4

The Business Plan

CH AP T E R L E A R N I N G O U T C O M E S

After reading this chapter, you should be able to:

1. Explain the purpose and importance of the business plan.
2. Describe the components of a business plan.
3. Recognize the importance of reviewing your business plan.

E
ntrepreneurs solve problems by creating businesses. A common problem that
many people face is finding just the right gift for a special someone—whether
the occasion is a twenty-first birthday or a fiftieth anniversary. The problem is
complicated further when a group is sharing in the gift giving.
Enter Eden Clark, president of eDivvy, which allows groups from office parties or
wed- dings to select gifts from retailers like Target or Macy’s and invite others to
contribute to the price. Rather than each person in a group getting someone a $50 gift,
they go in together on the gift and get a $200 to $300 treasure to be long remembered.
eDivvy provides a list
of recommendations and popular gifts, collects money, and pays the retailer when the
cost is covered. Recommended birthday gifts in-
clude a Garmin Colorado GPS system
($100 each when split six ways), a 17-inch
car video roof-mount monitor ($33.33
when split six ways), or a LCD digital
picture frame ($17 when split six ways).
Launched in spring 2009, the 11-
person firm generated $52,000 in less
than a full year. Projected 2010 revenue
is just over
$1 million on 35,000 group gift purchases.
Retailers benefit by receiving traffic from
each member of the group and are able to
advertise on the site.
eDivvy receives 4 percent of every
group purchase and 5 to 15 percent of
© Image Source/Getty Images

each group purchase from the retailer.

The company is seeking $1.5 million in
© Brigitte Sire

outside funding to expand. What would

you, as a potential investor, want to see in
a business plan for eDivvy before
investing?
Sources: April Joyner, “Elevator Pitch: eDivvy Helps People Buy Group Gifts Online,” Inc., March 2010, 105; Reuters press release,
June 24, 2009; and “An Interview with Edin Jarrin, eDivvy,” June 1, 2009, www.socaltech.com.
 Chapter 4: The Business Plan 81

Every Business Needs a Plan

Successful small business owners know where they want to go and find a way to get
there. To see their dreams of owning a profitable business become a reality, they know
they must plan each step along the way. Starting a business is like going on vacation—
you don’t reach your destination by accident. Whether you want to hike through Denali
National Park in Alaska or sell frozen yogurt to tourists in Miami, you need a map and
adequate provisions.
business plan A business plan is a written document that demonstrates persuasively that enough
A document describing a products or services can be sold at a profit for your firm to become a viable business.
business that is used to Planning is an essential ingredient for any successful business. Although we all create
test the feasibility of a mental plans, those thoughts need to be committed to writing before starting a busi-
business idea, to raise ness.1 A written plan can help us find omissions and flaws in our ideas by allowing other
capital, and to serve as a people to critically review and analyze them.
road map for future A business plan tells the reader what your business objectives are; when, where, why,
operations.
and how your business will accomplish its objectives; and who will be involved in run-
ning the business. When planning, you must define the goals of your business, determine
the actions that need to be taken to accomplish them, gather and commit the necessary
resources, and aim for well-defined targets. A business plan can mean the difference be-
tween running a business proactively and reactively. When NASA launched Apollo 7, the
first manned spacecraft to land on the moon, it didn’t aim at the moon. Instead, NASA
pointed the rocket to the point in space where the moon would be, factoring in the time
needed to get there. Similarly, a business plan should aim at the point where you want
your business to be in the future.

The Purpose
The three primary reasons for writing business plans
are (1) to help you determine the feasibility of your
business idea, (2) to attract capital for starting up the
business, and (3) to provide direction for your busi-
ness after it is in operation.

Proving Feasibility Writing a business plan is one of

the best ways to prevent costly oversights. Commit-
ting your ideas to paper forces you to look critically
at your means, goals, and expectations. Many people
thinking of starting a small business get caught up
in the excitement and emotions of the process. It is
truly an exciting time! Unfortunately, business deci-
sions based purely on emotion are often not the best
long-term choices.
Wanting to have a business does not automati-
cally mean that a market exists to support your
desire. You may love boats and want to build a
business around them, but if you live 100 miles from
© www.cartoonstock.com

the near- est body of water and are unwilling to

move, it is unlikely that you can create a viable boat
business. Norm Brodsky is a successful entrepreneur
who writes a column in Inc. magazine titled “Street
Smarts.” Brodsky states, “The initial goal of
every
82 Part 2: Planning in Small Business

business is to survive long enough to see whether or not the business is viable—no matter
what type of business, or how much capital you have. You never know for sure if a
business is viable until you do it in the real world.”2 Writing your plan can help remove
strong personal emotions from the decision-making process. You need to be passionate
about the business you are in, but emotion must be balanced and tempered with logic and
rationality.

Attracting Capital Almost all start-ups must secure capital from bankers or investors.
One of the first questions a banker or investor will ask when approached about partici-
pating in a business is “Where is your plan?” You need to appreciate the bankers’ posi-
tion. They have to be accountable to depositors for the money entrusted to their care.
Bankers in general are financially conservative, so before they risk their capital,
they will want assurances that you are knowledgeable and realistic in your projections.
There- fore, a complete business plan is needed before you can raise any significant
capital. Your business plan will show that you know what you are doing and have
thought through the problems and opportunities. Potential investors will also have
questions about your plan. They will want to know when your business will break
even, when it will be profitable, and if your numbers are real.3

Providing Direction Business plans should provide a road map for future operation.
“Can’t see the forest for the trees” and “It’s difficult to remember that your initial objec-
“Free or tive was to drain the swamp when you’re up to your hips in alligators” are clichés
that well apply to starting a small business in that so much of your time can be consumed
iNexpensive by handling immediate problems (“management by spot fire” or paying attention to the
busiNess-plaNNiNg lat- est dilemma to flare up) that you have trouble concentrating on the overall needs of
assistaNce is the business. By having a road map to guide you over the long term, you are more likely
to stay on course. Free or inexpensive business-planning assistance is available to
available to entrepre- neurs from such sources as Small Business Development Centers.
entrepreneurs Don’t misunderstand—providing direction does not mean that directions (and
from such plans) don’t change. Craig Knouf understands that point very well. He calculates that
he has revised his original business plan more than 120 times since he first wrote it in
sources as Small 1997 for Associated Business Systems, an office equipment supplier in Portland, Oregon.
BusiNess Knouf meets with his seven vice presidents to take a look at the 30-page document every
Development month to review current goals and every quarter for three-month goals, and he holds a
two-day meeting to discuss annual long-term objectives. Knouf says, “If you only looked
Centers.” at the plan every quarter, by the time you realize the mistake, you’re five months off.
You’re done. You’re not going to get back on track.”4

The Practice: Guidelines for Writing a Business Plan

No rigid formula for writing business plans exists that would fit every new business.
Plans are unique to each business situation. Even so, some general guidelines should be
followed.

Consider Your Audience You need to show the benefit of your business to your reader.
Investors want their money to go into market-driven businesses, which satisfy the wants
and needs of customers, rather than technology-driven ones, which focus more on the
product or service being offered than on what people want.5
 Chapter 4: The Business Plan 83

Keep It Brief Your business plan should be long enough to cover all the major issues
facing the business, yet not look like a copy of War and Peace. Your final plan
should be complete, yet concise. Including financial projections and appendices, it should
be less than 40 pages long. Your first draft will probably be longer, but you can sharpen
your ideas by editing the final document to 40 or fewer pages.

Point of View Try to write your business plan in the third person (do not use I or we).
This approach helps maintain objectivity by removing your personal emotions from the
writing process.

