Allen 8e PPT Ch10 Final

CHAPTER
10
Preparing a
Business Plan
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
CHAPTER OBJECTIVES
• Describe how to prepare to write a business

plan.
• Identify stakeholder interests.
• Explain how to demonstrate proof of concept.
• List the components of a compelling executive
summary.
• Discuss the elements of an effective business
plan.
• Describe how to successfully pitch a new
business.
BUSINESS PLANS
• A business plan depends on your having

achieved a validated business model that has
been market-tested and is reliable, repeatable,
and scalable because a business plan is about
building and growing a company, not starting it.
• Business plans should be based on reality.
PREPARING TO WRITE
10.1
A BUSINESS PLAN
• The following tasks are a guide to the founding team in
preparing to write a business plan.
1. Identify who is responsible for what.
• Make a list of everything that must be collected and how it needs
to be collected.
• Decide who will do what and by what date it must be accomplished.
2. Develop a timeline based on tasks identified.
• Determine whether all of the tasks are critical to the business plan.
• Prune any that are not essential to conveying a convincing
argument.
3. Hold the team to the timeline and work diligently to get the
plan done.
• Get a trusted third party to review the plan to catch anything the
team may have missed.
• Plan to review the business plan at least once a year.
10.1a Identify Stakeholder Interests
(slide 1 of 5)
• Every new venture has stakeholders external

to the founding team.
• These stakeholders view the new venture from
different perspectives so you will need to develop
an executive summary, pitch, and business plan to
address the needs of particular stakeholders.
(slide 2 of 5)
Investor Interests
• Anyone investing in a new venture has four principal
concerns:
1. Rate of growth.
• Investors want to know how fast the business is projected to
grow, when that growth will take place, and what will ensure that
the growth actually occurs as predicted.
2. Return on investment.
• Investors are naturally concerned when and how the principal
portion of their investment will be repaid and how much gain on
that investment will accrue over the time they are invested in the
company.
(slide 3 of 5)
Investor Interests (continued)

3. Degree of risk.
• Investors want to understand thoroughly the risks they face in
investing in the new venture.
4. Protection.
• Investors want to know how their original equity will be protected
and how you will mitigate any challenges your business will face.
• Investors have found that the primary flaws in most
business plans are:
• Overly optimistic financial projections.
• Too much hype.
• Poor explanation of the business model.
• No demonstration of customer demand.
(slide 4 of 5)
Lenders’ Interests
• Lenders, whether they are banks or private lenders, are primarily
interested in the company’s margins and cash flow projections,
because they are concerned about how their loans or credit lines
to the business will be repaid.
• They look at the qualifications and track record of the management
team and frequently require personal guarantees of the principals.
• When considering a business plan and an entrepreneur for a
loan, lenders have a few additional concerns:
• The kind of positive impact the loan will have on the business.
• The kind of assets the business has for collateral that can be
pledged as security for the loan.
• How the lender will be protected if the business doesn’t meet its
projections.
• The entrepreneur’s stake in the business.
(slide 5 of 5)
Strategic Partners’ Interests

• If you intend to manufacture a product or bring a new drug or
medical device to market, you will likely choose to form a strategic
alliance with a larger company so that you don’t have to incur the
tremendous costs of purchasing equipment for a manufacturing
plant or funding expensive clinical trials required by the Food and
Drug Administration (F D A).
• In a strategic alliance, the larger company that is allying itself with
the new venture is usually looking for new products, processes, or
technologies that complement its current line of products or services.
• Accordingly, it will seek a new venture management team that has
some previous corporate experience so that the relationship will be
smoother.
• Larger companies are also interested in strategic issues such as the
marketing and growth strategies of the new venture.
10.1b Proof of Concept Demonstration
(slide 1 of 4)
• As part of the preparation for writing a business plan,

you will want to ensure that you have a way to
demonstrate that you have proved your business
concept—that is, that you can provide evidence that
customers in sufficient numbers want what you’re
offering.
• There are various types of proofs of concept (P O Cs), and
each has a different strength of evidence it provides.
• You should not settle on one but, instead, move through the entire
spectrum with one P O C building on the next until critical mass is
achieved and you are confident that the business can survive.
FIGURE 10.1 The Proof of Concept
Pyramid
(slide 2 of 4)
Achieving Proof of Concept with a Prototype

