and profit growth rates of 20% could not provide the necessary return unless the founders gave up a substantial share of the company.
In fact, the executives had only considered their own perspective—including the new company’s services, organization, and projected results. Because they had not convincingly demonstrated why potential customers would buy the services or how investors would make an adequate return (or when and how they could cash out), their business plan lacked the credibility necessary for raising the investment funds needed.
We have had experience in both evaluating business plans and organizing and observing presentations and investor responses at sessions of the MIT Enterprise Forum. We believe that business plans must deal convincingly with marketing and investor considerations. This reading identifies and evaluates those considerations and explains how business plans can be written to satisfy them.
The MIT Enterprise Forum
Organized under the auspices of the Massachusetts Institute of Technology Alumni Association in 1978, the MIT Enterprise Forum offers businesses at a critical stage of development an opportunity to obtain counsel from a panel of experts on steps to take to achieve their goals.
In monthly evening sessions the forum evaluates the business plans of companies accepted for presentation during 60- to 90-minute segments in which no holds are barred. The format allows each presenter 20 minutes to summarize a business plan orally. Each panelist reviews the written business plan in advance of the sessions. Then each of four panelists—who are venture capitalists, bankers, marketing specialists, successful entrepreneurs, MIT professors, or other experts—spends five to ten minutes assessing the strengths and weaknesses of the plan and the enterprise and suggesting improvements.
In some cases, the panelists suggest a completely new direction. In others, they advise more effective implementation of existing policies. Their comments range over the spectrum of business issues.
Sessions are open to the public and usually draw about 300 people, most of them financiers, business executives, accountants, lawyers, consultants, and others with special interest in emerging companies. Following the panelists’ evaluations, audience members can ask questions and offer comments.
Presenters have the opportunity to respond to the evaluations and suggestions offered. They also receive written evaluations of the oral presentation from audience members. (The entrepreneur doesn’t make the written plan available to the audience.) These monthly sessions are held primarily for companies that have advanced beyond the start-up stage. They tend to be from one to ten years old and in need of expansion capital.
The MIT Enterprise Forum’s success at its home base in Cambridge, Massachusetts has led MIT alumni to establish forums in New York, Washington, Houston, Chicago, and Amsterdam, among other cities.
Emphasize the Market
Investors want to put their money into market-driven rather than technology-driven or service-driven companies. The potential of the product’s markets, sales, and profit is far more important than its attractiveness or technical features.
You can make a convincing case for the existence of a good market by demonstrating user benefit, identifying marketplace interest, and documenting market claims.
Show the User’s Benefit
It’s easy even for experts to overlook this basic notion. At an MIT Enterprise Forum session an entrepreneur spent the bulk of his 20-minute presentation period extolling the virtues of his company’s product—an instrument to control certain aspects of the production process in the textile industry. He concluded with some financial projections looking five years down the road.
The first panelist to react to the business plan—a partner in a venture capital firm—was completely negative about the company’s prospects for obtaining investment funds because, he stated, its market was in a depressed industry.
Another panelist asked, “How long does it take your product to pay for itself in decreased production costs?” The presenter immediately responded, “Six months.” The second panelist replied, “That’s the most important thing you’ve said tonight.”
The venture capitalist quickly reversed his original opinion. He said he would back a company in almost any industry if it could prove such an important user benefit—and emphasize it in its sales approach. After all, if it paid back the customer’s cost in six months, the product would after that time essentially “print money.”
The venture capitalist knew that instruments, machinery, and services that pay for themselves in less than one year are mandatory purchases for many potential customers. If this payback period is less than two years, it is a probable purchase; beyond three years, they do not back the product.
The MIT panel advised the entrepreneur to recast his business plan so that it emphasized the short payback period and played down the self-serving discussion about product innovation. The executive took the advice and rewrote the plan in easily understandable terms. His company is doing very well and has made the transition from a technology-driven to a market-driven company.
