Chapter 6 Conducting a Feasibility Analysis and Crafting a Winning Business Plan

IntroductionStarting a business requires planning. Whatever their size, companies that engage in planning outperform those who do not.

For entrepreneurs, a planning is:

a systematic, realistic evaluation of a venture’s chances for success in the market. a way to determine the principal risks facing the venture. a game plan for managing the business successfully. a tool for comparing actual results against targeted performance. an important tool for attracting capital in the challenging hunt for money.

Entrepreneurs can benefit if they begin their planning with a feasibility analysis and then continue with the creation of a business plan.

CONDUCTING A FEASIBILITY ANALYSISConducting a Feasibility AnalysisFor many entrepreneurs, coming up with an idea for a new business concept or approach is easy. A feasibility analysis is the process of determining if the idea is a viable foundation for creating a successful business. If the idea passes, the entrepreneur’s next step is to build a solid business plan for capitalizing on the idea. If the idea fails, the entrepreneur drops it and moves on to the next opportunity. A feasibility analysis offers efficiency and the opportunity to increase the chances for success before the entrepreneur invests resources. Conducting a feasibility study reduces the likelihood that entrepreneurs will pursue fruitless business ventures. The feasibility analysis asks the question: “Should we proceed with this business idea?

Feasibility StudyA feasibility study explores the viability of the business concept. A feasibility study:

Is not the same as a business plan: A feasibility study is a preliminary step before creating a business plan.

Serves as a filter: A feasibility study screens out ideas that lack the potential for building a successful business before an entrepreneur commits the necessary resources to build a business plan.

Is an investigative tool: A feasibility study investigates and tests the potential of the business concept.

Elements of a Feasibility AnalysisA feasibility analysis consists of three interrelated components:

1. An industry and market feasibility analysis, 2. A product or service feasibility analysis, and

3. A financial feasibility analysis

Elements of a Feasibility Analysis—Industry and Market FeasibilityAddressing these questions helps entrepreneurs determine whether the potential for sufficient demand for their products and services exist. We will first explore techniques to assess the “Industry and Market Feasibility” aspect of the Feasibility Analysis.

Industry and Market Feasibility AnalysisWhen evaluating the feasibility of a business idea, entrepreneurs find a basic analysis of the industry and targeted market segments a good starting point. The focus in this phase is two-fold:

1. To determine how attractive an industry is overall as a “home” for a new business, and 2. To identify possible niches a small business can occupy profitably.

Feasibility studies are particularly useful when entrepreneurs have generated multiple ideas for business concepts and must winnow their options down to the “best choice.

Five Forces ModelPorter’s Five Forces model evaluates five key forces that determine the industry setting in which companies compete. The Five Forces model assesses industry attractiveness by analyzing these five considerations:

1. The level of rivalry among the companies competing within the industry, 2. The bargaining power of suppliers, 3. The bargaining power of buyers, 4. The threat of new entrants, and 5. The threat of substitute products or services.

The Five Forces illustration shows how the four forces of entrants, suppliers, buyers and substitute products influence the rivalry among the existing firms within the industry. Let’s look at the influence each of these forces has on the competitive landscape within an industry.

Rivalry Among CompaniesRivalry among companies competing in the industry is the strongest of the five forces. In most industries, this assesses the rivalry that exists among the businesses competing in a particular market. This force can create markets that are dynamic and highly competitive. An industry is generally more attractive when these conditions exist:

The number of competitors is large, or, at the other extreme, fewer than five. Competitors are not similar in size or capability. The industry is growing at a fast pace. The opportunity to sell a differentiated product or service is present.

Bargaining Power of SuppliersThe greater the influences of suppliers of key raw materials or components have, the less attractive is the industry. An industry is generally more attractive when:

Many suppliers sell a commodity product to the companies in it. Substitute products are available for the items suppliers provide. Companies find it easy to switch suppliers or to substitute products When the items suppliers provide the industry account for a relatively small portion of

the cost of the industry’s finished products.

Bargaining Power of BuyersBuyers have the potential to exert significant power over businesses. When the number of customers is mall and the cost of switching to competitors product is low, buyers have a high level of influence. An industry is generally more attractive when these conditions exist:

Industry customers “switching costs” are high The number of buyers is large Customers demand differentiated products Customer find it difficult to gain access to information about buyers The products companies sell account for a small portion of the cost of their customers’

finished goods.