• Demonstrating proof of concept with a prototype
has a number of important benefits:
• You develop a clear understanding of customer
needs when you put the prototype in their hands
and watch how they use it.
• Changes in the prototype can be made early in the
process when changes are less costly.
• Doing a prototype reduces the risk of failure.
(slide 3 of 4)
Achieving Proof of Concept with a Website

• An enhanced beta site:
• Can communicate to visitors what the business does, who its
customers are, and what its value proposition is.
• Can inform users about the founding team, the company’s
mission and goals, and disclose to potential investors, customers,
and other interested parties how to contact the business.
• Can communicate to customers / users the look and feel of
the site without demonstrating the full functionality.
• Will tell you whether people are interested, how much time
they spend on the site, how often they come back, and
whether they communicate with the company.
• In other words, it will prove that it’s worth the time and money for
you to build out a more elaborate site.
(slide 4 of 4)
Achieving Proof of Concept with a Website (continued)

• Proprietary information that is not protected by patents or
trademarks should not be put on a beta site because companies
regularly peruse the Internet for information on their competitors.
• In fact, you should study the websites of your competitors for
important clues about what features you should build into your own
site and how you might improve on what your competitors are doing.
Achieving Proof of Concept with Purchase Orders and

Customer Sales
• For some types of products, securing a purchase order or actual
sale is very possible.
• This allows a company to save on inventory costs and manufacturing
costs.
STARTING WITH A
10.2
COMPELLING STORY (slide 1 of 2)
• Today, most investors want to see a well-written executive
summary that tells a compelling story and grabs their interest.
• An important argument for developing an executive summary and
pitch is that it forces entrepreneurs to identify and focus on the
most persuasive aspects of the business.
• An effective executive summary and its associated pitch, which
may be in the form of a PowerPoint deck or Prezi presentation,
will do the following:
• Convey the compelling story quickly and memorably.
• Highlight the critical elements of the business that provide a
competitive advantage.
• Highlight the various proofs of concept that have been achieved.
• Present a coherent path to profitability and success that makes
sense.
• Demonstrate that the team can successfully execute the plan.
STARTING WITH A
10.2
COMPELLING STORY (slide 2 of 2)
• The following essential questions must be answered by
the executive summary and are organized in an order
that builds a compelling story:
• How will you grab my attention?
• What pain is being addressed and who has it?
• How is your venture solving the problem?
• What is your venture’s competitive advantage?
• Can your venture make money?
• Can the founding team execute the plan?
• Why is now the right time to launch this venture?
• What is the team seeking from investors?
10.2a How Will You Grab My Attention?
• It is vital to lead with the most persuasive

reason for the existence of the business.
• Leading with the compelling reason solves the
problem of grabbing attention in the first 15 seconds
and makes sure that what investors and others
need to hear is up front and obvious.
• Grabbing attention at the start of the executive
summary means that your readers will likely not
tune out when you start to get into the details.
10.2b What Pain Is Being Addressed
and Who Has It?
• Entrepreneurs need to emphasize that they are going to solve
very big and very important problems because big problems
translate to large markets.
• If you did your customer discovery and validation work effectively,
you discovered a total available market (TAM), a serviceable
available market (SAM), and a serviceable obtainable market
(SOM).
• Entrepreneurs always start with the TAM because it’s the easiest to
calculate being simply the total size of the market for whatever you’re
selling.
• Initial markets (first customers or SOMs) are always those for which
the pain is greatest.
• It’s easy to find the numbers for your TAM and SAM and forecast
based on historical data; however, the SOM will require a bottom-up
forecast that includes how you will use your startup’s resources to
reach your sales goals.
FIGURE 10.2 Types of Market
Evaluation
10.2c How Is Your Venture
Solving the Problem?
• You should demonstrate a clear link between the

problem or pain and the solution you’re offering.
• What are you providing and how does it specifically solve the
problem?
• What kind of business is this?
• Where does it fit in the value chain?
• If you currently have customers or any proof of
concept, now is the time to emphasize these facts.
• It’s important to be specific about who your first
customer is and how you know that they will buy what
you’re offering.
• Getting the customer wrong means there is no business.
10.2d What Is Your Venture’s
Competitive Advantage?
• No venture can succeed in the long term without a

