Business plan
Donald F. Kuratko
A business plan is a written document that details a proposed venture. It must illustrate the current status, expected needs, and projected results of the new business (Fry and Stoner, 1985). Every aspect of the venture should be described: the project, marketing, research and development, manufacturing, management, critical risks, financing, and milestones or time table. A description of all these facets of the proposed venture is necessary to give a clear picture of the venture, its intended direction, and the actions to be taken to reach its goals. Thus, the business plan represents the entrepreneur’s roadmap for a successful enterprise (Kur atko and Cirtin, 1990).
The business plan is also called a venture plan, a loan proposal, or investment prospectus. Whatever its name, this document is initially required by any financial source. Although it may be utilized as a working document once the venture is established, the business plan’s major purpose is to encapsulate strategic developments of the project in a comprehensive document for scrutiny by outside investors.
The business plan describes to potential investors and financial sources all of the events that may affect the proposed venture, including its projected actions and their associated revenues and costs. It is vital to explicitly state the assumptions on which the plan is being based. For example, changes in the economy or the venture’s target market(s) during the start up period should be indicated. Successful launch ing of the venture is what the plan should emphasize. In other words, it is not just the writing of an effective plan that is important, but also the translation of that plan into a successful enter prise (Perry, 2001). Thus, a business plan should:
- describe every aspect of a particular busi ness;
- include a marketing plan;
- clarify and outline financial needs;
- identify potential obstacles and alternative solutions;
- serve as a communication tool for all financial and professional sources.
The business plan is the major tool used to guide the venture’s formation as well as the primary document needed to manage it. It is also more than a written document: it is an ongoing process that begins when the entrepreneur gathers in formation and then continues as projections are made, implemented, measured, and updated.
Benefits of a Business Plan
The entire business planning process forces an entrepreneur to analyze all aspects of the venture and prepare effective strategies to deal with un expected uncertainties. Thus, a business plan may help an entrepreneur avoid failure. The benefits derived from a business plan for both the entrepreneur and the financial source that will evaluate it include the following.
Financing. Venture capitalists and most banks require business plans. Generally, when the na tional economy declines, it becomes more diffi cult to obtain financing, and financiers increase their demands for documentation.
Increased knowledge. For many entrepreneurs, the process of actually putting the plan together is just as important as obtaining financing. Writing the plan forces them to review the busi ness critically, objectively, and thoroughly.
Preventing poor investments. Business plans help entrepreneurs avoid projects that are poor in vestments. It is better not to begin a project that is destined to fail.
Planning. Business plans force planning. Be cause all aspects of the venture must be ad dressed in the plan, the entrepreneur develops and examines operating strategies and their expected results. Goals and objectives are 24 business plan quantified so that forecasts can be compared with actual results, facilitating the making of appropriate adjustments (Kuratko, 1991).
Entrepreneurs who prepare all or most of the business plan themselves tend to benefit the most, while those who delegate this job tend to gain the least. If an entrepreneurial team is in volved in planning, all key members should help write the plan, although it is important that the lead entrepreneur understand each member’s contribution. If consultants are sought to help prepare a business plan, the entrepreneur must remain the driving force behind the process. Seeking the advice and assistance of outside professionals is always wise, but owners need to understand every aspect of the business plan because they, not the consultants, will be scrutinized by financial sources. Thus, the business plan stands as the entrepreneur’s description and prediction for the venture.
Developing a Well-Conceived Business Plan
Most investors agree that only a well conceived business plan garners the support that results in financing. The business plan should enthusiastically (yet accurately) describe the new venture. A brief description of the ten components of a business plan is presented next (Kuratko and Hodgetts, 2004). See Table 1 for a complete outline.
Table 1 Outline of a business plan for entrepreneurial ventures
Section I: Executive summary
Section II: Description of the business
A General description of the business
B Industry background
C Company history or background
D Goals and potential of the business and milestones (if any)
E Uniqueness of product or service
Section III: Marketing segment
A Research and analysis
1 Target market (customers) identified
2 Market size and trends
3 Competition
4 Estimated market share
B Marketing plan
1 Market strategy: sales and distribution
2 Pricing
3 Advertising and promotions
Section IV: Operations segment
A Research and design results (if applicable)
B Development costs
C Identify location
1 Advantages
2 Zoning
3 Taxes
D Proximity to supplies/transportation
Section V: Management segment
A Management team: key personnel
B Legal structure: stock agreements, employment agreements, ownership, etc.
C Board of directors, advisors, consultants, etc.
