Preparing a Technology Business Plan How to use this Booklet This booklet is intended to help you prepare a

viable business plan which is appropriate for

technology based business ventures. It is part

of a series of documents and tools produced

by LIFT.

LIFT aims to build a bridge between those

requiring financing for the development of

commercial ventures based on the results of

their research and the finance world.

Preparing a Technology Business Plan 8 The Executive Summary 9 The Market 13 The Product 15 The Business and its trading position 16 Marketing Strategy 17 Manufacturing 18 Forecasts of sale, cash flow and break-even 21 Management and control of the business 23 The Required Financing Package 24 A Case Study Business Plan for Hephaestus Materials Ltd 25 Executive Summary 26 The Market 29 The Product and Process 30 The Business of Hephaestus 33 The Marketing Strategy 38 The Required Financial Package

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PREPARING A TECHNOLOGY BUSINESS PLAN INTRODUCTION OR HOW TO USE THIS BOOKLET This booklet has been designed to help individuals in technology research or companies prepare a viable business plan. For this reason it does not follow the standard reference works on business planning which are not on the whole intended to help R&D personnel with the subject of high technology business planning. It is recommended that the reader gathers information from the various sources mentioned in this booklet and seeks advice on how to proceed further from the LIFT helpdesk. This booklet has four main sections, namely: an introduction, a practical guide to the theory and practice of preparing a business plan, a case study to illustrate the theory and a list of information sources to obtain further help in preparing the plan. The section on theory and practice gives a guide to key topics for the plan, each followed by a checklist of the points to be included in the plan. The checklists are not necessarily exhaustive but are designed to help you compile the necessary material for the plan. Let us assume that you are the project leader of a company or department which has developed either a new material or a new processing method and you now wish to commercialise the results of the research work. You are probably asking six simple but profound questions about this guide, namely:

1. Why do we need a business plan? 2. When will we need it? 3. Who will be required to give input? 4. What will be needed to prepare the plan? 5. How do we go about it? 6. Where (failing any gaps in the above) do we get more information?

Although technical and scientific personnel may have already thought of the answers to these problems, the most critical of all is perhaps When will we need the plan? Much of the thinking about preparing a business plan to exploit results comes too late in the project. Many projects run several years before project leaders begin to contact commercial, production or marketing partners about exploiting the research results. Discussion with commercial staff at an early stage is more likely to help exploitation than hinder the research effort and may identify unrealistic assumptions about the market. If a research institute employs you, you may require the assistance of outside marketing consultants to help prepare aspects of the plan. If the plan is highly complex it may be necessary for you to sub-contract the writing of the document but the input must come from all those who will have to implement the plan. If there is no ownership of the input, the output will be disowned or implemented in a disinterested manner. 1. Why Do We Need a Business Plan? The primary objective in preparing a business plan is to set out a convincing case to secure financing, internal or external, for the start-up or expansion of a business venture.

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Many projects fail to be fully exploited because of poor communication amongst those expected to carry out that exploitation. By preparing a business plan the originators, usually the R&D or Technical Development Departments can begin to talk the language of commercialisation. It is the use of commercial language which will help exponents of technology get their message across to non-technologists and help demonstrate the value of R&D to other parts of the business or to sell an idea to an outside backer. The business plan is effectively the first sales brochure for a new product or process and is as necessary as the need for patents or publication in a scientific journal. With any communication instrument it is vital to project a simple message rather than a complex, correct but ultimately unwieldy technical discourse. Although the majority of business plans are prepared for presentation to an outside group of investors or bankers, in the case of high technology projects up to 60% of all presentations tend to be made to senior management or other interested departments. In other words an R&D department has to be able to communicate its ideas to an internal audience rather than outsiders. In either case the business plan must demonstrate in a rigorous manner the commercial viability of the proposed venture. The plan should cover all aspects of the business. From its conception, through start-up, to the management and control of the business, right up to the achievement of forecast annual sales targets. Typically the plan will cover a five-year planning period. While the acquisition of the necessary funds is the initial reason for writing the business plan, it will have other valuable functions. In its final form it will present a complete analysis of the business, its objectives, the market in which its operates, the competition against which it must establish itself and the problems which must be overcome in order for the plan to be fulfilled. As such, the business plan is a comprehensive operating manual, which the management will use to navigate their way to their objective. The preparation of the business plan is also an exercise which must essentially cause the writers of the plan to examine their basic assumptions in the minutest detail since these must be justified to an impartial third party. It sometimes happens that the enthusiasm of a product champion or inventor will demand a leap of faith to be made, which cannot be substantiated in the practicalities of the marketplace. Any weakness of this nature would be clearly exposed in the course of preparing a plan, which must stand up to the scrutiny of sceptical financial backers. Hindsight is a quality that many of us have in abundance but a business plan is designed to eliminate the use of hindsight as much as possible. Note that it will be necessary to update the plan on a yearly basis. Each years trading must be reviewed in the light of actual developments of the business. Any discrepancies between the original assumptions and the achieved performance must be accounted for and the assumptions modified if necessary. Forecasts for subsequent years must also be adjusted in line with the revised assumptions. In this way the company will have a rolling five-year business plan which is responsive to the real environment. In the subsequent discussion in this brochure the term product will be assumed to refer to both the physical products and processes and the intangible services supplied by a company to its clients. Having discussed when a business plan is needed, it is only fair to point out that rigorous business plans are not always required. This is particularly true when an R&D department has developed a new or improved process for an existing product. Here one may find that a simple cost benefit analysis is all that is required to convince the management of the benefits of exploitation.

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By providing an exact breakdown of all the costs of the new process (including unit costs) and comparing the factory gate cost with that of the existing process it should be fairly simple to demonstrate the commercial benefits. R&D managers should note that accountants, venture capitalists and bankers usually look for a payback within a reasonable period, particularly when times are hard. Although this may seem shortsighted it must be recognised that financial personnel are risk averse mostly because of external pressures. Other arguments are often needed to convince colleagues to switch to a new process, such as competitor and customer pressures, improved quality that could justify raising prices or offering warranties or increasing market share and environmental benefits. 2. Timing or When Will We Need It? Recent history is littered with inventions which never came to market because of faulty business plans usually prepared at the last minute and based on false assumptions, inaccurate information and misdirected research. Talk to the marketing and production staff about the need for research before the research is completed. Get a commitment to carry out a market research study for incorporation in the plan. Get an idea of production costs! Collect information on competitors and the products potential position in the market. Find out if the customer wants this product (see section 2.1). If he or she doesnt want it, perhaps the research money should be better spent elsewhere. 3. Who Will Be Required To Give Input? A business plan comprises information from various specialisations and it is unlikely that any one person will be able to provide all the answers to the questions posed in this booklet. If you are an SME it will be important to obtain input from the individuals in various departments such as finance, production, sales and personnel. A research institute may find such resources to be scarce and will need inputs from outside either through a joint venture or by contracting a consultant. It is important to obtain agreement from all the parties involved as to the aims and objectives of the plan and to obtain commitment to the contents of the plan. As with any project it is important to brief the project participants as to the basic requirements of the plan and to impose deadlines for the contributors. This technique known as pre-briefing has enormous benefits later on resulting in fewer criticisms and internal politics, which might sink a project at a first presentation. 4. What Will We Need To Prepare The Plan? The recipient of the business plan will be looking to see if the writer, or writers, has demonstrated a sound mastery of the dynamics of their business and the industry in which it operates. Most importantly, the readers will want to know how this mastery can be harnessed to provide a profitable return on the funds to be invested at a minimum acceptable level of risk to the investor or parent company. Thus, it will be essential to demonstrate that the plan is robust enough to allow a shortfall in the forecast sales levels as a result of unscheduled difficulties in trading conditions. It can be tempting at the start of a venture to be over optimistic and assume that everything will proceed exactly as planned. This rarely happens! There are almost always unbudgeted costs or investments and other events that could not be foreseen. Therefore a sensitivity analysis should be included in order to indicate the robustness of the plan to unforeseen events. A plan, which has little sensitivity between the planned scenario and the worst case scenario, is unlikely to be considered favourably. The contents of a business plan for any particular enterprise will depend on the nature of the business and the organisation from which finance is being sought. There are, nevertheless, certain categories of information that must be included if the proposition is to be successful. The main categories on which a business plan will be appraised can be summarised as follows:

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Soundness of financial structure

- Liquidity - Profitability

Market and products Physical and production resources Management

These categories can be further subdivided and they will be discussed under the headings indicated at the end of this section. It follows then, that the document has to be written from the point of view of the ultimate reader and not that of the writer. It is sometimes the case that the writer of a business plan is the originator of an invention and is thus a person from a scientific or engineering background. In such a situation there can be a temptation to include technical data, formulae and diagrams in order to demonstrate technical virtuosity. This must be wholly resisted! Technical information, where included, must be simplified to make it comprehensible to non-specialists and must be used only in order to demonstrate the commercial of financial viability of the proposed venture. The content of the business plan will be compiled by producing the information and generating the forecasts required for the following section headings. This data can only be obtained by making a detailed analysis of the whole business and its environment. The process will require many fundamental decisions to be taken. Decisions taken under one heading will inevitably affect decisions taken under other headings and this will require the earlier decision to be reconsidered. An iterative process thus writes the business plan. The process may require many loops until consistency is achieved between all the sections. Writing of the business plan may take several weeks or months work. The following is an outline of a typical business plan: Executive Summary The Market The Product, Process or Invention The Business and its Trading Position Marketing Strategy Manufacturing Forecasts of Sales, Cash Flow and Breakeven Management and Control of the Business The Required Financing Package 5. How Do We Go About It? This booklet provides a series of chapter headings for the business plan. Each Chapter has an explanation of the topic to be included in the plan followed by a checklist of the main points. Note that there are some very sophisticated techniques for analysing the risks; strategies, tactics and approach to starting a new venture but the basics are always the same. It is possible to refine the basic plan and a simple powerful message will have a greater impact than an elegant theological tract.

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1. THE EXECUTIVE SUMMARY This is the single most important chapter of the business plan. It must summarise in not more than 500 words the whole argument, which is set out in greater detail in the following chapters. The Executive Summary will be the first thing that is read by the prospective financier. In a number of cases it may be the only chapter which is read if it fails to present a convincing case. Most financiers receive many more requests for funds than they are able to grant and so are not highly disposed towards unravelling a potentially doubtful proposition. There is a real danger that the Executive Summary may fail to perform its function since it is inevitably the last section to be written. It may seem to be a simple matter to write only one or two pages. But, the Executive Summary will be prepared after a lengthy and potentially time-consuming process and so there may be an understandable desire at this point to finish as quickly as possible. The writers will be confident that they have ironed out all the problems and they may feel that even if the Executive Summary is not completely clear, all the necessary information is in the document somewhere. However, it must not be assumed that the potential financier will take the trouble to search through pages of data to uncover vital information. Above all, it must be remembered that the page or two of the Executive Summary must contain the most powerful and persuasive message of the whole document. So it is well worth the extra effort to have the Executive Summary read and checked for completeness and clarity by each of the writers involved. It is also helpful, if possible to have it read by any neutral persons who enjoy the confidence of the compilers of the plan. The document should be well presented, neatly typed and in an easy-to-read format. Only the most important numbers must be used in order to make the case as strong as possible. Careful attention must be paid to avoid clumsy grammar, obscure jargon and silly typing errors since these all have a disproportionately negative effect. CHECK LIST 1) What is the business name and area of activity? 2) Who are the key contacts? 3) What is the scope of the business and of the market potential for its products? 4) What resources, human and financial, are needed for the venture? 5) When will the business make a return? 6) What historical data do you have on your abilities to carry out the venture? 7) What is the mission statement of the venture?

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2. THE MARKET The market is the arena in which the plan of campaign is to be fought out. It is therefore necessary to define the market for the new product in terms of its size, its state of development, the types of customers and the competitors. How many customers are there and what is their influence in the market? There may only be one customer for a titanium submarine and the price is therefore likely to be high but there are many thousands of customers for carbon fibre tennis rackets. The market size, or annual consumption of the product, will be defined in terms of the scope of the business venture under consideration. The market size could therefore range from the annual consumption of the product in a given city, to a country, to a group of countries or to the whole world. If the company only has the resources to market in one country it would not be relevant to consider the world market and thought should be given to licensing or joint ventures. In addition to the total size of the market, it will be important to know the stage of development it has reached. There is a natural pattern for the evolution of almost any market and the stage of the cycle at which the market is entered will significantly affect the business strategy that must be adopted. These phases can be summarised as follows:

1. Embryonic 2. Growth 3. Maturity 4. Decline

Many high technology firms are researching areas which come under the first two phases but high technology markets can reach phase 4 fairly rapidly e.g. the electronic typewriter which as been superseded by the word processor. IDEALISED PRODUCT LIFE CYCLE

SALES

DEVELOPMENT

GROWTH

MATURITY

DECLINE

TIME

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2.1. The customers In addition to the geographical size of the market it will be relevant to a particular business venture to segment the market by end use customers. This will break down the consumption of the particular product among these types of customers. Thus if the company planned to market its product only to the automotive industry it would ignore the consumption of the product in other sectors such as aviation, civil engineering, shipbuilding etc. There are many other possible segmentations of the whole market, which could be applied in order to arrive at the size of the market, which is relevant to the enterprise being planned. The segmentations selected will reflect the decision on who are to be the prime target clients. It may be relevant to segment the market by size of customer in terms of turnover if it is considered that the clients will be either predominantly large companies or, alternatively, predominantly small companies. The profile of the customers will also require a listing of their needs. There will probably be several important customer needs but it is likely that it will be necessary to concentrate on a limited number, in order to focus the companys resources to the best advantage and to emphasise the products USP (unique selling proposition). Separately from customer needs, it will be important to identify purchasing criteria. While the two may coincide, it is likely that other factors are important such as credit rating, status and reputation of the supplier, technical service facilities available from the supplier, bulk purchasing discounts, delivery speed, the desirability or necessity for the product to meet international performance specifications. 2.2. Competitors Information on the number and capabilities of the competitors to the new enterprise will be most important. The new company will not have the luxury of operating in a vacuum. The better the new business idea, the stronger will be the possibility of retaliation from those companies already in the market or the stimulation of new entrants. The easiest response from existing participants would be price cutting, but a number of other tactics are available depending on circumstances, resources and expertise. Knowledge of the mix of competitors already in the market will be vital in order to evolve a credible business strategy. Convenient classification of competitors could be:

1. Dominant / Leader 2. Secondary / Strong 3. Niche / Fair 4. Minor / Weak

The dominant company, as the name suggests, dictates the key market indicators such as price and performance quality. The company has the most comprehensive product range and its pricing structure sets the standard for the rest of the industry. The dominant company is able to charge premium prices due to its widely perceived position of leadership. The secondary company has a slightly smaller product range but in some sectors may offer serious competition to the dominant company. The company in the niche of the market will be a well-run small company, which does not have the product range or resources to compete head-on with the dominant or secondary companies. Its strategy is to be market leader in small, specialised market niches. The minor company has no particular strengths and is at the mercy of commercial currents created by other players but may have an underlying sound control of its manufacturing costs. The strategic position of these companies is summarised in the table overleaf:

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COMPETITIVE POSITION PRODUCT PRICE DISTRIBUTION COMMUNICATION

1. DOMINANT Many products with unique or very competitive edge. Well differentiated from competitors. Used as the industry standard.