Create a Professional Image The overall appearance of your business plan should be pro-
fessional and attractive, but not extravagant. Having your document laser printed on
white paper, with a colored-stock cover, dividers, and spiral binding, is perfectly
acceptable. Think of the message your business plan will send to bankers and investors.
For example, having it bound in leather with gold leaf–trimmed pages is not a good sign.
Does the plan’s appearance suggest that you really need the money or will spend it
wisely? Con- versely, what might potential investors think of a business plan scratched
out on a Big Chief tablet with a crayon? Would it look as if you were really serious about
your business?
As you write the first draft of your plan, have several people who are not involved in
your business read your work to get their initial reactions. Do they quickly grasp the es-
sence of your proposal? Are they excited about your idea? Do they exclaim, “Wow!”?
Getting feedback while you are still writing the plan can help you refine your work and
get the reader to say, “Wow!”

Manager’s Notes
Good, Bad, and Ugly Business Plans
In their jobs, loan officers at a bank and small business consultants are constantly
ex- amining business plans. A discussion with them about good and poor business
plans reveals that they’ve seen the gamut from excellent to just plain awful. Let’s look
at se- lected pages from two specific examples of business plans—one well written
and one that needs a lot of revision. (Needless to say, the poorly written business
plan has been altered to protect the identity of the guilty writer.)
Company A The business plan for Cameo’s Fine Jewelry & Timepieces was writ-
ten as a class project by an undergraduate business student. Although the student
chose to take a different career direction, the plan summary in Figure 4.1a and the
full plan in the appendix to this book are solid and fundable.
Company B Jay’s Quarterback Club was the idea for a sports bar and restaurant
in Norcross, Georgia. When Jay M. went looking for financing for his idea, however,
he found that potential investors and lenders were reluctant to loan him the start-
up capital. A close look at his business plan reveals mistakes that might explain
their reluctance. Selected pages from that plan follow in Figure 4.1b.
84 Part 2: Planning in Small Business

FIGURE 4 -1A
Example of a Cameo’s Fine Jewelry & Timepieces Executive Summary
Good Business Cameo’s Fine Jewelry & Timepieces is designed to be the Western Slope of Colorado’s
Plan fin- est, most exquisite jewelry store available. Located in the heart of Grand Junction,
Cameo’s will offer jewelry and watches from world-renowned artists and designers from
A Professional-Looking
Report, with Sound countries known for their quality such as Switzerland, Germany, Italy, and the U.S.
Financial Projections, Is Galleries will fea- ture the work of Cartier, Rolex, Pippo Italia, Hearts on Fire, Paul Klecka,
Essential to Prospective and many more.
Business Owners. Of The experience our customers receive through our atmosphere and customer service
the Hundreds of Loan will be as fine as the jewelry itself. Our retail format will take on the elements of both a
Proposals That an gallery and a lounge. Saltwater fish tanks will enhance the environment, and a wine and
Investor or Banker
cocktail bar will be available to our customers. The sales staff and on-duty gemologist will
Must Sort through Each
Year, Only a Fraction be able to assist in finding that perfect piece of jewelry, and if it’s not available, they will
Will Be Funded. be able to order it or create a custom piece. Socials will invite the community to come
enjoy the galleries and become more educated on the different qualities of jewelry.
Location and Target Market Grand Junction serves as an ideal location, being that
it is the largest city on the Western Slope of Colorado and acts as a retail hub for the
sur- rounding communities. Since Cameo’s will be the only jewelry store on the
Western Slope that offers this level of quality, it will draw from a four-county region
including Mesa, Garfield, Delta, and Montrose counties, which have a total population
of 254,666. After taking into account age, percent of population who purchase jewelry,
yearly wed- dings, and salary, there are 101,096 jewelry consumers within this
geographic market.
My goal is to obtain a 1 percent market share during the first year of business,
which would provide 1,011 customers.
With this market penetration, and an average jewelry purchase of $2,000, Cameo’s
would sell $2,022,000 worth of products in the first fiscal year. The cash position at the
end of the first fiscal year will equal $460,052, making this a very attractive and profitable
venture to pursue.
Competitive Advantage Cameo’s defining strengths will be that of location and facility
as well as inventory. Cameo’s will be housed in a 6,850 square foot renovated building on
4th and Main in Grand Junction. Being downtown means that Cameo’s will fall under the
guid- ance of the Downtown Partnership. The purpose of the Downtown Partnership is to
oversee the promotion of the downtown area and provide community-benefiting events.
Some events held downtown include an October fest, a farmer’s market, a parade of lights,
and an art hop.
Cameo’s exclusive inventory will also set it apart from other jewelry stores. Many
pieces in inventory will be rare or hard to find and certainly the only one available within
this geographic market.
There are several things that make the jewelry industry as a whole very attractive,
including strong growth, a stable position, and new product creation, innovation, and
trends. Currently the jewelry industry is growing annually at a rate of 9 percent, allowing
for more retail outlets in one geographic region.
Jewelry is very stable because it is never going away, nor is it a fad item. Jewelry
is often considered a necessity in times of marriage and anniversary, and is often used as
a gift. There are many new jewelry products entering the market all the time that are
technologically, fashion, and trend driven, which creates an increase in demand.
Management My passion for watches, and the jewelry industry, combined with previ-
ous work experience will enable me to make this business a success. Previous employ-
ment has provided me with experience in the necessary functions of this business,
including management, marketing, event planning, and financials.
My skills in marketing and event planning will prove most beneficial to the startup
of this
busin
ess.
The
produ
ct
costs
in this
indust
ry are
very
high,
and
gener
al
knowl
edge
is
 Chapter 4: The Business Plan 85

FIGURE 4-1 A low; therefore, providing information and educating the consumer are crucial. Special events will
(Continued) draw consumers into the store in order to show them what it has to offer.

Finances Financial projections show that equipment, supplies, fixtures, and leasehold
improvements totaling $111,000 are needed, along with a beginning inventory of
$513,500 and operating expenses of just over $90,000, which all together will create total initial
capitalization costs of $730,000. The owner brings $73,000 of equity and seeks a bank loan of
$657,000 at competitive terms.
Cash flow projections show positive cash flow in year 1, totaling approximately
$380,000.

FIGURE 4-1 B
Example of a Poor JAY’S QUARTERBACK CULB CLUB
Business Plan
Proposed Business
A Sloppy Appearance My idea is to open a bar/restaurant that have a sports theme. Sports are big
Can Hurt the Chances business right now and the timing is perfect. I think that people are really interested
of Your Plan Being in sports and will be willing to pay good money for this type of dining experience.
Taken Seriously by People eat out a lot and my business will give them another place to spend their money.
Lenders and Investors.
Marketing Research and Marketing Plan
I’ve done some research in the community and haven’t seen any restaurant or
bar like Jay’s Quarterback Club. Since there’s nobody else doing this type of
business, I won’t have no direct competition. So marketing expenses will be
minimal. Perhaps I’ll run some newspaper advertisements and put out coupons iif I
need to when sales aren’t enough to help me pay the expenses.
Operations Plan
As soon as I get word on my financing, I’ll start looking for an appropriate
location for my business. If I can’t find something that fits my needs, I’ll just build
one. I’ve been checking into suppliers for food and other materials I’ll need. I feel
confident that I can dedvelop good contacts and have reliable sources.
As far as employees goes, with the level of business that I know we can accom-
plish in the first few months of operations, I will be hiring 4 additional employees:
cook, bartender, and 2 waitpersons. This will leave me free to do the scheduling,
ordering, and managing.
Sales Projections
I’ve worked in restaurants in the past and have a lot of experience there so I
believe that my bar/restaurant can make lots of money. I believe that my first year’s
sales will be $500,000 and expenses will be $410,000. That means I’ll make $90,000.
I intend to have several cost controls but, still it’s really hard to tell exactly what my
expenses will be, though. In the second year, because we’ll be familiar to the customer,
I know we can increase sales by 20% for total revenue of $510,000. I think I can hold
my expenses constant at $90,000.
Conclusion
Since I’ve had a lot of experience working in restaurants, I am positive that I
can make this venture work. The theme will be unique and there’s not anyone else
doing this, so there shouldn’t be any problem attracting paying customers. If you’d
like more information, I’d be happy to share my idea for Jay’s Quaterback Club with
you in person. Just call me at my home number. Thanks for your consideration.
86 Part 2: Planning in Small Business

