Chapter 6: Writing a Business Plan
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CHAPTER 6
WRITING A BUSINESS PLAN
LEARNING OBJECTIVES
1.
Explain the purpose of a business plan.
2.
Describe who reads a business plan and what they are looking for.
3.
Discuss the guidelines to follow to write an effective business plan.
4.
Identify and describe a suggested outline of a business plan.
5.
Explain how to effectively present a business plan to potential investors.
CHAPTER OVERVIEW
This chapter introduces the important topic of writing a business plan, which is a step that
all start-up firms should go through. An emphasis is placed on the proper time to write a
business plan—it should follow the completion of a feasibility analysis. An emphasis is
also placed on the reasons for writing a business plan, who reads the plan and what
they’re looking for, and guidelines for writing a business plan.
The bulk of the chapter provides an outline of a comprehensive business plan. The
chapter ends with a section titled “Presenting the Business Plan to Investors.” This
section provides guidelines on how to present a business plan to a group of investors in
the most effective manner possible.
CHAPTER OUTLINE
I. The Business Plan
A. Reasons for Writing a Business Plan
B. Who Reads the Business Plan—and What Are They Looking For?
1. A Firm’s Employees
2. Investors and Other External Stakeholders
C. Guidelines for Writing a Business Plan
1. Structure of the Business Plan
2. Content of the Business Plan
a. Style or Format of the Business Plan
b. Recognizing the Elements of the Plan May Change
II. Outline of the Business Plan
A. Exploring Each Section of the Plan
1. Cover Page and Table of Contents
2. Executive Summary
3. Industry Analysis
4. Company Description
5. Market Analysis
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6. The Economics of the Business
7. Marketing Plan
8. Product (or Service) Design and Development Plan
9. Operations Plan
10. Management Team and Company Structure
11. Overall Schedule
12. Financial Projections
13. Appendix
14. Putting It All Together
III. Presenting the Business Plan to Investors
A. The Oral Presentation of a Business Plan
B. Questions and Feedback to Expect from Investors
CHAPTER NOTES
I. The Business Plan
A. Reasons for Writing a Business Plan
1. A business plan is important for two major reasons.
B. Who Reads the Business Plan—and What Are They Looking For?
1. A Firm’s Employees. A clearly written business plan, which articulates the
vision and future plans of a firm, is important for both the management team
and the rank-and-file employees of a new venture.
2. Investors and Other External Stakeholders. External stakeholders, such as
investors, potential business partners, potential customers, and key employees
who are being recruited to join a firm, are the second audience for a business
plan.
C. Guidelines for Writing a Business Plan
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1. Structure of the Business Plan. To make the best impression, a business plan
should follow a conventional structure, such as the outline of the business plan
shown in the next section of the chapter.
a. Although some entrepreneurs want to demonstrate creativity in everything
they do, departing from the basic structure of the conventional business
plan format is usually a mistake. Typically, investors are very busy people
2. Content of the Business Plan. The business plan should give clear and concise
information on all the important aspects of the proposed venture. For most
plans, 25 to 35 pages are sufficient.
a. Style or Format of the Business Plan. The appearance of the plan must be
carefully thought out. It should look sharp but not give the impression that
a lot of money was spent to produce it. There are three types of business
plans.
i. Summary plan: A summary business plan is 10 to 15 pages and works
best for companies that are very early in their development and are not
prepared to write a full plan.
audience. Commonly running between 40 and 100 pages in length, this
plan can obviously feature a great amount of detail.
b. Recognizing the Elements of the Plan May Change. A final guideline for
writing a business plan is to recognize that the plan will usually change as
it is being written and as the business evolves.
II. Outline of the Business Plan
*A suggested outline of the full business plan appears in Table 6.2 in the textbook. A
specific firm’s business plan may vary, depending on the nature of the business and the
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personalities of the founding entrepreneurs. Most businesses do not include all the
elements introduced in Table 6.2; we include them here for the purposes of completeness.
A. Exploring Each Section of the Plan
1. Cover Page and Table of Contents. The cover page should include the name of
the company, its address, its phone number, the date, and contact information
for the lead entrepreneur.
2. Executive Summary. The executive summary is a short overview of the entire
business plan; it provides a busy reader with everything that needs to be
known about the new venture’s distinctive nature.
a. Although the executive summary appears at the beginning of the business
plan, it should be created after the plan is finished. Only then can an
accurate overview of the plan be written.
b. An executive summary shouldn’t exceed two single-spaced pages. The
cleanest format for an executive summary is to provide an overview of the
business plan on a section-by-section basis.
