22 September 2012
CHAPTER 5: DEVELOPING AN EFFECTIVE BUSINESS
WHAT IS A BUSINESS PLAN?
A start-up business plan is a written document of a set of business goals, the reasons
they are believed attainable, and the plan for reaching those goals.
Also, a business plan may also be used to get the required financing from the
It may also contain background information about the organization or team
attempting to reach those goals.
NOTE: Writing a business plan is primarily an ongoing process and only secondarily the
means to an end product or outcome.
THE NEED FOR A BUSINESS PLAN
For internal use: to provide a clearly articulated statement of goals, strategies and
Imposes discipline on the entrepreneur and management team,
Helps them envision success and
Prepare for the unexpected
In short, the business plan provides a structure for communicating the entrepreneur’s
mission to current employees of the firm.
For External use: to serve as a selling document to be shared with outsiders
Provides a credible overview for prospective customers, suppliers, and investors
Helps secure favorable credit terms from suppliers
Opens approaches to lenders and other sources of financing
Some common business plan flaws include the following:
Overly optimistic financial projections, which send up a red flag to lenders, as do
inadequate assessments of the competition and the market environment
Vague marketing strategies that fail to clearly state product differentiation or the size
of the target market
A poorly prepared document that looks unprofessional or lack research material
Poor organization descriptions, such as limited comments on the management team,
hazy timelines, or a vague risk assessment, which reduce the perception of
A legal document called a prospectus, or offering of memorandum is frequently required
for raising capital from the investors. This documents contains all the information
necessary to satisfy federal and provincial requirements for warning potential investors
about the possible risks of the investment. 22 September 2012
Typically, investors are also required to sign a confidentiality agreement, a document
used to ensure investors keep information confidential.
Features of the plan that repel investors include the following:
Show a high infatuation with the product or service and downplay market needs or
Are based on financial projections at odds with accepted industry norms.
Have unrealistic growth projections.
Contain a need for custom or applications engineering or market development, which
makes substantial growth difficult.
Features of the plan that attract investors include the following:
Recognize the investors’ needs for required rates of return on investments and
Demonstrate evidence of focus on a limited number of products or services
Have a proprietary market position through patents, copyrights, and trademarks
Offer compelling competitive advantage
Plans speak the investors’ language when they:
Focus on limited offerings and highlight return on investment & payback.
Have a compelling ExecSum, concise & avoid excessive length or detail.
Have an attractive overall appearance.
Are well organized with a table of contents, numbered pages and full set of financials.
Are market-oriented by showing how meet customer needs; is not all about technical
Show convincing evidence of customer acceptance of the proposed product or service.
Respect risk & potential for problems 22 September 2012
Criterion for business plan evaluation:
1. The availability and quality of collateral
2. The strength of cash flow – the ability to cover interest and repay the loan
3. The competence and commitment of the founder; do they have the skills to operate
the venture and have they committed time and money
4. The reputation of the founder, and their credit rating
5. The overall risk of the industry
HOW MUCH BUSINESS PLAN IS NEEDED
Preparing a business plan requires both time and money. Other considerations include the
Preferences of the management team: Some teams want to participate in the planning
process; others don’t.
Complexity of the business
Level of uncertainty: Entrepreneurs are more inclined to plan when there is less
uncertainty because they can better anticipate future events.
PREPARING A BUSINESS PLAN
Three issues re of primary concern in preparing a business plan: (1) the underlying
research, (2) the basic format and effectiveness of the written presentation, and (3) the
content of the plan.
Key Concepts in the Business Plan:
Business Concept - Typically novel idea for a business that includes basic information
about product or service, the demographic targeted, and explains company’s advantage
The Business Model - Description of the key variables and methods business will use to
create and deliver value in order to make money from operations.
Value Proposition - Business’s fundamental marketing premise that explains why
consumers will be driven to buy product or use service
Revenue Model - Mechanism(s) that will be used to generate business’s cash inflows
Business Strategy - Long-term plan of ac