Pricing determines price levels for other serious competitors. When these change, others move too

Large share of the business enjoyed in all channels. Some channels may be locked in. Ability to dictate channel terms.

All announcements are eagerly awaited. Regular high profile exposure. All influences positively disposed.

2. SECONDARY Products are on a par with the best input across the range. Comprehensive selection for most customer requirements.

Pricing may vary above and below nearest competitors but normally within a narrow band. Room to price strategically.

Some presence in most channels and a major presence in the important ones.

Regular exposure. Normally included in media comparisons. Respectable image. Serious consideration given by influences.

3. NICHE Most products are specialists in their field. Gaps in range.

Can command premium prices in areas of strength. Need to have price edge elsewhere. Little room for flexibility.

Probably holding good share of one major channel with minimal presence elsewhere.

Known and recognised mainly in limited area of specialism. Not seen to be in same league as major competitors.

4. MINOR Product range limited. Opportunities restricted. Quality performance no more than average.

Must have price advantage to stay in the market. Margins adequate rather than healthy.

Few channels open and only small share of these. Little incentive for new channels to adopt unless bought with heavy discounts.

Existence is known but little awareness of products or activities. Erratic low level exposure.

5. MARGINAL Few products available. No specialism apparent. Generally below average quality. Not a serious consideration.

Prices reduced across the board. Margins suffering. Heavy discounting. Backlash signalling low quality products.

Struggle to keep a foothold in any channel.

Nearly invisible from almost zero exposure. Alternatively a bad image through excessive bad publicity. Few influencers prepared to associate.

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CHECK LIST 1) What is the geographical scope of the market: World? Europe? Local? 2) What is the market value in terms of units and value? 3) How fast is the market growing and where are the opportunities? Which market segment will you concentrate on and why? 4) What market share are you aiming for? 5) If there is no existing market or if the market is being developed when are the expected breakthrough dates? 6) How would your companys entry affect the market? 7) What is the market structure? Are there many small customers or a few large customers? What do the customers do with the product and how much is their business worth? 8) What are the key requirements of your customers? 9) How will your company meet these needs? Current and future? 10) Who are your major competitors? What are their strengths and weaknesses? What are their patent positions, potential, operating methods and profitability? 11) How will they react to another player in the market? 12) What is unique about your business?

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3. THE PRODUCT This is probably the chapter with which the writer is most confident but the reader is least familiar. Every effort must be made to explain the technology in simple terms and to explain the Unique Selling Proposition (USP) of the invention. This chapter must answer the questions relating to what the product or service is and why anyone would want to buy it. In marketing terms products can be divided into two classes (see chapter 2 also):

Market pull Product push

The market pull type of product is defined as having been conceived as a result of an identifiable unsatisfied need. The product push type of product is brought into existence as a result of an invention or development for which an application has to be found. Both of these types of product can be successful but experience shows that the success rate for the market pull type of product is significantly higher than for the product push. Often a product is created as a result of a combination of these two approaches. Typically, the product push type of product arises from the work of a companys research or development department as process innovation does, e.g. the invention of polyethylene. This may be the extension of an existing product range or perhaps a spin-off development, which is considered to have potential application in a completely new sector. The market pull product arises as a result of the companys marketing effort, which involves understanding their customers problems. Information on customer needs and dissatisfactions will be gained on an ongoing basis by the companys regular sales force. This will be supplemented on a general and specific basis by market research consultants. Once the need has been clearly identified, the specification of a product is drawn up which would solve these problems and work is then undertaken to develop such a product. The vital aspect to emphasise in this section is the need to identify just one Unique Selling Proposition for the new product. Some possible USP's are: lower price higher quality longer life faster operation rapid maintenance comprehensive back-up service smaller size Then you must indicate how important this USP is to the customers in value terms. It will be necessary to compare your product with others from competitive suppliers. These should be analysed in terms of the end use segments of the markets, which they serve, their USP's, their drawbacks and weaknesses, pricing, etc. This will enable the differences and advantages of the proposed product to be seen more clearly in the context of its market potential. In the case of a process innovation by an R&D or technical department the customers are likely to be internal rather than external i.e. a manufacturing, production or finishing department. While it is still necessary for the R&D department to communicate the USP's to an audience, the benefits need to be presented in a slightly different way e.g. improved productivity may mean that expensive machines may not need replacement. Alternatives include warranties could be granted or scrap levels and inventory stocks reduced but whatever the benefits the R&D department still needs to convince

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customers. There may also be additional spin-offs from technology which the marketing department may be able to exploit and which can form part of the business plan (see case history). The question of patents on the new product needs to be examined thoroughly and the impact the patents will have on the marketability of the product. CHECK LIST 1) Describe the product, process or service in simple terms. 2) Is it available for sale and, if not, when will it be ready? At what cost? 3) Do you have legal protection and if not why not? Have you taken advice on patents? 4) What is the Unique Selling Proposition (USP) of the product or process? 5) Will you provide other services such as warranties, guarantees or after sales service?

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4. THE BUSINESS AND ITS TRADING POSITION This chapter gives an introduction to the business and the executives who are making the application for the funding. The aim is to inspire confidence in the potential financiers that the business is financially soundly based and the executives have the appropriate management and entrepreneurial skills. Any project backer has to appraise three non-financial aspects of a business: The product/invention and its market (see chapter 3) The physical and production resources The management of the business The reader is trying to assess whether this team will be able to transform an unproved product into sales, which will exceed costs! Perhaps the only way of assessing the management is to look at their history. Information given will include a summary of recent trading results, the legal status of the business as a limited company or any other type of standing, an organisation chart, biographies of the executives giving their relevant experience, and the mission statement (or objectives) of the company. If the application for financing is being made on behalf of a start-up business it will not be possible to give evidence of the soundness of its standing. In this case it will be necessary to emphasise the track record of the founding partners and their suitability to take on the risks of the proposed venture. It will be critical for you to produce a company mission statement. The mission statement will define the essential character of the company and will set out what the company is aiming to achieve and your backers will hold you to this. It will state what business the company is, not in terms of the technology that it employs but in terms of the type of clients it supplies. Most importantly, it will say how the company is uniquely different from any of its competitors. The mission statement will demonstrate how the company satisfies clients needs better than any other company. A statement on the companys corporate objectives will be required. This will declare aims in terms of growth of turnover and market share. These will be given for both the short term and the long term. Financial appraisal of the business should include the following information: Net tangible assets: the size of the proprietors capital. This value will influence the amount of money, which can be borrowed. Capital gearing: ratio of borrowing to shareholders funds. This will indicate the vulnerability of the business to fluctuations in sales. CHECK LIST 1) What is the business name and industry? 2) What are the backgrounds of the business team and what are their roles? 3) What skill gaps exist within the organisation and how will these be filled? 4) What are the resources required for the business over time?

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5. MARKETING STRATEGY This chapter on developing an exploitation strategy will show how the company will develop its USP, whether it is lower manufacturing cost, better quality product, better service and technical support or lower price. Obviously a price will have to be established for the product. If the product is completely new this may be difficult. However it is usually possible to determine a price based on analysing the added value offered to the customer by the product. In addition, all costs associated with the manufacture, marketing and distribution of the product must be calculated and apportioned on a unit basis. This is the benchmark from which the value of the product to the client must be decided as distinct from its cost. The sales process must be addressed once the marketing stage has been completed and the pricing strategy decided. It is important to distinguish between sales and marketing since these are sometimes considered to be the same thing. Marketing is the process described in chapter 2 whereby a customer need is identified, and quantified. Sales, on the other hand, are the process of communication with the potential customers and converting their interest into firm orders and cash. Once it has been established that a given market demand exists, it is essential to devise a workable sales strategy. The essential elements of this will include: the identification of a sufficiently large number of individual potential customer companies identification of individual purchasing decision makers within each company establishment of a priority listing of customers according to sales potential training of sales personnel in selling techniques development of an effective sales message communication of the sales message to potential purchasers provision of suitable answers to sales resistance and objections conversion of customer interest into a purchase This procedure calls for a plan involving the use of a sales force, distributors, agents, advertising, publicity and the production of promotional brochures and videos. Management monitoring and control procedures will have to be installed to ensure that the right customers are being contacted, at the right frequency and that target performances are being achieved. Decisions on all of these points must be translated into the resulting commitment to staffing levels and associated costs. CHECK LIST 1) Have you obtained prices of competitive products or processes? 2) Have you prepared a detailed cost breakdown for each stage of the products manufacturing and sales? 3) Have you developed a price performance analysis comparing your product with that of competitors? 4) Have you set a price based on steps 1 to 3 including discounts and terms? 5) Have you prepared product literature / leaflets or datasheets on the product? 6) Prepare a press release for the media and articles for serious journals 7) Prepare an advertising and promotional budget. 8) Prepare salesforce training programmes and possible responses to enquiries.