3. Industry Analysis. This section should begin by describing the industry the
new business will enter in terms of its size, growth rate, and sales projections.
It is important to focus strictly on the business’s industry and not its industry
b. Industry structure refers to how concentrated or fragmented an industry is.
Fragmented industries are more receptive to new entrants.
c. Industry trends should be discussed, which include both environmental
and business trends. This is arguably the most important section of an
industry analysis because it often lays the foundation for a new business
idea in an industry.
4. Company Description. This section begins with a general description of the
company. Although at first glance this section may seem less critical than the
others, it is extremely important. It demonstrates to your reader that you know
how to translate an idea into a business.
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a. The company description should start with a brief introduction, which
provides an overview of the company and reminds the reader of the reason
it is starting.
b. The sections to include in this portion of the plan include: Company
History, Mission Statement, Products and Services, Current Status, Legal
Status and Ownership, and Key Partnerships (if any).
5. Market Analysis. While the industry analysis focuses on the industry that a
firm will participate in, the market analysis breaks the industry into segments
and zeroes in on the specific segment (or target market) to which the firm will
try to appeal.
a. The sections to include in this portion of the plan include Market
Segmentation and Target Market Selection, Buyer Behavior, and
Competitor Analysis.
c. A competitor analysis is a detailed analysis of a firm’s competitors.
6. The Economics of the Business. This section begins the financial analysis of
the business, which is further fleshed out in the financial projections. It
a. Revenue drivers and profit margins. Summarize the major revenue drivers
of the business in proportion to where you expect to make your money.
Describe the size of the overall gross margins and margins for each of the
major revenue drivers of the business. Then determine the weighted
average contribution margins.
b. Fixed and variable costs. Provide a detailed summary of fixed and variable
costs for the venture.
c. Operating leverage and its implications. Characterize whether your cost
structure is predominantly fixed or variable and then indicate the
implications.
d. Start-up costs. Distinguish the one-time start-up costs of the business.
e. Overall economic model. Put the pieces above together. Indicate how you
will make money in terms of the combination of margins, volumes,
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operating leverage, and revenue source flexibility. How attractive is the
combination?
f. Breakeven chart and calculations. Compute the number of units the
7. Marketing Plan. The marketing plan focuses on how the business will market
and sell its product or service. It deals with the nuts and bolts of marketing in
terms of price, promotion, distribution, and sales.
a. The sections to include in this portion of the plan include Overall
Marketing Strategy and Product, Price, Promotions, and Distribution.
b. A firm’s marketing strategy refers to its overall approach for marketing its
products and services. A firm’s overall approach typically boils down to
how it positions itself in its market and how it differentiates itself from its
competitors.
8. Product (or Service) Design and Development Plan. If you’re developing a
completely new product or service, you need to include a section in your
business plan that focuses on the status of your development efforts.
a. The sections to include in this portion of the plan include: Development
Status and Tasks, Challenges and Risks, and Intellectual Property.
b. Most products follow a logical path of development that includes product
invention as a 3D model that can be viewed from all sides and rotated 360
degrees.
9. Operations Plan. The operations plan outlines how your business will be run
and how your product or service will be produced.
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a. The sections to include in this portion of the plan include: General
Approach to Operations, Business Location, Facilities, and Equipment.
b. A useful way to illustrate how your business will be run is to first
articulate your general approach to operations in terms of what’s most
important and what the make-or-break issues are. You can then frame the
discussion in terms of “back stage,” or behind the scenes activities, and
“front stage,” or what the customer sees and experiences.
10. Management Team and Company Structure. This is a critical section of a
business plan. Many investors and others who read business plans look first at
the executive summary and then go directly to the management team section
to assess the strength of the people starting the firm.
a. The sections to include in this portion of the plan include: Management
Team, Board of Directors, Board of Advisors, and Company Structure.
b. A board of directors is a panel of individuals elected by a corporation’s
shareholders to oversee the management of the firm, as explained in more
detail in Chapter 9.
11. Overall Schedule. A schedule should be prepared that shows the major events
required to launch the business. The schedule should be in the format of
milestones critical to the business’s success.
12. Financial Projections. The final section of a business plan presents a firm’s
pro forma (or projected) financial projections. Having completed the previous
sections of the plan, it’s easy to see why the financial projections come last.
