AIRA Newsletter

As the business environment becomes more complicated, a flexible and useable business plan is essential to the success of a new, expanding or reorganized company. These plans and the outline presented are applicable to all businesses – retailers, manufacturers, real estate developers, etc.

A business plan is vital to a business for two critical reasons: first, as an instrument to raise essential capital and financing, and second, as a management tool.

As an instrument to secure capital or other financing from investors and/or lenders, the plan provides a framework in which you can tell who you are, and why you need what you need. It demonstrates the viability and potential of your business, as well as your knowledge and understanding of the variables necessary for successfully attaining your objectives. The forecast, which should be a part of your business plan, will answer such critical questions as when you’ll need the money, how you will use the money, and how you will repay it. Together, the plan and the forecast provide financiers with a basis upon which to evaluate both the potential for return on their investment and the individuals who will manage the business.

As a management tool, the plan helps you define your objectives and keep the business on target. It enables you to deal effectively with constant change, helping you to guide your company more steadily through a rapidly changing environment. Furthermore, the planning process itself can serve as a valuable exercise that should increase the chances of success in your venture.

Typically, business plans are prepared as a necessary step in securing financing from potential investors, bankers and other lenders; going public; or selling all or part of the company in private sale.

Important Dos and Don’ts

Do be brief. Begin with a one-page executive summary. Then, limit the body of the plan to ten to fifteen typewritten pages. Include everything important to the business and to the financing decision, but leave secondary issues and information for discussion at a later meeting.
Do let the reader know in the first few pages of your plan what business the company is in. While this may seem obvious, many plans don’t tell the reader until page 20. With some plans, you’re never certain whether the plan describes the type of business or not.
Do state the company’s objectives.
Do describe the strategy and tactics that will enable the company to reach those objectives.
Do cite clearly how much money the company will need, over what period of time, and how the funds will be used.
Do have a clear and logical explanation about when and how the money will be paid back.
Don’t use highly technical descriptions of your products, processes and operations. Use layman’s terms. Keep it simple and complete.
Do be realistic in making estimates and assessing market and other potentials.
Do discuss your company’s business risks. Your credibility can be seriously damaged if existing risks and problems are discovered by outside parties on their own.
Don’t make vague or unsubstantial statements. For example, don’t just say that the sale will double in the next two years or that you are adding new product lines.
Do be specific. Substantiate your statements with underlying data and market information.
Do summarize and properly structure internal budgets and plans to facilitate review by outside parties.
Do enclose your proposal/business plan in an attractive (but not overdone) cover.
Do provide extra copies of your plan to speed up the review process.

Contents

A business plan is unique to the company, and, accordingly, the approach used and structure of plans vary considerably. Regardless of approach, however, certain basic elements must appear in your plan.

The Summary

Your business plan/proposal shows investors and lenders the quality and depth of your corporate leadership and indicates management’s ability to reach its stated goal. These factors lie at the heart of the decision to invest in your company.

Nevertheless, every financier has more business plans and related material to read than he or she can possibly digest. To make it easier, therefore, we recommend that you begin with a summary that clearly addresses the reasons someone should invest in your company. It should include very brief discussions of:

The product and technology you expect to capitalize on.
The market potential.
The track record and depth of your management team.
Abbreviated financial forecasts.
The amount and purpose of the desired financing.

Your Business

Briefly describe your company and its products and industry, including:

Your company’s operating history, present ownership and future objectives.
Your product’s function and uniqueness.
Your technology involved.
Your company’s role within your industry and the trends in that industry.

The Market Potential

Market potential is one area where financiers separate the inventors from the entrepreneurs. They know that many good products are never successfully commercialized because their investors don’t stop to analyze the market potential.

This section of your plan will be scrutinized carefully. Your market analysis should therefore be as specific as possible, focusing on believable, reasonable and obtainable projections, including:

The size of the potential market and market niche you are pursuing.
The market share you anticipate achieving.
The competition – who and what.
The marketing channels you expect to use.
The potential customers – who, where, how many.
The pricing of your product compared with competitive products.