sustainable competitive advantage—not a single
competitive advantage but a bundle of them
encompassing every aspect of the business.
• The executive summary needs to address which
advantages will enable this venture to create a unique
unserved niche and to enter the market and secure
customers with little or no competition in the beginning.
• In the executive summary, you should be very specific
about comparing your offering with a significant
competitor.
• Given the competitor’s established brand and position in the
market, why would customers choose your company?
10.2e Can Your Venture Make Money?
(slide 1 of 3)
• How will the business create and capture value that will
enable it to make money over the long term?
• In general, value is created when the business is adequately
capitalized and has:
• Highly regarded investors.
• An experienced management team.
• Customers.
• A unique technology, product, or service.
• The ability to continually innovate.
• A rapidly expanding market.
(slide 2 of 3)
• Once your new venture has passed the startup stage,

additional value is created by:
• Its position in the market.
• Significant customers.
• Effective operating systems.
• A strong gross margin.
• Positive cash flow.
• A high return on equity.
• You need to be able to identify the critical metrics on which the
business will be judged and demonstrate that the business
model is repeatable, can be leveraged to develop new
revenue streams, and is scalable as the market grows or new
markets are added.
(slide 3 of 3)
• Because executive summaries are most often used to raise

capital, the questions they answer are frequently of great interest
to an investor or lender.
• How much money is needed to address this opportunity?
• How will the capital be allocated and at which milestones?
• How will the business provide a superior return on investment (R O
I)?
• Which exit strategies are possible?
• In addition to explaining the business model, you need to present
a well-thought-out summary financial plan with three to five years
of projected revenues, expenses, cash flow, and headcount or
personnel requirements at various milestones.
• These numbers must be backed up with solid assumptions.
• You also need to identify the critical success factors for the
business as well as the critical risk factors and how they will
mitigate them.
10.2f Can the Founding Team
Execute the Plan?
• Why is this founding team the best team to execute this concept?
• Can it be demonstrated that the founding team has the
experience and skills required by the various areas of the
business?
• If the team has someone who accomplished something significant in
the industry, it should be highlighted.
• Do the founders have their own money invested in this concept?
• It is easy to spend other people’s money or to consider “sweat” equity
as equivalent to cash—but it isn’t equivalent in the eyes of investors,
who figure that the founding team won’t give up easily if they have
invested their own money in the deal.
• Does the team have the passion and the drive to make this
business a success?
• Passion and drive are difficult to measure but are reflected in the level
of work that was put into the market research.
10.2g Why Is Now the Right Time
to Launch This Venture?
• What makes this concept so valuable right now?

• If this business is the only one of its kind, why is that
so?
• Has anyone tried this before and failed? If so, why?
• What makes the current environment right for this
venture?
• Timing is critical in the launch of any new venture, so it is
important to explain why now is the right time and how long
the window of opportunity will remain open.
10.2h What Is the Team
Seeking from Investors?
• A finely honed executive summary is needed whether

or not you are seeking investor capital.
• If your new venture is self-funded, this section of the business
plan will discuss the funding plan going forward.
• If you are seeking investor capital, this section will specify the
minimum amount of capital required to meet the next major
milestone.
• If you expect to need several rounds of investment, the
associated milestones and funding amounts should be
projected.
• Do not include any language about equity stakes or
return on investment for the investors.
• That will come later as part of a negotiation.
10.2i Guidelines for Executive Summaries
• Here are some guidelines to consider when developing the

executive summary:
• Keep the executive summary to no more than three to five pages,
single-spaced with white space and headers for easy reading.
• Read each sentence multiple times to prune unnecessary words and
to make sure that the summary is focusing on the critical points.
• Include recognizable names if there is an established relationship
with the person or company.
• Avoid puff words and phrases such as “no one else is doing this” or
“our financial projections are conservative.”
• Avoid jargon and acronyms that might be foreign to the reader or listener.
• Explain the business in words that anyone can understand.
• Use analogies if they help the reader or listener to quickly understand
your business.
• Keep the pitch deck to about 10 slides that contain only the key
points in large fonts; use graphics and high-quality photos.
TABLE 10.1 Business Jargon to Avoid
Think outside the box Scalable