Threat of New EntrantsThe larger the pool of potential new entrants to an industry, the greater is the threat to existing companies in it. This is particularly true in industries where the barriers to entry, such as capital requirements, specialized knowledge, access to distribution channels, and others are low. An industry is generally more attractive to new entrants when these conditions exist:

Absence of economies of scale Capital requirement to enter are low

Cost advantages are not related to company size Buyers are not brand-loyal

Governments do not restrict new companies from entering the industry

Threat of SubstitutesSubstitute products or services can turn an entire industry on its head. An industry is generally more attractive when these conditions exist:

Quality substitutes are not readily available Prices of substitute products are not significantly lower that those of the industry’s

products

Buyer’s switching costs are high

Business PrototypingBusiness Prototyping enables entrepreneurs test their business models on a small scale. It recognizes that every business idea is a hypothesis that needs to be tested. If the test supports the hypothesis and its accompanying assumptions, it is time to launch a company. If the prototype fails, the entrepreneur scraps the business idea with only minimal losses and turns to the next idea.

Business prototyping recognizes that a business idea is a hypothesis that need to be tested before implementing the concept, requiring time and resources. Business prototyping can be another tool to reduce the inherent risk of starting a business.

Elements of a Feasibility Analysis—Financial FeasibilityThe financial feasibility of a venture is the final component of the feasibility analysis. This involves these three elements:

1. Capital requirements What are financial resources need to get everything in place? This may include the costs associated with acquiring office or manufacturing space, equipment and people.

2. Estimated earnings: What are the projected earnings of the venture? A three-year earnings forecast will be a part of this step. Are those earnings acceptable?

3. Return on investment: Based on these anticipated expenses and earnings, what is the return on the investment? Is that return attractive? Does it merit the risk?

THE BENEFITS OF A BUSINESS PLAN

A Business Plan Is …A business plan is a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities. The plan serves as an entrepreneur’s “road map” on the journey toward building a successful business.

The business plan describes the direction the company is taking. The business plan states:

What its goals are.

Where it wants to be.

How it’s going to get there.

The business plan:

Is a systematic evaluation of the venture’s chances for success A way to determine risk A “game plan” for managing a business A tool for comparing actual performance to the targeted results A tool for attracting capital

The business plan is the entrepreneur’s best insurance against launching a business destined to fail or mismanaging a potentially successful company.

A Business Plan: Two Essential Functions:The business plan serves two essential functions.

1. The business plan guides the company’s operations by charting its future course and devising a strategy for following it.

The plan provides a battery of tools—a mission statement, goals, objectives, budgets, financial forecasts, target markets, strategies—to help managers lead the company successfully.

It gives managers and employees a sense of direction.

It gives everyone targets to shoot for, and it provides a yardstick for measuring actual performance against those targets, especially in the crucial and chaotic start-up phase.

In addition, writing a plan requires entrepreneurs to get an in-depth understanding of the industries in which they plan to compete and how their companies fit into them.

Finally, creating a plan forces entrepreneurs to subject their ideas to the test of reality: Can this business actually produce a profit?

2. The second function of the business plan is to attract lenders and investors. Lenders and investors want to see solid and incisive business plans that demonstrate

an entrepreneur’s creditworthiness and his ability to build and manage a profitable company.

Applying for loans or attempting to attract investors without a solid business plan rarely attracts needed capital.

The quality of the firm’s business plan weighs heavily in the decision to lend or invest funds.

The business plan also creates the first impression to potential lenders and investors of the company and its managers.

A Business PlanThe business plan is a reflection of its creator, is further tests the business idea, and its real value come from the process of creating the plan.

As a reflection of its creator, a business plan:

Documents that an entrepreneur has thought seriously about the venture and what will make it succeed.

Demonstrates that an entrepreneur has taken the time conduct the necessary research and to commit the idea to paper.

Forces an entrepreneur to consider both the positive and the negative aspects of the business.

In most cases, potential lenders and investors read a business plan before they ever meet with the entrepreneur behind it. Sophisticated investors will not take the time to meet with an entrepreneur whose business plan fails to reflect a serious investment of time and energy in defining a promising business opportunity. They know that an entrepreneur who lacks the discipline to develop a good business plan likely lacks the discipline to run a business.

An entrepreneur should not allow others to prepare a business plan for him or her because:

Outsiders cannot understand the business nor envision the proposed company as well as he can.