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6. MANUFACTURING The manufacturing operation can involve significant commitments to investment capital for plant and equipment, which may require heavy financing expenditure. For a small company or a start-up venture this could involve major risks which could render the venture unattractive to the potential financial backers. It is possible to reduce capital requirements by sub-contracting manufacture to other companies and by leasing certain types of equipment and machinery. However, these strategies must be weighed against the need to achieve a sufficiently high and reliable level of production to satisfy the companys customers. The potential backers will want to see that a satisfactory compromise has been reached between the containment of capital requirements and adopting a penny-pinching approach which could cause manufacturing problems and supply bottle-necks once the company has started operation. All costs associated with manufacture will have to be fed into the business plan five-year projections in order to produce cash flow forecasts, pro-forma balance sheets and break-even forecasts. The plan must also discuss how manufacturing will be controlled and monitored and the level of stocks of raw materials and finished products, which will have to be maintained. Material requirements, costs and supply sources and terms of supply must be included in the costing. The role and responsibilities of key production management personnel must be specified. The availability of a sufficiently skilled labour force must be indicated and the industrial relations record presented. CHECK LIST 1) Will you make the product yourself or sub-contract the work? 2) Will you hire or buy premises or machines? 3) What are the exact machinery requirements and what will they cost? 4) What are the manufacturing-costs? 5) How much raw material has to be bought and will you make to stock or to order? Who will be your suppliers? 6) What are the delivery-times for orders? 7) Who will solve problems such as trials and quality control? 8) Have roles and responsibilities of the key management personnel been specified?

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7. FORECASTS OF SALES, CASH FLOW AND BREAK - EVEN The forecasts of sales and cash flow, and hence ultimate profitability, will be the bedrock on which the potential financiers will assess the future viability of the business. It follows that these forecasts will come under severe scrutiny and critical judgement. 7.1. Sales Forecasts The sales forecasts cannot be simply a series of numbers plucked out of the air as a result of wishful thinking. This is an area that is likely to come under vigorous cross-questioning from the financiers during the application for funding. The forecasts must have sound backing from the information which has been described in the earlier chapters of this brochure, i.e. market size, customer needs, customer segmentation, state of development of the market, strengths and weaknesses of competitors, etc. In addition, it will be necessary to add supporting evidence from the companys current trading activities such as volume of orders on the books, trading levels with key clients, historical growth of business in the targeted market sector. 7.2 Cash Flow Forecast Once a sales forecast has been prepared it is possible to calculate the cash flow forecast for the period of the business plan. This is an estimate of the net cash position of the company on a month by month basis. The cash flow forecast will itemise the difference between the income from forecast sales and the planned monthly expenditure for all known liabilities such as rent, rates, wages, material costs, interest payments etc. Some of these payments will occur on a regular monthly basis while others may be at more irregular intervals, such as material purchases and capital investment in plant and equipment. A further complication is that there will be a protracted time delay between the purchase of raw materials and the receipt of cash from customers. Large customers may well expect to be given the provision to make payment of invoices 60 days after delivery and in many cases may delay payment significantly beyond that. The company from the time of their purchase must therefore finance the cost of the materials until such time as the payment is received from the client. It therefore frequently occurs that the company will experience a heavy cash outflow despite a buoyant level of sales. This is especially the case at the start of a new venture when capital investment and associated start-up costs may significantly outweigh the income from sales. It will therefore be essential to write into the business plan the provision of sufficient working capital either in the form of a bank overdraft or a loan to cover the heaviest cash outflow that can be foreseen. 7.3 Break-even Forecast The ultimate confirmation of the viability of the business venture is the demonstration of the break-even point when sales revenue first equals the sum of fixed and variable costs. Fixed costs arise from regular payments, which are not affected by changes in the short-term level of sales. These include items such as rent, rates, and interest payments on loans and administration costs. Variable costs include payments, which vary in proportion with changes in the level of sales revenue. Examples of this include material costs and energy costs. The question of whether labour costs are fixed or variable costs is one that must be answered in terms of the nature of the business. In some situations labour may be available on a freelance or subcontract basis in order to carry out specific job-related tasks. In other cases the company may retain a labour force with a high level of specialist expertise and it would not be feasible to decrease and increase labour costs in line with fluctuations in sales revenue. The break-even point of the venture is not an immovable milestone. Its timing can be adjusted significantly according to whether the costs of the operation are predominantly fixed or variable. As was mentioned in chapter 6, the planners of the venture may have considerable flexibility in choosing the type of costing structure to incur. The installation of a manufacturing plant will require significant

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capital investment and it will be possible to calculate how long it will take to repay these costs from sales revenue. If the alternative route is chosen of assembling subcontracted components, the variable cost of the bought-in components will be higher than the variable costs in the first case but the break-even point will be reached much earlier. In general terms, the sooner the break-even can be achieved, the more attractive a venture is to the potential financial backers. It will be necessary to calculate a number of alternative break-even scenarios, i.e. best and worst case and showing sensitivity or robustness. Repeating the calculations by inputting different assumptions on sales revenue and direct and variable costs does this. Typical variations might be to examine the effect of a 10% reduction in sales revenue accompanied by a 10% increase in costs. Other assumptions must be examined to establish the boundaries where the proposed venture becomes non-viable. In order to produce a comprehensive financing plan for the new venture, it will be necessary to build up the break-even calculations in conjunction with a pro-forma balance sheet and a pro-forma profit and loss statement covering the projected five year period after start up. Converting the estimates and policy decisions of the previous chapters into hard numbers will produce these. Note that very complex investment-projects e.g. chemical plant, steel plants and a number of high technology businesses may require more sophisticated techniques of project appraisal. These include: Return on capital employed (ROCE) Payback period Discounted cash flow techniques i.e. net present value (NPV) and internal rate of return (IRR) It is essential that specialist accounting expertise be acquired if such techniques of project appraisal are to be used. 7.4 The Pro-Forma Balance Sheet The balance sheet will be a statement of the source of funds for the business in terms of loans, equity participation and retained profit and how these have been allocated. The allocation of the funds will be broken down according to investment in fixed assets of plant and equipment, and also current assets, which are defined as working capital. The current assets refer to the stock of materials and completed manufactured goods and also cash funds, which are held by the company. The balance sheet will also itemise the companys current liabilities, which are money owed to creditors, bank overdraft and tax liability. The balance sheet is a tabulation of pure numbers and there is no identification of the nature of the individual creditors, sources of loans and equity, or the type of fixed assets, which have been purchased. These will, however, be identified elsewhere in the plan. The assets and liabilities are defined from the point of view of the business as an entity and not from the point of view of the creditors or the providers of finance. 7.5 The Pro-Forma Profit and Loss Statement The function of the profit and loss statement is different to that of the balance sheet. While the latter will include a reference to the retained profit of the company, it will only do this in the context of a source of finance for the company and will not indicate how the profit arose. The profit and loss statement is a tabulation of the gross sales income to the company from which must be deducted all

