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Chapter 1
Why Plan?
Key Words
Business plan—a written document that carefully explains every aspect of a new
business venture
Chapter Overview
This chapter introduces the idea of the business plan, including the rationale for writing
one, the multiple purposes that a business plan can serve both inside and outside the firm,
and the key audiences for a business plan. Students will also learn about major
imperatives in creating a business plan, as well as some potential pitfalls in writing the
business plan.
Chapter Summary
1.
A business plan is a written document that carefully explains every aspect of a
new business venture.
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5.
The two primary audiences for a firm’s business plan are the firm’s employees
and investors and other external stakeholders.
6.
It is important to remember that a firm’s business plan is typically the first aspect
of a proposed venture that will be seen by an investor (or anyone else who reads
the plan), and if the plan is incomplete or looks sloppy, it is easy for an investor
to infer that the venture itself is incomplete or sloppy.
structure. Typically, the individuals who read business plans are busy people
who want a plan that allows them to easily find critical information.
8.
As a business plan is written, the people involved should continually measure the
type of company that they are hoping to start against their personal goals and
aspirations.
9.
There are four types of businesses: survival, lifestyle, managed growth, and
aggressive growth. This book focuses on lifestyle, managed growth, and
aggressive growth firms.
analysis, are also important.
Chapter Outline
I. Introduction
II. Reasons for Writing a Business Plan
III. Who Reads the Business Plan—And What Are They Looking For?
IV. Guidelines for Writing a Business Plan
a. Structure and Style of the Business Plan
i. Develop an Elevator Speech
1. Steps in an Elevator Speech
ii. Red Flags in a Business Plan
founding team to work together to hammer out the details of the business
venture, (2) it communicates the merits of a new venture to outsiders, such as
investors or bankers.
4.
The process of writing a business plan forces a team to not only work together,
but to turn abstract ideas into concrete realities.
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V. Types of Business
VI. The Plan for the Book
a. Section 1: Starting the Process
Chapter Notes
I. Introduction
• Research reveals an increased interest in the study of entrepreneurship
o 2,100 colleges and universities offer entrepreneurship coursework;
up from 380 in 1990
• The business plan is a written document that carefully explains every
aspect of a new business venture
o Inside the firm, the business plan is used to develop a “road map”
II. Reasons for Writing a Business Plan
• There are two primary reasons for writing a business plan
o Internal reason—forces the founders of a firm to systematically
think through each aspect of their new venture
o External reason—communicates the merits of a new venture to
outsiders, such as investors and bankers
▪ One specific type of outside support for entrepreneurs is the
business incubator, an organization that provides physical
space and other resources to new firms in hopes of
promoting economic development in a specific area
▪ Investors rely heavily on the business plan to make their
decisions regarding initial investment
▪ Many investors first ask for an executive summary, which
is a short overview of a business plan, or a set of
PowerPoint slides describing the merits of a new venture
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III. Who Reads the Business Plan—And What Are They Looking For?
• There are two primary audiences for a firm’s business plan
a. A firm’s employees—because the business plan articulates the
vision and future of the firm, both the management team and the
rank-and-file employees can benefit from reading the business plan
in order to operate in sync and with purpose
IV. Guidelines for Writing a Business Plan
• It is important to remember that a firm’s business plan is typically the
first aspect of a proposed venture that will be seen by an investor or
whoever the plan is presented to
a. Structure and Style of the Business Plan
• The business plan should follow a conventional structure
• Most experts recommend a length of between 25 and 35 pages
i. Develop an Elevator Speech
• An elevator speech is a brief, carefully constructed
statement, usually 45 seconds to two minutes long
that outlines the merits of a business venture
(business plan insight feature)
1. Steps in an Elevator Speech (from
business plan insight feature)
• Describe the opportunity
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• Describe your market
ii. Red Flags in a Business Plan (Table 1.3)
• Founders with none of their own money at risk
b. Content of the Business Plan
• Most plans are divided into sections that represent the major
aspects of a new venture’s business
c. Measuring the Business Plan Against Your Personal Goals and
Aspirations
• Accepting venture capital will almost assuredly force a firm into a
fast-growth model from the start
o Most venture capitalists shoot for a 30 to 40 percent annual
return and a total return of five to 20 times their original
investment over the life of the investment
d. Recognizing That Elements of the Plan May Change
• The corridor principle is an academic principle which states that
once an entrepreneur starts a business, he or she begins an journey
down a path where “corridors” leading to new venture
opportunities become apparent
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V. Types of Businesses
• There are four distinct types of businesses
o Survival—provides its owner just enough money to put
food on the table and pay bills (handyman, part-time
childcare)
VI. The Plan for the Book
a. Section 1: Starting the Process
o A business plan is also an essential document for a firm to have at
its disposal, particularly if it plans to reach out to others to try to
gain access to resources
b. Section 2: What to Do Before the Business Plan Is Written
c. Section 3: Preparing a Business Plan
o This section provides an explanation of how to complete each
section of a business plan
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d. Section 4: Presenting the Business Plan to Investors and Others
Review Questions
1.
does not have a business plan. Finally, the process of writing the plan forces the
entrepreneur to examine the merits of the business idea and test its feasibility.