Lots of moving parts Best practice
Ducks in a row Empower
Core competency Drinking the Kool-Aid
Leverage Move the needle
Buy-in Drill down
Core values Vertical
Unpack Synergize
PREPARING THE FULL BUSINESS
10.3
PLAN: STRATEGY AND STRUCTURE
• The most effective business plans focus on
telling a story about the business in a clear and
compelling manner, providing evidence to
support claims made, and giving the reader a
rich picture of the strategy the company is
taking as it grows.
TABLE 10.2 Outline for the Business
Plan
10.3a Components of the Business Plan
(slide 1 of 15)
The Business
• This section provides the key information a
reader would want to know about the business
so that the rest of the business plan makes
sense.
• This section also introduces the business
model, which is the heart of the business.
• If you already have customers, showcase that
here.
(slide 2 of 15)
Industry / Market Analysis

• The industry is the environmental context for your business; it
determines whether the business can be profitable.
• Presenting the demographics of the industry, the major trends, the
possibilities for disruption, and the potential impact of industry opinion
leaders should demonstrate your ability to be successful in this
industry.
• The market is defined by customers.
• You would want to lay out the demographics of the broad market
you’re targeting and then show how you segmented that market to
arrive at a first customer.
• You also need to explain how you calculated demand, what the
competitive landscape looks like for that market, which distribution
channels you’ll use, and what your overall entry strategy will be.
(slide 3 of 15)
Product / Service Development Plan

• This section provides a detailed description of your
product or service and the timeline for completion of
the prototype and final product or service.
• If you have a technology business, you should provide
a technology assessment with a Technology
Readiness Level (T R L).
• The T R L is a measurement system originally developed by
NASA to assess the maturity level of a technology on a scale
of 1 (where scientific research is just beginning) to 9 (which is
a proven technology).
• Many investors will not consider an investment until a technology
has reached at least T R L 6 or 7.
FIGURE 10.3 Technology Readiness
Levels
(slide 4 of 15)
Founding or Management Team

• This section should present:
• The qualifications of the team (experience, expertise, resources).
• How the team will cover the critical tasks.
• What gaps, if any, there are in the team.
• Who the significant people are who will participate as advisors or as
members of the board of directors.
Organization Plan
• This section discusses the legal form of organization that the
venture will take, whether that be as a sole proprietorship,
partnership, L L C, or corporation.
• This section includes an organization chart showing key
management, defines personnel required for specific duties and
employee incentives, and discusses the use of strategic partners.
(slide 5 of 15)
Operations Plan
• This section of the business plan contains a detailed description
of the business operations, including those processes that the
new venture will own and undertake in-house and those that will
be outsourced to a strategic partner.
• A major portion of this section explains:
• How the business will operate.
• Where it will get its raw materials.
• How a product will be manufactured and / or assembled.
• What type and quantity of labor will be required to operate the
business.
• The location strategy is also included in this section.
(slide 6 of 15)
Marketing Plan
• The marketing plan is the strategy for communicating the
company’s message, developing awareness of the product or
service (brand equity), and enticing the customer to purchase.
• The marketing plan includes:
• A discussion of the plan’s purpose.
• The market niche.
• The business’s identity.
• Tools that will be used to reach the customer.
• A media plan for specific marketing tools.
• A marketing budget.
(slide 7 of 15)
Financial Plan
• This section demonstrates the financial viability of the venture and
explains the assumptions you made in doing the forecasts.
• It is designed to show that all the claims about the product, sales,
marketing strategy, and operational strategy can work financially
to create a business that can survive and grow over the long term.
• The financial plan begins with a summary of the key metrics for
the business:
• Time to positive cash flow.
• Break-even and sales volume.
• Capital requirements to launch the business.
(slide 8 of 15)
Financial Plan (continued)

• Fundamentally, it presents a snapshot of the
entrepreneur’s predictions for the immediate future of
the business.
• Generally, these forecasts are in the form of a complete set of
pro forma financial statements broken out by month in the first
year or two, and then annually for the next two to three years.
• The forecasts consist of a statement of cash flows, an income
statement, and a balance sheet.
(slide 9 of 15)

