business plan writing

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Business Plan Writing

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7 steps in business planning

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7 steps in business planning

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The Purpose of business plans

Pre-venture Counseling

Business Planning

Financial Analysis

Franchise Evaluation

International Trade

Loan Packaging

Market Research

New Product Commercialization

Strategic Planning

Human Resource Mgmt

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Ingredients for business Success

competent PERSONPOTENTIAL BUSINESS OPPORTUNITYBUSINESS PLANSUFFICIENT CAPITALAll the above

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THE BUSINESS PLAN

THE BUSINESS PLAN IS A WRITTEN DOCUMENT WHICH DESCRIBES YOUR BUSINESS IN TERMS OF . . .

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THE BUSINESS PLAN

WHO YOU AREWHAT YOU DOWHERE YOU ARE HEADEDHOW AND WHEN YOU EXPECT TO GET THEREWHY YOU WILL BE SUCCESSFUL

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WHY YOU NEED A BUSINESS PLAN

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Your First Marketing and Sales Tool

A Business Plan is:

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Typical Business Plan Outline(First Time Entrepreneurs)

I. Overview (Summary)II. The OpportunityIII. The SolutionIV. The Business ModelV. OperationsVI. FinancialsVII. Required Capital, Equity Structure and

Rate of ReturnVIII.Management Team

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TO ENCOURAGE YOU TO BE SPECIFICTO EVALUATE THE FEASIBLITY OF YOUR IDEASTO PROVIDE PLANNING, OPERATING, AND POLICY GUIDESTO IMPROVE DECISION-MAKING, EFFICIENCY, AND CONTROL

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TO IMPROVE YOUR CHANCES OF SUCCESSTO PERSUADE POTENTIAL LENDERS AND INVESTORS YOU WILL SUCCEED

NOTE: DO NOT WRITE A BUSINESS PLAN JUST TO OBTAIN FINANCING, WRITE IT FOR YOUR BENEFIT.

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COMPONENTS OF A BUSINESS PLAN

NARRATIVE

FINANCIAL DATA

SUPPORTING DOCUMENTS

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STATEMENT OF PURPOSE

WHO IS ASKING FOR THE MONEY?WHAT IS THE BUSINESS STRUCTURE?HOW MUCH MONEY?WHAT IS THE MONEY NEEDED FOR?HOW WILL THE FUNDS BENEFIT THE BUSINESS? WHY DOES THE LOAN MAKE SENSE?HOW WILL THE FUNDS BE REPAID?

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DESCRIPTION OF BUSINESS

BUSINESS FORM?-PROPIETORSHIP-PARTNERSHIP-CORPORATION

TYPE OF BUSINESS?-MERCHANDISING-MANUFACTURING-SERVICE

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DESCRIPTION OF BUSINESS (cont.)

WHAT IS THE PRODUCT AND/OR SERVICE?

IS IT A NEW BUSINESS, TAKEOVER, OR EXPANSION?

WHY WILL THE BUSINESS BE PROFITABLE?

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DESCRIPTION OF BUSINESS (cont.)

WHEN WILL YOUR BUSINESS OPEN?

IS IT A SEASONAL BUSINESS?

WHAT HAVE YOU LEARNED ABOUT YOUR BUSINESS FROM OUTSIDE SOURCES?

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PRODUCT/SERVICE

WHAT ARE YOU SELLING?WHAT BENEFITS ARE YOUR CUSTOMERS BUYING?WHICH PRODUCTS ARE RISING STARS, STEADY CASH COWS, IN DECLINE (INVESTMENT EGOS)?WHAT IS DIFFERENT ABOUT YOUR GOODS AND SERVICES?

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MARKET

WHO BUYS FROM YOU? DEFINE YOUR TARGET MARKETS.

ARE YOUR MARKETS GROWING, STEADY, OR DECLINING?

IS YOUR MARKET SHARE GROWING, STEADY, OR DECLINING?

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MARKET (cont.)

HAVE YOU SEGMENTED YOUR MARKETS? HOW?

ARE YOUR MARKETS LARGE ENOUGH FOR EXPANSION?

HOW WILL YOU ATTRACT, HOLD, AND INCREASE YOUR MARKET SHARE?

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MARKET (cont.)

ARE YOU PLANNING TO ENTER OR LEAVE ANY MARKETS?

HOW DO YOU PRICE YOUR PRODUCTS?

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COMPETITION

WHO ARE YOUR DIRECT COMPETITORS?WHO ARE YOUR NEAREST INDIRECT COMPETITORS?HOW ARE THEIR BUSINESSES SIMILAR TO AND DIFFERENT FROM YOURS?WHAT HAVE YOU LEARNED FROM THEIR OPERATIONS, ADVERTISING?

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LOCATION OF BUSINESS

WHERE ARE YOU (OR SHOULD YOU BE) LOCATED?WHY IS IT A DESIRABLE AREA OR BUILDING?WHAT KIND OF SPACE DO YOU NEED?ARE ANY DEMOGRAPHICS OR OTHER MARKET SHIFTS GOING ON?

