Entrepreneurship SummitIIT Kharagpur
How to Write a Business Plan
Prof Parameshwar P. Iyer
Business Plan
•What is it?
•Do you really need one?
•How long is it useful i.e. how quickly doesit become obsolete?
•Who should prepare it?
•Which parts of it matter the most?
Business Plan Contents
1.Executive Summary
2.Industry, Company and its Products
3.Market Research & Analysis
4.Economics of the business
5.Marketing Plan
6.Design and Development Plans
7.Manufacturing and Operations Plan
8.Management Team
9.Overall Schedule
10.Critical Risks, Problems and Assumptions
11.The Financial Plan
12.Proposed Company Offering
13.Appendices
1.Executive Summary
•Description of Business Concept and theBusiness
•Target Market and Projections
•Competitive Advantages
•Costs
•Economics, Profitability, and Harvest Potential
•The Team
•The Offering
2. Industry, Company, Products orServices
•The Industry
•Company and Concept
•Products and/or Services
•Entry and Growth Strategy
3. Market Reseach and Analysis
•Customers
•Market Size and Trends
•Competition and Competitive Edges
•Estimated Market Share and Sales
•Ongoing Market Evaluation
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Perspectives on Marketing
•Understanding your offering the way acustomer values it – not as an innovation,but as a package of innovative services;
•Discerning which kinds of customers arelikely to yield the first sale; and which willcomprise the large, mainstream market;
•Learning what markets are trying to tellyou; and responding appropriately.
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Marketing Philosophy
•The marketing concept provides an orientationfor conducting a business, a way of thinking, anda basic approach to business problems.
•Marketing is .. The whole business seen fromthe point of view of its final result, that is, fromthe customer’s point of view.
•The principal task of the marketing function… isnot to be skillful in making the customer do whatsuits the interests of the business as to be skillfulin conceiving and then making the business dowhat suits the interests of the customer
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Indicators of Customer andMarketing Orientation
•What information do you collect about the exactneeds of your customers?
•Could you consider custom designing yourproducts or services for smaller groups ofcustomers? How?
•Are your employees specifically trained torepresent your company to customers? How?
•How do you convert unsatisfied customers tosatisfied customers? Do you have any strategy?
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Technology as Service
•Transition from technology professional totechnology entrepreneur
•Replace the techno-centric view of the worldwith one that is customer-oriented
•Technology is not just a tangible object, butrather a package of valuable services
•Customers have little use for products asobjects; they have great use for services theseobjects provide.
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Five steps for assessing marketopportunities
•1. Identify business environmental forces (economic,legal, regulatory, technological)
•2. Describe the industry and its outlook (type, size,market segments, marketing practices)
•3. Analyze key competitors (products, marketpositioning, market practices (channels, pricing,promotion, services), estimated market share
•4. Create a target market profile (levels, generic needs,product types, end-user focus, targeted customerprofiles, implications for opportunity
•5. Set sales projections (formal/ intuitive approaches,comparison of results)
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Sources of information for MarketOpportunity Analysis (MOA)
•1. Published sources: Periodicals,newspapers, trade association reports,information service reports, governmentdocuments, company reports
•2. Interviews with experts: Managers ofsuppliers, trade companies, associations,consultants, sales persons
•3. Personal observation: Of customers,competitors, environmental influences
•4. Primary marketing research: focus groups,concept tests, cross-sectional surveys,longitudinal panels, experiments
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4. Economics of the Business
•Gross and Operating Margins
•Profit potential and Durability
•Fixed, Variable and Semi-variable Costs
•Months to breakeven
•Months to reach positive cash flow
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Financial Intelligence
•Basics of financial measurement: readingincome statements, balance sheets, cash flowstatements, etc.
•The art of finance: separating hard data fromassumptions and estimates
•The mechanics of analysis: calculating ratios,return on investment, and working capital
•Cash and profit: knowing the difference betweenthem, and why cash is suddenly becoming “hot”
•Financial literacy and transparency; recognizinghow they can boost performance
5.Marketing Plan
•Overall Marketing Strategy
•Pricing
•Sales Tactics
•Service and Warranty Policies
•Advertising and Promotion
•Distribution
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Marketing Mix Variables
•1. Product: Features, Quality, Packaging,Branding, Services, Guarantees, Assortment
•2. Distribution: Types of channels/ middlemen,Store/ distributor location, Storage,Transportation and Logistics, Service Levels
•3. Price: List price, Credit terms, Discounts,Selection and allowances, Flexibility
•4. Promotion: Promotion blend: Advertising,Media, Copy, Timing; Personal selling: Training,Motivation, Allocation; Sales promotion, Publicity
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Four Steps for Pricing Products
•1. Establish Specific Objectives for PricingPrograms: For example,
•Increase sales or profit growth
•Maximize short-run/ long-run profits
•Discourage entrants
•Speed exit of marginal competitors
•Discourage price cutting
•Stabilize market prices
•Rapidly establish market position
•Rapidly recover new product development costs
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Four Steps for Pricing Products
•2. Determine the extent of price flexibility:Determined by costs, demand, competition, andlegal and ethical considerations
•Demand and competition set the ceiling forprices; determine “what the market will bear”.