The entrepreneur is the driving force behind the business idea and is the one who can best convey the vision and the enthusiasm he has for transforming that idea into a successful business.

The entrepreneur will make the presentation to potential lenders and investors, he must understand every detail of the business plan.

Investors want to feel confident that an entrepreneur has realistically evaluated the risk involved in the new venture and has a strategy for addressing it. Investors also want to see proof that a business will become profitable and produce a reasonable return on their investment.

One way to understand the need for a business plan is to recognize the validity of the “two-thirds rule”

1. Only two-thirds of the entrepreneurs with a sound and viable new business venture will find financial backing.

2. Those that do find financial backing will only get two-thirds of what they initially requested, and it will take them two-thirds longer to get the financing than they anticipated.

3. The most effective strategy for avoiding the two-thirds rule is to build a business plan!

The time to find out that a business idea won’t succeed is in the planning stages, before an entrepreneur commits significant money, time, and effort to the venture.

A business plan is much less expensive to make mistakes on paper than in reality. A business plan reveals important problems to overcome before launching a

company.

The real value in preparing a plan is not as much in the plan itself as it is in the process the entrepreneur goes through to create the plan.

Although the finished product is useful, the process of building the plan requires entrepreneurs to subject their ideas to an objective, critical evaluation.

What entrepreneurs learn about their industries, target markets, financial requirements, competition, and other factors is essential to making their ventures successful.

Building a business plan reduces the risk and uncertainty of launching a company by teaching an entrepreneur to do it the right way!

Why Take the Time to Build a Business Plan?A business plan can:

Increases chances of success Provide a road map for direction

The result is that the business plan may provide valuable insight to a journey that is going to be unfamiliar and uncertain.

Writing a Business PlanEntrepreneurs who invest their time and energy building plans are better prepared to face the hostile environment in which their companies will compete than those who do not. The business plan is:

Typically 25-50 page and this varies with the nature and complexity of the business and the purpose of the plan

Every plan is as unique as the business itself

Tells a story about the vision for the business

THE ELEMENTS OF A BUSINESS PLAN

Key Elements of a Business Plan Every business plan is unique and must be tailor-made to tell the story of the business.

The elements of a business plan may be standard, but how an entrepreneur tells the story should be unique and reflect her personal excitement about the new venture.

If this is a first attempt at writing a business plan, the entrepreneur should seek the advice of individuals with experience in this process. This list of resources may include consultants with Small Business Development Centers, accounts, business professors, business planning professionals, and attorneys.

There are many resources available as a guide to create a business plan. The seemingly overwhelming task is easily broken down into workable parts that any entrepreneur—or student—can undertake. Most business plans begin by including these key elements:

Title page and table of contents Executive Summary Mission Statement Company History Business and Industry Profile Business Strategy Description of Product/Service

Title Page and Table of ContentsThe bound business plan should have a title page and a table of contents. Each section of the plan has a purpose to accomplish a specific objective.

The Executive SummaryThis section summarizes the presentation to each potential financial institution or investors. It should be concise—a maximum of two pages—summarizing the relevant points of the proposed deal. The executive summary is not an introduction, it is a synopsis of the entire plan, capturing its essence in a capsulized form. An effective executive summary enables the readers to understand the entire business concept and what differentiates the company from the competition.

The executive summary should:

- Explain the basic business model,- Describe the problem the business will solve for customers,- Briefly describe the owners and key employees, target market(s), financial

highlights (e.g. sales and earnings projections, the dollar amount requested, how the funds will be used, and how and when any loans will be repaid), and

- Present the company’s competitive advantage through key points.

Mission StatementA mission statement expresses an entrepreneur’s vision for what the company is, what it is to become, and what it stands for. It is the broadest expression of a company’s purpose. The mission statement defines the direction in which it will move and serves as the thesis statement for the entire business plan.

Company HistoryThe manager of an existing small business should prepare a brief history of the operation, highlighting the significant financial and operational events in the company’s life. It should describe when and why the company was formed, how it has evolved over time, and what the owner envisions for the future. The company history should highlight the successful accomplishment of past objectives and should convey the firm’s image in the marketplace.

Business and Industry ProfileThis section should provide with an overview of the industry or market segment in which the new venture will operate. It should include information regarding:

- Industry data such as market size, growth trends, and the relative economic and competitive strength of the major firms in the industry all set the stage for a better understanding of the viability of the new product or service.