19

attributable costs. For the purpose of the business plan it will be necessary to prepare the first years projected profit and loss statement in some considerable detail. This is likely to require the year to be broken down into monthly figures or on a quarterly basis at the very least. For the remaining four years of the five-year business plan it will be adequate to produce annual profit and loss statements. The assumptions on which the figures have been produced must be clearly stated. As with the break-even forecast, it will be necessary to test the sensitivity of the forecasts by producing additional statements based on lower sales income figures and higher figures for costs and expenses. The initial deduction from sales income is the cost of the goods sold. This gives the gross profit. The cost of goods sold is calculated by totalling all the relevant variable costs, i.e. the material and labour costs. It will not include the cost of the machinery on which the goods were produced or the cost of the factory, which was constructed for their manufacture. Next, it is necessary to deduct operating expenses from the gross profit in order to arrive at the profit before tax (PBT). The operating expenses include rent, rates, administration costs, depreciation, advertising costs, and other overhead costs. Finally, having arrived at the profit before tax, it only remains to deduct the tax payments, the interest charges and the directors emoluments. This leaves the profit after tax from which dividends to the shareholders are distributed. CHECK LIST 1) Does the business have firm orders? 2) Which customers are expected to place orders in the first year? How much and when? 3) What market research data is to hand to support a sales forecast? 4) Prepare a sales forecast for each major product group 5) Prepare a system for updating the sales forecast at regular intervals.

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8. MANAGEMENT AND CONTROL OF THE BUSINESS An integral role for the business plan will be the need to demonstrate to the financiers that the business will be suitably controlled once it commences trading. It will be necessary to produce regular records, which are useful, both to the management of the company itself and external authorities such as tax inspectors, accountants and banks. It is sometimes considered by small businesses that bookkeeping and the maintaining of records is a time consuming formality which must be endured simply to conform with time honoured precedent. This is a complete misunderstanding of the situation. These management controls are used to steer the business in the same way that a cars controls are used to steer it along the highway. It is necessary for the executives of the new venture to determine what are the key indicators of successful performance in every important sector of their particular company. Systems must then be devised for collecting the relevant data on a regular basis, analysing it and then presenting the conclusions in a simple way which nevertheless paints a comprehensive picture of the state of play at any one moment of time. The procedures devised must be both sufficiently comprehensive to provide useable information yet are easily workable. In such a way that the data can be provided promptly enough for remedial action to be taken if this is necessary. There would be little value in providing detailed analyses if they were not available until a problem became critical. The three principal areas in which control is required are: Financial Sales Manufacturing In the area of financial controls it will be necessary to decide whether the venture will be of a sufficient size to warrant the services of an in-house accountant. This would be the preferred option for any company that planned to grow to an appreciable size. However, if the resources were not sufficient in the start up phase, the alternative would be to appoint someone within the company to carry out the function of bookkeeper on a day to day basis and then use a firm of accountants to process the data at regular intervals. Sales data will most conveniently be collected and processed by a member of the sales force. Information required may include records of sales by product type, sales by individual customer, sales by individual sales representative, sales generated per visit, and sales generated by telephone call. Customer record files or cards will be needed which summarise the sales achieved, the sales visits and calls made together with the main points of the discussion. Other additional types of record may be considered to be relevant. Manufacturing records will be required which can be used to analyse the cost, efficiency, speed and quality of production, the time required for the manufacture of individual components, scrap rates, the output rate of individual machines, material costs, power consumption etc. These will be best collected and analysed within the manufacturing department but they will also have to be made more widely available within the company to people like the accountant so that they can be analysed in the context of the total business costs.

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CHECK LIST 1) What bookkeeping and accounting system have you chosen? 2) What control information does it produce and with what frequency? 3) Who will keep the accounts? 4) Who will be your auditors? 5) What other business controls (manufacturing, personnel, quality and environmental) are important?

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9. THE REQUIRED FINANCING PACKAGE The steps, which have been followed in the preceding chapters of this brochure, will have finally led to the provision of sufficient data to enable the financing requirements of the new venture to be defined. The details of financing sources will vary throughout the EU and from time to time. It is thus essential that expert advice be sought on what options are open to a particular business venture and what their relative costs will be before a formal application is submitted. The main options available will be equity participation by a venture capital company, long term and short term loans, bank overdrafts, mortgages and debentures. In deciding on the financing package it will be necessary to specify the need for working capital and the need for capital for the purchase of plant and equipment. The timing of the financing must be specified and whether this will be required in phases or in a single lump sum. The funding by the proprietors must be specified since it will normally be a pre-condition that the backers commit a satisfactory level of their own resources before the financiers are willing to advance any money. The question of the availability of assets as security for loans must be considered. CHECK LIST 1) Based on your financial projection state how much cash you require to set up the business and state when repayment will be. 2) Based on the cashflow forecast, explain when you will need key amounts of resources. 3) How much money will come from you or the parent company? 4) Where do you expect to raise all other funds? Overdraft? Bank loan? Venture Capital? Share issue? 5) If you are issuing shares how will you value the business? 6) What is on offer to an outside investor? 7) What exit route is available to an investor? 8) What security, if any, is available on a loan? 9) How could the business fail and what is the level of risk? 10) How do you intend to manage or minimise these risks and their consequences?

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A CASE STUDY:

BUSINESS PLAN FOR HEPHAESTUS MATERIALS LTD

Hephaestus Materials Ltd 48 Britannia Road Little Blighty-on-the Wold London UK Tel.: 171-8285036 Fax: 171-8289318 Key Contacts: Dr Erebus Technical Director Mr U. Heep Finance Director

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EXECUTIVE SUMMARY Hephaestus Materials Ltd is a materials development company with major interests in the advanced ceramics field. The company is a manufacturer of carbon, transition metal boride and other hard materials. Hephaestus materials sells advanced materials to a variety of industrial customers in the heavy engineering, aerospace, automotive and petrochemicals industries. Hephaestus Materials has developed in conjunction with research partners, via a Community funded RTD programme, an advanced composite with the wear resistance of alumina but with the ductility and impact strength similar to hard steels. This material will have applications for wear resistant parts such as tools, digger teeth and materials handling equipment and has the tradename Unobtanium. The original research work on Unobtanium arose as part of a need to improve the existing Hephaestus process for advanced ceramics. The level of scrap in most advanced ceramics processing is usually very high but by using the results of research the company has been able to reduce the level of scrap (and improve product quality) by 15%. This has resulted in a high level of productivity with existing machines and a saving which will be invested in the new venture for Unobtanium products. The potential European market for this material is estimated at EURO 0.448 million in year XXX6, EURO 1008 million in year XXX7 and EURO 3.2 million in year XX11. The total market is estimated at EURO 10 million in Europe and EURO 40 million world wide by year XX15. The total investment required by Hephaestus Materials for this project is EURO 200,000 over five years. * Note: Any similarity to existing persons or companies is purely coincidental. ** We are in year XXX6 The investment covers the following expenditure: Purchase of one sintering and one hot isostatic pressing (HIP) machine Recruitment of commercial staff Training of a technical support team A marketing budget R&D development programmes The product will need to be presented to Hephaestus existing clients who will need to evaluate material. Design of the simpler components will take 12-18 months. Payback will be in year 4.

