Structure of a Business Plan

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Structure of a Business Plan

(Adapted from Douglas (2006) and http://www.myownbusiness.org/s2/ and http://www.business.vic.gov.au/BUSVIC/STANDARD/PC_62526.html)

 

As a general rule your business plan should be limited to 25 pages of text, plus a further 15 pages of appendices (maximum) that include the managers’ resumes and other documentation supporting the claims made in the business plan. This is consistent with most investors’ preferences and the rules of major business plan competitions, one of which JCU might sponsor you into if your plan wins through to that point.

Of great importance is the fact that setting such a limit will force you to express your ideas more succinctly, and to decide what is really important to say in the business plan, and what can wait until questions are asked at some later time. Understand that the reader’s patience is limited as is their time, particularly if he/she is a venture capitalist who sees dozens of business plans every week. So do yourself a favour – keep it short and focused.

A suggested ‘Page Budget’ for your Business Plan

With a limit of 25 pages, it is important to do a ‘page budget’ before you start, allocating a certain number of pages to each section.

How you do this will vary depending on your own business plan and its unique characteristics, but the following guide should be used as a starting point from which you can deviate if you think your plan needs more or less space devoted to a particular issue. The items listed under ‘content’ in Table 1 represent the major components of most plans, although the content and structure of the business plan will differ from business to business.

Section	Content	Page budget
1	Executive Summary	2
2	Table of Contents	1
3	Company Overview	1
4	New Product (or Service) Concept	2
5	Window of Opportunity and Distinctive Competence	1
6	Market Environment and Competitor Analysis	3
7	Competitive Strategy and Market Positioning	3
8	Manufacturing/Operations	1
9	Research and Development Plan	1
10	Organisation Structure and Ownership	2
11	Risk Recognition and Risk Reduction Strategies	1
12	Financial Summary, Assumptions and Scenarios	2
13	Pro-forma Financial Statements	4
14	The ‘Ask’ and the ‘Offer’	1
	Subtotal	25
15	Appendices	15
	Total	40

Table 1:       A Suggested ‘Page Budget’ for Your Business Plan

Some general matters to consider:

Things to include – things not to include

Some things must be included in the business plan, while other things are optional – they might be deferred to the presentation or left out altogether. Issues that are constantly evolving, such as prototype development and patent protection, can be left out of the written plan because the information would almost certainly be obsolete within days. But be prepared to give an up-to-date picture of these issues in the presentation, and expect more technical questions on these issues during a Q&A session.

Target the Intended Audience

Your business plan will be stored on disk and can easily be modified from day to day to include the latest developments in your business. It can also be modified to suit the target audience. You need a different version of the plan if you are trying to raise funds, compared with if you are trying to hire a key employee who might reasonably wants to see the business plan to judge whether he/she should gamble his/her career on your business.

The Logical Flow of Ideas

It is important to take the audience (investor or other stakeholder) through the plan and the presentation in an orderly manner, each new part building upon the preceding parts, so that he/she will more likely arrive at the end with the sense of ‘no problems perceived’ and have reached the conclusion that the business is probably viable. So, you need to think through the business plan, and the presentation, and ask yourself a series of questions.

• Does it flow in a logical manner?


• What questions will this raise in the audience’s mind?


• What is the next thing the audience will want to know?


• Is the next paragraph answering the probable next question?

Keep revising – then revise again, and again, and ……

Writing a good business plan is an iterative process with the draft document becoming better and better with each edit and re-write. Do this often, and thoroughly.

Start with major headings and subheadings. As you do more research and obtain more information write it under the appropriate heading. Make assumptions where information is lacking and then replace those assumptions with information once it has been acquired.

Quite often it is not immediately clear what research you need to do until you start evaluating the early drafts of a business plan. Read the draft plan again and decide what other information you need in order to make the story complete and convincing. A business plan is never finished – it could always be improved a little more.

Critical Review by an Outside Party

At some stage in the process the plan needs to be exposed to ‘outside’ criticism. Ask people to read your draft and make comments. The people you should ask to read the business plan include fellow entrepreneurs who have successfully raised capital, accountants, lawyers, bankers, and knowledgeable friends. Having asked someone to evaluate your business plan you should not be defensive about their comments. If they are asking a question it should tell you that the issue is not completely clear in the plan, and thus your development of the idea needs to be improved.