•Range between cost floor and demand andcompetition ceiling defines the flexibility inpricing
•Critical demand consideration is priceelasticity= % change sales/ % change inprice
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Four Steps for Pricing Products
•3. Develop price strategies: guidelinesand policies to effectively guide pricingdecisions to match target markets:
•Whether prices should vary day to day;
•Overall price levels;
•Price stability;
•Pricing relative to the stages of theproduct/ service life cycle; and
•Use of psychological pricing
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Four Steps for Pricing Products
•4. Establish prices: How are prices for specificproducts actually set?
•Sound approach to pricing must incorporatecost, competition, and demand factors
•Costs establish the floor for a possible pricerange
•Cost plus pricing involves adding a % of the costto set the price.
•There could be many other strategies
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Alternative Pricing Strategies
•Markup Pricing: Different from cost plus;markups are calculated as % of selling price(rather than cost)
•Successful new ventures are founded oninnovative, low-margin pricing (hoping that highvolumes will provide good returns)
•Break-even Pricing: Determine the level ofsales needed to cover all relevant fixed andvariable costs (e.g. FC= Rs . 1,00,000; UnitVC=Rs.2; and Price= Rs.4, Break even= 50,000)
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Alternative Pricing Strategies
•Target Return Pricing: Set the price as adesired % return over and above the break-evenpoint (weakness is that it ignores marketdemand; yet ensures that prices exceed allcosts, contribute to profit)
•Going-rate Pricing: Set prices equal to or acertain % above or below competitor’s prices.Depends on pricing objectives, structure ofindustry, relative production selling, andadministrative costs
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Promotion Decisions
•Promotion is considerably more than justadvertising. Can use four major tools:
•1. Sales Promotion: Communicating withaudience through variety non-personaland non-media vehicles, e.g. freesamples, gifts, coupons, etc.
•2. Advertising: Communicating withaudience through non-personal paidmedia
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Promotion Decisions
•3. Publicity: Communicating with audience bypersonal or non-personal media, that are notexplicitly paid for delivering the messages; theaudience is more likely to perceive the mediarather than the business as the source ofmessages.
•4. Personal selling: Communicating directlywith an audience through paid sales personnel
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Criteria to Determine Roles ofPromotion Tools
•Cost of reaching an audience
•Ability to reach target audiences with littleleakage to persons not included in them
•Ability to deliver a complicated message
•Ability to engage in interchanges withtarget audiences
•Credibility
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6. Design & Development Plans
•Development Status and Tasks
•Difficulties and Risks
•Product Improvement and New Products
•Costs
•Proprietary Issues
7.Manufacturing & Operations
•Operating Cycle
•Geographical Location
•Facilities and Improvements
•Strategy and Plan
•Regulatory and Legal Issues
8.Management Team
•Organization
•Key Management Personnel
•Management compensation andOwnership
9.Overall Schedule
•Typical Project Plan with customaryartifacts
–Timeline
–Milestones
–Responsibilities
10. Critical Risks, Problems,Assumptions
•Minor and major risk
•Known problems and issues
•Possible impact on plan
•Implicit and explicit assumptions about anyaspect of the venture
•Dominant theme ---- Try to identity everyconceivable source of unexpected andunpleasant surprises and change
11.Financial Plan
•Actual Income statements and BalanceSheets (Historical as well)
•Pro-forma Income statements andBalance Sheets
•Pro-forma Cash Flow Analysis
•Breakeven Chart and Calculation
•Cost Control
•Highlights
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What are Financial Projections
•Numbers that relate to the future are calledfinancial projections or financial pro formas
•Differ from accounting numbers, which arebased on past performance
•Good set of financial projections should includea pro forma income statement; a balance sheet;and a cash flow statement; along with detailedassumptions that underlie the projections
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Purpose of Financial Projections
•Show what a business will realize in:
•Sales, Gross profits, Net profits
•Net worth, Cash flows, and other measuresassociated with
•Income statement, Balance sheet, Cash flow
•How much money will my business need tomaintain a positive cash flow?