• A statement of cash flows provides information on changes in
the company’s cash account through inflows and outflows of cash
and cash equivalents associated with the daily operations of the
business.
• Operating cash inflows include sales and accounts receivable that
have been collected.
• Nonoperating cash inflows are loans, investments, or the sale of
assets.
• Cash outflows consist of inventory payments, accounts payable
payments, and payments associated with payroll taxes, rent, utilities,
and so forth.
• Nonoperating cash outflows include such items as payments of
principal or interest on debt, divided distribution, and asset purchase.
(slide 10 of 15)

• The income statement, also known as a profit and loss
statement, provides information about the projected profit or loss
status of the business for a specified period of time.
• It depicts when the new venture will cover its costs and begin to make
a profit.
• Revenues and expenses are recorded in the income statement when
a transaction occurs in the case of sales, or when a debt is incurred
in the case of expenses, whether or not money has been received or
expended.
• The balance sheet, called a “statement of financial position,”
looks at the financial health of the business at a single point in
time—a given date.
• The balance sheet is divided into two parts that must balance; that is,
be equal to each other based on the following formula:
Assets  Liabilities  Shareholders' Equity
(slide 11 of 15)

• Ratios compare items in the financial statements and
convert them to relative terms so they can be compared
to the same ratios in other periods or in other companies.
• The following are five of the most common tools used
to measure liquidity, debt, and profitability:
1. Current ratio.
• The current ratio provides information on the company’s ability to
meet short-term obligations.
• It is found by:
Current ratio  Total current assets/Total current liabilities
• The higher the number, the more liquid the company is and the
more easily these assets can be converted to cash to pay off
short-term obligations.
(slide 12 of 15)

2. Profit margin.
• This is a profitability ratio that uses net income and net sales
from the income statement to give the percentage of each dollar
of sales remaining after all costs of normal operations are
accounted for.
• It is found by:
Profit margin (%)  Net income/Net sales
3. Return on investment.
• This ratio provides a measure of the amount of return on the
shareholders’ investment based on the earnings of the company.
• It is found by:
Return on investment (ROI)  Net income/Shareholders' equity
(slide 13 of 15)

4. Inventory turnover.
• This ratio is a measure of the liquidity of inventory or the number
of times it turns over in a year.
• It is found by:
Inventory turnover  Cost of goods sold/Average inventory
5. Break-even analysis.
• This tells you how many units must be sold before your company
can achieve a profit or the sales volume required to be profitable.
• The break-even point is that point at which the total variable and
fixed expenses are covered and beyond which the company
makes a profit.
• It is found by:
Total fixed costs
Break-even quantity 
Selling price  Variable costs (unit)
(slide 14 of 15)
Growth Plan
• The growth plan discusses how you plan to take your business
from startup through the various stages of growth and outlines the
strategy that will be used to ensure that the business model is
sustainable and continues to scale over its life.
Contingency Plan and Harvest Strategy