The Use of Visual Aids in the Business Plan

Page after page of prose can become tedious, so visual variety is desirable in a business plan. Visual aids, such as pictures or diagrams of the product or service concept, as well as charts and graphs sprinkled liberally throughout the plan, all help to impart information quickly and effectively, and can be very economical when you are working with limited page space. Tables allow presentation of data in an orderly way, such as the ‘pros and cons’ of various alternative strategies. Tables can be set in a font size somewhat smaller than the text, and thus save page space at the same time communicating more effectively.

Document design is important for the ‘approachability’ of the business plan. A ‘reader-friendly’ document entices the reader to read the paragraph and turn the page, luring the reader through the document while informing them of the message in the document. First, second and third level headings should be in different font size (and perhaps even different font style) such that they communicate to the reader their function. First level headings indicate a new section. Second level heads indicate a major new idea (or subsection) within the same section. Third level headings indicate a major new point to be made within the subsection. Using headings as part of the communication process allows the reader to keep track of where the writer is taking them.

White space is a good idea in a business plan. Leave an additional space before a new heading, and leave the bottom part of a page blank rather than start a new section there. Indeed, many people think it looks better and is more compelling to have main headings always fall at the top of a new page. This will require serious editing to achieve, but will force you to consider the importance of every word and every sentence. Colour always brightens up a business plan, and can also be used as part of the communication process. The use of colour accents on the page, such as in a border or placement of your logo in the header or footer on each page can be very effective.

The Virtues of Clarity and Brevity

Clarity and brevity are key issues in the writing style of your business plan. Clarity requires that the information be written in an organized way, i.e. all information must flow in a logical sequence, answering questions that arise in the reader’s mind just as these questions arise (or just before they arise).

Brevity requires careful editing and all business plan writers must be prepared to be edited ruthlessly. If this bothers you, then someone else on your team should be the primary writer.  Redundancy and repetition are thoughtless ways of wasting the time of busy readers.  Summary tables, charts and bullet point lists are useful aids to help reinforce major points and/or make the document more readable.

The Components of the Business Plan:

The Executive Summary

The executive summary is extremely important. Your whole plan can fail at this early stage if the executive summary is badly written, does not create interest and excitement, is too long, or conversely omits important information.

The executive summary must communicate key pieces of information to the prospective investor. Most importantly, it should first state the name of the company, the business it is in, and the purpose of this particular business plan.

Here is an example, from the opening paragraph of the XXX Executive Summary:

XXX Inc has been established to globalise an innovative self-cleaning water filtration technology that is applicable to a wide range of markets. Our launch product is a self-cleaning filter for domestic swimming pools, which has been successfully introduced in the Australian market. This plan concerns the introduction of that product into the US market, and seeks $300,000 funding for working capital and continued R&D activity.

In the next paragraph of the executive summary, the entrepreneur needs to quickly establish the compelling benefits of the new product or service. Thus:

 

The XXX pool filter saves substantial maintenance time, water, pool chemicals and electricity, while consistently filtering to a higher level of water clarity. XXX’s simple design, smaller size, and low-pressure operation allow a substantial cost advantage in production. These advantages are protected by intellectual property protection and will be sustained over the longer term by brand name and reputation building, and the fruits of our ongoing R&D program.

 

Here is another example for a winery/B&B venture:

The Enchanted Vineyard Bed & Breakfast is a charming bed and breakfast (B&B) located in the Lorane Valley, outside of Eugene, OR. The valley is well known for its beauty and concentration of vineyards. The B&B will be set up as a sole proprietorship of Missy Stewart. The B&B will reside in The Stewart’s newly renovated home. Their home is the centrepiece for the entire B&B experience. Each of the five rooms has its own private bath. The facility has a wonderful centralized living room for the socialisation of the guests, a private garden patio, and an on-site winery on the Stewart’s 10 acres of land. To top things off, every room has 65% of their walls as windows offering guests an unprecedented view of the valley.

The next task is to establish the size of the potential market for the new product or service, and indicate your selected strategy to access this market:

The Enchanted Vineyard will be targeting three distinct groups. The first is weekend getaway travelers, generally people from Eugene looking to escape for the weekend. Eugene is a wonderful town in the Willamette River valley nationally renowned for its wineries, cycling and old growth trees. This customer group is growing at 11% a year with 12,000 potential customers. The second group is out-of-town travelers, which is growing at 10% with 18,000 potential customers. The last group of customers the B&B is targeting are University of Oregon travelers. The university brings thousands of visitors to Eugene whether they are professors, speakers, or parents. Once a relationship has been established with the U of O, it will be a constant stream of business. This customer group is growing at 17% with 12,000 potential customers.