Where to Get Help Who should write the business plan for your proposed venture? You
should! The person who is best qualified and who receives the most benefit from the
planning process is the person who is going to implement the plan. It is your business,
after all, and it needs to be your plan. With that stated, can you get aid in writing the
plan? Of course you can, and you should seek such help if you need it. Here are some
sources:
• The Small Business Administration home page at www.sba.gov
• Your local Small Business Development Center
• A local SCORE (Service Corp of Retired Executives) chapter
• Your local Chamber of Commerce
• A nearby college or university
• One of the many paperback guides written on business plans available at any bookstore
Computer software is available to perform many functions of our daily lives. We can
balance our checkbook or design our dream house using software, for example. Although
software packages can make our lives easier, you need to be careful not to use one to
generate a “cookie-cutter” business plan. Filling in a few blanks on a master document
does not produce a workable business plan any more than a paint-by-numbers kit pro-
duces valuable art. Because your business will be different from others, you need to
emphasize your competitive advantage and show your objectives.
This is not to imply that you should not use word-processing, spreadsheet, or
graphics packages to produce your plan. You should, because they can be extremely
helpful. Instead, this caveat applies to “canned” business plans. If you wish to investigate
business-planning software, check out JIAN’s BizPlanBuilder Interactive and Palo Alto
Software’s Business Plan Pro, but remember that writing a business plan is as much an
art as it is a science.6

Business Plan Contents

A business plan should be tailored to fit your particular business. Write the plan your-
self, even if you seek assistance from lawyers, accountants, or consultants. In 40 or fewer
pages, the plan should present your strengths clearly and in a logical order.
Although a plan’s contents will vary from business to business, its structure is fairly
standardized. Your plan should contain as many of the following sections as appropriate
for your type of venture.7 Not every business will require every one of these sections. For
example, if your business is a start-up, it won’t have a history section, but you can de-
scribe your management experience.

Cover Page
The cover page should include the name of the business, its address and phone number,
and the date the plan was issued. If this information is overlooked, you have a problem if
a potential investor tries to reach you to ask additional questions (or send a check).

Table of Contents
executive summary You want the business plan to be as easy to read as possible. An orderly table of contents
A condensed abstract of a will allow the reader to turn directly to the sections desired.
business plan used to
spark the reader’s interest Executive Summary
in the business and to The executive summary gives a one- to two-page overview of your entire plan. It is the
highlight crucial
most important section of the plan because readers do not want to wade through 35 to
information.
40 pages to get the essential facts. If you do not capture the reader’s attention here, he or
she is not likely to read the rest of the plan.
 Chapter 4: The Business Plan 87

The executive summary should include the following components:

• Company information—what product or service you provide, your competitive ad-
vantage, when the company was formed, your company objectives, and the back-
ground of you and your management team.
• Market opportunity—the expected size and growth rate of your market, your ex-
pected market share, and any relevant industry trends.
• Financial data—financial forecasts for the first three years of operations, equity in-
vestment desired, and long-term loans that will be needed.
The information in the preceding list is a lot to condense into two pages, but all of it
is important, and if you truly understand what you are writing about, you will find that
you can explain it simply and succinctly. A first-rate executive summary provides you
with a two-sentence “elevator pitch,” so named in case you would ever find yourself con-
“A first-rate tained in an elevator with a venture capitalist and need to explain your business concept
executive quickly.8
summary provides Although the executive summary is the first section of the plan, it should be written
last. You are condensing what you have already written into the summary, not expand-
you with a two- ing the summary to fill the plan. Here’s a hint for writing the executive summary: As you
sentence ‘elevator compose all the other sections of the plan, highlight a few key sentences that are impor-
pitch,’ so Named tant enough to include in your executive summary. To see examples of executive sum-
maries, refer to the complete plan included in Appendix A and the sample plans on this
iN book’s Web site.
case you would
ever fiNd Company Information
yourself In this section, you should describe the background of your company, your choice of
legal business form, and the reasons for the company’s establishment. How did your
coNtaiNed iN aN company get to the point where it is today? Give the company’s history by describing
elevator with a in some detail what your business does and how it satisfies customers’ needs. How did
venture capitalist you choose and develop your products or services to be sold? Don’t be afraid to describe
any setbacks or missteps you have taken along the way to forming your business. They
aNd Need to represent reality, and leaving them out could make your plan and projections look “too
explaiN your good to be true” to lenders or investors.
busiNess coNcept
Environmental and Industry Analysis
quickly.”
In the section on environmental and industry analysis, you have an opportunity to show
how your business fits into larger contexts. An environmental analysis shows identified
trends and changes that are happening at the national and international levels that may
influence the future of your small business. Introduce environmental categories such as
economic, competitive, legal, political, cultural, and technological arenas that affect and
are affected by your business. Discuss the future outlook and trends within these catego-
ries. For example, a cultural trend of “Buy American” might create a competitive advan-
tage for your small manufacturing business. Changes in the legal or political arena can
provide opportunities as well. Suppose the Environmental Protection Agency (EPA)
banned lead fishing sinkers because of possible contamination of water supplies. What
if you had just created a line of fishing sinkers produced from some material other than
lead?
While you generally cannot control such external environments, you can describe
the opportunities that changes in them present in your business plan. As an entrepre-
neur, you have to understand the world in which you operate and how you can best as-
sess the opportunities that arise there.
88 Part 2: Planning in Small Business

© Sipa via AP Images

Opportunity can come from recycling, as seen with these circuit boards. Veolia Environmental Services has installed the
first mechanized demolition and sorting unit for WEEE (Waste Electrical and Electronic Equipment) in Gonesse, France.
This automatic process dismantles small household appliances with a recovery rate of up to 90%.

After completing the environmental analysis, you should do an industry analysis de-
scribing the industry within which your business operates. Here you will focus on spe-
cific industry trends. Describe industry demand—pertinent data will likely be readily
available from industry trade publications or other published sources. How do you deter-
mine what other businesses or products should be included as part of your industry?
One helpful way to draw the line between what and whom to include in your industry
is to consider possible substitutes for your product. If you own a business that sells ice
cream, do your customers view frozen yogurt or custard as a potential substitute for your
frozen treats? If so, you should consider businesses that sell these products to be part of
your industry. What competitive reactions and industry-wide trends can you identify?
Who are the major players in your industry? Have any businesses recently entered or
exited the field? Why did they leave? Is the industry growing or declining? Who are the
new competitors in the industry?
Lenders want to see that you have a clear understanding of how your industry oper-
ates. Specifically, which of Porter’s five forces (threat of new entrants, bargaining power
of customers, threat of substitutes, bargaining power of suppliers, and rivalry among
existing competitors; see Chapter 3) are rated as high or low for the industry you intend
to enter?9
The environmental and industry analyses are tricky sections of your business plan to
write. As stated earlier, your plan must be concise, but in this section especially you must
cover huge, comprehensive issues and factors that could fill volumes. Feel like you are
be- ing pulled in several different directions at once? Good—now you are starting to
realize the complexity of what you are getting into. Think of the environmental and
industry analysis section in the following way: As a small business owner, you have to be
knowledgeable about all current and potential factors that could affect your business.
Of course, the
 Chapter 4: The Business Plan 89

business plan is not the place to describe every possible development in detail. Instead,
treat this section as if you are showing only the tip of the iceberg that represents your
accumulated knowledge, and make it clear that you are prepared to answer questions
relat- ing to less critical factors that you chose not to include in your business plan.