• The contingency plan presents potential risk scenarios, usually
dealing with situations such as unexpected high or low growth or
changing economic conditions, and then, for each situation,
suggests a plan to minimize the impact on the new business.
• The harvest or exit strategy is the plan for capturing the wealth of
the business for the founders and any investors.
• It typically involves a liquidity event, such as an initial public offering,
a merger, or a sale, among other options.
(slide 15 of 15)
Timeline to Launch
• The business plan should contain a graphic that depicts the
timeline to launch and the critical milestones that take the
business from its current status to first customer.
Appendices
• Appendices are the appropriate place to put items that support
your claims in the main body of the report—things like résumés,
calculations, surveys, spreadsheets, and so forth.
Endnotes
• Endnotes are simply the linked citations to material in the main
body of the report that were gathered from sources other than the
entrepreneur.
FIGURE 10.4 Timeline to Launch
Timeline for a Business
FIGURE 10.5
That Has Launched
SUCCESSFULLY PITCHING
10.4
THE BUSINESS (slide 1 of 2)
• For entrepreneurs seeking outside investment capital, it is not uncommon
to be asked to do a pitch or presentation designed to persuade or
promote the value of the business.
• Usually the pitch occurs after potential funders have reviewed the
executive summary and determine that it is worth their time to hear from
the entrepreneur and the founding team to judge whether they measure
up to expectations.
• The pitch should answer the fundamental questions in the section on
creating a compelling executive summary.
• The pitch itself should take less than half an hour—usually about 15 to 20
minutes.
• The pitch should catch the audience’s attention in the first 15 to 30
seconds.
• This is usually accomplished by conveying the compelling story of the
pain or problem in the market, the magnitude of the pain, and how the
new venture will cure or solve that pain for the customer.
SUCCESSFULLY PITCHING
10.4
THE BUSINESS (slide 2 of 2)
• Here are some guidelines to consider to ensure an effective pitch.
• Stand without using a podium as this enables a better command of
the situation, enhances rapport with the audience, and makes it
easier to use gestures and visual aids.
• Move around without pacing because moving helps reduce stress
and livens up the presentation.
• Maintain eye contact with everyone and talk to the audience.
• Use visual aids, such as colorful PowerPoint slides with high-
resolution photos and minimal text.
• Slides should be kept simple (no more than three lines per slide), be
big enough to read from a distance, and be professional-looking.
• A live demonstration, if there is a product or service involved, helps to
generate excitement about the business.
• The C E O and perhaps the chief technical person should do the
pitch, although other members of the team may be drawn in during
the question and answer period.
10.4a Answering Questions (slide 1 of 2)
• Investors generally like to ask questions to which they already

know the answers; this is a test to see whether the founding team
knows what it’s talking about or whether the team is making up
answers spontaneously.
• Investors often ask questions that either require an impossibly
precise answer or are so broad that it’s hard to tell what they are
looking for.
• In this instance, the presenter should repeat the question to ensure
that it has been understood or ask for clarification.
• If investors ask a factual question to which you do not know the
answer, you should admit that you don’t have that answer off the
top of your head but will be happy to find it after the meeting is
over and get back to the questioner.
10.4a Answering Questions (slide 2 of 2)
• The type of question that poses the most problems for

the founding team is the inordinately complex one that
contains several underlying assumptions.
• Example: “If I were to analyze your new venture in terms of its
market share before and after this potential investment, how
would the market strategy have changed and how much of the
budget should be allotted to changing that strategy?”
• The first thing you should do when faced with such a question is
to ask that the question be repeated, to ensure that you haven’t
missed anything or made an incorrect assumption, and then take
a few seconds to formulate an answer.
• If the pitch or anything the team has proposed is criticized
by investors, you should be careful not to be defensive or
to turn the criticism in any way on the audience.
FINAL THOUGHTS ON
10.5
BUSINESS PLANS
• Preparing and pitching a business plan are the culmination of
months of work and represent the heart and soul of a new
venture.
• A well-conceived plan enables the benchmarking of progress
toward the company’s goals.
• It establishes the purpose, values, and goals of the company that
will guide its decision making throughout its life.
• Even successful entrepreneurs who have started businesses
without a written plan have had to write business plans when they
needed growth capital, a government grant, or a credit line from a
bank.
• The important thing to remember is that a business plan is a living
document that will no doubt undergo numerous changes over the
life of the business.

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CHAPTER

• Describe how to prepare to write a business

• A business plan depends on your having

• Every new venture has stakeholders external

Investor Interests (continued)

Strategic Partners’ Interests

• As part of the preparation for writing a business plan,

Achieving Proof of Concept with a Prototype

Achieving Proof of Concept with a Website

Achieving Proof of Concept with a Website (continued)

Achieving Proof of Concept with Purchase Orders and

• It is vital to lead with the most persuasive

• You should demonstrate a clear link between the

• No venture can succeed in the long term without a

• Once your new venture has passed the startup stage,

• Because executive summaries are most often used to raise

• What makes this concept so valuable right now?

• A finely honed executive summary is needed whether

• Here are some guidelines to consider when developing the

Think outside the box Scalable

Industry / Market Analysis

Product / Service Development Plan

Founding or Management Team

Financial Plan (continued)

Financial Plan (continued)

Financial Plan (continued)

Financial Plan (continued)

Financial Plan (continued)

Financial Plan (continued)

Contingency Plan and Harvest Strategy

• Investors generally like to ask questions to which they already

• The type of question that poses the most problems for

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