Note that this paragraph also indicates future sources of growth and diversification that have been identified.

Having indicated the exciting market opportunity, the executive summary should next briefly indicate the qualifications and experience of the management team who will manage and exploit the opportunity.

The Enchanted Vineyard will be able to execute its strong business model because of its management. Missy earned her MBA, providing her with invaluable business skills. While Missy was pursuing her MBA she was on a team of five students that opened up their own service business. Lastly, Missy has spent numerous years in the B&B industry, providing her with insight and experience directly related to what she is doing now.

Now that you have presented the market opportunity and the talents of the management team, it is time for a summary of the sales revenue and profit projections, and other relevant financial details, such as:

The Enchanted Vineyard will be able to leverage its amazing facility and turn it into a beautiful, special B&B serving the Eugene community. This will be done by the passion and experience of Missy Stewart, the sole proprietor. The B&B will become profitable by year two and will earn over $77,000 in revenue by the end of year three, indicating an Internal Rate of Return on investment of 17%, comparing with a cost of capital of between 11% – 13% depending on options that can be accessed.

Having described the company’s business, its exciting new product, the talents of its management team, the extent of the market, the strategic option selected, and summary financial projections, it is time for the ‘ask’ and the ‘offer’, see the internet cafe example below:

For an investment of $299,671, we project dividends of $100,000 in year two, and $200,000 in year three, subject to predicted cash flows. These projections are based on actual business revenues from similar start-up customers of our internet kiosk supplier in other states. In the first year, with a break-even point of $42,599 per month, we expect revenues of $727,072 and net profit of 18.5%, or $134,305. By year three, revenues will increase to $1,136,067, and the net worth of KNet will increase to $610,320. Dividends thereafter will depend on cash flows; in year five, investors will have the option of being bought out by the company owners.

Considerable time and effort should be invested in the executive summary – it is the make or break ‘entry-point’ to your business. It should be continually revised and improved. It absolutely must not be a ‘cut and paste’ from other parts of the plan – sentences in the executive summary should not appear later in other parts of the plan. Be careful to write the executive summary succinctly and in different words, to keep the plan ‘fresh’ and free of annoying repetitions of sentences.

Company Description

The investor will first want to see a brief overview of who and what the company is ‘about’ to decide whether it falls within the category of businesses they want to be associated with. For example, some investors prefer the seed stage of investment, while others prefer the start-up or later growth stages. Some invest only in high technology while others invest only in software. You should find out what type of business an investor likes to invest in, before wasting your time, effort, and emotion on an investor that will not be interested in you – as well as theirs!

What Business is the New Venture in?

The investor wants to know management’s vision for the business. The mission statement needs to provide medium to long term direction but not be so tightly defined as to constrain future growth by placing narrow blinkers on opportunity searching.  Consider this mission statement:

The Mission of The Enchanted Vineyard Bed & Breakfast is to provide the finest B&B experience. We exist to attract and maintain customers. When we adhere to this maxim, everything else will fall into place. Our services will exceed the expectations of our customers.

Importance placed on the mission and the future form of the business does not reduce the emphasis on the launch product – rather it puts the launch product in a context of future growth. The launch product will be the first test of the viability of the business and of management’s competence, and investors will scrutinise it accordingly.

The New Product or Service Concept

Investors want to see detail about the product early in the business plan, so they can begin to apply their knowledge about the business environment for that product, and, in effect, begin their due diligence process. Note that this is not the place for technical detail on the new product – it is best to keep this for an appendix and concentrate at this point mainly on the product as a solution to a recognised problem.

Window of Opportunity

The investor will want to know what has caused the window of opportunity to appear. Describing the opportunity and why the window of opportunity has only recently opened (or, better yet, has only opened to the new venture) will demonstrate to investors that now is the right time for the new venture, and that these managers are the right team to do it.

Sustainable Competitive Advantage

Successful businesses are based on sustainable competitive advantages, which are derived from control resources that are valuable, rare, inimitable and non-substitutable (VRIN). The investor will want to know what resources are VRIN and how the new venture intends to keep them that way. Early-stage investors will be particularly interested in intellectual property protection and stakeholder agreements achieved, since the new venture will not yet have been able to develop VRIN reputational and organizational resources.

