A quality business plan is an important first step in convincing investors that the management team has the abilitiy to build a successful enterprise. The plan also provides measurable operating and financial objectives for management and potential investors to measure the company’s progress. Let me begin with the body of the business plan and its components.

1. Company Overview

In this section one should fully describe the reason for founding the company and the general nature of the business. The investor must be convinced of the uniqueness of the business and gain a clear idea of the market in which the company will compete. The entrepreneur’s vision for the company’s future production and operations strategy should also be described. An investor needs to be assured that the company is built around more than a product idea. The entrepreneur needs to demonstrate that a profitable business can be built based on the strategies detailed in the plan.

2. Products and Services

The business plan must convey to the reader that the company and product truly fill an unmet need in the marketplace. The characteristics that set the product/ service and company apart from the competition need to be defined. It is also important to describe each of the end-user segments that will be targeted. A full profile of the end-users and the key potential applications of the product will demonstrate to an investor that the entrepreneur has done his/her marketing homework. A description of the status of patents, copyrights and trade secrets is very important. It is equally imperative to describe barriers to entry. Keep in mind that patents are only as good as they are defensible.

The plan should list all the major product accomplishments achieved to date as well as remaining milestones. This will give an investor a comfort level, knowing that the entrepreneur has tackled several hurdles and is aware of remaining hurdles and how to surmount them. Specific mention should be made of the results of alpha (internal) and beta (external with potential customers) product testing. If alpha or beta tests are upcoming, mention how these tests will be conducted. Single product companies can be a concern for investors. It is always beneficial to include ideas and plans for future products/services. If the plan demonstrates the viability of several products, an investor will see an opportunity to grow a successful business.

3. Market Analysis

The analysis of market potential separates the entrepreneurs from the inventors. Many good products are never successfully commercialized because their inventors don’t stop to understand the market or assemble the management team necessary to capitalize on the opportunity. This section of the business plan will be scrutinized carefully; market analysis should therefore be as specific as possible, focusing on believable, verifiable data. Market Research should contain a thorough analysis of the company’s industry and potential customers. Industry Data should include growth rates, size of the market, recent technical advances, government regulations and future trends. Customer Research should include the number of potential customers, the purchase rate per customer, and a profile of the decision-maker. This research drives the sales forecast and pricing strategy, which relates to all other strategies in marketing, sales and distribution. Finally, comment on the percentage of the target market the company plans to capture.

4. Management & Ownership

Venture capitalists invest in people - people who have run or who are likely to run successful operations and hence the company’s management team is always closely looked at. The team should have experience and talents in the key disciplines: technological development, marketing, sales, manufacturing and finance. This section of the plan should therefore introduce the members of your management team and what they bring to the business. Detailed resumes should be included in an appendix.

The management team in most start-up companies includes only a few founders with varied backgrounds and an idea. If there are gaps in the team it is important to mention them and comment on how the positions will be filled. Glossing over a key unfilled position will raise red flags. Often, because venture capital investors have access to networks of management talent, they can provide a list of proven candidates appropriate for these crucial positions. Include a list of the board of directors or advisors: key outside industry or technology experts who lend guidance and credibility. This is another area where empty positions may be filled from suggestions of a well-net-worked investor.

5. Marketing Plan

The primary purpose of the marketing section of a business-plan is to convince the venture capitalist that the market can be developed/penetrated and the sales projections contained herein drive the rest of the business plan by estimating the rate of growth of operations and the financing required. The plan should have an outline of pricing, distribution channels and promotion.

Pricing

The strategy used to price a product or service provides an investor with insight for evaluating the strategic plan. Explain the key components of the pricing decision, i.e., image, competitive issues, gross margins, and the discount structure for each distribution channel. Pricing strategy should also involve consideration of future product releases and future products.

Distribution Channels

A manufacturer’s business plan should clearly identify the distribution channels that will get the product to the end-user. For a service provider, the distribution channels are not as important as are the means of promotion. Distribution options for a manufacturer may include:

1. Direct Sales, such as mail-order, direct contact through salespeople, and telemarketing

2. Original Equipment Manufacturers (OEM) - integration of the product into other manufacturers’ products

3. Distributors or Wholesalers

4. Retailers.

Each of these methods has its own advantages and disadvantages and financial impact, and these should be clarified in the business plan. For example, assume the company decided to use direct sales because of the expertise required in selling the product. A direct sales force increases control, but it requires a significant investment. A venture capitalist will look to the entrepreneur’s expertise as a salesperson, or to the plans to hire, train and compensate an expert sales force. If more than one distribution channel is used, they should all be compatible. For example, using both direct sales and wholesalers can create channel conflict if not managed well.

Fully explain the reasons for selecting these distribution approaches and the financial benefits they will provide. The explanation should include a schedule of projected prices, with appropriate discounts and commissions as part of the projected sales estimates. These estimates of profit margin and pricing policy will provide support for the decision.

Promotion

The marketing promotion section of the business plan should include plans for public relations, potential advertising plans, online strategy, trade show schedules and other promotional vehicles to be used. The venture capitalist must be convinced that the company has the expertise to move the product to market. A well-thought-out promotional approach will set the business plan apart from the competition. It is important to explain the thought process behind the selected sources of promotion and the reasons for those not selected.

