82) The value test that a business must pass in order to attract financing from lenders and
investors involves proving to them that the venture offers a high probability of repayment or an
attractive rate of return.
83) The data shows that writing a business plan increases the odds that a venture will
successfully accomplish important tasks-initializing product development, obtaining inputs,
starting marketing, talking to customers, and asking for external funds-as well as continue in
business.
84) Although building a business plan does not guarantee an entrepreneur’s success, it does
increase his or her chances of succeeding in business.
85) The “two-thirds rule” says that only two-thirds of the entrepreneurs with a sound new
business venture will get financing, that they will get only two-thirds of what they need, and that
it will take them two-thirds longer to get it than they anticipated.
86) An entrepreneur may find that the business plan indicates that the business concept is not
viable. This is another potential benefit of writing a business plan; this revelation occurred before
the owner committed significant resources -time and money – to the venture.
87) The real value in preparing a business plan is not so much in the plan itself as it is in the
process the entrepreneur goes through to create the plan.
88) Potential lenders and investors believe that an entrepreneur who lacks the discipline to
develop a good business plan likely lacks the discipline to run a business.
89) Because the entrepreneur is the driving force behind a business idea, he or she should also be
the driving force behind the business plan.
90) Before presenting a business plan to potential lenders and investors, an entrepreneur must be
well informed and well prepared.
91) A business plan should contain certain basic elements, but it should also be tailored to the
individual company by emphasizing its particular personality and reflecting the entrepreneur’s
excitement for the business opportunity.
92) The most effective business plans follow the “cookie cutter approach,” following the
standard format most preferred by lenders and investors.
93) The ideal business plan should be at least 100 pages long to prove to potential lenders and
investors that the entrepreneur has studied the business and the market opportunity sufficiently.
94) A table of contents that allows lenders to navigate a business plan easily is an important
element of any business plan.
95) The executive summary serves as the thesis statement for the entire business plan.
96) The executive summary of a business plan should summarize all of the relevant points of the
proposed venture and should be concise-no more than two pages.
97) The executive summary of a business plan should highlight significant financial and
operational events.
98) The company’s mission statement expresses in words the entrepreneur’s vision for what her
company is and what it is to become.
99) In the business and industry profile section of the business plan, the entrepreneur should
provide information on the size of the market, growth trends, and the relative economic and
competitive strength of the industry’s major players.
100) The business and industry profile section of the business plan should cover existing and
anticipated profitability of firms in the targeted market segment and any significant entry or exit
of firms.
101) In a business plan, both company goals and objectives should relate to the company’s
mission.
102) Objectives are short-term, specific targets that the small company plans to accomplish.
103) To be meaningful, an objective must include a time frame for achievement.
104) The business strategy section of the business plan addresses the question of how the
entrepreneur plans to achieve the mission, goals, and objectives he has established for his
business venture.
105) An important theme of the business strategy section of the business plan is what makes the
owner’s company original in the eyes of its target customers.
106) The safest strategy for an entrepreneur launching a new business to follow is a “me-too”
strategy-copying products, services, and the images of already successful businesses.
107) The section of the business plan that describes the company’s products or services should
focus on how a business will transform the tangible features of its products or services into
important, but often intangible, customer benefits.
108) A benefit is a descriptive fact about a product or service; a feature is what the customer
gains from that product or service benefit.
109) When describing their products and services in their business plans, entrepreneurs must
remember that customers buy the benefits from products and services, not the features.
110) An important goal of the “marketing strategy” section of the business plan is to prove that
there is a real market for the proposed good or service.
111) Defining the company’s target market and its buying potential is one of the most important
and most challenging parts of building a business plan.
112) Identifying a specific target market is not an essential part of creating a solid business plan
for a small company.
113) The wise entrepreneur will indicate that there is no real competition for his new business
venture, thereby increasing the likelihood that he will gain more interested investors.
114) A business plan that fails to assess a company’s competitors realistically makes the
entrepreneur appear to be poorly prepared.
115) Because gathering information on competitors’ products or services, strategies, and market
share is so difficult, most lenders and investors see the competitor analysis section of the
business plan as optional.
116) The most important factor in the success of a business venture is the quality of its
management, and financial officers and investors weigh heavily the ability and experience of the
firm’s managers in their financing decisions.
117) The business plan should include the resumes of anyone with more than a 20 percent
ownership interest in the company.
118) Lenders and investors prefer experienced managers when they consider financing a
business venture.
119) The plan of operation section of the business plan should address how the business plans to
retain key managers and employees.
120) The business plan should include an existing firm’s past three years of financial statements
as well as its projected statements.
121) An entrepreneur should prepare a single set of “most likely” financial forecasts for one year
into the future as part of the business plan.
122) Essential pieces of information for potential lenders and investors include the assumptions
the entrepreneur uses to derive the financial forecasts and projections in the business plan.
123) Entrepreneurs should artificially inflate the amount of a loan request and expect the loan
officer to “talk them down.”
124) After presenting the business plan to a group of potential lenders and investors, an
entrepreneur should sit back and wait to hear from those who might be interested in the venture.
125) A lender’s primary concern in granting a loan is reassurance that the applicant will repay it,
whereas an investor’s primary concern is earning a satisfactory rate of return.
126) The loan proposal portion of the business plan should include a realistic timetable for
repayment or for investors to exit.
127) The entrepreneur’s request for funds in the business plan should be specific and detailed.
128) Spelling and grammatical errors in a business plan don’t really matter; potential lenders and
investors look past them at the content of the plan.