Section VI: Financial segment
A Financial forecast
1 Profit and loss
2 Cash flow
3 Breakeven analysis
4 Cost controls
5 Budgeting plans
Section VII: Critical risks segment
A Potential problems
B Obstacles and risks
C Alternative courses of action
Section VIII: Harvest strategy segment
A Transfer of assets
B Continuity of business strategy
C Identify successor
Section IX: Milestone schedule
A Timing and objectives
B Deadlines and milestones
C Relationship of events
Section X: Appendix
Source: Kuratko, Montagno, and Sabatine (2002)
Components
Executive summary. The executive summary is the most important section because it must con vince readers that the business will succeed. In three pages or less, the plan’s highlights should be summarized. Because investors who review many business plans may read only the executive summary, it must stand on its own. Executive summaries failing to attract the investor’s atten tion often lead to non acceptance of the business plan. Because this section summarizes the plan, it is often best to write it last.
Description of the business. This section should provide background information about the in dustry, the venture’s history, and a general de scription of the new product or service’s unique qualities and value to consumers.
Marketing segment. This section has two major parts. The first part is the research and analysis section in which the entrepreneur discusses the target customer/market in terms of size and anticipated trends and projects sales revenue. Additionally, competitors are identified and examined in terms of their strengths and weak nesses and the competitive advantage of the pro posed venture relative to competitors is specified.
The second part is a marketing plan. This section details a marketing strategy in terms of sales, distribution, pricing, advertising, promotion, and public awareness. The primary pur pose of this material is to highlight how the marketing plan will support the venture’s competitive advantage(s).
Operations segment. This section includes developmental research leading to the design of the product (good or service), as well as the costs associated with these activities. This section should also describe the advantages of the pro posed venture’s location in terms of zoning, tax laws, wage rates, labor availability, and proximity to suppliers and transportation systems. Anticipated expenses for facilities and equipment are also specified in this section.
Management segment. Here, the entrepreneur describes the venture’s management team, its unique qualifications, and plans for their compensation (including salaries, employment agreements, stock purchase plans, levels of own ership, and other considerations). In addition to presenting the venture’s legal and organizational structures, the potential contribution of the board of directors, advisors, and consultants are described in this section.
Financial segment. Commonly covering a three year period, three key financial statements are presented in this section: a balance sheet, an income statement, and a cash flow statement. Pre paring these documents allows the entrepreneur to specify the stages at which the venture will require external financing and identify the expected financing sources (both debt and equity). In addition, the expected return on investment is highlighted, as well as the revenue and cost structures necessary to earn the projected return. These statements serve as a standard to measure actual operating results and become a valuable tool for managing and controlling the venture in its first few years.
Critical risks segment. Here, entrepreneurs identify the venture’s potential risks as well as approaches to deal with them. Strong pricing tactics by competitors, potentially unfavorable industry wide trends, design or manufacturing costs that exceed estimates, failure to meet sales projections, production delays, difficulties or long lead times in procuring parts or raw materials, and greater than expected innovation and development costs are examples of risks entrepreneurs may encounter. The objective of this section is anticipation and control of risks.
Harvest strategy segment. It is important for entrepreneurs to plan the orderly transition of the venture. Thus, this section deals with change management issues such as the orderly transfer of the company assets if ownership of the business changes, continuity of the business strategy during such a transition, and the designation of key individuals to run the business if the current management team changes. With foresight, entrepreneurs keep their dreams alive, ensure the security of their investors, and usually strengthen their businesses in the process.
Milestone schedule. Here, the entrepreneur specifies batches of tasks that are to be completed within certain time lines. A network of the activities associated with the venture’s launching and subsequent actions results from a careful and tightly integrated set of milestones.
Appendix. This section presents important background information that was not included in other sections. It should include such items as 26 business plan resumes of the management team, names of references and advisors, drawings, documents, agreements, and sources from which information was gathered.
Bibliography
Fry, F. L. and Stoner, C. R. (1985). Business plans: Two major types. Journal of Small Business Management, 1 6.
Kuratko, D. F. (1991). Demystifying the business plan process: An introductory guide. Small Business Forum, 33 40.
Kuratko, D. F. and Cirtin, A. (1990). Developing a business plan for your clients. National Public Accountant, 24 8.
Kuratko, D. F. and Hodgetts, R. M. (2004). Entrepreneur ship: Theory, Process, Practice, 6th edn. Mason, OH: Thomson South-Western Publishing, 304 13.
Kuratko, D. F., Montagno, R. V., and Sabatine, F. J. (2002). The Entrepreneurial Decision. Muncie, IN: Midwest Entrepreneurial Education Center, College of Business, Ball State University.
Perry, S. C. (2001).Therelationship between written business plans and the failure of small businesses in the US. Journal of Small Business Management, 39 (3): 201 8.