Find out the Market’s Interest
Calculating the user’s benefit is only the first step. An entrepreneur must also give evidence that customers are intrigued with the user’s benefit claims and that they like the product or service. The business plan must reflect clear positive responses of customer prospects to the question “Having heard our pitch, will you buy?” Without them, an investment usually won’t be made.
How can start-up businesses—some of which may have only a prototype product or an idea for a service—appropriately gauge market reaction? One executive of a smaller company had put together a prototype of a device that enables personal computers to handle telephone messages. He needed to demonstrate that customers would buy the product, but the company had exhausted its cash resources and was thus unable to build and sell the item in quantity.
The executives wondered how to get around the problem. The MIT panel offered two possible responses. First, the founders might allow a few customers to use the prototype and obtain written evaluations of the product and the extent of their interest when it became available.
Second, the founders might offer the product to a few potential customers at a substantial price discount if they paid part of the cost—say one-third—up front so that the company could build it. The company could not only find out whether potential buyers existed but also demonstrate the product to potential investors in real-life installations.
In the same way, an entrepreneur might offer a proposed new service at a discount to initial customers as a prototype if the customers agreed to serve as references in marketing the service to others.
For a new product, nothing succeeds as well as letters of support and appreciation from some significant potential customers, along with “reference installations.” You can use such third-party statements—from would-be customers to whom you have demonstrated the product, initial users, sales representatives, or distributors—to show that you have indeed discovered a sound market that needs your product or service.
You can obtain letters from users even if the product is only in prototype form. You can install it experimentally with a potential user to whom you will sell it at or below cost in return for information on its benefits and an agreement to talk to sales prospects or investors. In an appendix to the business plan or in a separate volume, you can include letters attesting to the value of the product from experimental customers.
Document Your Claims
Having established a market interest, you must use carefully analyzed data to support your assertions about the market and the growth rate of sales and profits. Too often, executives think “If we’re smart, we’ll be able to get about 10% of the market” and “Even if we only get 1% of such a huge market, we’ll be in good shape.”
Investors know that there’s no guarantee a new company will get any business, regardless of market size. Even if the company makes such claims based on fact—as borne out, for example, by evidence of customer interest—they can quickly crumble if the company does not carefully gather and analyze supporting data.
One example of this danger surfaced in a business plan that came before the MIT Enterprise Forum. An entrepreneur wanted to sell a service to small businesses. He reasoned that he could have 170,000 customers if he penetrated even 1% of the market of 17 million small enterprises in the United States. The panel pointed out that anywhere from 11 million to 14 million of such so-called small businesses were really sole proprietorships or part-time businesses. The total number of full-time small businesses with employees was actually between 3 million and 6 million and represented a real potential market far beneath the company’s original projections—and prospects.
Similarly, in a business plan relating to the sale of certain equipment to apple growers, you must have U.S. Department of Agriculture statistics to discover the number of growers who could use the equipment. If your equipment is useful only to growers with 50 acres or more, then you need to determine how many growers have farms of that size, that is, how many are minor producers with only an acre or two of apple trees.
A realistic business plan needs to specify the number of potential customers, the size of their businesses, and which size is most appropriate to the offered products or services. Sometimes bigger is not better. For example, a saving of $10,000 per year in chemical use may be significant to a modest company but unimportant to a Du Pont or a Monsanto.
Such marketing research should also show the nature of the industry. Few industries are more conservative than banking and public utilities. The number of potential customers is relatively small, and industry acceptance of new products or services is painfully slow, no matter how good the products and services have proven to be. Even so, most of the customers are well known and while they may act slowly, they have the buying power that makes the wait worthwhile.
At the other end of the industrial spectrum are extremely fast-growing and fast-changing operations such as franchised weight-loss clinics and computer software companies. Here the problem is reversed. While some companies have achieved multi-million-dollar sales in just a few years, they are vulnerable to declines of similar proportions from competitors. These companies must innovate constantly so that potential competitors will be discouraged from entering the marketplace.