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THE MARKET IAL Consultants have estimated the European market for advanced engineering ceramics at EURO 226 million in year XXX3 growing to EURO 390 million by year XXX8. The total size of the market is summarised in the following table: Table 1. European Market for Advanced Eng. Ceramics Year XXX3

Tonnes year XXX7 EURO million

% by value year XXX8 EURO million

year XXX8 % by value

A12 03 (non-electronic) 3.100 125 55 175 45 A12 03 (electronic) 120 45 20 70 18 A12 03 (bioceramic) 15 8 4 15 4 PZT/PLZT (piezoelectric) 15 7 3 10 2.5 Zr 02 120 8 4 15 4 Mg0 20 2 1 5 1 SiC (reaction bonded /

infiltrated) 40 5 2 10 2.5

SiC (sintered) 10 4 2 15 4 Si2 N4 (reaction bonded) 3 2 1 5 1 Si3 N4 (sinterec) 5 10 4 35 9 Sialons 5 10 4 35 9

TOTALS

3.453

226

100

390

100

Source: IAL Consultants The projected growth rates of these materials are extremely high despite the fact that as with all new material developments the estimated breakthrough dates are extremely long. See below: Table 2: Annual Average Growth Rate year XXX3 - year XXX8 A12 03 (non-electronic) 7 A12 03 (electronic) 10 A12 03 (bioceramic) 15 PZT/PLZT (piezoelectric) 10 Zr02 15 Mg0 15 SiC (reaction bonded / infiltrated) 15 SiC (sintered) 30 Si3N4 (reaction bonded) 15 Si3N4 (sintered) 30 Sialons 30 Table 3: Estimates of Commercial Breakthrough Times Year

(average) Year (upper extreme)

High temperature diesel engine components XXX4 XX13 High temperature gas turbine engine components XXX9 XX25 Low temperature wear resistant engine components XXX2 XXX8 Cutting tools XXX1 XXX5 Bearings XXX3 XXX8 Pump components XXX1 XXX5 Precision jugs XXX1 XXX5 Welding nozzles XXX1 XXX5 High temperature recuperators XXX5 XX25 The mechanical wear resistant applications represent the single most important end user sector of the engineering ceramics market in Europe, accounting for some 45% of the total market value. The range of applications included: cutting and grinding tools, wire drawing cones and guides, bearing nozzles,

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burner nozzles, metal extrusion dies, welding pins and nozzles, pistons for metering pumps, plungers for high pressure pumps, precision balls and valves, seal rings for rotary pumps, shaft protection sleeves, sealing discs and cartridges for mixer valves. However the share that advanced ceramics hold of the European wear resistant market is very small. The total European Market for cutting tools is estimated at EURO 2-3,000 million and the overall market for wear resistant materials could be as high as EURO 5,000 billion. Engineering ceramics hold between 0.5 and 1% of the total market for these applications with the balance being held by metal alloys such as manganese steel or high-speed steels. Current projections of the European engineering ceramics market make no attempt to take account of any dramatic technical or marketing breakthroughs, which would create an altogether different scenario. The reasons for this are purely technical. Existing engineering ceramics are still brittle, unpredictable and difficult to manufacture compared to metals. A considerable amount of research has gone into developing materials with the ductility, predictability and impact resistance of metals and anti-wear properties of ceramics. Hephaestus Materials have developed a class of composite ceramic materials, which display the best properties of both ceramics and tooling steels. This is a specialist category of products currently used in the aerospace, military and power generating industries. These materials are embryonic in terms of market growth and their value is about EURO 25 million p.a. and included such products as SiC and Si3N4 reaction bonded materials. The main customers for Hephaestus are firms in the industrial tooling field and those making wear resistant metal parts for materials handling. Number of Customers for Unobtanium Material Sector UK France Germany Italy Rest of

Europe

Total

Cutting tools 10 10 20 24 10 74 Digger teeth / mining 3 4 5 5 5 22 Slides / jigs 112 110 110 112 105 549 Extrusion dies

5 5 10 10 0 30

TOTAL 130 129 145 151 120 675

In the cutting tools sector 10 firms control 50% of the total market. In digger teeth 10 firms control 70% of the market but in slides / jigs there is no dominant player. Manufacturers of cutting tools have a wide product range including drill bits, milling inserts and knives. The initial application for Unobtanium will be for the replacement of inserts. These devices are quite small and are currently made from hard steels, polycrystalline diamond (PCD) and ceramics. Unobtanium will fill the gap between high performance PCD and ceramic inserts and the steel tipped inserts. The total European market is estimated at EURO 320 million p.a. of which Hephaestus hope to capture a 1% market share within 5 years i.e. the same % sales of advanced ceramics today. Of the remaining markets digger teeth / mining is thought to be worth EURO 10 million. The level of penetration by Unobtanium is likely to be much higher because of fewer players and more demonstrable advantages. Hephaestus hopes for a 10% market share of specialist tips in 10 years. The markets for slides / jigs and extrusion dies offer good long term growth prospects but require more development work. The values of these markets are thought to be EURO 50 million and EURO 20 million p.a. respectively. Customers for cutting tools have strict requirements from material suppliers. These include:

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Demonstrated material performance (data sheets, efficiency studies, cost benefit analysis) High product consistency Delivery lead times of less than 1 week Customised tools for difficult materials Good technical support Such companies are not involved in long term projects or bespoke work. Quality, consistency, delivery and a proven level of performance are more important than problem solving. Strong marketing of a limited product range will be more important than developing a wide range of Unobtanium material grades and initially Unobtanium will fill a specific niche. The Unobtanium material has the following advantages for customers: It has a price / performance level superior to its competitors It is more consistent compared to ceramics Standards shapes can be made rapidly ensuring quick delivery times Hephaestus has detailed technical and scientific data on the product and a strong technical team Unobtanium has been tailored to meet customer needs in the tooling industry Unobtanium meets internationally recognised standards Unobtanium faces competition in ceramic metal matrix / ceramic inserts from the following firms. Competitive Position Assessment * Companies ABC PDQ XYZ LOS VIP

CATEGORY

Market share F S S S S Pricing leadership F S S S S Protected position F F F F F Product line breadth F S S S S Desirable brand names F F F W S Breadth of customer base F S S S F Total cost position F S F S W Special business relationships F F F S S Capacity / Location of the production F L S S L Degree of integration Forward Backward

W W

F W

W F

W F

W S

Technology position F F W W S Technology capacity F F S S S Management risk taking S ? F F F Management responsiveness S W F F F Resource sufficiency F F F F S Profitability F S F F S Rating system: (L) leader, (S) strong, (F) fair, and (W) weak This table shows that there is no clear leader in this field and that equal participation exists. In certain niches there are leaders in each niche. The competitor ABC is most vulnerable to competitive incursions given its small size and it is probably less able to raise prices. Of the firms evaluated none appears to have a clearly secured position by virtue of patents, know-how, outstanding distribution or other business aspects.

* Against performance ceramic metal composites competing with Hephaestus

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Also no single competitor provides all the products and services demanded by the industry. Only VIP with their VIPER product has a brand name, which is identifiable. Each firm has a reputable name but not associated with a strong leadership position. While brand names may be of some importance the suppliers are more concerned with establishing and maintaining a viable customer base of growth. PDQ, XYZ and LOS enjoy a superior cost position because of their size and multiple plant location. Multiple location allows for the establishment of special business relations and many buyers like the fact that they are dealing with the biggest in the business. VIP is perceived, as having the strongest technology position as a result of its resources for R&D but this is not thought to be decisive. Hephaestus marketing strategy is to offer Unobtanium to niche markets in the cutting tool field in local markets to establish a viable product history and to compete in the added value tool field initially exploiting the weaknesses of ABC, PDQ, and XYZ. Emphasising the superior technology of Hephaestus compared to VIPER would not bring long term benefits since customers are more interested in other business factors. THE PRODUCT AND PROCESS Hephaestus Materials has developed a range of metal matrix composite materials, the Unobtanium range based on a steel matrix and titanium carbide and titanium boride fillers. Using a manganese steel matrix and a TiB2 / TiC filler, impact wear rate better than Nihard and equivalent to Steel/TiC materials has been achieved. The use of metal matrix composites has been largely limited to specialist applications in the aerospace, high performance and military sector e.g. tank armour. Hephaestus have extended the principle to the production of low cost medium value parts by means of: Novel material combinations Advanced manufacturing and improvement of existing material Detailed market analysis The materials produced have equivalent or superior properties to several commercially available wear resistant composites and ceramics. Hephaestus has improved existing carbothermic and hot isostatic pressing (HIPing) processes for manufacturing small to medium sized parts by working in conjunction with partners in the Community RTD Programme research project. Hephaestus has already made use of the technology in a process upgrade for its advanced ceramics lines. Using Unobtanium in the green machining of the ceramic blanks and the high pressure chamber of the hot isostatic pressing machine has resulted in a major reduction in tool wear and lower scrap levels for finished and semi-finished products. The company is able to reduce costs in the following ways: lower unit costs per item lower planned maintenance levels and reduced level of indirect labour lower machine tool inventories lower raw materials fewer quality inspections Overall savings for these two process innovations are likely to be worth a 15% increase in profits before tax which means a year XXX7 pre-tax profit figure of EURO 421,000 on a turnover similar to year XXX6 Moreover these savings will be worth over EURO 250,000 over five years which is equivalent to the cost of replacing 1 of the current 5 production machinery lines.

