Establishing an effective Business plan

Matthijs Hammer

Senior lecturer Innovative Entrepreneurship

School of Business, Building & Technology

Research Center for Innovation & Entrepreneurship

More than just a checklist …

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• What is a business plan / venture plan?

• The three important questions

• The importance of a ‘Business model’

• Different formats

• Now it is your turn!

What is a Business plan?

“a plan for the business”

Nothing more or less from an entrepreneurial point of view

The three important questions

• What?

• Why?

• How?

What?

What, is it you want to do?

– Be as specific as possible.

– Indicate the added value.

– Brief description.

– Elevator pitch.

– Normal language, slang.

Why?

Why you going to do it?

• Is it needed?

• Inspiration.

• Higher (social) values.

• The your ultimate goal.

• The Why (Simon Sinek)http://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action?language=nl

How?

• Make it plausible (feasibility, competitors, legal)

• Show the mechanisms.

• What are your (unique) resources.

• With whom? (Stakeholders)

• Predict the future in a way of:

– Financial

– Material

– Market (development)

Different formats

• Chamber of Commerce

• Banks & accountants

• Saxion Center for Entrepreneurship(Barry Koelman)

• Your own design

Take into account:

• Recognisability

• Verifiability

• Logic

• Existing knowledge

Different formats

Minimal requirements:

• What is it?

• Why is it needed / important?

• How it will made happen?

• Feature / design the future by:

– Models

– Calculations

– Scheme / draught

• Who is / are doing the action?

How it works?

• For whom the plan is written for?

• Which setting?

• What is your goal?

Every target / target group favour its own type of plan.

Less is more, more less!

It starts with: the (brilliant / award winning) idea!

A business model

Chesbrough & Rosenbloom (2002, 532): The business model provides a coherent frameworkthat takes technological chracteristics andpotentials as inputs, and converts themthrough customers and markets into economicoutputs. The business model is thus conceivedas a focusing device that mediates betweentechnology development and economic valuecreation.

Technical

InputsEconomic

Outputs

Business

Model

Elements of a model

The Business model Canvas

Starting a business in practice

Recognise

opportunity

Have an idea

Consideration

Planning?

Business &

product

development

Access & gain

resources

Social

connection

Launch

Early trading

Survival?

Principles of a succesfullbusiness

• Realistic planning

• Control over costs and cashflow

• Generating turnover

• Funding

And…

• A simple idea

• Teamwork to make it happen

Ingredients of effective planning

• The plan is a projection, not reality

• Research: use real information not assumptions

• Set realistic targets for sales and production

• Teamwork – get everyone involved in planning

• Plans should be dynamic not static – markets and other factors will change

• ‘Planning’ is more important than ‘having a plan’

• Always consider and plan for the downside

What is your business model?

• Who are your target customers?

• What value is created for them?

• Why will they buy the product from you?

• How is it superior to its competitors?

• How will you produce, market and distribute it?

• How and when will it generate cash and profits?

• What financial investment is required?

• Can you draw a simple diagram to show the process?

CUSTOMER GROUP

PROJECTED GROWTH

Sales

Year 2 =

Year 3 =

BUSINESS MODEL

SALES INCOME

Total income=

VARIABLE COSTS

Variable costs per customer =

Total variable costs =

FIXED COSTS

Finance costs

Premises, facilities, insurance

Salaries

Other fixed costs

Total fixed costs =

CUSTOMER BENEFITS

Gross profit margin:

Net profit margin:

Breakeven sales:

Total costs:

Gross profit:

Net profit before tax:

A simple business model (Example of Busmode Ltd)

PROJECTED GROWTH

Gain 300 customers/year in

years 2-3

Lose 25% past customers/year

Increase charges 5%/year

Sales

Year 2 = £425000

Year 3 = £634000

CUSTOMER BENEFITS

200 x improved communications

systems

100 x start e-business

100 x managed CRM system

100 x time saved within businesses

Gross profit margin: 83%

Net profit margin: 32%

Breakeven sales: £110844

CUSTOMER GROUP

Micro-small businesses buy

integrated

web/e-business/comms/CRM service

They pay £50 month flat fee + traffic

charges on 1 year contract

BUSMODE LTD

FIXED COSTS

Repayment on £100,000 financing of IT

system = £28,000

Premises, facilities, insurance = £24,000

Salaries (2 people) = £40,000

Total fixed costs = £92,000

SALES INCOME

200 customers in year 1

£50 month each = £120,000

+ £25 month average traffic = £60,000

Total income= £180,000

VARIABLE COSTS

Marketing costs £100 to attract each

customer = £20,000

Variable costs £50 per customer = £10,000

Total variable costs = £30,000

Total costs: £122,000

Gross profit: £150,000

Net profit before tax: £58,000

Is the business a sound investment proposition?