You must convincingly project the rate of acceptance for the product or service—and the rate at which it is likely to be sold. From this marketing research data, you can begin assembling a credible sales plan and projecting your plant and staff needs.
Address Investors’ Needs
The marketing issues are tied to the satisfaction of investors. Once executives make a convincing case for their market penetration, they can make the financial projections that help determine whether investors will be interested in evaluating the venture and how much they will commit and at what price.
Before considering investors’ concerns in evaluating business plans, you will find it worth your while to gauge who your potential investors might be. Most of us know that for new and growing private companies, investors may be professional venture capitalists and wealthy individuals. For corporate ventures, they are the corporation itself. When a company offers shares to the public, individuals of all means become investors along with various institutions.
But one part of the investor constituency is often overlooked in the planning process—the founders of new and growing enterprises. By deciding to start and manage a business, they are committed to years of hard work and personal sacrifice. They must try to stand back and evaluate their own businesses in order to decide whether the opportunity for reward some years down the road truly justifies the risk early on.
When an entrepreneur looks at an idea objectively rather than through rose-colored glasses, the decision whether to invest may change. One entrepreneur who believed in the promise of his scientific-instruments company faced difficult marketing problems because the product was highly specialized and had, at best, few customers. Because of the entrepreneur’s heavy debt, the venture’s chance of eventual success and financial return was quite slim.
The panelists concluded that the entrepreneur would earn only as much financial return as he would have had holding a job during the next three to seven years. On the downside, he might wind up with much less in exchange for larger headaches. When he viewed the project in such dispassionate terms, the entrepreneur finally agreed and gave it up.
Investors’ primary considerations are:
Entrepreneurs frequently do not understand why investors have a short attention span. Many who see their ventures in terms of a lifetime commitment expect that anyone else who gets involved will feel the same. When investors evaluate a business plan, they consider not only whether to get in but also how and when to get out.
Because small, fast-growing companies have little cash available for dividends, the main way investors can profit is from the sale of their holdings, either when the company goes public or is sold to another business. (Large corporations that invest in new enterprises may not sell their holdings if they’re committed to integrating the venture into their organizations and realizing long-term gains from income.)
Venture capital firms usually wish to liquidate their investments in small companies in three to seven years so as to pay gains while they generate funds for investment in new ventures. The professional investor wants to cash out with a large capital appreciation.
Investors want to know that entrepreneurs have thought about how to comply with this desire. Do they expect to go public, sell the company, or buy the investors out in three to seven years? Will the proceeds provide investors with a return on invested capital commensurate with the investment risk—in the range of 35% to 60%, compounded and adjusted for inflation?
Business plans often do not show when and how investors may liquidate their holdings. For example, one entrepreneur’s software company sought $1.5 million to expand. But a panelist calculated that, to satisfy their goals, the investors “would need to own the entire company and then some.”
Making Sound Projections
Five-year forecasts of profitability help lay the groundwork for negotiating the amount investors will receive in return for their money. Investors see such financial forecasts as yardsticks against which to judge future performance.
Too often, entrepreneurs go to extremes with their numbers. In some cases, they don’t do enough work on their financials and rely on figures that are so skimpy or overoptimistic that anyone who has read more than a dozen business plans quickly sees through them.
In one MIT Enterprise Forum presentation, a management team proposing to manufacture and market scientific instruments forecast a net income after taxes of 25% of sales during the fourth and fifth years following investment. While a few industries such as computer software average such high profits, the scientific instruments business is so competitive, panelists noted, that expecting such margins is unrealistic.
In fact, the managers had grossly—and carelessly—understated some important costs. The panelists advised them to take their financial estimates back to the drawing board and before approaching investors to consult financial professionals.
Some entrepreneurs think that the financials are the business plan. They may cover the plan with a smog of numbers. Such “spreadsheet merchants,” with their pages of computer printouts covering every business variation possible and analyzing product sensitivity, completely turn off many investors.