- Strategic issues such as ease of market entry and exit, the ability to achieve economies of scale or scope, and the existence of cyclical or seasonal economic trends further help the reader evaluate the new venture.

The business and industry section also should describe significant industry trends and an overall outlook for its future. The U.S. Industrial Outlook Handbook is an excellent reference that profiles a variety of industries and offers projections for future trends. Another useful resource of industry and economic information is the Summary of Commentary on Current Economic Conditions, known as the Beige Book

The industry analysis should also address the profitability of the businesses in the targeted market segment. It should spell out what the business plans to accomplish, how, when, and who will do it.

- Goals are broad, long-range statements of what a company plans to do in the distant future that guide its overall direction. Goals answer the question: “Why am I in business?”

- Objectives are short-term, specific performance targets that are attainable, measurable, and controllable. Every objective should include a technique for measuring progress toward its accomplishment. An objective must have a timeframe for achievement.

Both goals and objectives should relate to the company’s basic mission.

- They should describe the present state of the art in the industry and what they will need to succeed in the market segment in which their businesses compete.

- They should then identify the current applications of the product or service in the market and include projections for future applications.

Business StrategyThis section presents the owner’s view of the strategy needed to meet—and exceed—the competition. It addresses the question of how to “get there.” An entrepreneur must explain how he or she plans to gain a competitive edge in the market and what sets his business apart from the competition. The entrepreneur should comment to how he or she plans to achieve business goals and objectives in the face of competition and government regulation and should identify the image the business will project. An important theme is what makes the company unique in the eyes of its customers. It should outline the methods the company can use to meet the key success factors.

Description of Firm’s Product/ServiceThis section should describe the company’s overall product line, giving an overview of how customers use its goods or services. Drawings, diagrams, and illustrations may be required if the product is highly technical. It is best to write product and service descriptions so that laypeople can understand them. A statement of a product’s position in the product life cycle might also be helpful. It should include a summary of any patents, trademarks, or copyrights protecting the product or service from infringement by competitors.

Manufacturers should describe their production process, strategic raw materials required, sources of supply they will use, and their costs. Explain the company’s environmental impact and degree of sustainability. If necessary, explain how the entrepreneur plans to mitigate any negative consequences the manufacturing process may produce.

The description of the products and services should include an honest comparison of the company’s product or service with those of competitors, citing specific advantages or improvements that make its goods or services unique and indicating plans for creating the next generation of goods and services that will evolve from the present product line.

- What competitive advantage does the venture’s product or service offer?- Avoid dwelling on the features of their products or services.

Feature vs. BenefitIt is important to differentiate between a feature and a benefit in a business plan.

A feature is a descriptive fact about a product or service.The vehicle has six airbags strategically placed throughout the interior cabin.

A benefit is what the customer gains from the product or service feature. The insurance industry considers this the safest vehicle in its category and it may save your life.

Remember: Customers buy benefits, not product or service features.

Key Elements of a Business Plan—Marketing StrategyThe marketing strategy section of a business plan identifies and describes the company’s target customers and their characteristics and habits. Defining the target audience and its potential is one of the most important parts of building a business plan.

Creating a successful business depends on an entrepreneur’s ability to attract real customers who are willing and able to spend real money to buy its products or services. One of the most blatant marketing errors an entrepreneur can commit is failing to define his target market and trying to make his business “everything to everybody.” Small companies usually are much more successful focusing on a specific market niche where they can excel at meeting customers’ special needs or wants. Every other aspect of marketing depends on their having a clear picture of their customers and their unique needs and wants.

Proving that a profitable market exists involves two steps:

1. Showing customer interest: The plan must be able to prove that their target customers need or want their goods or services and are willing to pay for them. It should offer the prototype to several potential customers in order to get written testimonials and evaluations to show to investors. Another alternative is that the owner could sell the product to several customers at a discount.

2. Document market claims with research. The plan should document market claims and avoid vague generalizations such as, “This market is so huge that if we get just one percent of it, we will break even in eight months.” These statements usually reflect nothing more than an entrepreneur’s unbridled optimism, and in most cases, are quite unrealistic! Entrepreneurs must support claims of market size and growth rates with facts. Results of market surveys, customer questionnaires, and demographic studies lend credibility of an entrepreneur’s frequently optimistic sales projections. This may be an opportunity for business prototyping.

