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Chapter 5

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York University
Administrative Studies
ADMS 3920

22 September 2012 CHAPTER 5: DEVELOPING AN EFFECTIVE BUSINESS PLAN 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 investors  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 expected economics  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 competency 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 acceptance.  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 manage risks.  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 product details.  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 following:  Preferences of the management team: Some teams want to participate in the planning process; others don’t.  Complexity of the business  Competitive environment  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 over competitors. 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
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