Business Plans: the structure & the process
This chapter defines business plans, describes the different types that exist, and also discusses contrasting views as to what a successful business plan should contain.
Defining a Business Plan
A Business Plan is a written document that carefully explains every aspect of a new busi-ness venture (Barringer, 2009). Kuratko and Hornsby (2009) define it as a written docu-ment that describes in detail a proposed venture with the purpose of illustrating the current status, identifying expected needs, and showing the projected results of a new and expand-ing business. With the inclusion of each and every component of the business plan, a clear picture will be shown of the venture and where it is going as well as the necessary steps the entrepreneur plans to use to get to the ultimate end goal. Barringer (2009) goes further to say that besides acting as a physical manuscript necessary to show to investors and other parties, it also is a way of illustrating the passion, drive and energy that the individual has when it comes to his business idea and execution.
A Business Plan can be very important to FTEs as well as to individuals who may stand to benefit or lose from the execution of this idea. Kuratko and Hornsby (2009) view the busi-ness plan as the deterrent from failure. It is important that the entrepreneur understand each component of the business plan despite possibly seeking aid from outside profession-als and experts. To gain support, the entrepreneur must be clear and focused, and he must of course stand behind his idea and the business plan itself. Kuratko and Hornsby (2009) identify five benefits that entrepreneurs can gain from creation of this document:
- The time, effort, research, and discipline needed to create a formal business plan force entrepreneurs to view the venture critically, objectively, and holistically.
- The competitive, economic, and financial analyses included in the business plan subject entrepreneurs to close scrutiny of their assumptions about the venture‟s Because all aspects of the business venture must be addressed in the plan, entrepre-neurs develop and examine operational strategies and expected results for outside evaluators.
- The business plan quantifies goals and objectives, which provide measurable benchmarks for comparing forecasts with actual results.
- The completed business plan provides entrepreneurs with a communication tool for outside financial sources as well as an operational tool for guiding the venture towards success.
Business plans can be used not only to follow the proposed direction of the venture but also to convince the various stakeholders of the potential of the business (Timmons, Zacharakis & Spinelli, 2004). It is thus important to know who the business plan is for and how the target group will react towards it. For example, in situations where funding is re-quired, Mason and Stark (2004) suggest that Business plans should be tailored depending on the type of financier that will be approached. Based on their conducted research, a Business Plan should appropriately be customised as follows:
- Bankers consider the financial aspects of the plan to be critical and thus place min-ute emphasis on other issues such as the Market and the Entrepreneur
- If the target financiers are Equity Investors, Capitol Fund managers, Business An-gels or Venture Capital Fund managers then it is essential to mutually emphasize the market and financial components.
From this, we can identify that different financial groups are unique in determining what they consider to be important aspects.
The Business Plan is the second step once the idea has been derived. Kuratko and Hornsby (2009) sum up in a few sentences their overall view of this document‟s importance:
“…the business plan is the major tool for guiding the operation of the venture as well as the primary document for managing it. Its main thrust is the strategic de-velopment of the project compiled into a comprehensive document for outside in-vestors to read and understand. It allows entrepreneurs entrance into the invest-ment process. A subsidiary benefit is that it enables the enterprise to avoid common pitfalls that cause less – organized efforts to fail.” (p 77).
What this means is that writing a business plan is a way for the company to create specific directives that can be used to follow a certain development path. This can be used inter-nally within the company or as a means by which external parties can obtain a general pic-ture of what is happening or will happen within the company and track the progression.
Types of Business Plans
Business plans vary in terms of the level of detail used. Schwetje and Vaseghi (2007) indi-cate that the degree of detail included depends entirely upon the purpose and necessity be-hind the business plan, and the complexity of the particular business. These authors iden-tify three basic types of business plans: the Short Business Plan, the Extended Business Plan and the Operational Business Plan.
Short Business Plan
This type, like the name suggests is condensed and comprised of the same information as other business plan; with the necessitated information outlined in a suitable manner. Short business plans are suited to small start – up companies in their initial stages of development with the main task being to convince prospective investors of the entrepreneur‟s under-standing of the business and target market. This can also be used by well – established companies but usually it is solely for the purpose of describing a specific investment oppor-tunity for approval before creating an extended version.
Extended Business Plan
This version of the business plan usually goes into greater detail than the Short version. The difference here is that the Extended Business plan includes a comprehensive market analysis and the revenue, cost and financial planning for a period of no more than 5 years.
Operational Business Plan
This type tends to be utilized by well – established companies. It is used as a way to docu-ment the activities of the company as well as show evidence of company objectives which management is supposed to adhere to. From this, management is able to make sure that they actually meet their objectives at every step of the way. This version tends to be very detailed and can be extremely lengthy.
Business Plans, despite being of different types, usually have similar requirements. The in-formation itself may differ depending on the industry or the business idea and concept. However, potential investors look for certain aspects. The task therefore is to determine what information is necessary for the targeted investor.