Describe target customersAn effective market analysis should identify the following:

- A clear description of the target market: - Who are the company’s target customers?- How many of them are in the company’s trading area? - What are their characteristics (age, gender, educational level, income, and others)? - What do they buy? - Why do they buy? - When do they buy?- What expectations do they have about the product or service?- Will the business focus on a niche?

- How does the company seek to position itself in the market(s) it will pursue?- Knowing my customers needs, wants, and habits, what should be the basis for

differentiating my business in their minds? Advertising and promotion

The next step is to identify which media are most effective in reaching the target market. This will involve addressing these questions:

- How will the media selections be used? - How much will the promotional campaign cost? - How will the promotional campaign position your company’s products or services? - How can the company benefit from publicity? - How large is the company’s promotional budget?

Market size and trendsAssessing the size of the market and relevant trends provide scope and perspective for revenue potential. Questions to ask in this area include:

- How large is the potential market?- Is it growing or shrinking? Why? - Are the customer’s needs changing?- Are sales seasonal?- Is demand tied to another product or service?

LocationFor many businesses, choosing the right location is a key success factor. These questions may help in that process.

- Which specific sites put the company in the path of its target customers?- Do zoning regulations restrict the use of the site? - For manufacturers, the location issue often centers on finding a site near its key raw

materials or near its major customers. - Using demographic reports and market research to screen potential sites takes the

guesswork out of choosing the “right” location for a business. Pricing

Pricing is an important decision and will have a significant impact on total revenue and profits. These questions may help in determining pricing of products and services.

- What does the product or service cost to produce or deliver?- What is the company’s overall pricing strategy?- What image is the company trying to create in the market?- Will the planned price support the company’s strategy and desired image?- Can it produce a profit? - How does the planned price compare to those of similar products or services? - Are customers willing to pay it? - What price tiers exist in the market?

- How sensitive are customers to price changes? - Will the business sell to customers on credit? - Will it accept credit cards? - Will the company offer discounts? If so, what kinds and how much?

DistributionDistribution determines how customers will have access to the goods and services they purchase. Questions that help with this decision include:

- How will the product or service be distributed? - Will distribution be extensive, selective, or exclusive? - What is the average sale? - How large will the sales staff be? - How will the company compensate its sales force? - What are the incentives for salespeople? - How many sales calls does it take to close a sale? - What can the company do to make it as easy as possible for customers to buy? - An entrepreneur should summarize the firm’s overall pricing strategies and its

warranties and guarantees for its products and services.

Key Elements of a Marketing Plan—Competitor AnalysisEntrepreneurs should assess honestly their new ventures’ competition. Trade associations, customers, industry journals, sales representatives, and sales literature are valuable sources of data. The competitor analysis should focus on demonstrating that the entrepreneur’s company has an advantage over its competitors. These questions apply?

- Who are the company’s key competitors? - What are their strengths and weaknesses? - What are their strategies? - What images do they have in the marketplace? - How successful are they? - What distinguishes the entrepreneur’s product or service from others already on the

market, and how will these differences produce a competitive edge?

Key Elements of a Marketing Plan—Owners’ and Managers’ ResumesThe most important factor in the success of a business venture is its management, and financial officers and investors weight heavily the ability and experience of the firm’s managers in financing decisions. A plan should include the resumes of business officers, key directors, and any person with at least 20 percent ownership in the company. This is the section of the plan where entrepreneurs have the chance to sell the qualifications and the experience of their management team.

Ideally, lenders and investors look for managers with at least two years’ of operating experience in the industry they are targeting. A resume should summarize each individual’s education, work history (emphasizing managerial responsibilities and duties), and relevant business experience. This portion of the plan should show that the company has the right people organized in the right fashion for success. One experienced private investor advises entrepreneurs to remember the following: Ideas and products don’t succeed; people do. The marketing plan also documents the strengths of key employees and what will be in place to retain them. In addition, a board of directors or advisers consisting of industry experts lends credibility and can enhance the value of the management team.

Key Elements of a Marketing Plan—Plan of OperationAn entrepreneur should construct an organizational chart identifying the business’s key positions and the people occupying them. The entrepreneur should describe briefly the steps taken to encourage important officers to remain with the company. Employment contracts, shares of ownership, and perks are commonly used to keep and motivate key employees. A description of the form of ownership (partnership, joint venture, S Corporation, LLC) and of any leases, contracts, and other relevant agreements pertaining to the operation is helpful.