The Enchanted Vineyard has two distinct competitive edges that differentiate it from the competition. The first is the never-ending attention to detail and customer service. The Stewarts recognize that their mission is to ensure that their customers have the finest stay with them. Both Missy and John will do whatever it takes to ensure the customer’s happiness. Their second competitive edge is the unique facility. The facility is so wonderful in part because of the actual structure which is a wonderful place to stay. It is also unique because of the location, overlooking the Lorane Valley, a beautiful area filled with wineries and vineyards.

Market Environment and Competitor Analysis

Investors will want to know the details of domestic and international markets; the segments found in those markets; the target market and why it was chosen; and a detailed analysis of competition within the target market now and in the future.

Industry Attractiveness

The business plan should define the industry and assess the attractiveness of the industry today and into the future. The major issues that need to be addressed are Porter’s Five Forces, namely:

• Barriers to entry – how likely is it that there will be new entrants?


• Bargaining power of suppliers – will profits be expropriated by suppliers?


• Substitutability of the industry’s products with those from another industry – will this place a ceiling on the new venture’s prices and profitability?


• Bargaining power of buyers – will profits be expropriated by suppliers?


• Competitive rivalry within the industry – will rivals act to reduce profitability?

 

Overall Market and Target Segment(s)

After an assessment of industry attractiveness, investors will want to assess the attractiveness of the new venture’s position within that industry. This requires information about the market in general, segments of the market and specific details about those segments to be targeted. Information required about the market in general includes the:

• Size of the current market,


• Rate of growth of the market


• Major segments of the market and their characteristics, and


• Target market – details on existing and potential customers within that segment as well both existing and potential competitors serving the target market(s).

Note that complete information is rarely available, and thus investors do not expect full information to be presented in the plan. Nor will they accept with blind faith assumptions made without the support of some evidence or argumentation. While direct information is not normally available, the investor expects that evidence will be produced to demonstrate the reasonableness of the assumptions made.

This applies particularly to market research estimates. For example, since it is impossible to know what the growth rate of the market is going to be in the future, an assumption of future growth rate needs to be supported by evidence from other sources, e.g. the growth rate for the industry in the recent past, growth rates from comparable industries, and expert opinions as to what the growth rate will be. One by itself is unconvincing to the investor but the weight of evidence from several sources helps provide validity to the assumption and shows that you have done your research and investigated the opportunity from many different angles.

The market needs to be segmented in a meaningful way either through demographic, geographic, or product-use characteristics, so that segments of the market can be identified and assessed in terms of their attractiveness. The investor is interested in the most attractive segment(s) and the unsatisfied demands of those segments.

The plan must give the investor a feel for the managers’ understanding of ‘who’ the customers are, by indicating the demographic characteristics of potential customers, what their critical needs are, and their ability to pay for those needs. It is important to demonstrate that customers needs are not being fully satisfied, i.e. there is an opportunity to offer a product or service that better meets the needs of the market at a price that customers are willing to pay.

Competitive Positioning

The plan must demonstrate that the new product will be better positioned in the minds of the customer, relative to competitors’ current and future offerings. The new venture must provide superior value (a higher ratio of quality to price) and a more defensible position (or sustainable competitive advantage) that will last even when competitors attempt to imitate. This is the key to convincing investors that this is a viable business opportunity.

The next question in the mind of investors will be how will management position the business in a defensible position as the high-value provider? The investor needs to be informed about the decision making process of customers, the proposed marketing mix, and the firm’s growth strategy.

Customers’ Decision Making Process

Management needs to demonstrate their awareness of the way customers think, and it is from this knowledge that marketing strategy is directed at the factors that drive the purchase decision and purchase behaviour. This could include recognition of the difference between the customer and consumer and the difference between primary customer and secondary customer. The customer is the person who decides on or buys the product and the consumer is the person who uses or consumes the product – these may or not be the same person. The primary customers are the group of buyers who directly buy the new venture’s products. In some cases they then sell to another group of buyers (secondary customers). These differences in both customer/consumer and primary/secondary customers need to be reflected in the marketing strategy.