Securing independent studies to verify the potential of various markets or market niches, rather than relying on your “instincts,” is recommended. These studies, in addition to being highly credible, can be very helpful in demonstrating the size and scope of the opportunity both to you and to the financier.

Your Marketing Strategy

The ability to market your product successfully is just as important as your product’s development. In presenting your marketing strategy, therefore, be sure to include a discussion of:

The specific marketing techniques you plan to use – that is, how you plan to identify, contact and sell to potential customers.
Your pricing plans – demonstrating the value added to the customer, versus the price paid.
Your planned sales force and selling strategies for various accounts, areas and markets.
Your customers – how many there are and where they are located.
Your customer service – which markets will be covered by the direct sales force, and/or by which distributors, representatives or resellers.
Your specific approaches for capitalizing on each channel and how they compare with other practices within your industry.
Your advertising and promotional plans.

Your Product And Its Development

In broad, fairly non-technical terms, present the status of your product development, to allow someone reasonably familiar with the technology or industry to conclude whether you are dealing with a concept, prototype or product ready for market. Points to cover in this section include:

The extent of invention or development required to complete your projects successfully. The track record of key people in developing similar products.
The proprietary aspects of your technology.
The reasons why your product is more advanced or better than the existing technology, products or services.

Your Operations

Outline your plans for operations within various timeframes. For instance, include the timeframes needed for development, early manufacture, market development and first product installation, as well as discuss the facilities, workforce by job category, the extent of subcontracting, sources of supply, and warranty and service strategy.

Your workforce analysis should represent a headcount by function or department (or both) for a specified time period. This analysis not only will allow you to better plan your hiring, but will also demonstrate to potential investors the sensitivity of your plans regarding the hiring of key personnel.

Your Management Team

This is a second area in which financiers look to see if you are an inventor or an entrepreneur. They want to know if you have assembled the management team necessary to capitalize on the opportunity. Financiers invest in people – people who have run or are likely to run successful operations. So, they’ll look closely at the members of your management team. Your team should have experience and talents in the most important management disciplines, such as research and development, marketing and sales, manufacturing and finance. This section of the business plan should, therefore, introduce the members of your management team, highlighting their track records. Detailed resumes should be included in an appendix.

In planning for “start-ups,” new ventures, new product lines and additional plants, the following should be included:
The critical events or actions that must occur in order for you to achieve your objectives (e.g., opening of a pilot operation to test a new product or service or approval on a patent application).
An assessment of key assumptions on which the new venture’s success depends.
The events that must take place in a necessary sequence, such as:
- Completion of concept
- Product testing
- Prototype developed
- Pilot operation opened
- Market tests
- Production start-up
- Initial key sales
A graphic presentation of the aforementioned sequence of key events by dates and by expenditures, if appropriate.

A Financial Summary

Your business plan should include a financial summary of your company, an income statement, a cash flow analysis and a balance sheet. (Detailed financial forecasts should also appear in your plan, but in an appendix, and condensed to about a page). Be sure this information addresses the extent of investment you’ll need and provides the basis for a financier to decide on the potential future value of the investment made.

Appendices

Resumes of senior management and other significant individuals should be in the appendices.

Detailed financial forecasts are also included in the appendices of your plan. It is important that these forecasts clearly do the following:

Establish the need for funds in the amount requested.
Demonstrate your ability to either realize the investment or repay the loan.
Indicate your understanding of the financial implications of your business’s growth plans.
Portray a realistic measurement of your planned business activity – that is, integrate your financial plan with your business plan.

The forecasts, including income statement, cash flow, and balance sheet, should cover a minimum of three years – a period in which realistic assumptions can be made without projecting too far into the future. The forecasts should be designed monthly, at least until you achieve positive cash flow. This is particularly significant because a positive annual cash flow may mask certain monthly cash deficiencies that must be provided for in/by the financial plan.