Financial ForecastsOne of the most common reasons for creating and reading a business plan relates for financing. In those cases, this section is critical. Entrepreneurs must avoid the tendency to “fudge the numbers” since some venture capitalists automatically discount an entrepreneur’s financial projections by as much as 50 percent

Projected financial statementsA business owner should supply copies of the firm’s major financial statements from the past 3 years. Ideally, these statements should be audited ore reviewed by a certified public accountant. An entrepreneur should carefully prepare monthly projected (or pro forma) financial statements for the venture for one year and by quarter for the next 2 to 3 years.

Income statementThe income statement shows the company’s revenues, expenses, and the resulting profit. Investors and lenders expect to see positive trends in earnings. They look to see if the gross-, operating-, and net-income margins on the forecasted income statements are consistent with industry averages.

Balance sheet statementThe balance sheet provides a projected view of the company’s assets (everything it owns), its liabilities (everything it owes), and its net worth (the difference in assets and liabilities).

Cash flow statementThe cash flow statement will project whether or not the company is viable over time. Staying in business requires a company to generate positive cash flow. Entrepreneurs must make sure that they have accumulated enough capital to carry the company until it generates enough cash to support itself.

Capital expendituresA detailed account of anticipated capital expenditures should reinforce and add credibility to the financial information.

Financial ForecastsThe financial forecast should:

Offer three forecastsThere should be forecasts under pessimistic, most likely, and optimistic conditions to reflect the uncertainty of the future.

Be Realistic!Offer the most objective assessment of the situation and provide the most realistic projection of future performance. Potential lenders and investors want to know how the entrepreneur derived forecasts for sales, cost of goods sold, operating expenses, accounts receivable, collections, inventory, and other such items.

Include assumptionsA statement of the assumptions on which these financial projections are based adds credibility and perspective to the financials.

Including a break-even analysis and a ratio analysis on the projected figures. A common mistake among entrepreneurs creating plans for business startups is devoting too much space to financial forecasts that are uncertain at best and spending too little time on the people, the marketing research, and the strategies that will generate the financial results.

Key Elements of a Business Plan—Loan/investment ProposalThe loan proposal section of the business plan should state the purpose of the loan or investment, the amount requested, and the plans for repayment or cash-out. When describing the purpose of the loan, entrepreneurs must specify the planned use of the funds. Entrepreneurs should state the precise amount of money they are requesting. This information should include relevant backup data, such as vendor estimates of costs or past production levels. Inflating the amount of a loan request in anticipation of the financial officer trying to “talk them down” is a mistake.

Another important element of the loan or investment proposal is the repayment schedule and exit strategy. A lender’s main consideration in granting a loan is the reassurance that the applicant will repay, whereas an investor’s major concern is earning a satisfactory rate of return. It is necessary to produce tangible evidence showing the ability to repay loans or to generate attractive returns. It is beneficial to include an evaluation of the risks of a new venture. The best strategy is to identify the most significant risks the venture faces and then to describe the plans the entrepreneur has developed to avoid them altogether or to overcome the negative outcome if the event does occur.

An entrepreneur should have a realistic timetable for implementing the plan. There is a difference between a working business plan—one the entrepreneur is using to guide the business—and the presentation business plan—the plan written to attract capital.

Tips on Preparing a Business PlanA business plan is usually the tool that an entrepreneur uses to make a first impression on potential lenders and investors. There are tips on preparing your business plan that can save time and help to create a more cohesive and impressive overall plan.

Have a cover page with the company’s name and logo Rid your plan of spelling, grammar errors and “typos” Create a visual appeal that is attractive, uses white space and has a high skim value

Include a table of contents to allow readers to navigate through your plan easily

Make the business plan interesting and compelling Use spreadsheets for financial forecasts. Include cash flow projections Keep it concise and crisp

Tell the truth—always!

THE THREE TESTS OF AN EFFECTIVE BUSINESS PLAN

Your Plan Must Pass Three TestsBuilding the plan forces a potential entrepreneur to look at her business idea in the harsh light of reality. It also requires the owner to assess the venture’s chances of success more objectively. A well-assembled plan helps prove to outsiders that a business idea can be successful. To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors:

The Reality TestThe external component of the reality test revolves around proving that a market for the product or service really does exist. It focuses on industry attractiveness, market niches, potential customers, market size, degree of competition, and similar factors. The internal component of the reality test focuses on the product or service itself. The reality text poses these questions:

- Can the company really build it for the cost estimates in the business plan? - Is it truly different from what competitors are already selling? - Does it offer customers something of value?