Marketing Mix

After demonstrating to the investor your understanding of the minds of the target customers, and the desired location for the new product in the minds of those customers, the plan must detail the concrete action that will be taken to achieve these ends. This involves detailing the product, price, promotion, and distribution (marketing mix) strategies. The investor is also particularly concerned about the cash flow. They want cash coming in the door as soon as possible, because being out-of-cash (OOC) typically leads to being out-of-business (OOB).

For example, an investor assessing a new industrial product will have a series of pertinent questions. Which specific firms are to be targeted? What are the names of the decision-makers within those firms? How they will be contacted? When? How will the primary customer gain access to the secondary customer? When will the first sales be made? When will the money come in the door? How long will it take to build up the customer base? How frequently will the customers repeat purchase? What will be the size of orders? Is there any seasonality, and is there anything that can be done to smooth demand? How large is the sales force initially? How fast will the sales force numbers grow? What methods will be employed to motivate salespeople, i.e., commission, quota or bonus? These details must be provided to potential investors and must also be factored into the financial statements.

 

The business plan needs to detail how the new venture plans to get the product to the market and how the products/services are going to be promoted to induce customer trial. Therefore access to distribution systems and a clear promotion strategy are key investor criteria.

 

Investors respect an entrepreneur who realises the importance of cash flow. Ocean Products (example below) demonstrate an emphasis on cash by proposing a strategy for reducing accounts receivable.

Payment will be based on a thirty-day account with a 4% discount on accounts settled within seven days, which Asian Foods, our key customer, has agreed to utilise. These terms provide Ocean Products with critical cash flow advantages in the early months of operation.

Growth Strategy

The marketing strategy must provide evidence to the investor that this new venture has potential to grow (whether through an increase in market share and/or from overall market growth). But growth may also occur through vertical or horizontal integration, through the development of new products, and targeting new markets. The growth strategy needs to be detailed to encourage the investors that the firm is not reliant on just one product in one market and that they can be confident they are investing in a high growth potential business.

Growth requires a strategic deployment of assets in a particular direction. Investors do not want to see the venture growing in all directions at once; they would prefer to see a staged growth strategy where growth opportunities are made explicit and pursued in an orderly and possibly sequential fashion (although R&D should obviously be working a few steps ahead). Investors will also be concerned about unsustainable growth rates, where the new venture is growing so fast that it crashes and burns. Growth places considerable strain on resources as well as the management and organisation as a whole.

Investors are interested in what market share the management team expects to capture. Assumptions of market share are often overly optimistic so the investor will carefully scrutinise market penetration claims. There is no point in losing credibility by putting forward wildly optimistic market share claims – assumptions need to be supported by evidence to provide credibility for the assumption. Growth in market share must be translated into the number of customers and number of individual units sold. This calculation must include not only customers gained through increases in market share but also via growth of the market.

Research and Development

An investor will be looking for reassurances that any key technology works, that it will be continually improved upon, and that there is potential for creating new products and/or generating new markets that will drive the new venture’s growth. If R&D is the growth engine of the new venture, the investor will want to evaluate how the venture is going to maintain its technological lead (if that it is one of the competitive advantages of the venture).

Therefore this section of the plan must provide in greater detail the essence of the technology behind the launch product. The investor will want to know at what stage of development is the technology for this and other related products i.e., how long before this and other products will be ready for release onto the market. The investor is normally more comfortable if the testing of prototype performance is also performed by a reputable third party expert.

The investor will be wary of overoptimistic claims in this section of the plan. Claims that future new inventions will emerge miraculously and rapidly from the R&D process (and that each one will be a huge success) will be met with cold scepticism. The difficulty with convincing the investor of future roll out products and markets is that there is little evidence to demonstrate future success with products that are not yet fully through the design phase, not to mention introduced in a future market with unknown demand and unknown competitors. The investor will carefully evaluate the quality of the R&D team, including their experience and track record, and will also assess the amount of resources dedicated to R&D.

Investors want to know what approval process (if any) future products or services may require from government or regulatory bodies. This will need to include information on the length and cost of the approval process and include an assessment of probability of approval. This is a common consideration for investors in biotechnology ventures, but would also apply to such businesses as coffee shops and restaurants, the winery/B&B we have discussed previously, and many others.

Manufacturing/Operations

The investor does not want the finer details of manufacturing and/or delivery of the service, the position of every machine, how each works and where they will be located. But investors do want to know how the manufacturing of the product or delivery of the service will be performed, what, if any, competitive advantages are derived from manufacturing/operations and an assessment of associated risks and resulting risk reduction strategies to eliminate or at least reduce those risks. These investor concerns also apply to a service based business.