Products or Services
In this section, you can go into detail describing your product or service. How is your
product or service different from those currently on the market? Are there any other
uses for it that could increase current sales? Include drawings or photos if appropriate.
Describe any patents or trademarks that you hold, as these give you a proprietary posi-
tion that can be defended. Describe your competitive advantage. What sets your product
or service apart as better than the competition’s?
What is your product’s potential for growth? How do you intend to manage your
product or service through the product life cycle? Can you expand the product line or
develop related products? In this section of your business plan, you can discuss potential
product lines as well as current ones.

Marketing Research and Evaluation

You need to present evidence that a market exists for your business. A section on market-
ing research and evaluation, presenting the facts you have gathered on the size and nature
of your markets, will tell investors if a large enough market exists and if you can be com-
petitive in that market. State the market size in dollars and units. Give your sales forecast
by estimating from your marketing research how many units and dollars worth of your
prod- uct you expect to sell in a given time period. That sales forecast becomes the basis
for pro- jecting many of your financial statements. Indicate your primary and secondary
sources of data, and the methods you used to estimate total market size and your market
share.

Target Markets and Market Segmentation You must identify your target markets and
then concentrate your marketing efforts on these key areas. These markets must share
some identifiable need that you can satisfy. What do the people who buy your product
have in common with one another? To segment your markets, you could use a demo-
graphic characteristic (for example, 18- to 25-year-old females), a psychographic variable
(similar lifestyles, usage rate of product, or degree of loyalty), a geographic variable
(any- one who lives within a five-mile radius of your business), or another variable.
Describe actual customers who have expressed a desire to buy your product. What
trends do you
expect will affect your markets?

“A daNger of
segmentatioN aNd
target marketiNg
is that it
encourages the
belief that those
segments aNd
markets will
stay the same—
they woN’t.”
Market Trends
Markets and consumer
tastes change, so you
will need to explain
how you will assess
your customers’ needs
over time. A danger of
segmentation and target
marketing is that it
encourages the belief
that those segments and
markets will stay the
same—they won’t.
Specify how you will
continue to evaluate
consumer needs so you
can identify market
trends and, based on
that information,
improve your market
lines and aid new
product development.

Competition Among
three or four primary
competitors, identify
the price leader, the
quality leader, and the
service leader.
Realistically discuss the
strengths and
weaknesses of each.
Compare your products
or services with those
of competitors on the
basis of price, product
performance, and other
attributes.
This section offers
a good opportunity to
include the SWOT
analysis you completed
in the strategic planning
chapter (Chapter 3).
Identify the strengths
and weaknesses of your
business and the
opportunities and
threats that exist
outside your business.
90 Part 2: Planning in Small Business

Market Share Because you have identified the size of your market and your competitors,
you can estimate the market share you intend to gain—that is, the percentage of total
industry sales. Market share can effectively be shown and explained using a pie chart.
Your job in writing the marketing-research section of your business plan is to con-
vince the reader that a large enough market exists for your product for you to
achieve your projected sales forecasts.

Marketing Plan Your marketing plan shows how you intend to achieve your sales fore-
cast. You should start by explaining your overall marketing strategy, identifying your po-
tential markets, and explaining what you have decided is the best way to reach them.
Include your marketing objectives (what you want to achieve) and the strategies you
will use to accomplish these objectives.

Pricing as Part of Marketing Plan Your pricing policy is one of the most important de-
cisions you will have to make. The price must be “right” to penetrate the market, to
maintain your market position, and especially to make profits. Compare your pricing
policies with those of the competitors you identified earlier. Explain how your gross mar-
gin will allow you to make a profit after covering all expenses. Many people go into busi-
ness with the intent of charging lower prices than the competition. If this is your goal,
explain how you can follow this strategy and still make a profit—through greater effi-
ciency in manufacturing or distribution of the product, lower labor costs, lower over-
head, or whatever else allows you to undercut the competition’s price.
You should discuss the relationship between your price, your market share, and your
profits. For example, by charging a higher price than the competition, you may reduce
your sales volume but realize a higher gross margin and increase your business’s bottom
line.

Promotion as Part of Marketing Plan How will you attract the attention of and commu-
nicate with your potential customers? For industrial products, you might use trade shows
and advertise in trade magazines, via direct mail, or through promotional brochures. For
consumer products, you should describe your plans for advertising and promotional cam-
paigns. You should also give the advertising schedule and costs involved. Examples of
ad- vertising or brochures may be included in the appendix of the business plan.

Place as Part of Marketing Plan Describe how you intend to sell and distribute your
products. Will you use your own sales force or independent sales representatives or dis-
tributors? If you will hire your own sales force, describe how it will be structured, the
sales expected per salesperson per year, and the pay structure. Your own sales force will
concentrate more on your products because it will sell them exclusively. If you will use
sales representatives, describe how those individuals will be selected, the territories they
will cover, and the rates they will charge. Independent sales representatives may also
handle products and lines other than yours, but they are much less expensive for you
because they are not your employees. Your place strategy should describe the level of
coverage (local, regional, or national) you will use initially and as your business grows.
It should include the channels of distribution you will use to get and to sell products.

Service Policies as Part of Marketing Plan If you sell a product that may require ser-
vice, such as cameras, copy machines, or bicycles, describe your service and warranty
policies. These policies can be important in the customer’s decision-making
process. How will you handle customer service problems? Describe the terms and types
of war- ranties offered. Explain whether you will provide service via your own service
depart- ment, subcontract out the service work, or return products to the factory. Also
state whether service is intended to be a profit center or a break-even operation.
 Chapter 4: The Business Plan 91

© Image copyright Monkey Business Images 2010. Used under license from Shutterstock.com
Personalized customer service is a competitive advantage for many small businesses.

Manufacturing and Operations Plan

The manufacturing and operations plan will stress elements related to your business’s
production. It will outline your needs in terms of facilities, location, space requirements,
capital equipment, labor force, inventory control, and purchasing. Stress the areas most
relevant to your type of business. For instance, if you are starting a manufacturing busi-
ness, outline the production processes and your control systems for inventory, purchas-
ing, and production. The business plan for a service business should focus on your
location, overhead, and labor force productivity.

Geographic Location Describe your planned geographic location and its advantages and
disadvantages in terms of wage rates, unionization, labor pool, proximity to
customers and suppliers, types of transportation available, tax rates, utility costs, and
zoning. Again, you should stress the features most relevant to your business. Proximity to
customers is especially important to a service business, whereas access to transportation
will be of greater concern to a manufacturing business.

Facilities What kind of facilities does your business need? Discuss your requirements for
floor space (including offices, sales room, manufacturing plant space, and storage areas),
parking, loading areas, and special equipment. Will you rent, lease, or purchase these fa-
cilities? How long will they remain adequate: One year? Three years? Is expansion
possible?

Make-or-Buy Policy In a manufacturing business, you must decide what you will pro-
duce and what you will purchase as components to be assembled into the finished prod-
uct. This is called the make-or-buy decision. Many factors go into this decision (see
Chapter 12). In your business plan, you should justify the advantages of your policy. De-
scribe potential subcontractors and suppliers.
92 Part 2: Planning in Small Business

Control Systems What is your approach to controlling quality, inventory, and production?
How will you measure your progress toward the goals you have set for your business?