•When exactly will I need this money?
•What kind of money (debt or equity or both)?
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Integrated Financial Projections
•Instead of a stand alone incomestatement, balance sheet, and cash flowstatement; we need to link these differentstatements together
•These statements change when theirunderlying assumptions or values change
•All these numbers are related or tied toone another is why they are calledIntegrated Financial Statements
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Why Integrated Financials?
•You want to add several employees
•Buy a piece of expensive equipment
•Start a sales campaign
•Likely financial impacts of your decisions; notonly on your income statement, but also on yourcash flows, balance sheet, and other financialmeasures, including breakevens
•Financial projections must be tied together, orintegrated, to have real utility
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How to Produce IntegratedFinancial Statements
•Build a sales forecast
•Use the projected sales revenue as a basis forderiving a projected income statement
•Calculate (estimate) all expense items as apercentage of total sales
•Derive each balance sheet item, either by usingits historical relationship to total assets; or usehistorical ratios (accounts receivable turnoverperiod or inventory period) to derive projectedbalance sheet
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How to Produce IntegratedFinancial Statements
•Build a cash flow statement by actually tracking cashinflows and cash outflows over a relevant time period(one month, for most start ups)
•Be explicit about your assumptions by building first anassumptions statement
•Understand the general inter relationships between yourassumptions and the sales revenue projection, theincome or P&L projection, the balance sheet projection,and the cash flow projection
•Understand the specific relationships between line itemswithin and across the different statements: e.g retainedearnings are derived from net income, and not vice versa
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Income Statement
•The Income Statement shows revenues,expenses, and profits for a period of time,such as a month, a quarter, or a year. It isalso called Profit and Loss (P&L)Statement, Statement of Earnings, orStatement of Operations. The bottom lineof the Income Statement is Net Profit, alsoknown as Net Income or Net Earnings
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Operating Expenses
•Operating Expenses are the costs that arerequired to keep the business going day today. They include Salaries, Benefits,Insurance Costs, etc. Operating Expensesare listed on the Income Statement, andare subtracted from Revenue to determineProfit. Operating Expenses show up onthe Income Statement, and thus reduceProfit.
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Capital Expenditures
•A Capital Expenditure is the purchase of an itemthat is considered a long – term Investment,such as Computer Systems and Equipment.Most companies follow the rule that anypurchase over a certain amount counts as aCapital Expenditure, while anything less isOperating Expense. Capital Expenditures showup on the Balance Sheet; only the Depreciationof a piece of capital equipment appears on theIncome Statement
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Accruals
•An Accrual is the portion of a given revenue orexpense item that is recorded in a particular timespan.
•Product development costs, for instance, arelikely to be spread out over several accountingperiods, and so a portion of the total cost will beaccrued each month.
•The purpose of accruals is to match revenues tocosts in a given time period as accurately aspossible.
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Allocations
•Allocations are apportionments of costs todifferent Departments or activities within aCompany
•For instance, Overhead Costs, such as theCEO’s salary, are often allocated to theCompany’s operating units.
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Depreciation
•Depreciation is the method accountants use toallocate the cost of equipment and other assets,to the total cost of products and services, asshown on the Income Statement.
•It is based on the same idea as accruals: wewant to match as closely as possible, the costsof our products and services, with what wassold.
•Most capital expenditures are depreciated (landis an example of one that isn’t). Accountantsattempt to spread the cost of the expenditureover the useful life of the item.
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Goodwill
•Goodwill comes into play when oneCompany acquires another Company. It isthe difference between the Net Assetsacquired (the fair market value of theassets less the accumulated liabilities),and the amount of money the acquiringCompany pays for them. It reflects all thevalue that is not reflected in the acquiredCompany’s tangible assets – for example,its name, reputation, customer lists, etc
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Balance Sheet
•The Balance Sheet reflects the Assets,Liabilities, and Owners’ Equity at a point of time.In other words, it shows, on a specific day, whatthe Company owned, what it owed, and howmuch it was worth. The Balance Sheet is calledsuch, because it balances – Assets must alwaysequal Liabilities plus Owners’ Equity. Afinancially savvy manager knows that all thefinancial statements ultimately flow to theBalance Sheet.
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Cash
•Cash, as presented on the balance sheet,means the money a company has in thebank, plus anything else, such as stocksand bonds, that can be readily turned intocash. When companies talk about cash, itreally is the cold, hard stuff.