The Competitive TestThe external part of the competitive test evaluates the company’s relative position to its key competitors. The competitive test asks these questions:

- How do the company’s strengths and weaknesses match up with those of the competition?

- How are existing competitors likely to react when the new business enters the market?

- Do these reactions threaten the new company’s success and survival? - The internal competitive test focuses on management’s ability to create a

company that will gain an edge over existing rivals. - What other resources does the company have that can give it a competitive edge

in the market?

The Value TestA business plan must prove to them that it offers a high probability of repayment or an attractive rate of return. A plan must convince lenders and investors that they will earn an attractive return on their money.

WHAT LENDERS LOOK FOR IN A BUSINESS

The “5 Cs” of CreditBankers and other lenders include the “five Cs” of credit as a part of their evaluation of the credit-worthiness of loan applications. The higher a business scores on the evaluation, the greater its chance will be of receiving a loan based on these five criteria:

The five Cs of credit include:

1. CapitalA small business must have a stable capital base before any lender will grant a loan. The most common reasons that banks give for rejecting small business loan applications are undercapitalization or too much debt.

2. CapacityA synonym for capacity is cash flow. Lenders and investors must be convinced of the firm’s ability to meet its regular financial obligations and to repay bank loan, and that takes cash. Lenders expect a business to pass the test of liquidity, especially for short-term loans.

3. CollateralCollateral includes any assets an entrepreneur pledges to a lender as security for repayment of the loan. Banks make very few unsecured loans (those not backed by collateral) to business start-ups. Bankers view the owner’s willingness to pledge collateral (personal or business assets) as an indication of dedication to making the venture a success.

4. CharacterAn evaluation of character frequently is based on intangible factors such as honesty, competence, polish, determination, intelligence, and ability. Lenders and investors know that most small businesses fail because of incompetent management, and so they try to avoid extending loans to high-risk entrepreneurs.

5. ConditionsThe conditions surrounding a loan request also affect the owner’s chance of receiving funds. Banks consider factors relating to the business operation such as potential growth in the market, competition, location, form of ownership, and loan purpose. Another important condition influencing the banker’s decision is the shape of the overall economy, including interest rate levels, inflation rate, and demand for money.

Bankers score the small business in terms of the five Cs—the greater the score, the higher probability that the small business will receive the loan.

MAKING THE BUSINESS PLAN PRESENTATION

Presenting the PlanWhen entrepreneurs try to secure funding from lenders or investors, the written business plan usually precedes the opportunity to meet “face-to-face.” Usually, the time for presenting a business opportunity is short, often no more than just a few minutes, usually less than 20 minutes, 30 minutes at the maximum.

A business plan presentation should cover five basic areas:

1. The company’s background and its products or services.2. A market analysis and a description of the opportunities it presents.3. The company’s competitive edge and the marketing strategies.

4. The management team and its members’ qualifications and experience. 5. A financial analysis that shows lenders and investors an attractive payback or payoff.

Entrepreneurs who are successful in raising the capital their companies need to grow have solid business plans and make convincing presentations of them.

Some helpful tips for making a business plan presentation to potential lenders and investors include:

Prepare. Demonstrate enthusiasm about the business, but don’t be overemotional. Focus on communicating the dynamic opportunity your idea offers and how you plan to

capitalize on it. “Hook” investors quickly with an up-front explanation of the new venture, its

opportunities, and the anticipated benefits to them.

Presenting the Plan – continued

Use visual aids. Hit the highlights; specific questions will bring out the details later. Don’t get caught up

in too much detail in early meetings with lenders and investors. Keep the presentation “crisp” just like your business plan and focus in on 2 or 3 major

points. Avoid the use of technological jargon and terms that will likely be above most of the

audience.

Answer every lender or investor’s question of: “What’s in it for me?” Close by reinforcing the nature of the opportunity. Be prepared for questions.

Learn the pattern of investor’s questions and try to anticipate the questions the audience is most likely to ask and prepare for them in advance. Be sensitive to the issues that are most important to lenders and investors

Follow up with every investor to whom you make a presentation.

Conclusion

A good plan serves as a strategic compass that keeps a business on course as it travels into an uncertain future. A solid plan is essential to raising the capital needed to start a business; lenders and investors demand it. Building a plan is just one step along the path to launching a business.