Labor Force At the location you have selected, is there a sufficient quantity of ade-
quately skilled people in the local labor force to meet your needs? What kinds of training
“TraiNiNg caN be will you need to provide? Can you afford to offer this training and still remain competi-
a hidden cost that tive? Training can be a hidden cost that can turn a profit into a loss.
caN turN a profit
iNto a loss.” Management Team
A good management team is the key to transforming your vision into a successful busi-
ness. Show how your team is balanced in terms of technical skills (possessing the knowl-
edge specific to your type of business), business skills (the ability to successfully run a
business), and experience. As when building any other kind of team, the skills and ta-
lents of your management team need to complement one another. Include a job descrip-
tion for each management position, and specify the key people who will fill these slots.
Can you show how their skills complement one another? Have these individuals worked
together before? An organization chart can be included in the appendix of your plan to
graphically show how these positions fit together. Résumés for each key manager should
be included in the appendix.
State how your key managers will be compensated. Your chances of obtaining fi-
nancing are very slim unless the managers are willing to accept substantially less than
their market value for salary while the business is getting started. Managers must be
committed to putting as many proceeds as possible back into the business.
Discuss the management training your key people have had and may still need. Be
as specific as possible on the cost, type, and availability of this management or technical
training.
Like your managers, you may need professional assistance at times. Identify other
people with whom you will work, including a lawyer, a certified public accountant, an
insurance agent, and a banker. Identify contacts you have supporting you in these
areas.
Anyone who is considering putting money into your business will scrutinize this
section thoroughly. Therefore, your plan must answer the following questions about the
management team members, which were first posed by Harvard professor William
Sahlman:
• Where are the founders from?
• Where have they been educated?
• Where have they worked, and for whom?
• What have they accomplished—professionally and personally—in the past?
• What is their reputation within the business community?
• What experience do they have that is directly relevant to the opportunity they are
pursuing?
• What skills, abilities, and knowledge do they have?
• How realistic are they about the venture’s chances for success and the tribulations
it will face?
• Who else needs to be on the team?
• Are they prepared to recruit high-quality people?
• How will they respond to adversity?
• Do they have the mettle to make the inevitable hard choices?
• How committed are they to this venture?
• What are their motivations?10
 Chapter 4: The Business Plan 93

Timeline
Create a timeline outlining the interrelationships and timing of the major events planned
for your venture. In addition to helping you calculate your business needs and minimize
risk, the timeline is an indicator to investors that you have thoroughly researched poten-
tial problems and are aware of deadlines. Keep in mind that people tend to underesti-
mate the time needed to complete projects. Your schedule should be realistic and
attainable.

Critical Risks and Assumptions

All business plans contain implicit assumptions, such as how your business will operate,
what economic conditions will be, and how you will react in different situations. Identi-
fication and discussion of any potential major trends, problems, or risks that you think
you may encounter will show the reader that you are in touch with reality. These
risks and assumptions could relate to your industry, markets, company, or personnel.
This section gives you a place to establish alternate plans in case the unexpected
happens. If potential investors discover unstated negative factors after the fact, they
may quickly question the credibility of both you and the business. Too many businesses
are started with only a plan A and no thought about what will happen if X, Y, or Z
occurs.11 Possible contingencies that you should anticipate include the following
scenarios:
• Unreliable sales forecasts. What will you do if your market does not develop as
quickly as you predicted or, conversely, if your market develops too quickly? Each
of these situations creates its own problems. Sales that are too low may cause
serious financial problems. Sales that are too high may cause bottlenecks in
production, difficulties in purchasing enough products from vendors or suppliers,
trouble hiring and scheduling employees, or dissatisfied customers who must wait
longer than they expected for your product or service.
• Competitors’ ability to underprice or to make your product obsolete.
• Unfavorable industry-wide trends. Not long ago, businesses that produced asbestos
made up a thriving industry supplying products for automotive and building con-
struction firms. Then reports linking asbestos with cancer drastically affected the
demand for that product and virtually eliminated the industry.
• Appropriately trained workers not as available as predicted.
• Erratic supply of products or raw materials.
• Any one of the 10,000 other things you didn’t expect.

Benefits to the Community

Your new business will affect the lives of many other people besides yourself. Describe
the potential benefits to the community that the formation of your business could
provide.
• Economic development—number of jobs created (total and skilled), purchase of
supplies from local businesses, and the multiplier effect (which shows the number of
hands that new dollars brought into the community pass through before exiting).
• Community development—providing needed goods or services, improving physical
assets or the appearance of the community, and contributing to a community’s
standard of living.
• Human development—providing new technical skills or other training, creating
opportunities for career advancement, developing management or leadership skills,
offering attractive wages, and providing other types of individual growth.
 94 Part 2: Planning in Small Business

Competitive Advantage
I N N O V ATI O N A ND S U S T AI N A B I L I T Y

Bring It On
You’re in this class, and maybe you’ve even finished
Moot Corp.’s prize and bagged $100,000, without
writing your assigned business plan. How about
having to give up as much company ownership as the
enter- ing it into a collegiate business plan
other competition required. That $100,000 will come
competition? There are a lot of them around now—
in handy as the alarms go on sale on QVC television
nearly 3,500 stu- dents competed in some 70
shopping channel and in catalogs like those produced
contests at the regional, national, and international
by Sharper Image, Hammacher Schlemmer, and
levels. The prizes can in- clude hundreds of
SkyMall.
thousands of dollars plus access to venture capital.
And here is another college-student success story:
The Carrot Capital Venture Bowl offers a top prize of
Medical students Jon Mathy, Eshan Alipour, Eric Alli-
$750,000; however, most B-school com- petitions
son, and Amita Shukla created a device that bypasses
generally offer less than $100,000.
an artery blockage the way water in a river flows
Matt Ferris and Bruce Black wrote a business
around a big boulder and eliminates the need for sur-
plan for KidSmart Vocal Smoke Detector while in the
gery. They identified a huge market and wrote a busi-
Univer- sity of Georgia’s MBA program. KidSmart
ness plan that won Stanford University’s business plan

© Image Source/Getty Images

includes a per- sonalized message in a parent’s own
annual competition. And so VisiVas was born.
voice giving
instructions to children in case of fire. Ferris and Black’s
plan won second place in the Carrot Capital Venture Sources: Jennifer Merritt, “Will Your Plan Win a Prize?” BusinessWeek, March
15, 2004, 108; Elaine Pofeldt et al., “Here Comes the Competition,” Fortune Small
Bowl, but the pair turned down the $750,000 prize Business, November 2003, 38; and Carolina Braunschweig, “No Business Plans,
because they felt the offer was too restrictive. They Please,” Venture Capital Journal, August 2003, 24–31.
went on to win

Exit Strategy
Every business will benefit by devoting some attention to a succession plan. Before you begin your business is a
good time to consider how you intend to get yourself (and your money) out of it. Do you intend to sell it in 20
years? Will your children take it over? How will you prepare them for ownership? Do you intend to grow the
business to the point of an initial public offering? How will investors get their money back?

Financial Plan
Your financial plan is where you demonstrate that all the information from previous sec- tions of your business plan,
such as marketing, operations, sales, and strategies, can come together to form a viable, profitable business.
Potential investors will closely scrutinize the financial section of your business plan to ensure that it is feasible
before they become involved. Projections should be your best estimates of future operations. Your financial plan
should include the following statements (existing businesses will need historical statements and pro forma
projections, whereas start-ups will have only projections):
 Sources and uses of capital (initial and projected)
 Cash flow projections for three years
 Balance sheets for three years
 Profit-and-loss statements for three years
 Break-even analysis
We will discuss how to prepare these documents in later chapters. (See Chapter 8 for cash flow projections,
balance sheets, and profit-and-loss statements, and Chapter 9 for sources and uses of capital.) With the financial
statements, you need to show
 Chapter 4: The Business Plan 95

sources and uses of

conclusions and important points, such as how much equity and how much debt are
funds
A financial document used
included, the highest amount of cash needed, and how long the payback period for
by start-up businesses loans is expected to be.
that shows where capital
Sources and Uses of Funds The simple sources and uses of funds form shows where
comes from and what it
will be used for.
your money is coming from and how you are spending it (see Figure 4.2).