They take the plans you’ve developed and express them in financial terms.
a. The sections to include in this portion of the plan include: Sources and
Uses of Funds Statement, Assumptions Sheet, Pro Forma Income
Statements, Pro Forma Balance Sheets, Pro Forma Cash Flows, and Ratio
Analysis.
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c. Pro forma (or projected) financial statements are the heart of the financial
section of a business plan. A firm’s pro forma financial statements are
similar to the historical statements an established firm would normally
prepare, except they look forward rather than track the past.
d. Ratio analysis—Most business plan writers interpret or make sense of a
firm’s historical and/or pro forma financial statements through ratio
analysis. Ratios, such as return on assets (ROA) and return on sales
(ROS), are computed by taking numbers out of financial statements and
forming ratios with them.
13. Appendix. Any material that does not easily fit into the body of a business
plan should appear in an appendix.
14. Putting It All Together. In evaluating and reviewing the completed business
plan, the writers should put themselves in the reader’s shoes to determine if
III. Presenting the Business Plan to Investors
A. The Oral Presentation of a Business Plan
1. When asked to meet with an investor, the founders of a new venture should
prepare a set of PowerPoint slides that will fill the time slot allowed for the
presentation portion of the meeting.
2. The first rule in making an oral presentation is to follow instructions. If an
investor tells an entrepreneur that he or she has one hour and that the hour will
B. Questions and Feedback to Expect from Investors
1. Whether in the initial meeting or on subsequent occasions, an entrepreneur
will be asked a host of questions by potential investors. The smart
entrepreneur has a good idea of what to expect and is prepared for these
queries.
Chapter 6: Writing a Business Plan
2. In the first meeting, investors typically focus on whether a real opportunity
exists and whether the management team has the experience and skills to pull
off the venture.
BOXED FEATURES: QUESTIONS FOR CRITICAL THINKING
What Went Wrong?
1.
Once a piece of secondhand furniture was listed on Move Loot’s website, if a
customer didn’t like the price, he or she could offer a lower amount. Move Loot’s
50 percent commission was based on the final selling price. This must have made
it difficult for Move Loot to forecast both its gross margin and its contribution
margin on individual sales. To what do you believe this was a problem for Move
Loot?
Answer: While students may have different opinions on this issue, it should be
clear that is likely to have caused problems in a business where the fixed costs are
quite high. The contribution dollars from each transaction (the 50 percent
commission minus the variable costs of completing the transaction) should add up
to pay for all the fixed costs. Forecasting the contribution margin when the selling
price could move down is a big challenge.
2.
To what extent do you believe Move Loot’s business model was sound?
Answer: It was an unsound business model because Move Loot had to perform a
number of steps to complete a transaction and get paid for it. The case lists 8
discrete activities that entails both fixed and variable costs. At the end of it, what
they are selling is somebody’s unwanted used furniture!
3.
In your judgment, were the “economics of the business” sound for Move Loot
from the outset? How could Move Loot establish its business in a manner that the
economics of the business made more sense?
Answer: The economics of the business rests on generating an adequate
contribution margin from each transaction to cover the fixed costs and yield a
profit. Move Loot had significant variable costs for each transaction, which,
interestingly, had little to do with the commission from the sale. These costs were
variable in that they were not incurred if a transaction did not take place. But
whether they were selling a chair or a complete living room set, steps 1-8 listed in
the case had to be performed. Perhaps, if Move Loot had set a minimum selling
price for a transaction to occur, they may have had a better margin on each
4.
What can all start-up founders learn from the Move Loot case?
Answer: All parts of a start-up’s business model must make sense, not the least of
which is the economic model. Granted that the founders of Move Loot changed
their business model more than once toward the end, validating the business model
at the outset is critical.
Urge your students to expand upon this and generate more takeaways.
Savvy Entrepreneurial Firm
Know When to Hold Them, Know When to Fold Them
1.
Despite all the changes that have happened with the Internet since 2007, when
Songkick was founded, why do you think the company has been able to
successfully stick with its original business plan?
Answer: Songkick provides two fundamental services—it alerts people to when
their favorite bands are in their area and it sells tickets for concerts and music-
related events. Although the Internet has changed a lot since 2007, the
fundamental needs that Songkick fulfills have not changed. As a result, Songkick’s
business model hasn’t changed much since the company’s inception.
2.
What do you think would have happened to Grubhub if it hadn’t changed its
business plan?