Business Plans: The Features that attract Success
The publications available on today‟s market tend to contain the same information some-times grouped into different categories or explained under different headings. Templates have been created which are deemed suitable for use by first – time entrepreneurs, and au-thors have justified the relevance of the inclusion of certain information. These templates tend to have the content organized in the way that authors believe to be important to in-vestors. However, this tends to differ from one template to the next.
Business Plans generally have ten main components. This number of course varies depend-ing on the creator. All business plans contain an executive summary which serves to cap-ture the reader‟s attention and entice them to read more (Barringer, 2009). The second component is an industry, customer and competitor analysis which lays the foundation for the company to introduce its vision to prospective readers (Timmons et al, 2004). There are also a Company and Product / Service description, which describes the new company and the new product or service being offered, and a Marketing Plan, which describes strategies that will be used to achieve success. Business Plans can include sections dealing with the operations of the company, the development over time, the team that will run the company, the risks that can influence survival and the amount of capital that will be needed. Finally, there is a section which shows the company‟s intentions expressed in fi-nancial terms. These components of the business plan have been further explained in Ap-pendix 1.
Several authors have formulated different structures in writing a business plan, however they all contain the same relevant information and they all maintain that following their frameworks will guarantee the success rate of the business plan. Additionally, to support first – time entrepreneurs, Kuratko & Hornsby (2009) pose a series of questions which could help to determine what information should be included. These can be found in Ap-pendix 2.
With the availability of various books on writing business plans, there is a high possibility that entrepreneurs may experience difficulty in identifying books and templates that may be the most appropriate. At the same time, they may attempt to figure out if it is absolutely necessary to include all of the information proposed by the book despite the fact that it may seem irrelevant based on the purpose and idea. Well, according to William A. Sahlman (2008), it is not the best idea to create a highly detailed business plan. Through research he has found that despite the widely proposed belief that writing a business plan is the only hurdle that must be crossed by entrepreneurs in order to achieve their goals, it is simply in-sufficient to become successful. He stated that the more detailed the document is, the lower the chance of a winning venture being created.
Writing Business Plans: Sahlman’s Framework
Business Plans are not without their fair share of problems. In many instances, the various information available does not explicitly state these and thus they are not as obvious to in-experienced entrepreneurs. Sahlman (2008) says that there are two main problems with the business plans. The first is that many business plans waste time and effort on including numbers rather than paying more attention to the information that is really important to potential investors. Secondly, a new venture has too many unknowns and so it is difficult to accurately forecast revenues and hence, profits.
The knowledge of problems can create the ability to derive an appropriate framework. Sahlman (2008) believes that a business model should be created which shows both the break – even level and numbers which prove to readers of the business plan that entrepre-neurs have thought of the issues which could, in the end, result in either success or failure. His view is that even though these should be included within the business plan, they should only account for a few pages towards the end. A view that is contrary to those expressed in the content of business plan publications.
Sahlman instead suggests a framework which, unlike the promise of complete success given by many current publications, simply helps a new firm to analyse what he considers to be the four factors critical to all new ventures: the People, the Opportunity, the Context, and Risks and Rewards.
The initial component of this framework is basically to get an idea of the people starting the new venture, and external groups and individuals who provide necessary services. There are fourteen questions that investors ask to familiarize themselves with the entrepre-neurs (Appendix 3) and the whole aim of posing these questions is to address three main issues: What do they know? Whom do they know? and How well are they known?
A business plan should clearly illustrate the knowledge that each team member possesses about the new product or service offering, the production process and finally the market, with a special focus on competitors and customers. If an entrepreneurial team is well known, a high possibility of the venture being viewed favourably exists. This reassures in-vestors who are usually inclined to avoid taking chances on unknowns due to the high lev-els of risk and unpredictability that they tend to be associated with.
This reaction towards uncertainty suggests that this section is the most important to inves-tors. According to Sahlman (2008), the majority of venture capitalists pay less attention to ideas and more to the ability to execute these ideas. He provided the following quote by Arthur Rock, a venture capitalist associated with establishment of some of the world‟s larg-est companies, such as Apple:
“I invest in people, not ideas…if you can find good people, if they’re wrong about the product, they’ll make a switch, so what good is it to understand the product that they’re talking about in the first place?” (p. 11)
From this, Sahlman deduced that when writing this section, it is important to provide a lot of information about the people involved. Unlike many business plan books which say that gaps in teams can be filled on later occasions, he believed that if there is nothing special about the knowledge and experience of team members, teams should re – think the venture idea.
The Opportunity section involves a descriptive profile of the new venture. The aim is to describe the products or services the company will sell, the potential target customers, growth possibilities and the time line through which these may occur, its economics and fi-nally any barriers that can hinder success. Shalman suggested that an ideal business plan should begin by focusing on two specific questions: Is the total market for the venture‟s product or service large, rapidly growing, or both? and Is the industry now or, does it have the potential to become, structurally attractive?