Cash Flow Statement The most important financial statement for a small business is the
cash flow statement cash flow statement, because if you run out of cash, you’re out of business. In a
A financial document that
cash flow statement, working from your opening cash balance, you add all the
shows the amount of
money that comes into your business for a given time period (week, month, quarter), and
money a business has on
hand at the beginning of a then you subtract all the money you spend for the same time period. The result is your
time period, receipts closing cash balance, which becomes your opening balance for the next time period (see
coming into the business, Figure 4.3).
and money going out of You should project a cash flow statement by month for the first year of operation
the business during the and by quarter for the second and third years. Cash flow shows you what the highest
same period. amount of working capital will be. It can be especially critical if your sales are seasonal
balance sheet in nature or cyclical.
A financial document that
Balance Sheet The balance sheet shows all the assets owned by your business and the
shows the assets,
liabilities, and owner’s liabilities, or what is owed against those assets (see Figure 4.4). The difference between
equity for a business.
the two is what the company has earned, or the net worth of the business, which is
also called capital. From the balance sheet, bankers and investors will calculate some
key ratios, such as debt-to-equity and current ratio (see Chapter 8), to help determine
the financial health of your business. You need to prepare balance sheets ending at
each of the first three years of operation.

FIGURE 4 -2

Sources and Uses of Funds Worksheet

Sources of Funds:
A Sources and Uses of Funds Worksheet Shows Where Money Comes from and What It Is Used For.
Debt:
Term loans Refinancing $
of old debt Lines of
credit
Line 1
Line 2 Mortgage
Equity:
Investments

Total Sources: Uses of

$
Funds:
Property Inventory
Equipment (itemize) $

Working capital
Cash reserve
Total Uses: $
96 Part 2: Planning in Small Business

FIGURE 4 -3
Opening cash balance
Sample Components of a CashAdd:
Flow Statement Cash receipts
A Cash Flow Statement Shows How Money Enters and Collection of accounts receivable
Exits Your Business. New loans or investment
Other sources of cash Total
Less: receipts
Utilities Salaries
Office supplies Accounts payable
Leased equipment Sales expenses
Loan payments General expenses
Total disbursements

Cash increase (or decrease)

Closing cash balance

FIGURE 4 -4
Balance Sheet For year ended [month] [day], [year]
Year 1Year 2 Year 3
A Balance Sheet Shows
What You Own and Current Assets
Whom You Owe. Cash $ $ $
Accounts Receivable
Inventory
Supplies
Prepaid Expenses
Fixed Assets
Real Estate
Equipment
Fixtures and Leasehold Improvements
Vehicles
Other Assets
License
Goodwill
TOTAL ASSETS $ $ $

Current Liabilities
Accounts Payable
Notes Payable (due within 1 year)
Accrued Expenses
Taxes Owed
Long-Term Liabilities
Notes Payable (due after 1 year)
Bank Loans
TOTAL LIABILITIES $ $ $
NET WORTH (assets minus liabilities) $ $ $
 Chapter 4: The Business Plan 97

Profit-and-Loss Statement Don’t expect the pro forma for your business plan to be a
profit-and-loss finely honed, 100 percent accurate projection of the future. With a profit-and-loss
statement statement, your objective is to come up with as close an approximation as possible of
A financial document that what your sales reven- ues and expenses will be. In making your projections, it is helpful
shows sales revenues, to break sales down by product line (or types of services) and then determine a best-case
expenses, and net profit
scenario, a worst-case sce- nario, and a most-likely scenario somewhere between the two
or loss.
extremes for each category. This practice helps create realistic projections. Remember
that lenders and investors (espe- cially venture capitalists) are professionals at picking
apart business plans.12
Start preparing this statement in the left-hand column to show what your sales and
expenses would be under the worst conditions (see Figure 4.5). Assume that you have
difficulty getting products, that the weather is terrible, that your salespeople are
out spending all their time playing golf instead of selling, and that the state highway

FIGURE 4 -5
Profit-and-Loss Most
Statement Low Likely High
Projecting the Best and SALES:
the
Worst That Could Happen Product/service line 1 $ $ $
Helps You Calculate What Product/service line 2
Your Profits or Losses Are Product/service line 3
Likely to Be. Product/service line 4
TOTAL SALES REVENUE
Cost of Goods Sold:
Product/service line 1
Product/service line 2
Product/service line 3
Product/service line 4
TOTAL COST OF GOODS SOLD $ $ $
GROSS PROFIT $ $ $

EXPENSES:
Variable:
Payroll $ $ $
Sales commission
Freight and delivery
Travel and entertainment
Semivariable:
Advertising/promotion
FICA/payroll tax
Supplies
Telephone
Fixed:
Rent
Utilities
Property taxes
Dues and subscriptions
TOTAL EXPENSES
Profit before depreciation
Depreciation
NET PROFIT $ $ $

Note: Expense items for your business will vary from these three categories. For illustration
purposes only.
98 Part 2: Planning in Small Business

department closes the road that runs in front of your only location for repairs. Imagine
that anything bad that can happen will happen. Now, in the right-hand column, make
projections assuming that everything goes exactly your way. What would your sales and
expenses be if customers with cash in their hands are waiting in line outside your door
every morning at opening time, if suppliers rearrange their schedules so that you never
run out of stock, and if competitors all close their doors for a month of vacation just as
you are beginning operations? This is a lot more fun, of course, but not any more likely
to happen than the first scenario, although either could happen. Your most realistic esti-
mate will fall between these two extremes in the center column.
Question and test your projections. Is there enough demand for you to reach your
sales goal? Do you have enough space, equipment, and employees to reach your sales
goal? Break your sales down into the number of units, then the number of units bought
per customer, and then the number of units sold per day. When viewed this way, you may
find that every person in town would have to buy eight bagels per day, 365 days per year,
for you to achieve your sales projections for your proposed bagel shop. (Yes, real
business plans get written with such projections.) Obviously, you would need to revise
your goal, expand your menu, do more to control your expenses, or convince people to
eat more ba- gels than is humanly possible for your business to succeed to meet such a
break-even point projection.
The point at which sales
Break-even Analysis How many units (or dollars’ worth) of your products or service will
and costs are equal and a
business is neither have to be sold to cover your costs? A break-even analysis will give you a sales projection
making nor losing money. of how many units or dollars need to be sold to reach your break-even point—that is, the
point at which you are neither making nor losing money (see Figure 4.6; see also Chapter
14).