Answer: Grubhub would have waned in terms of popularity and profitability.
Because restaurants were not comfortable paying upfront to be listed on
Grubhubs’s Web site, a large number of them would have eventually dropped the
service. Grubhub essentially saved its business as a result of its willingness to
change its business plan. Once Grubhub switched from a subscription pricing
model to a transactional pricing model where they collected a commission for each
order placed (rather than charging an upfront fee), they saw a dramatic increase in
restaurants using its service.
3.
Why do you think some start-ups find it difficult to change their business plan,
even when presented with evidence that their current business plan isn’t working?
Answer: Some people are stubborn and don’t want to admit that their initial plan
isn’t viable; so instead of changing, they persist even when faced with long odds.
Other people suffer from hubris, which means they have excessive pride and/or
arrogance, and simply won’t change. Still others may be so passionate about a
business idea that they become blinded by their passion, and discount any
information that isn’t supportive of their current idea.
4.
Look at the “You Be the VC” features at the end of Chapter 5, which focus on
Prynt and ZUtA Labs, and the “You Be the VC” features at the end of this chapter,
which focus on Beyond Meat and Ava. From the information in the features and
on each company’s website, which company do you think will have the easiest
time sticking to its original business plan? Which company do you think will have
the hardest time? Explain your selections.
Answer: This is a good assignment for an individual or group assignment. We
think ZUtA Labs will have the easiest time sticking to their business plan and
Prynt will have the most difficult time, although students may come up with
different conclusions.
Partnering for Success
Establishing a Community of True Believers and Early Evangelists
1.
What are ways to get people to care about your product or service? Why is it
important to establish a community of true believers and early evangelists?
Wouldn’t it be easier to acquire customers via traditional advertising?
Answer: Most entrepreneurs (including those featured in various chapters in the
book) initially reach out to their friends and family to gain support for what they
are doing. In so doing, they introduce their product or service and get their
network interested. When members of such a network begin talking to others about
the product or service, there is a level of authenticity about this that traditional paid
advertising does not have. Besides, soliciting the support of one’s personal
network doesn’t have the same costs that traditional advertising has.
2.
Why are the people who are asked to test a prototype of a product or provide
feedback in some other way ideal candidates to become true believers and early
evangelists?
Answer: When someone is approached to test a product or service and provide
feedback, there is an intense level of engagement between the two parties. Testers
“buy in” to the process and believe that their opinion is valued. Once they are
attracted by the product or service, they carry their whole hearted embrace of the
product or service to become evangelists for it.
3.
On a scale of 1-10 (10 is high), how prominent a role do you think social media
typically plays in helping companies gain early adopters for their product or
service?
Answer: Social media increases the reach of an entrepreneur in accessing his or
her network. Not only that, social media plays a big role in spreading the message
about the product or service. Given that students are quite savvy about social
media, they may give it a scale of 10 in this regard.
4.
Brainstorm other ways to establish a community of true believers and evangelists
not mentioned in the feature.
Answer: This is a good class exercise to get students to think of ways to reach out
to and enlist the support of true believers and evangelists.
REVIEW QUESTIONS
6-1.
What is a business plan?
Answer: A business plan is a written narrative, typically 25 to 35 pages long,
that describes what a new business plans to accomplish and how it plans to
accomplish it.
6-2.
What are the advantages of preparing a business plan for a new venture?
Answer: For most new ventures, the business plan is a dual-purpose document
used both inside and outside the firm. Inside the firm, the plan helps the
company develop a “road map” to follow in executing its strategies and plans.
Outside the firm, it introduces potential investors and other stakeholders with
the business opportunity the firm is pursuing and how it plans to pursue it.
6-3.
When is the appropriate time to write a business plan?
Answer: The time to write a business plan is toward the end of the stage in the
entrepreneurial process titled “Moving from an Idea to an Entrepreneurial
Firm.” It is a mistake to write a full business plan too early. The business plan
must be substantive enough to have sufficient details about the merits of the
new venture to convince the reader that the new business is exciting and should
receive support.
6-4.
What are the two primary reasons for those starting a new venture to write a
business plan?
Answer: A business plan is important for two reasons. First, a business plan is
an internal document that helps a new business flesh out its business model and
solidify its goals. Second, a business plan is a selling document for a company.
It provides a mechanism for a young company to present itself to potential
investors, suppliers, business partners, and key job candidates by showing how
all the pieces of a new venture fit together to create an organization capable of
meeting its goals and objectives.