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Also Hephaestus has commissioned an extensive market research programme of both its existing customers and potential new clients for these materials. Under the existing Brite / Value programme Hephaestus will be looking to licence the process improvements. Detailed market research shows that customers are prepared to pay up to 41% more for an Unobtanium type product. USP Value % Increase Value Over Steel

Faster cut out 15 High batch quality 3 Long tool life 18 Faster delivery 5

TOTAL 41

It is unlikely that Hephaestus can supply Unobtanium more quickly than suppliers of standard steel inserts but it should be possible to match existing firms. It is clear that Hephaestus should concentrate on the market for inserts as a first step. Second and third grade material instead of being scrapped can be promoted to manufacturers of digger teeth and wear parts who do not have such tight specifications. THE BUSINESS OF HEPHAESTUS MATERIALS Hephaestus Materials is a supplier of specialist materials to the metal working industry and were part of the original research team under the Community funded RTD programme. The company is based in the UK but has licensees worldwide for its range of carbons and hard ceramics. The main aim of the company is to develop and supply high quality ceramic/composite materials to a wide range of specialist customers. Company Reg. No: 0031726711, Incorporated year XXX0 EURO000

Date of Accounts year XXX6 year XXX5 year XXX4

Turnover 4,274 3,686 2,649 Profit before Tax 366 266 -13 Fixed Assets 1,829 1,739 1,803 Current Assets 1,157 1,094 775 Current Liabilities 1,037 1,070 689 Shareholders Funds 1,671 1,492 1,365 Capital Employed 1,949 1,763 1,889 ROCE % 18.8 15.1 - ROT % 8.6 7.2 -

As can be seen from the accounts Hephaestus has been trading steadily ever since 1988 when it won major long-term orders for military ceramics. Since then the company has traded steadily and profitably but it requires more capital to take advantage of Unobtanium developments. Hephaestus Management team are as follows: MD & General Management: P.W. Gross, 18 years business experience,

Manythings Plc. Previously managing director of

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WearnTear Plc.

Technical Director: Dr. Erebus, 8 years Technical Director Patently Brilliant Inst. Research Manager of Cerebral Inc. (manufacturers of high technology products)

Finance Director: Mr U. Heep, 4 years partner of Psycho Accountants, 10 years at Pastit Equipment Co.

Marketing Director: Mr A. Bonus, formerly sales manager of Metropolis Military. 5 years business manager at Big Rockets & Tools Ltd.

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Current staff N of EmployeesManagement 4Research 10Production 16Sales & Administration 10TOTAL 40 As a result of this new venture the following additional establishment will be required. Unobtanium Manpower Requirements year XXX7 year XXX8 year XXX9

Capital Equipment 1.5* 2.5 2.5Cutting Tools Development 1.0 1.0 1.5Other Development 1.0 1.0 1.5Sales to Cutting Tools 2.0 3.0 3.0Sales for Others 0.5 1.0 1.0Process engineering 2.5 2.0 0.5

TOTAL 8.5 10.5 10.0

* Staff to operate capital equipment will not be required until 2nd half of year XXX7.

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Unobtanium Competitive Assessment Companies

Hephaestus ABC PDQ XYZ LOS VIP

Category

Protected Position S S F F F S Product Line Breadth L W W W W L Product Line Differentiation L S W W W L Desirable Brand Names S W W W W S Total Cost Position F S S F S W Capacity / Location of Prod W F L S S S Technology Position L F F W W S Technology Capacity L F F S S S Congruency with Competition L S F F F S Rating System: (L) leader, (S) strong, (F) fair, and (W) weak Hephaestus has the strongest patent and know-how position along with ABC & VIP. Hephaestus is, along with VIP, the leading firm in terms of product line and desirable brand name. Hephaestus is fairly weak in terms of total cost position but the investment programme outlined will remedy this. Investment in the new plant and training of a sales team will place Unobtanium in the position of dominance within three years. The aim of Hephaestus is to become the leading supplier of ceramic composites for the cutting tools market in Europe. This implies manufacturing materials for its customers that offer improved cost performance, quality and consistency. THE MARKETING STRATEGY The unique selling points of Unobtanium have already been listed but effectively they offer better tool life and faster cutting speeds. Unobtanium materials are perceived to fill a niche between expensive PCD tools and cheaper throwaway metal or tungsten carbide tools. They are speciality products used for those projects which do not justify the purchase of expensive diamond tools but where metals do not have the performance. Both diamond tools and metal tools are sold in fairly high volumes but the production of Unobtanium will have to be limited for the short to medium term. Unobtanium will be targeted to those areas with specific technical problems using conventional tools at a price just below the more expensive existing systems. Unobtanium will be differentiated by its superior performance, its niche application and by superior technical service. Hephaestus Materials aims to get maximum benefit by selective advertising and sales promotion and by using the prestige gained through Community funding. Workshops and seminars will be set up in conjunction with industrial partners and a customer service manager will be allocated to key accounts. Hephaestus feels that many of its competitors have focused on the technology of advanced ceramics. Hephaestus will stress the customer benefits in terms of cost performance. A study of all customer costs and the product unit costs will be prepared in order to assist the value-added strategy for Unobtanium. Manufacturing The production of Unobtanium will take place at existing Hephaestus premises but more administration space will be required rented for adjoining premises. The total equipment demands are Cost EURO

One sintering machine 60.000 One HIP machine 40.000

33

Testing equipment 10.000

TOTAL 110.000 The new equipment will be modified to take into account the process innovations from Unobtanium, which provide a 10-15 % improvement over existing machines mentioned previously. Further equipment will be purchased in year XXX9 in order to double production capacity from EURO 1,500,000 p.a. to over EURO 3,000,000 in year XX11. Expected order lead times are thought to cover 2 weeks for inserts and one to two weeks for digger teeth and slides. Existing laboratory and R&D facilities will be used as far as possible for year XXX7. Field trials will be carried out at the customers premises or subcontracted to independent research bodies, e.g. Universities. The use of Unobtanium is a good example of synergy and spin-offs from exploiting production and processing technologies. Annual manufacturing costs for Unobtanium Unobtanium Range (at 80 % plant utilisation) EURO 000

Raw materials 68,400 Energy 1,000 Fixed Cost 60,000 Utilities 1,000 Capital charge 7,200 Labour 136,320

TOTAL 273,920 There are no special environmental or safety hazards to be accounted for. The independent valuers Beancounters Ltd. using sophisticated management and cost accounting techniques not described in this plan developed these cost estimates. The existing top management team at Hephaestus remains but a sales manager will operate the plant for Unobtanium and production development manager will be appointed to run the day to day business. The sales manager has yet to be appointed but the current deputy R&D manager Mr Calculus will take over the production development department full time. Sales Forecast EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11

Cutting tools

Mills 200 400 800 1,100 1,200 Inserts 150 300 600 1,050 1,150 Discs 50 150 150 150 250 Blades 48 158 160 264 300 Digger teeth 200 300 300

448 1,008 1,910 2,864 3,200

Sales Concentration EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11

UK 448 608 1,110 1,500 1,600

France 200 250 450 550

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Benelux 100 200 350 350

Germany 100 250 400 500

Others 100 164 200

TOTAL 448 1,008 1,910 2,864 3,200

Firm orders for mills and inserts have been placed by Grindup, AbrasivenBoring Co and Rubemwrong at EURO 1,000 p.a. each while discs have been ordered on a sale and return basis from 5 customers. The independent management consultancy firm, IAL Consultants, in London has carried out the initial market research into the cutting tools and advanced metal matrix composites market for Hephaestus. Hephaestus will update the sales forecast on a quarterly basis in-house and commission further market research from IAL Consultants in Year XXX8.