Feasible, Viable, Good Idea? costs—and can the target market be reached so
A full-blown business plan is not always needed. they will buy?
A feasibility study is an abbreviated planning pro-
Test 4: Resource Feasibility
cess to determine whether to proceed with the
Even if your idea passes the previous tests, you still
next step in creating a new venture or launching a
won’t succeed if you cannot muster all resources
new product. The goal is to identify and “make or
(personnel, raw materials, money, etc.).
break” issues that would argue against an action or
suggest whether a favorable outcome can be Test 5: Other Aspects
accomplished. Finally, consider specific factors such as appropriate
Step 1: SWOT Analysis location for business, adequate suppliers and ven-
As covered in Chapter 3, begin by considering all dors, and costs versus benefits.
strengths, weaknesses, opportunities, and threats for A feasibility study will indicate if it is possible to
the purpose of positioning strengths with external turn an idea into a business, but what you are RE-
op- portunities and internal weaknesses away from ALLY looking for is if it will be viable. Viability
threats. means that something is not only possible but also
profitable.
Step 2: Financial Feasibility
Can you gather data that shows that the business
or
product generates more money than it will cost (in a rea-
sonable time period)? If not, why investigate further? Can your business opportunity generate a high en- ough sales
volume to justify all other necessary
Step 3: Marketing Feasibility
Sources: “Feasibility Study,” www.inc.com/encyclopedia,
April 27, 2010; Brad Sugars, “How to Research Your
Market,” Entrepreneur.com/startingabusiness, March 2,
2007; and Tamara Monosoff, “Get Your Product to
Market in 6 Steps,” Entrepreneur, May 7, 2009.
 Chapter 4: The Business Plan 99

FIGURE 4 -6
Total sales $
Break-even Analysis
Fixed costs $
At What Point Will You Make Money?
Gross margin $
Gross margin as percentage of sales (line 3/line 1) % %
Breakeven sales (line 2/line 4) $
Profit goal $
Sales required to achieve profit goal [(line 2 + line 6)/line 4] $

To reinforce your financial projections, you may want to compare them to industry
averages for your chosen industry. Robert Morris Associates Annual Statement publishes
an annual index showing industry averages of key manufacturing, wholesale, and retail
business groups. Compare your projected financial ratios with industry averages to give
the reader an established benchmark (see Chapter 8).

Appendix
Supplemental information and documents not crucial to the business plan, but of
potential interest to the reader, are gathered in the appendix. Résumés of owners and
principal managers, advertising samples, brochures, and any related information can be
included. Different types of information, such as résumés, advertising samples, an orga-
nization chart, and a floor plan, should each be placed in a separate appendix and
labeled with successive letters of the alphabet (Appendix A, Appendix B, and so on). Be
sure to identify each appendix in your table of contents (for example, “Appendix A:
Advertising Samples”).

Review Process
Writing a business plan is a project that involves a long series of interrelated steps. Be-
ginning with your idea for a business, you want to determine its feasibility through the
creation of your business plan. The technique illustrated in Figure 4.7 will allow you to
identify the steps you need to take in writing your plan. Steps connected by lines show
that lower-numbered steps need to be completed before moving on to higher-numbered
ones. Steps that are shown as being parallel take place simultaneously. For example,
steps 6 through 10 can be completed at the same time, and all must be accomplished
before you can estimate how much capital you need in step 11.
Like any project involving a number of complex steps and calculations, your busi-
ness plan should be carefully reviewed and revised before you present it to potential in-
vestors. After you have written your plan, rate it yourself the way lenders and investors
will evaluate it (see Manager’s Notebook, “How Does Your Plan Rate?”).

Business Plan Mistakes

Often we can learn from the mistakes of others. Writing business plans is no exception.
Bankers and investors who assess hundreds of business plans each year look for reasons
to reject the proposals. This practice helps them to weed out potentially unworthy invest-
ments and to identify the likely winners—the most organized, focused, and realistic
proposals.
100 Part 2: Planning in Small Business

FIGURE 4 -7 Business Plan

Writing a Business Plan Is a Long Process of Progressive Steps That Generally Follow the Sequence Shown Here.

1. Identify product/service/concept
opportunity (The Big Idea).

2. Determine market feasibility/

potential.
3. Determine market size (in units
4. Complete competitive analysis.
and dollars).
5. Go/no go decision (proceed or
look for another opportunity).

6. Develop marketing strategy.

7. Identify marketing mix 9. Determine location, size,

components (product, place, type, and layout of
price, promotion). necessary physical facilities.

8. Determine beginning inventory

10. Establish administrative
and project your seasonal 11. Estimate the initial capital
organization and personnel
inven- tory for the next three requirements for the
requirements.
years. business.

13. Identify critical risks

14. List possible sources of start-
and assumptions to 12. Choose legal form of
up capital and the amount you
develop alternate your organization.
expect from each.
plans.

15. Prepare an opening balance

sheet for the business, based
on figures from steps 11 and 17. Estimate monthly (or seasonal)
16. Prepare pro forma profit- 14. cash flows for each of the
and- loss statements for
first three years of operation.
the first three years of
operation. 18. Prepare pro forma balance
sheets for the first three
years of operation.

19. Compute financial ratios for

each year projected in the
financial statements; compare
ratios to industry averages.

20. Prepare executive

summary of plan.

21. Present plan to lenders

or investors.
 Chapter 4: The Business Plan 101

Your business plan says a lot about your level of financial and professional knowl-
edge. How can you keep investors focused on your ideas while keeping your plan out of
the “reject” pile? It helps to avoid the most common errors.
• Submitting a “rough copy.” Your plan should be a cleanly typed copy without
coffee stains and scratched-out words. If you haven’t worked your idea out
completely enough to present a plan you’re proud of, why should the investor
take you seriously?
• Depending on outdated financial information or industry comparisons. It is impor-
tant to be as current as possible to convince the investor that you are a realistic
planner.
• Trying to impress financiers with technojargon. If you can’t express yourself
in common language in your business plan, how will you be able to market
it?
• Lacking marketing strategies. Getting your product or business known
by potential buyers is key. “We’ll just depend on word-of-mouth advertising”
won’t cut it.
• Making unsubstantiated assumptions. Explain how and why you have reached your
conclusions at any point in the plan. Don’t assume that the competition will roll
over without a fight or that phenomenal growth will begin the moment you get the
money.
• Being overly optimistic. Too much “blue sky and rainbows” will lead the investor to
wonder if your plan is realistic. Describe potential pitfalls and your strategies to cope
with them.
• Misunderstanding financial information. Even if you get help from an accountant in
preparing your financial documents, be sure you understand and can interpret what
they say.
• Ignoring the macroenvironment. How will competitors react to your business? What
other economic factors are likely to change? Considering the business climate and
environment will help demonstrate the breadth of your understanding.
• Avoiding or disguising potential negative aspects. If you fail to mention possible
pro- blems, or misrepresent them, you will give the impression that you are either
naive or devious, and lenders find neither trait especially charming.
• Having no personal equity in the company. If you aren’t willing to risk your own
money in the venture, why should the investor? A vested interest in the business will
help to convince potential lenders that you will work as hard as possible to make the
business succeed. Or, if you have invested only $1,000, is it reasonable to seek $20
million in capital?13

Manager’s Notes
How Does Your Plan Rate?
On the following checklist, take the perspective of a potential lender or investor who is
rat- ing your business plan. Give each section a grade ranging from A to F, with A being
the best grade. Would you want to invest your money in a business that doesn’t earn an
A in as many categories as possible? Use your rating to identify areas that can be
improved.
102 Part 2: Planning in Small Business

GRADE MODEL ( A) PLAN

Business Description
Company Industry Simply explained and feasible
Growing in market niches that are pres-
ently unsatisfied
Products Proprietary position; quality exceeds
customer’s expectations
Services Previous success Described clearly; service level exceeds
Competitive advantage customer expectations

Risks turned into opportunities Business has past record of success

Orientation of business Identified and sustainable

Risks identified; how to minimize risks is
Marketing shown
Target market(s) Market oriented, not product oriented
Size of target market(s) User
benefits identified Management Clearly identified
Team Experience of team Large enough to support viable business
Benefit to customers clearly shown

Successful previous experience in similar

business
Key managers identified Managers with complementary skills on team

Financial Plan
ProjectionsRealistic and supported
Rate of returnExceptionally high; loans can be paid back in less than one year
Participation by ownerOwner has significant personal investment
Participation by othersOther investors already involved
Plan Packaging
Appearance
Professional, laser-printed, bound, no spelling
Executive summary or grammatical errors
Concise description of business that prompts
reader to say, “Wow!”
Sections of plan appropriate and complete
Body of plan Appendices
Plan standardized or custom Appropriate supporting documentation
Plan custom-written for specific business, not
“canned”
 Chapter 4: The Business Plan 103