Investors are wary even when financial projections are solidly based on realistic marketing data because fledgling companies nearly always fail to achieve their rosy profit forecasts. Officials of five major venture capital firms we surveyed said they are satisfied when new ventures reach 50% of their financial goals. They agreed that the negotiations that determine the percentage of the company purchased by the investment dollars are affected by this “projection discount factor.”
The Development Stage
All investors wish to reduce their risk. In evaluating the risk of a new and growing venture, they assess the status of the product and the management team. The farther along an enterprise is in each area, the lower the risk.
At one extreme is a single entrepreneur with an unproven idea. Unless the founder has a magnificent track record, such a venture has little chance of obtaining investment funds.
At the more desirable extreme is a venture that has an accepted product in a proven market and a competent and fully staffed management team. This business is most likely to win investment funds at the lowest costs.
Entrepreneurs who become aware of their status with investors and think it inadequate can improve it. Take the case of a young MIT engineering graduate who appeared at an MIT Enterprise Forum session with written schematics for the improvement of semiconductor-equipment production. He had documented interest by several producers and was looking for money to complete development and begin production.
The panelists advised him to concentrate first on making a prototype and assembling a management team with marketing and financial know-how to complement his product-development expertise. They explained that because he had never before started a company, he needed to show a great deal of visible progress in building his venture to allay investors’ concern about his inexperience.
Once investors understand a company qualitatively, they can begin to do some quantitative analysis. One customary way is to calculate the company’s value on the basis of the results expected in the fifth year following investment. Because risk and reward are closely related, investors believe companies with fully developed products and proven management teams should yield between 35% and 40% on their investment, while those with incomplete products and management teams are expected to bring in 60% annual compounded returns.
Investors calculate the potential worth of a company after five years to determine what percentage they must own to realize their return. Take the hypothetical case of a well-developed company expected to yield 35% annually. Investors would want to earn 4.5 times their original investment, before inflation, over a five-year period.
After allowing for the projection discount factor, investors may postulate that a company will have $20 million annual revenues after five years and a net profit of $1.5 million. Based on a conventional multiple for acquisitions of ten times earnings, the company would be worth $15 million in five years.
If the company wants $1 million of financing, it should grow to $4.5 million after five years to satisfy investors. To realize that return from a company worth $15 million, the investors would need to own a bit less than one-third. If inflation is expected to average 7.5% a year during the five-year period, however, investors would look for a value of $6.46 million as a reasonable return over five years, or 43% of the company.
For a less mature venture—from which investors would be seeking 60% annually, net of inflation—a $1 million investment would have to bring in close to $15 million in five years, with inflation figured at 7.5% annually. But few businesses can make a convincing case for such a rich return if they do not already have a product in the hands of some representative customers.
The final percentage of the company acquired by the investors is, of course, subject to some negotiation, depending on projected earnings and expected inflation.
Make It Happen
The only way to tend to your needs is to satisfy those of the market and the investors—unless you are wealthy enough to furnish your own capital to finance the venture and test out the pet product or service.
Of course, you must confront other issues before you can convince investors that the enterprise will succeed. For example, what proprietary aspects are there to the product or service? How will you provide quality control? Have you focused the venture toward a particular market segment, or are you trying to do too much? If this is answered in the context of the market and investors, the result will be more effective than if you deal with them in terms of your own wishes.
An example helps illustrate the potential conflicts. An entrepreneur at an MIT Enterprise Forum session projected R&D spending of about half of gross sales revenues for his specialty chemical venture. A panelist who had analyzed comparable organic chemical suppliers asked why the company’s R&D spending was so much higher than the industry average of 5% of gross revenues.
The entrepreneur explained that he wanted to continually develop new products in his field. While admitting his purpose was admirable, the panel unanimously advised him to bring his spending into line with the industry’s. The presenter ignored the advice; he failed to obtain the needed financing and eventually went out of business.