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ompany

Hephaestus Unobtanium Year XXX7 Cash Flow Inflow 1 2 3 4 5 6 7 8 9 10 11 12 Total

Sales 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 448,008

Parent C

Capital 50,000 50,000

Other Capital 60,000 60,000

Investment

Capital 100,000 100,000

247,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 658,008

Outflow

Capital Expenditure 110,000 110,000

Raw Materials 11,400 11,400 11,400 11,400 11,400 11,400 68,400

Labour 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 136,320

Rent 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 54,000

Rates 500 500 500 500 500 500 500 500 500 500 500 500 6,000

Advertising 2,000 2,000 2,000 2,000 2,000 8,000

Overheads 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000

Administration 800 800 800 800 800 800 800 800 800 800 800 800 9,600

Loan interest 600 600 600 600 600 600 600 600 600 600 600 600 7,200

36,160 132,760 34,160 24,760 34,160 22,760 36,160 22,760 34,160 24,760 34,160 22,760 459,520

Net inflow/

(Outflow) 211,174 (95,426) 3,174 12,574 3,174 14,574 1,174 14,574 3,174 12,574 3,174 14,574 198,488

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Management Controls of the Business The management of Hephaestus intends to set up a special Unobtanium working group with weekly meetings to discuss progress and systems with targets for sales, production, quality, customer services, marketing and distribution roles. The financial controls will follow the business plan projections, which have been set out as follows: Pro Forma Profit and Loss Account for Year to 31 December Unobtanium Materials EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11

Sales income 448 1,008 1,910 2,864 3,200

Cost of goods 274 614 1,166 1,748 1,952

Gross Profit 174 394 744 1,116 1,248

Expenditure Administration/ Distribution 10 56 60 60 80

Rent & Rates 60 120 210 210 210

Advertising 8 16 28 40 40

Overheads 60 120 210 210 210

Depreciation 22 22 44 44 44

Interest 14 16 36 36 36

TOTAL 174 350 588 600 620

PBIT (Profit before interest and tax) 0 44 156 516 628

Taxation 0 14 56 110 160

Profit after tax 0 30 100 406 468

Gross % 39 39 39 39 39

Total expenditure % 39 35 31 21 19

Profit before Tax % 0 4 8 18 20

ROI % 0 14 48 1.88 2.27

Gearing % 67 24 17 11 8

Note to the P & L Accounts. The NPV calculations for Unobtanium are reproduced in a separate

report but they show a positive result and on this basis project will proceed.

37

Pro-forma P & L Sensitivity Analysis Sales Down 20 % December 31 EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11

Sales income 358 806 1,528 2,291 2,560

Cost of goods sold 216 491 932 1,398 1,561

Gross Profit 142 315 596 893 999

Expenditure Administration/ Distribution 10 56 60 60 80

Rents & Rates 60 120 210 120 210

Advertising 8 16 28 40 40

Overheads 60 120 210 210 210

Depreciation 22 22 44 44 44

Interest 14 16 36 36 36

TOTAL 174 350 588 600 620

PBIT (Profit before

interest and tax) -32 -35 8 293 379

Taxation 0 14 56 100 160

Profit after tax -32 -35 8 193 219

Gross % 39 39 39 39 39

Total expenditure % 48 43 38 26 24

Profit before Tax % (9) (4) 0 13 15

ROI % - - - 91 104

Gearing % 67 24 17 11 8

Note: This assumes that R & D expenditure is written off as incurred. Mr U Heep will hold the responsibilities for the accounts while the auditors will be Beancounters Ltd. The Hephaestus MD and General Manager Mr Gross will modify the existing operations control systems used at Hephaestus. THE REQUIRED FINANCIAL PACKAGE Hephaestus Materials has a long history of producing high quality ceramics for specialist customers. As a result of a major military funded R & D programme the company grew rapidly by selling high quality military ceramics. By December of year XXX6 profits had risen five times over five years and growth is expected to continue despite military cutbacks.

38

At the same time Hephaestus in conjunction with other partners developed Unobtanium via a Community funded RTD. Although Hephaestus will receive further promotional assistance from the EU via these programmes the company wishes to exploit the Unobtanium technology. To do this Hephaestus requires up to EURO 210,000 over three years for a capital investment programme. The first EURO 110,000 of investment is required in year XXX7 while the remainder required to increase overall capacity and meet projected demand is required in year XXX9. If sales do not reach the required level at the end of year XXX8, the 2nd phase of the investment programme will be postponed by one year. Hephaestus intends to raise the required capital for the Unobtainium project in the following ways: EURO

Investment by Hephaestus 50,000 New Share Capital 60,000 Loan Capital (overdraft facility) 100,000

TOTAL 210,000 The financing programme is extremely conservative and covers all the first years operations in full. Unobtainium is a unique product and Hephaestus is hoping for a 1% market share in a business worth EURO 390 million by year XXX8. Even with sales at 20 % below projected levels Unobtainium would make profits by year XX10. The Hephaestus Company offers security on the loan capital in terms of the machinery and guarantees.

39

BusinessHow to use this Booklet

PREPARING A TECHNOLOGY BUSINESS PLANINTRODUCTION OR HOW TO USE THIS BOOKLETSoundness of financial structure

1.THE EXECUTIVE SUMMARYCHECK LIST

2.THE MARKETIDEALISED PRODUCT LIFE CYCLE

2.1.The customers2.2.CompetitorsCHECK LIST

3.THE PRODUCTCHECK LIST

4.THE BUSINESS AND ITS TRADING POSITION5.MARKETING STRATEGYCHECK LIST

6.MANUFACTURINGCHECK LIST

7.FORECASTS OF SALES, CASH FLOW AND BREAK - EVEN7.1.Sales Forecasts7.2Cash Flow Forecast7.3Break-even Forecast7.4The Pro-Forma Balance Sheet7.5The Pro-Forma Profit and Loss Statement

8.MANAGEMENT AND CONTROL OF THE BUSINESSCHECK LIST

9.THE REQUIRED FINANCING PACKAGECHECK LIST

A CASE STUDY:BUSINESS PLAN FOR

Table 1. European Market for Advanced Eng. CeramicsTable 2: Annual Average Growth Rate year XXX3 - year XXX8Table 3: Estimates of Commercial Breakthrough Times

THE PRODUCT AND PROCESSUSP Value

THE BUSINESS OF HEPHAESTUS MATERIALSCompany Reg. No: 0031726711, Incorporated year XXX0Current staff

Unobtanium Manpower RequirementsUnobtanium Competitive AssessmentManufacturingAnnual manufacturing costs for UnobtaniumSales ForecastSales ConcentrationManagement Controls of the BusinessPro Forma Profit and Loss Account for Year to 31 DecemberPro-forma P & L Sensitivity Analysis Sales Down 20 %

THE REQUIRED FINANCIAL PACKAGE