It is believed that many investors prefer large or rapidly growing markets mainly because it is easier to become established, secure an appropriate market share and achieve a certain profit level. Using this framework, it is the task of entrepreneurs to ensure that the industry matches their expectations and this must be made aware to potential investors. If the situa-tion is opposite from the desired state, the entrepreneurial team has the task of convincing investors and stakeholders about the profit potential that can be derived. Once investors are aware of these details, the business plan should show how the company will develop its product or service and how it will initiate its presence on the market. To guide this, Shal-man proposes nine questions that about the business that should be addressed within the business plan (Appendix 3). These questions can be used by the new enterprise to make an attempt at understanding the potential customers, which may initially be difficult. This un-derstanding must be documented in the business plan.
The Opportunity section of the business plan should address certain issues. It must explain and analyze exactly how the growth of an opportunity can be achieved, the current product or service range, the number of customers, the competitors, and how the overall scope can be developed over a period of time. The overall aim of this section is thus to ensure that the entrepreneur knows the positive and negative trends that the new business may face in the near future.
The Context mainly deals with external factors which, if changed, can seriously affect the opportunity. Entrepreneurs have no influence over these factors. These could include in-terest rates, demographic changes, government regulations and inflation.
Context can greatly influence the entire entrepreneurial process and can create difficulties when it comes to launching new ventures. It can also exerts influence over the entire state of the industry. It is therefore critical that a business plan contains specific issues relating to Context. In business plans, entrepreneurs must show the role of context on the develop-ment of new ventures. This helps to exhibit the knowledge with regards to the instability of context, and the methods that will be used to deal with it. It is of course important to state the effects that context can have on the launching of the venture. In the end, the business plan must show what management can do in order to bestow positive influences upon con-text, of course, this is only if there are any available.
Risk and Reward
Risk and Reward assesses every possible thing that can go wrong for the new venture and how entrepreneurs will be able to respond accordingly if, and when, they arise. When ana-lyzing risks, it is important to look at those associated with people, opportunities and con-text. Investors prefer to see business plans which acknowledge risks, ask questions, and of-fer suitable and justifiable responses. After analyzing all available risks, the investors want to see the beneficial attributes. For example, investors may want to know whether or not the company can be taken public in the future (Sahlman, 2008). In the end, the business plan should exhibit and prove to them that financial gains do exist.
FTEs and the Business Plan selection process
The assumption behind Sahlman‟s framework is that businesses have characteristics and traits which, despite being readily identifiable, can still prove to be difficult to bring to-gether. Moving along the route from idea to venture launch and then to success is, and will continue to be, risky. As a result, the best business plans should demonstrate awareness and the knowledge of how they will navigate along this route. This of course requires the use of appropriate entrepreneurial strategies. An attractive business plan should therefore ideally focus on the many dynamic aspects which are characteristic of the entrepreneurial process.
When a comparison is made between Sahlman‟s framework and frameworks and templates that exist in today‟s literature it is seen that different frameworks suggest emphasis on dif-ferent areas. If entrepreneurs are to evaluate dissimilar frameworks when trying to deter-mine a suitable one for the first time, there are chances that the level of confusion increases and the task becomes more complicated. This is especially the case where they are faced with opinions on important factors coming from varying angles. As a result, it could make the process even more challenging. So the important factor is to know what entrepreneurs have to be aware of when facing this task for the first time.
The Importance of Creating Business Plans
Entrepreneurship, and in particular business planning, is becoming a very powerful force. With the increase in entrepreneurial activities and the number of ventures being established in recent years, it has become vital for business plans to be written based on theoretical standpoints. It is therefore essential to know exactly what a business plan is and its impor-tance to the entrepreneurial process. Additionally, it is important to identify the different types that exist today so that the document that is written matches the relevant business concept.
A suitable business plan is often required depending on the situation, and so investigations must be conducted to determine what is necessary for this document. What is important of course depends on the business idea itself and the type of business plan that is required. As a result, it is crucial to look at and analyze different views on the subject.
1 Business Plans and the Entrepreneurial Process
1.2 Problem Statement
1.3 Purpose Statement
1.4 Defining “Easy”
1.5 Selection of Research Study
1.6 Definition of Terms
1.7 Organization of Research Study
2 Business Plans: the structure & the process
2.1 Defining a Business Plan
2.2 Types of Business Plans
2.3 Business Plans: The Features that attract Success
2.4 The Importance of Creating Business Plans
3 Industry’s View on Business Plans
3.1.1 Knowledge and its role in writing Business plans
3.2 Summary of the Industry View
4.1 Data Collection
4.2 Analysis Methods
4.4 Credibility of Research Study
4.5 Type of Business Plan used in the Research study
5 Empirical Study
5.1 Niyan Fraser
5.2 Manny Gradenski
5.3 Markus Dere and Aaron Castro Gonzalez
6 Empirical Analysis
6.1 Interpretation of Findings
6.2 Analysis of Findings
6.3 Relationships & Derived Conclusions
8 Future Research
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WRITING BUSINESS PLANS IS IT POSSIBLE TO DEFINE THIS TASK AS “EASY” OR LESS CHALLENGING FOR FIRST – TIME ENTREPRENEURS (FTEs)?