What is a business plan? What are the advantages to preparing a business plan
for a new venture?
Answer: A business plan is a written document that carefully explains every
2.
What are the two most common reasons that entrepreneurs write business plans?
Answer: The most common reasons for writing a business plan are that it forces
3.
attractive financial return when compared with lower risk investment
Who are the primary consumers of business plans? In what ways do the people
who read business plans differ in the information they are looking for?
Answer: The primary consumers of a business plan are the firm’s employees,
investors, and other external stakeholders. A firm’s employees may use the
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4.
It is often argued that the process of writing a business plan is as important as the
plan itself. How is this so?
Answer: The process of working together on a business plan can help to develop
5.
to visualize what the firm will look like in terms of the demands on their time,
the pressures of accepting venture capital, and the need to accept investor
scrutiny over operational decisions for the firm. If an entrepreneur wants to
Why is it important for the founders of a firm to continually measure whether the
type of company they are envisioning, as described by their business plan, is
consistent with their personal goals and aspirations?
Answer: It is important that the founders use the business plan writing process
6.
What are the hazards involved with using a software package to help write a
business plan or hiring consultants to write the business plan for you?
Answer: Software packages and outside consultants are useful in providing a
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7.
Describe the general rules of thumb for the length and appearance of a business
plan.
Answer: Most experts agree that the plan should be between 25 and 35 pages in
8.
Why is it important for a firm to test the feasibility of its business idea prior to
writing a business plan?
Answer: There are steps that naturally precede the completion of a business
9.
What is the corridor principle, and how does an understanding of the principle
help entrepreneurs remain open to change as their business plans are being
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written and after their businesses are launched?
Answer: The corridor principle is an academic principle that states that once an
10.
founders to develop a sharp and concise description of their business.
What is an elevator speech? How can developing an elevator speech help a firm
write a more effective business plan?
Answer: An elevator speech is a 45-second to two-minute statement outlining
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Application Questions
1.
Sarah Peters is one of three founders of a medical products company. The
founders have decided to write a business plan to try to obtain funding. In a
meeting with her cofounders, Sarah said, “I know that we’re all very busy, so I’d
like to volunteer to write the business plan. I have a cabin on a lake about an
hour from here, so if it’s all right with the two of you, I’d like to take my laptop
up to the cabin for a couple of days and hammer out the business plan. Any
objections?” If you were one of Sarah’s cofounders, what would you say? What
alternative approach, if any, would you suggest to writing the plan?
Answer: Sarah’s cofounders should consider the fact that the process of writing
2.
Jim Bower, a friend of yours, has spent the past three years working on an
innovative new type of car alarm. He was just awarded a U.S. patent on the
device and is thinking about leaving his job at General Motors to start a company
to sell the alarm. Jim is planning to attend a new business conference in Chicago
next month, which will feature a number of investors. You know Jim doesn’t
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have a business plan. When you asked Jim what he’ll do if he meets an investor
at the conference and is asked for a copy of his business plan, Jim said, “If that
happens, I’ll tell the investor that I’d rather meet with him to talk about my ideas
rather than go through all the work involved with writing a business plan. If he
insists, I’ll put together a plan as quickly as possible and get it in the mail.”
Describe what is wrong with Jim’s thinking.
Answer: Jim’s shoot-from-the-hip style may lose him potential investors. Many
3.
The founders of New Venture Fitness Machines have decided to send their
business plan to a select group of investors who they know have funded fitness
equipment companies in the past. The founders think that the group of investors
they have identified represents their best shot at funding and don’t want to blow
the effort. They have decided to read through their plan one more time before
sending it out. Make a list of the things that should be in the plan and the things
that shouldn’t be in the plan, based on the material in this chapter.
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Answer: The plan should include a clear, coherent story of what the business
intends to accomplish and how it intends to get there. Included should be: an
4.
Lindsey Simpson is the founder of company that plans to sell a new line of skin
care products through high-end boutiques. Because her produced will be priced
at the high end of the market, Lindsey has decided to try to project an image of
sophistication and class in everything she does. As a result, she plans to pay
several thousand dollars to have her business plan professionally prepared, and
each copy of the plan will be enclosed in a $59 leather binder. Do you agree with
Lindsey’s approach? If not, what advice would you give her?
Answer: Lindsey’s decision to use her business plan as a tool to illustrate her
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5.
Spend some time studying the website of LiveHealthier.com, the company
started by Mary Moslander and referred to in the chapter. Search for additional
information on the company. Write a 60-second elevator speech for
LiveHealthier.com.
Answer: Student responses will vary, but should cover the four steps of an
elevator speech:
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Additional Activities
1. Virtual Incubator Tour
Purpose: to introduce students to business incubators
If you have Internet access in your classroom, take your students on a virtual tour of an
2. Business Plan Competition
Purpose: to enhance retention of course concepts and encourage students to apply what
they learn
Does your college or university participate or sponsor a business plan competition?
3. Elevator or Quick Pitch
Purpose: to encourage students to practice presenting their new business concepts
Although some colleges and universities put on quick pitch or elevator speech
competitions, you can easily have a competition in your classroom. Have each student