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MANAGEMENT

HOW DOES YOUR BUSINESS EXPERIENCE HELP YOU IN THIS BUSINESS?

WHAT RELATED WORK EXPERIENCE DO YOU HAVE?

WHO IS ON THE MANAGEMENT TEAM?

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MANAGEMENT (cont.)

WHAT ARE THEIR STRENGTHS AND WEAKNESSES?WHAT ARE THEIR DUTIES?ARE THESE DUTIES CLEARLY DEFINED? HOW?WHAT ADDITIONAL RESOURCES ARE AVAILABLE TO YOUR BUSINESS?

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PERSONNEL

WHAT ARE YOUR CURRENT PERSONNEL NEEDS?

WHAT SKILLS WILL YOUR EMPLOYEES NEED? IN FIVE YEARS?

WHAT ARE YOUR PLANS FOR HIRING AND TRAINING PERSONNEL?

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APPLICATION/EXPECTED EFFECT OF THE LOAN

(INVENSTMENT)

HOW WILL THE LOAN (INVESTMENT) MAKE YOUR BUSINESS MORE PROFITABLE?WILL YOU BUY OR LEASE (EQUIPMENT, PLACE OF BUSINESS)?DO YOU NEED THIS MONEY?

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FINANCIAL DATA

SOURCES ANDAPPLICATIONS OF FUNDINGASSUMPTIONSWAGE/REVENUE SCHEDULEBALANCE SHEETTHREE YEAR INCOME STATEMENTTHREE YEAR CASH FLOW STATEMENT

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Goal for Session

Quick Introduction to Business Plan Financial Analysis Help you understand what is important

Not a class in accounting!

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What should it be ?

What is the Purpose of Business Plan Financials?Passing the “Taste Test”Executive Summary FinancialsDetailed (Appendix) Financials

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Business Plan Financials

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What is the Purpose of Your Business Plan Financials?

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Business Plan FinancialsPhase I

Helps you: test various potential business models isolate critical assumptions determine whether this is a viable

business opportunity determine how much money you’ll

need

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Business Plan FinancialsPhase II

Helps potential investors: test the viability of your business model evaluate your critical assumptions

Are they credible? Do you understand your business?

evaluate you as someone who understands how business works from a financial perspective

determine whether the investment is potentially attractive

evaluate your true financial needs

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“The Taste Test”

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Job 1: Pass the “Taste Test”

Tom Canfield of Equity Catalysts: “Can you taste $25-$50 million in

revenues?”

Is the revenue scenario credible or will you have to achieve miracles to hit your forecast

numbers?

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So, how do you convince someone that your revenue scenarios are credible?

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Tips for CredibilityShow your

assumptions and be able to back them up with

FACTS based on market research

and/or some compelling rationale

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Showing a Potential Market

Enterprize, Inc.Market share required to achieve Revenue Goals

Gizmo Unit Sales Price 2,500$ 25% of competitor price; greater value

Market Opportunity in Units 150000 According to Gartner Group;

Market Opportunity in Revenue to Enterprize 375$ $ million

Yr Yr Yr Yr Yr1 2 3 4 5

Enterprise, Inc. Yearly Objectives ($ millions) 3.50$ 7.00$ 14.00$ 28.00$ 56.00$ Growth Rate 100% 100% 100% 100%Required Unit Sales 1400 2800 5600 11200 22400Required Market Share to Achieve Objective 0.93% 1.87% 3.73% 7.47% 14.93%

Note: Enterprise will achieve this required market share because of:1) Partnership with xyz will yield . . .2) ajsadfjkdfsajkl adfjkldsfkl, etc.

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Mistakes to Avoid

Assumptions you can’t justify Too high a market share

Too much detailToo little detailNot enough growthToo much profit (in later years)

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Summary Financials

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Summary Financials

Pro-forma Income StatementPro-forma Return to Investors

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Income Statement

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What is an Income Statement?

Shows financial results of a company over a given period of timeIncludes:

Revenues Cost of Sales (costs directly attributable to the

products/services sold) Other Operating Expenses

Marketing, Sales Research and Development General and Administrative

Earnings before TaxOperating Income Tax Earnings after Tax

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Sample Income Statement

Simple Income StatementEnterprize, Inc.Jan-Dec, 1999

Revenues $60,000

Cost of Goods Sold $30,000

Gross Margin $30,000

Research & Development $35,000Sales and Marketing $40,000General and Administrative $10,000

Total Operating Expenses $85,000

Operating Profit -$55,000Tax 35% 0

Profit After Tax -$55,000

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Income Statement Questions

What is Revenue? How would a magazine account for a

subscription? How would a software company

account for a software license?

What is Cost of Goods sold?What are some of the components of operating expenses?What is operating profit?