Once you accept the idea that you should satisfy the market and the investors, you face the challenge of organizing your data into a convincing document so that you can sell your venture to investors and customers. We have provided some presentation guidelines in the insert called “Packaging Is Important.”
Packaging Is Important
A business plan gives financiers their first impressions of a company and its principals.
Potential investors expect the plan to look good, but not too good; to be the right length; to clearly and cisely explain early on all aspects of the company’s business; and not to contain bad grammar and typographical or spelling errors.
Investors are looking for evidence that the principals treat their own property with care—and will likewise treat the investment carefully. In other words, form as well as content is important, and investors know that good form reflects good content and vice versa.
Among the format issues we think most important are the following:
The binding and printing must not be sloppy; neither should the presentation be too lavish. A stapled compilation of photocopied pages usually looks amateurish, while bookbinding with typeset pages may arouse concern about excessive and inappropriate spending. A plastic spiral binding holding together a pair of cover sheets of a single color provides both a neat appearance and sufficient strength to withstand the handling of a number of people without damage.
A business plan should be no more than 40 pages long. The first draft will likely exceed that, but editing should produce a final version that fits within the 40-page ideal. Adherence to this length forces entrepreneurs to sharpen their ideas and results in a document likely to hold investors’ attention.
Background details can be included in an additional volume. Entrepreneurs can make this material available to investors during the investigative period after the initial expression of interest.
The Cover and Title Page
The cover should bear the name of the company, its address and phone number, and the month and year in which the plan is issued. Surprisingly, a large number of business plans are submitted to potential investors without return addresses or phone numbers. An interested investor wants to be able to contact a company easily and to request further information or express an interest, either in the company or in some aspect of the plan.
Inside the front cover should be a well-designed title page on which the cover information is repeated and, in an upper or a lower corner, the legend “Copy number______” provided. Besides helping entrepreneurs keep track of plans in circulation, holding down the number of copies outstanding—usually to no more than 20—has a psychological advantage. After all, no investor likes to think that the prospective investment is shopworn.
The Executive Summary
The two pages immediately following the title page should concisely explain the company’s current status, its products or services, the benefits to customers, the financial forecasts, the venture’s objectives in three to seven years, the amount of financing needed, and how investors will benefit.
This is a tall order for a two-page summary, but it will either sell investors on reading the rest of the plan or convince them to forget the whole thing.
The Table of Contents
After the executive summary include a well-designed table of contents. List each of the business plan’s sections and mark the pages for each section.
Even though we might wish it were not so, writing effective business plans is as much an art as it is a science. The idea of a master document whose blanks executives can merely fill in—much in the way lawyers use sample wills or real estate agreements—is appealing but unrealistic.
Businesses differ in key marketing, production, and financial issues. Their plans must reflect such differences and must emphasize appropriate areas and deemphasize minor issues. Remember that investors view a plan as a distillation of the objectives and character of the business and its executives. A cookie-cutter, fill-in-the-blanks plan or, worse yet, a computer-generated package, will turn them off.
Write your business plans by looking outward to your key constituencies rather than by looking inward at what suits you best. You will save valuable time and energy this way and improve your chances of winning investors and customers.
- SR Mr. Rich has helped found seven technologically based businesses, the most recent being Advanced Energy Dynamics Inc. of Natick, Massachusetts. He is also a cofounder and has been chairman of the MIT Enterprise forum, which assists emerging growth companies.
- DG Mr. Gumpert is an associate editor of HBR, where he specializes in small business and marketing. He has written several HBR articles, the most recent of which was “The Heart of Entrepreneurship,” coauthored by Howard. H. Stevenson (March–April 1985). This article is adapted from Business Plans That Win $$$ : Lessons from the MIT Enterprise Forum, by Messrs. Rich and Gumpert (Harper & Row, 1985). The authors are also founders of Venture Resource Associates of Grantham, New Hampshire, which provides planning and strategic services to growing enterprises.