129) Potential lenders and investors expect entrepreneurs to exaggerate the truth in their business
plans, so telling the truth in the plan is really not important.
130) The quality of the entrepreneur’s business plan determines the first impression potential
lenders and investors have of the company.
131) The majority of loans banks make to small business startups are unsecured loans.
132) The most common reasons banks give for rejecting small business loan applications are
undercapitalization and too much debt.
133) Cash flow projections are not an essential part of a business plan as long as the entrepreneur
provides accurate forecasts of the venture’s profits.
134) The most common reason banks give for rejecting small business loan applications is the
entrepreneur’s poor credit history.
135) The “C” of the 5 C’s of Credit that is synonymous with cash flow is capital.
136) Most loans banks make to startup businesses are secured not by collateral but by the
character of the entrepreneur.
137) The entrepreneur’s “character” (even though it is an intangible factor) and the quality of the
presentation are important factors in evaluating a loan proposal.
138) The higher a small business scores on the 5 C’s of credit, the greater its chances will be of
receiving a loan.
139) When presenting a business plan to a group of potential lenders and investors, an
entrepreneur should cover every detail in the plan, striving to answer every question his audience
might have.
140) To make a business plan more attractive, an entrepreneur should include a potential exit
strategy as a way to “cash out” for investors.
141) What are some of the most important questions a feasibility analysis answers and what
model may be of value in this process?
142) Explain at least two functions or purposes of preparing a business plan.
143) To get external financing, an entrepreneur’s plan must pass three tests with potential lenders
and investors. List and briefly explain all three.
144) “Sometimes the greatest service a business plan provides an entrepreneur is the realization
that the business venture just won’t succeed.” Explain this statement.
145) You have been asked to explain the basic elements of a sound business plan to your friend,
who is considering beginning a new business. What elements should you recommend he include
in his business plan?
146) Explain the concept of a company’s mission. What are goals? What are the objectives? How
are the three concepts related?
147) The marketing strategy section is a vital part of any business plan. What issues should it
address?
148) The financial plan within a business plan is of interest to potential lenders and investors.
Explain the contents of this section and describe what potential lenders and investors look for.
149) When making a loan to a small business, bankers tend to look for the 5 Cs. List and explain
each of the 5 Cs of credit.
150) What tips would you offer an entrepreneur who is scheduled to present her business plan to
a group of potential lenders and investors in one week?
151) Select one of the following “business plan mistakes” and discuss three techniques that may
help avoid this potentially fatal error.
1. Failure to explain the business opportunity clearly
2. Trying to be everything to everybody
3. Falling into the trap of capturing one percent of the market
4. Unrealistic projections
5. Forgetting the importance of cash flow
6. Overly simplistic assumptions
7. Weak competitor analysis
8. Failure to describe the company’s competitive advantage
9. Counting on a low-price strategy for success
10. A sloppy plan that contains errors
11. Exaggerating the qualifications of the management team
12. A plan that is incomplete
37
Mini-Case 4-1: The Need For A Plan
Twenty-three year-old Shirley Halperin had just been kicked off the staff of her college
newspaper, when she launched Smug magazine with just $1,700 in personal savings, $7,000 in
donations, and a $10,000 loan, co-signed by her father Eli Halperin who helped her get a line of
credit.
The ten-issues-a-year publication is targeted at music fans in the 16-to-30-year-old age group
with well-written stories “about musicians that matter plus bands you haven’t even heard of yet,”
says Halperin. It covers the alternative-music scene between the musical meccas of New York
City and Philadelphia. Her enthusiasm for her subject has spilled over to the writers, editors,
designers and photographers who now total 30, and continue to contribute without pay. They
donate their talents for such incentives as by-lines, photo credits, college internships, job
experience, free tickets to concerts, free CDs, and other things. Halperin cuts costs whenever
possible and her frugality enables her to keep start-up costs low. She runs Smug out of her
Gramercy Park apartment with two roommates.
Smug charges $1,000 per ad. Competitive publications like Village Voice, Spin, and the Aquarian
Weekly charge between $7,000-$29,700 for a similar ad. Halperin says that her budget ads are
designed specifically for smaller bands with a regional following that have not hit the big time
yet. “It doesn’t make sense for baby bands to advertise in the bigger publications until awareness
of them rises,” she says.
In less than 18 months, Smug’s circulation went from 5,000 to 20,000, its readership expanded to
60,000 and advertising revenues climbed from zero to $15,000 per month. After publishing its
fourth issue, Smug beat out its larger, more established competitors to win a prestigious local
music award. Readers rave about the quality of the magazine’s writing, its design and
photography; however, Smug’s continued success is not guaranteed. Half of all magazines fail
the first year, and those that don’t take five years to break-even. If Smug succeeds, it can look
forward to attractive profit margins of between 15-30 percent.
Halperin is very good at knowing what music people are listening to and what people want to
read about; however, she is quick to admit that finance is not one of her strong points. Another
concern is cash flow; at the end of its first year, $7,500 of Smug’s and $70,000 in revenues were
still in accounts receivables. Although she started Smug without a business plan, she now realizes
she needs one to raise the $500,000 necessary to take the magazine “to the next level.” She needs
the money to upgrade the newsprint to semi-glossy paper stock, and most importantly, to pay her
staff. She wants the plan to reflect her business philosophy: “Every year circulation should go up,
your pages should go up, and your ad revenues should go up.”
152) Write a memo to Shirley Halperin explaining what topics she should include in her business
plan.
153) What advice would you offer Halperin when she begins to use her business plan to locate
capital?