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Pro-forma Income Statement

Summary Table showing 3-5 years of Revenues Cost of Sales Other Operating Expenses Operating Income

Plus: Brief text on how can you support these financials The key assumptions

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Pro-forma Income Statement

Years 1 2 3 4 5

Revenues $13.1 $54.3 $143.3

$230.2 $321.2

Cost of Goods Sold

$15.6 $28.8 $54.1 $82.4 $112.1

Other Operating Expenses

$23.8 $32.1 $64.5 $100.4 $140.3

Operating Income

-$26.3 -$6.6 $24.8 $47.4 $68.8

Operating Margin

-201.2

%

-12.2%

17.3% 20.6% 21.4%

Income Statement (MM)

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Required Capital, Equity Structure and Rate of Return

How much cash will you need?What is the value of the company?How much will the management team contribute, if any?What is the rate of return on capital for the investors?

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Rate of Return Assumptions

Assumptions for ROI Calculation

Investment by Partner 25.0$ millionValuation of the company after the investment 100.0$ million

Equity from Investment 25%Equity from Strategic Relationship 5%Total percent of equity 30%

Year 5 Operating Profit 69$ millionAssumed multiple of operating profit at sale 7

Assumed value of the company after 5 years 483$ millionReturn to Partners 145$ million

Assumed dividends during 5 years 0

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Rate of Return CalculationYr Yr Yr Yr Yr

1 2 3 4 5

Initial Investment (25)$ -$ -$ -$ -$

Dividends -$ -$ -$ -$ -$

Return from Sale 145$

Net Cash Flows (25)$ -$ -$ -$ 145$

Internal Rate of Return 55%

Net Present Value at 35% $13.82

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Detailed Financials (“Appendix”)

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Exhibits for Detailed Financials

Typically: 5 years on an annual basis and month-to-month for the first yearComponents: Assumptions and Outcomes Page Income Statement Detailed Revenue Detailed Expenses Headcount Return on Investment Balance Sheet Cash Flow

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Assumptions and Outcomes

Shows key assumptions and the outcomes in terms of profits, etc.Helps show the reasonableness of your analysisTells the story in summary form, in case someone only looks at this page

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Income Statementand RelatedExhibits

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Income StatementRevenues Summarizes components of revenue

Expenses Cost of goods sold Other major components of operating expenses

Sales, marketing, general and administrative Research and Development, etc.

Earnings before income and tax (or operating income)TaxProfit after tax

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Detailed Revenue

Shows revenue over time divided into key components: Product areas Geographies Any components that make sense

Documents assumptions and their effects

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Detailed Expenses

Summarizes key expense categories in major detailDocuments assumptions not summarized elsewhere

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Payroll and Headcount

Who are you going to hireWhen will they start?How much will they earn?Cost of benefits, etc.

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Return on Investment

Expected investmentExpected share of ownershipChange in share of ownership due to other investmentsReturns on the investment, including dividends and some “terminal value”Discount cash flows to show Internal Rate of Return and Net Present Value

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Balance Sheet

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What is a Balance Sheet?A snapshot of a company’s financial position at a moment in timeLeft hand side = AssetsRight hand side = Liabilities and EquitiesAssets must equal liabilities plus equities (hence it is a “balance” sheet)

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Balance SheetSimple Balance SheetEnterprize, Inc.6-Jan-00

Liabilities &Assets Equity

Cash 25,000$ Accounts Payable 5,000$ Accounts Receivable 10,000$ Prepaid royalties 25,000$ Inventory 15,000$ Current portion of notes payable -$

Total Current Assets 50,000$ Total Current Liabilities 30,000$

Property, Plant & Equipment 25,000$ Long term debt -$

Total Liabilities 30,000$

Paid-in Capital 100,000$ Retained Earnings (cumulative deficit) (55,000)$

Total Assets 75,000$ Total Liabilities and Equities 75,000$

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What is an Asset?

Assets are valuable resources owned by an

entity and include: Cash Things that are likely to become

cash soon (inventories, accounts receivable)

Valuable things that help the business produce revenues over a longer period (property, plant, and equipment, etc.)

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What is a Liability?

Liabilities are the claims of creditors

and include: Accounts payable Notes payable this

year Longer term

obligations, such as long term debt

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What is an Equity?

Equities reflect the “claims” of investors and include:

Paid in capital“Retained Earnings” or the sum total of profits after tax that haven’t been paid out through dividends

Note: You can’t cash in equities—they represent a claim on the business not an asset.

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Cash Flow Statement

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Cash Flow Statement

Records the Flow of Cash during a given periodCash inflows include:

Profits Sale of assets Reduction in:

Accounts Receivables Other assets

Cash outflows include: Losses Purchase of assets Increase in:

Accounts Receivables Other assets

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Cash Flow StatementSimple Cash Flow StatementEnterprize, Inc.Jan-Dec, 1999

Sources of Cash Uses of CashCash from Operations: Increase in accounts receivable 10,000$

Increase in Inventory 15,000$ Net Income (loss) (55,000)$ Purchase of property, plant 30,000$ Depreciation 5,000$ & equipment

Net cash from operations (50,000)$

Other Sources of Cash:

Sale of Stock 90,000$ Increase in accounts payable 5,000$ Increase in prepaid royalties 25,000$

Total Sources of Cash 70,000$ Total Uses of Cash 55,000$ Increase (decrease) in cash 15,000$

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Business Plan Financial Projection WorkshopHandout

Example Statements and Recommended Readings

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Q and A

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Thanks and

ABM Consult