Summary
1. Explain the purpose and importance of the team, timeline, critical risks and assumptions,
business plan. bene- fits to the community, exit strategy, financial
Business plans are important to (1) raise capital, plan, and appendix.
(2) provide a road map for future operations, and 3. Recognize the importance of reviewing
(3) prevent omissions. your business plan.
2. Describe the components of a business plan. Like any project involving a number of complex
The major sections of a business plan include the steps and calculations, your business plan should
cover page, table of contents, executive summary, be carefully reviewed and revised before you pres-
company, environmental and industry analysis, ent it to potential investors. After you have written
pro- ducts or services, marketing research and your plan, evaluate it as you think lenders and in-
evaluation, manufacturing and operations plan, vestors will.
management

Questions for Review and Discussion

1. Why wouldn’t a 100-page business plan be 6. Why do some prospective business owners
four times better than a 25-page business plan? refuse to plan?
2. Should you write a business plan even if you do 7. Why is the executive summary the most impor-
not need outside financing? Why or why not? tant section of the business plan?
3. Who should write the business plan? 8. Talk to the owner of a small business. Did he or
4. If successful companies like Pizza Hut have been she write a business plan? A strategic plan? If he
started without a business plan, why does the or she received any assistance, where did it come
author claim they are so important? from?
5. Why do entrepreneurs have trouble remaining
objective when writing their business plans?

Questions for Critical Thinking

1. When you reach the point in your career where a. A recent college grad, full of energy and ideas,
you are ready to start your own business (or your but short on experience
next one), will you write a business plan before b. A middle-management corporate refugee desir-
beginning? Why or why not? If you would ing a business of her own after experiencing
choose to start a business without a business frustration with bureaucratic red tape
plan, what would be an alternative for testing c. A serial entrepreneur who has previously started
feasibility? seven businesses, three of which were huge suc-
2. You are an investor in small businesses, and you cesses and four of which failed, losing their en-
have three business plans on your desk. Which tire investment
of the following potential business owners do
you think would be the best bet for an
investment (if you could pick only one)?

What Would You Do?

Your telephone rings early one morning. It is your first Nobel Prize in Entrepreneurship. His plane leaves
small business/entrepreneurship professor, who tells soon for Stockholm, where he will pick up the award,
you he just received notification that he has won the so he won’t be in class today. Because you are one
of
104 Part 2: Planning in Small Business

the star students in this class, the professor asks you you keep discussion going? Would you show business
to conduct today’s class, covering Chapter 4, “The plan samples? Where would you find them? Would
Business Plan.” Write an outline of how you would you show Web pages? Which ones? You can do any-
teach this class and what you would cover to thing (except cancel class!) that your professor would
effectively teach this material. Would you lecture? do, but what would you do?
How would

Chapter Closing Case

Memory by Music Educators walking away from their product just

Blake Harrison was a good student in high school, but he didn’t make sense. Most of the teachers and administra-
struggled to memorize facts for tests. He had no problem tors they talked to seemed genuinely interested in their
knowing all the lyrics to his favorite rap songs, but when product. Time after time, they would listen to the pitch
it came to academics, forget it—literally. It was then that and rave about the concept—but more often than not
he realized that if a rapper hip-hopped things like would leave the booth with just one $18 book, or worse,
vocabulary words, students like him would score better an earful of praise. Harrison wondered, if Flocabulary’s
on the SAT exam. idea was so great and the materials so impressive, why
Harrison earned a degree in English from the Univer- weren’t people buying? The two friends wondered if they
sity of Pennsylvania and headed to San Francisco where were cut out to run a business at all.
he met Alex Rappaport. Rappaport had graduated from In April 2006, Flocabulary: The Hip-Hop Approach to
Tufts with a degree in music and was trying to break SAT Vocabulary hit bookshelves worldwide thanks to a
into the business by writing tracks for indie films and deal with Cider Mill Press, a novelty book publisher in
TV commercials. One evening, Harrison told his friend Kennebunkport, Maine. “I thought that with our design
about his idea for using hip-hop to help students. Rappa- sensibilities and publishing experience, we could really
port said, “let’s do it.” They wrote and recorded two make this a commercially viable product,” says John
songs that together defined 80 SAT vocabulary words, Wha- len, founder of Cider Mill. The best part: Cider Mill
using ly- rics like: “They don’t say the word think, they worked with Sterling Publishers, the distribution arm of
say ratioci- nate/ They don’t render repeat, they say Barnes & Noble, which meant Flocabulary’s books would
recapitulate.” They sent demos to various educational find space in bookstores nationwide. The Hip Hop Ap-
publishers and knew they were on to something when proach to SAT Vocabulary sold 10,000 copies in its first
study guide pub- lisher SparkNotes commissioned two year and has since been reprinted five times. And Floca-
songs and show- cased both songs as free, streamable bulary received a slew of attention from media outlets,
MP3s on its Web site. Harrison and Rappaport invested such as CNN, DailyCandy, MTV, and NPR—even histo-
their life savings into their new company, Flocabulary. rian Howard Zinn offered praise.
They launched a Web site and began selling a self- So Flocabulary guides began to sell due to distribu-
published hip-hop guide to the SAT. tion outlets, but the partners decided that students taking
For two years, the pair hustled to make their start-up the SAT or shopping at Barnes & Noble were not the ones
work, but sales were hard to close and they were nearly who could benefit from their approach the most. They
out of money. In the spring of 2007, Harrison and Rappa- decided to transform Flocabulary into an actual publish-
port were working the International Reading Conference ing business. They raised about $50,000 from friends and
in Toronto. They were desperate to close some deals. family and began visiting schools and attending education
“Wanna hear about how to teach history through hip- conferences. But just as when they first started, educators
hop?” they beckoned across the aisles. An attendee were a tough sell. “Teachers would say, ‘This is so cool;
wandered over, and Harrison and Rappaport cued up my kids will love this!’ but would buy just one book,”
“Let Freedom Ring,” one of their fact-filled rap songs, an Rappaport recalls.
ode to Martin Luther King Jr.’s “I Have a Dream” speech. They decided to participate in a program at Colum-
The educator listened intently to their pitch. He picked up bia Business School that pairs new business owners with
a copy of their book, Hip Hop U.S. History, and flipped MBA students who analyze business plans and offer ad-
through the pages, nodding his head in approval. Then it vice. Harrison and Rappaport didn’t claim to be experts in
happened again. “You kids have a million-dollar idea business. But the analysis from the Columbia students
here,” the man told them. And then he walked away. It stunned them: Not one of them thought Flocabulary
seemed like they always walked away. should continue self-publishing or pursue the school mar-
ket. Instead, they urged Flocabulary to find a new pub-
 Chapter 4: The Business Plan 105

lisher. After conducting extensive research, the students warned that Harrison and Rappaport were in way
over their heads. Nearly every school district works differently, and selling to schools requires an
immense amount of paperwork, they warned. One student concluded his cri- tique: “If you do this, you’re
going to die.”
Those words stung Harrison and Rappaport. Six months later they could still hear them as they sat in
the Flocabulary booth at the Toronto trade show. Most of their initial $50,000 investment was gone.
Perhaps, they thought, the students were right. Perhaps it was time to give up.

Sources: Lauren Bans, “How to Reinvent a Failing Start-up,” Inc., May 5, 2009, 62–65; www.wikipedia.og/wiki/flocabulary; Jana Winter, “Flocabulary Is the
Hip-hop Way to Educate,” The Arizona Republic, April 13, 2006, www.azcentral.com; and www
.focabulary.com/bios.

Questions
1. If you were in Rappaport and Harrison’s situation, how would you change your business plan for the
future?
2. Is Flocabulary’s problem (a) the wrong target market,
a bad product, (c) too few products, or (d) some- thing else? What are their alternative solutions to their problem