Therefore this section of the business plan needs to describe how the product will be produced now and in the future. There are various options: e.g., self-manufacture, subcontract or licensed manufacture by an independent business, or a combination of these. Investors will also want to know how many units can be produced under this system and how future growth in sales can be serviced, i.e., the means by which capacity will be expanded and when. Investors are also interested in economies of scale and scope and how this equates to different cost levels at different volumes (once again searching for a possible sustainable competitive advantage based on lower cost superiority). The key here is not to go overboard and provide too much detail. Stick to the one page budget for this section and include further details, if necessary in the appendices.

Investors constantly search for possible risks to the business. The plan must therefore indicate any critical components to the manufacturing or operations and efforts that have been (or will be) taken to secure those critical components, parts or suppliers. Issues of lead-time, lag time and quality assurance should also be addressed.

The Management Team and Organisational Structure

The quality of the management team is a critically important component of the entrepreneur’s communication. The investor will require details of the management team’s qualifications, experience, skills and knowledge that is related to starting and running the new venture. Include a full resume for each manager in the appendices.

The management team members must have complementary skills and experience, rather than duplicating each other (since salary expenses must be minimised). If there is any gap in the management team, investors will want to see what steps management plans to take to secure the right person for the job. This will include specifying the qualifications and experience of the person that will be sought, as well as how this person will be attracted and remunerated.  Investors will ask when and how the entrepreneurial team will be expanded and remunerated.

In addition, details of how many people will be employed initially and when growth calls for expansion: their primary duties, how they will be recruited, compensated and trained and the organisational structure of the business.  Consider presenting a table of people, qualifications, their roles, and their remuneration.

A simple organisation chart will indicate each member of the management team’s authority and responsibility, and the structure of how work gets done and by whom.

Ownership Structure

Investors want to know the legal structure and about the ownership of the business.  A helpful presentation of ownership in the form of a pie chart or table is an appropriate means of illustrating who owns what share of the business, prior to any injection of new equity. Another pie chart or expanded table might be used to show the dilution of the existing owners’ equities and the share accruing to the investor after new equity funds are received.

Risk Recognition and Risk Reduction Strategies

Explicitly consider factors that could threaten the viability of the business.

An investor will want to see a full understanding of the potential threats that could nullify the strategic competitive advantages you have identified. Here is a suggested format for conveying to the investor your understanding of potential threats to business profitability and appropriate risk reduction strategies to minimise the likelihood of those threats and/or the impact if they occur (in the context of the winery/B&B venture).

Examples of Risk Recognition and Risk Reduction Strategies

Threats	Pro-active Strategies	Reactive Strategies
New investors for high-density resorts or other ‘non-characteristic’ facilities	·    Research and understand environmental and building development laws·    Support local development laws prohibiting high density resort developments ·    Nurture contacts in environmental and local business communities.	·    Lobby against development laws permitting high density resort developments
New licenses are issued due to political pressures	·      Strong personal relationships built with existing politicians.	·   Support local MP and other community bodies·   Activate support from anti-development movements
Regulations make‘Home stay’ infeasible	·      Promote benefits of home stay experience for local industry and community	·   Support local MP and other community bodies·   Activate support from anti-development movements
Diseases damage wine industry	·      Develop coalition with wine growers and university agricultural researchers	·   Develop other activities eg. walking tours, bicycle picnics etc for customers

Financial Details

If the investor was excited by the business concept, the window of opportunity, and the entrepreneurial team to manage the venture, this is the section that will heighten their attention. They need to know what you want, and what’s in it for me?

A prudent investor will want to establish what that money they (may) provide will be spent on, plus what proportion of the money will be raised as equity and what proportion of that money will be raised as debt. They will want to see the details of the proposed financial deal as well as any non-monetary requirements of the management team on the investor.

The investor will be interested in a potential exit strategy since most investors want to re-use their cash in new ventures. Any dividend policy needs to be clearly stated. Return on investor’s funds should be calculated with assumptions about discount rates clearly stated. While the investor will no doubt perform his/her own calculations it is important that rates of return for the investor are stated in the plan to demonstrate the financial feasibility of the business and possibly also as the starting point for negotiations over any equity capital deal.