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The Matching Principle
•The matching principle is a fundamentalaccounting rule for preparing an incomestatement. It simply states, “Match the salewith its associated costs to determineprofits in a given period of time usually amonth, a quarter, or a year”. In otherwords, one of the accountants’ primaryjobs is to figure out and properly record allthe costs incurred in generating sales
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Sales or revenue
•Sales or revenue is the Rupee value of allthe products or services a companyprovided to its customers during a givenperiod of time.
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Earnings per Share (EPS)
•Earnings per Share (EPS) is a company’snet profit divided by the number of sharesoutstanding. It is one of the numbers thatDalal Street (or Wall Street) watches mostclosely; it has “expectations” for manycompanies’ EPS, and if the expectationsare not met, the share price is likely todrop.
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Cost of Goods Sold (COGS) andCost of Services (COS)
•Cost of Goods Sold (COGS) or Cost ofServices (COS) is one category ofexpenses. It involves all the costs directlyinvolved in producing a product, or indelivering a service.
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Above the Line, Below the Line
•The “line” generally refers to gross profit.Above that line on the income statement,typically, are Sales and COGS or COS.
•Below the line are Operating Expenses,Interest, and Taxes.
•Sales – COGS/ COS = Gross Profit
•Gross Profit – Operating Expenses =Operating Profit
•Operating Profit – I,T = Net Profit
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Operating Expenses
•Operating Expenses are the other majorcategory of expenses. The category includescosts that are not directly related to making theproduct, or to delivering a service.
•Typical Operating Expenses would includeSales, General and Administrative Expenses(SG&A), and Depreciation (for tangible assets)or Amortization (for intangible assets)
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Non – cash Expense
•A non – cash expense is one that ischarged to a period on the IncomeStatement, but is not actually paid out incash. An example is Depreciation:accountants deduct a certain amount eachmonth for Depreciation of equipment, butthe company is not obliged to pay out thatamount, because the equipment wasacquired in a previous period.
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Profit
•Profit is the amount left over afterexpenses are subtracted from revenue.There are three types of profit: gross profit,operating profit, and net profit.
•Each one is determined by subtractingcertain categories of expenses fromrevenue.
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Gross Profit
•Gross Profit is Sales minus Cost of GoodsSold (COGS) or Cost of Services (COS).
•It is what is left over after a company haspaid the direct costs incurred in makingthe product, or in delivering the service.
•Gross Profits must be sufficient to cover abusiness’s Operating Expenses, Taxes,Financing Costs, and Net Profit.
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Operating Profit, or EBIT
•Operating Profit, or EBIT, is Gross Profitminus Operating Expenses, which includeSG&A, Depreciation, and Amortization
•In other words, it showa the Profit madefrom running the business
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Net Profit
•Net Profit is the bottom line of the IncomeStatement. It shows what is left after allcosts and expenses are subtracted fromRevenue.
•It is equal to Operating Profit minusInterest Expenses, Taxes, One – timeCharges, and any other costs not includedin Operating Profit.
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Sample Income Statement(in Rs. Lakhs) year ended 31 March 2007
•Sales 86.89
•Cost of Goods Sold 67.56
• -----------
•Gross Profit 19.33
•Selling General Admin (SG&A)10.61
•Depreciation 2.39
•Other Income (0.19)
• -------------
•Operating Profit, or EBIT 6.52
•Interest Expense 1.91
•Taxes 2.13
• -------------
•Net Profit 2.48
12. Proposed Company Offering
•Desired Financing
•Offering
•Capitalization
•Use of Funds
•Investor’s Return
13.Appendices
•Typically a lot of the supportinginformation and data tends to bepresented in Appendices
–Detailed Financial Information
–Resumes
–Market Data
–Press Releases and Interviews
–News Clippings
Do Not…
•Have unnamed people in the plan
•Make unsubstantiated statements
•Use too much technical jargon
•Spend resources on aesthetics/packaging
•Swap execution time for writing time (anounce of visible implementation is worthseveral pounds of theoretical planning)
•Bank on deal until money is in the bank
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Conclusions
•A Business Plan is the Road Map for asuccessful business
•Need to clearly outline the Value Creation, ValueProposition, and Business Model
•Design, Development, Manufacturing, etc.
•Market Research, Analysis, and Marketing
•Economics of the Business, Financials, etc
•Critical Risks, Problems, Assumptions
•Management Team, Industry, Company,Offering
•Data Sheets, Appendices, Footnotes