6. Competition

A discussion of the competition is an essential part of the business plan. Every product or service has competition; even if the company is first-to-market, the entrepreneur must explain how the market’s need is currently being met and how the new product will compete against the existing solution. The venture capitalist will be looking to see how and why the firm will beat the competition. The business plan should analyze the competition, giving strengths and weaknesses relative to the product. Attempt to anticipate competitive response to the product. Include, if possible, a direct product comparison based on price, quality, warranties, product updates, features, distribution strategies, and other means of comparison. Document the sources used in the analysis.

7. Operations

The operations section of the business-plan should discuss the location and size of the facility. If one location is selected over another, be sure to include justification. Factors such as the availability of labor, accessibility of materials, proximity to distribution channels, and tax considerations should be mentioned. Describe the equipment and the facilities. If more equipment is required in response to production demands, include plans for financing. If the company needs international distribution, mention whether the operations facility will provide adequate support. If work will be outsourced to subcontractors, eliminating the need to expand facilities, state that, too. The investor will be looking to see if there are inconsistencies in the business plan.

If a prototype has not been developed or there is other uncertainty concerning production, include a budget and timetable for product development. The venture capitalist will be looking to see how flexible and efficient the facility plans are. The venture capitalist will also ask such questions as:

1. If sales projections predict a growth rate of 25 percent per year, does the current site allow for expansion?

2. Are there suppliers who can provide the materials required?

3. Is there an educated labor force in the area?

These and any other factors that might be important to the investor should be included. The sales projections will determine the size of the operation and thereby the funds required both now and in the future. Include the sources and uses of financing in the business plan, and be certain the assumptions are realistic. The timing and the amount of funds will be derived from the sales estimates.

Preparing the Financials

1. The Purpose of Financial Forecasts

Developing a detailed set of financial forecasts demonstrates to the investor that the entrepreneur has thought out the financial implications of the company’s growth plans. Good financial forecasts integrate the performance goals outlined in the plan into financial goals so that return on investment, profitability and cash flow milestones can be clearly stated. Investors use these forecasts to determine if (a) the company offers enough growth potential to deliver the type of return on investment that the investor is seeking, and (b) the projections are realistic enough to give the company a reasonable chance of attaining them.

2. Content of Financial Forecasts

Investors expect to see a full set of cohesive financial statements, including a balance sheet, income statement and cash-flows statement, for a period of three to five years. It is customary to show monthly statements until the breakeven point or profitability is reached. Thereafter, quarterly statements should be prepared for two years, followed by yearly data for the remaining timeframe. The forecasts should include a footnote that explains the major assumptions used to develop revenue and expense items.

It is not advisable to “ramp up” sales and expenses in sequential fashion—this gives the impression that the financial implications of the plan have not been fully thought out. Prepare the financial projections as the final step in putting together the plan. The following section contains some helpful hints on how to develop sound assumptions from which to base projections.

3. Assumptions to Use in Forecasts

Sales

Preparing the sales forecasts can be a difficult process, especially in a developing or niche market. Typically, the plan should state an average selling price per unit along with the projected number of units to be sold each reporting period. Sales prices should be competitive with similar offerings in the market and should take into consideration the cost to produce and distribute the product.

Cost of Sales

Investors will expect accurate unit cost data, taking into consideration the labor, material, and overhead costs to produce each unit. Have a good grasp on initial product costing so it is protected against price pressure from competitors. This data will also be important for strategic “make versus buy” decisions.

Product Development

Product development expenses should be closely tied to product introduction timetables elsewhere in the plan. These expenses are typically higher in the early years and taper off because product line extensions are less costly to develop. Investors will focus on these assumptions because further rounds of financing may be needed if major products are not introduced on time.

Other Expenses

A detailed set of expense assumptions should take into consideration headcount, selling and administrative costs, space, and major promotions. It is useful to compare final expense projections with industry norms. All expense categories should be considered.

Balance Sheet

The balance sheet should agree with the income and cash flows statement. Consideration should be given to the level of inventory and capital expenditures required to support the projected sales level. It is important to limit capital expenditures at the outset to current requirements because cash will be harder to come by if fiscal restraint is not demonstrated to investors. It is generally better to rent or lease capital equipment in the first few years in order to conserve cash for marketing and selling expenses that will generate sales.

Cash Flows

The cash-flows statement must correlate to the balance sheet and income statement and should mirror the timing of the funding requirements stated in the plan. Investors will study the cash-flows statement to deter-mine when cash-flow breakeven is expected and when periodic needs are anticipated. Venture capital firms set aside a certain percentage of their funds for follow-on financing to address these periods of need by their portfolio companies, but the cost in lower valuations for unanticipated financing can be high. This is why it is important to set realistic forecasts so that the initial request covers the capital needs until the business can complete milestones leading to higher valuations in future rounds. The assumptions are included as a guide and may not apply to all start-up companies. Be sure to consult a financial advisor.

Examples of Financial Forecasts, “Business plan do’s and don’t’s” as well as “All about an executive summary” are available by mail. For queries and obtaining of these three documents please mail: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

The author of the article Bijou Lall runs an investment advisory and business-planning firm called Alliances International.

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