• Growth potential?

• Perceived risk?

• Return on investment: profit stream?

• Competition and differentiation?

• Breakeven

• Timescale

• Potential exit routes

• The people – capability and incentives

The growth business plan: typical contents

• Summary of the business proposition

• Vision, goals and targets

• Market opportunity: research, analysis and plan

• Product/service concept

• Business model or process

• SWOT analysis in relation to competitors and differentiation from them

• People: who will run the business, track records

• How the business will operate: capabilities, resources, people, processes

• Financials: investment and working capital requirements, breakeven, pricing, gross and net margins, cashflow, return on investment

Vision

• What do you want to achieve?

• what business are you in ?

• How do you see the business in 2–5 years’ time?

• What is the purpose of the business?

• What are the values? Start with yours.

• Is it memorable and inspirational?

• Can it be understood by everyone in the business?

• Dreams need numbers to make them into business goals

Opportunity

• What are the most attractive opportunities for the business?

• Current market opportunities – exist now

• Future opportunities – need to create

• Why are they attractive for the business?

• What is the business model?

• What factors drive profitability?

• What investments are needed?

• What are the projected returns?

SWOT analysis: risk and advantage

A look from the inside and the outside in relation to the competition:

– How is the business stronger?

– Where is the business weaker?

– What opportunities can you exploit?

– What threats can you identify?

Risk factors

• Market risk: customer demand, volatility, competitor action

• Technical risk: performance, production capacity and responsiveness to demand

• Financial risk: investment, cost control, increase or reduction over time

Marketing and sales plan

• Your SWOT compared to competitors

• Success factors and buying triggers

• Current and future clients – groups or segments

• Market matrix

• Products and services in relation to client groups

• Pricing (incentives etc)

• Place (route to market, delivery, distribution)

• Promotion and selling (How you will reach and retain clients)

• Marketing budget and action plan

• Sales targets

Operations plan

• Products and services to be provided

• Sales order and key processes/systems

• Maximising use of capacity

• Continuous improvement – eg:

– Quality, customer service

– Efficiency – use of resources, time reductions

– Effectiveness of processes, ‘make or buy’

– Economy – cost savings

– Use of information, measurement

Project plan

1 2 3 4 5 6 7 8 9 10Activity

Competitor research

Analysis

Product development

Suppliers & logistics

Design promotionals

Production

Sales campaign

Launch

Sales

Review

Planning

Customer research

Launching a new product or service

People plan

• Leadership

• Team roles, areas for development

• Organisation – structure, responsibilities

• Capabilities and knowledge needed in the business

• How to develop or acquire these?

– Plan to develop existing staff

– Recruitment plan

– Motivation and rewards

Financial plan

• Business model• Financial objectives, years 1, 2 5?• Cash flow forecasts • Profit and loss (P&L) forecasts• Funding requirements:

– Capital expenditure, acquisition– Working capital– Sources of funding, return on investment

• Assumptions– Break-even analysis, pricing– Risks

• Balance sheet

See ‘Financial Planner’ toolkit on page 264 of Entrepreneurship: from opportunity to action

Pricing - the three ‘Cs’

• Cost: lower limit, full cost or marginal?

• Customers: upper limit, how high will (or can) they go?

• Competitors: how good are they? How do you compare? (This determines how high you can go and your price position in the market)

Key questions in ‘pitching’ the plan to sell the idea

• Who is the plan written for?

• What do you aim to achieve from presenting the plan?

• What are you prepared to exchange to gain what you need?

• What are the listeners’ needs and expectations? (e.g. are they looking for investment or lending opportunities, technology or distribution partnerships?)

• Do you know your audience – what is their investment history, in which types of ventures? What are their investment objectives or lending criteria?

• How can you fine-tune your presentation of the plan to meet their needs?

• How can you reassure them of your credibility and capability of making it happen?

Characteristics of an effective venture plan

Twelve features of an effective venture plan:

1. Demonstrates a clear opportunity which has not yet been exploited

2. Displays strong customer attraction and differentiation from competitors

3. Shows significant, quantified growth potential in identified markets

4. Demonstrates a credible strategy and plan to exploit the opportunity

5. Deploys innovation which can be shown to work effectively

6. Has unique aspects which can be prevented from copying (control of IPR [Intellectual Property Rights])

7. Success factors with risks identified and minimised

8. Investment required is shown with realistic return on investment

9. Timescale to breakeven and anticipated profit stream are realistic

10. Financial planning is accurately costed and realistic

11. Potential exit routes and timescales for investors are shown

12. The venture team demonstrate capability and motivation