Sensitivity and Scenario Analysis

A sensitivity analysis must be performed to test the robustness of the strategies and the business to variations in the assumptions. The assumptions must be clearly stated and must be derived from research that is presented in the plan. A potential investor will require all figures to be based on information contained and supported in the body of the plan.

The most probable scenario results in a return on investment of 250%. Under a worst case scenario this would reduce to 60%. The worst case scenario, still financially attractive, indicates the financial viability of the business even under adverse circumstances.

 

Sensitivity Analysis should be performed on a number of key variables, such as price, sales volume, cost of goods sold, and so on, to ensure that the business is not vulnerable to a deviation from the values assumed. In this context, break-even analysis is also recommended, along with a supported argument that the breakeven volume is easily attainable.

 

Financial Details

Assumptions underlying the financial tables must be stated because the investor’s first question will be ‘What are these numbers based on?’ A good way to present assumptions is to list them in a table and contrast the ‘most likely’ assumptions with those for the ‘pessimistic’ or worst-case scenario. Then, in a summary table, show projected Sales revenues, Earnings before Interest and Taxes (EBIT), Net Profit After Taxes (NPAT) and Cash Balances, for each year over the five year horizon. All of this information will be in the detailed pro-forma financial statements, but the investor will want to see a summary overview of these results before investigating the financials with a fine-toothed comb.

Also state early in the financial section the Net Present Value (NPV) of the business’s net cash flows over the five-year horizon, and the Internal Rate of Return (IRR) which those cash flows represent. Be sure to reveal the discount rate underlying the NPV calculation.

The pro-forma financial statements should include Income Statements, Balance Sheets and the Cash Flow Statement. These should be prepared at monthly intervals for at least the first year, at quarterly intervals for at least the next two years, and also shown on an annual basis for five years. Monthly and quarterly cash flow statements are particularly important for the new venture, since they might reveal a dangerously tight cash flow situation or a situation of technical insolvency.

The Deal – the Ask and the Offer

State clearly what the business wants from the investor:

• how much money is sought


• when will it be required


• how many tranches


• access to management advice if required


• introductions to the investor’s contacts and networks if required

State clearly what the investor is being offered:

• what share of the equity


• how many seats on the board


• assurances management will listen to the investor’s views, particularly if sales and profit projections are not met


• what mechanisms are in place to cede control of the business to the investors if the managers are unable to meet even the worst-case revenue projections

State clearly what an investor can expect in terms of financial reward:

• NPV and Return on Investment (IRR)


• number of times invested capital will multiply in (say) five years.

Appendices

Put material in the appendices that the investor will want to see if he/she is really interested in investing in your business. Investors rarely read appendices, either because they have already lost interest in the business plan, or because the management team has filled the appendices with a small mountain of not too relevant material.

The appendices should first of all be relevant, and contain at least the following materials:

• Appendix A: A background paper on the industry if the audience is broad and/or not familiar with your industry (normally you would not approach an investor who is not familiar with your industry, since he/she would be unlikely to want to invest).


• Appendix B: Technical material on the new product or service concept.


• Appendix C: Resumes of each member of the Management Team


• Appendix D: Market Research Survey Instrument and Results


• Appendix E: Worst-Case Scenario Financial Statements

In Conclusion

Different products or services may require different business plan layouts for optimal impact. Read other views of how a business plan should be structured (some web sites are listed in the references below), as this will reinforce many of the points made above, but may provide an alternative structure that might be more suitable for a different business plan that you might wish to write.

References

Shepherd, D.A. and Douglas, E.J. (1999). Attracting Equity Investors: Positioning, Preparing and Presenting the Business Plan, Sage Publications.

Hisrich, R.D., Peters, M.P. & Shepherd, D.A. Entrepreneurship, 6^th Ed., McGraw-Hill Irwin, Boston, 2005, Ch. 7, pp.184-217.

Barringer, B.R. & Ireland, R.D. Entrepreneurship: Successfully Launching New Ventures, Pearson Prentice-Hall, Upper Saddle River, NJ. 2006, Ch.9, pp. 202-227.

http://www.business.gov.au/Howtoguides/Thinkingofstartingabusiness/Pages/HowdoIwriteabusinessplan.aspx

http://toolkit.smallbiz.nsw.gov.au/dsrd/index.php

http://www.myownbusiness.org/s2/

http://www.business.vic.gov.au/BUSVIC/STANDARD/PC_62526.html

 



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