Chart 2.1 Schematic of Chapter 2
Purpose of Writing a Business Plan
Most entrepreneurs prepare a business plan for two reasons: to provide a road map for developing, managing, and operating the business and to raise outside equity or debt capital. While arguments can be made for and against writing a business plan, if financing is needed from an outside source, then a business plan needs to be written for this source to review.
Writing a business plan can be very difficult for entrepreneurs, as they are usually individuals characterized as doers, not planners. But it is not acceptable to hire someone to write the plan, as the task needs to be done personally. While outsiders (accountants, consultants, lawyers) can be used for input in terms of numbers and pieces of the plan, the final business plan needs to be developed and written by the entrepreneur and any initial top management team members when needed and appropriate. By doing this, the entrepreneur ensures that he or she is very familiar with all the details of the plan to be able to present it to outside sources of finance and make sound decisions that will affect the new venture. Every outside investor expects the entrepreneur to be knowledgeable about and totally involved in the proposed enterprise.
Developing the business plan takes energy, money, and time, with time being one of the most costly aspects. Since each business plan deals with an economy(s) and industry(s), a hidden cost of writing a business plan is a psychological one—understanding and knowing that anything can go wrong. This is particularly difficult for entrepreneurs who are overall optimistic and believe in themselves and their capabilities.
Benefits of a Business Plan
Since a business plan details the entrepreneur's vision in writing and indicates the implementation strategy and the costs involved, it has several benefits:
1 Determining the amount and timing of resources needed. The business plan indicates the existing resources of the firm, the resources needed, and some potential suppliers of these resources. This allows the entrepreneur to determine how much money is needed at various times to obtain these resources and what approach to develop and use to obtain the money as well as any other resources. The money will be obtained from outside capital providers. Other resources needed are in the areas of supply, distribution, personnel, and support services.
2 Establishing the direction of the firm. Since the business plan is a comprehensive document, it treats all the major issues faced starting and growing the venture. This enables the entrepreneur to develop strategies and contingency plans to reduce the impact of any problems.
3 Guiding and evaluating. By setting goals and milestones for the new venture, the business plan lays out the intentions of the entrepreneur as well as his or her values. Accomplishments and results can be measured and any deviations from the plan corrected in a timely manner. These results should be reported to all interested stakeholders and to outside providers of financial resources on a regular basis, usually four times a year if not more frequently, such as every month in at least the first year.
4 Avoiding conflicts. By being put together by the entrepreneur and the management team and being reviewed and revised frequently, the business plan can be used to guide decisions and help avoid conflicts among the entrepreneur, management team, employees, outside vendors, and financial providers. The amount of energy and resources needed to launch and grow something new is enormous, with the risks being high; the new firm requires reinvestment and seems to always need more time and money. This requires significant sacrifice by the entrepreneur in terms of short-term income and people and family. There are often individuals hurt by the tough personal decisions that an entrepreneur needs to make.
Elements of the Business Plan
While there are some variations on what goes into a successful business plan, they all have the same essential elements (aspects). These can be grouped into three sections:
Section 1: IntroductionTitle (Cover) PageTable of ContentsExecutive Summary
Section 2: Body of the Business PlanDescription of BusinessDescription of IndustryTechnology PlanMarketing PlanFinancial PlanProduction (Outsourcing) PlanOrganizational PlanOperational PlanSummary
Section 3: Support (Backup) MaterialExhibit A: Résumés of PrincipalsExhibit B: Market StatisticsExhibit C: Market Research DataExhibit D: Competitive BrochuresExhibit E: Competitive Price ListsExhibit F: Leases and ContractsExhibit G: Supplier Price Lists
Each of these sections, as detailed in Table 2.1, will be discussed in turn.
Table 2.1
Section 1: Introduction
Section 1 contains the title (cover) page, table of contents, and executive summary. The title (cover) page is an important part of every business plan, as it has the following:
1 The company name, address, telephone, fax, e-mail address, and website.
2 Name and position of each member of the management team and the contact person.
3 The purpose of the plan, the amount of money needed, and funding increments
4 At the bottom of the title page: “This is confidential business plan number ____.” A low number should be put in for each business plan given out and when, and who received this numbered plan should be tracked for a 30-day/60-day/90-day period.
The first page after the title (cover) page is the table of contents. This follows the usual format and lists at least the major subsections in each section and the corresponding page number as well as each figure, table, and exhibit. Preferably each major subsection and smaller subsections should be labeled as 1.0, 1.1, 1.2, 2.0, 2.1, 2.3, and so on. The executive summary precedes the numbering and therefore either has no number or smaller letters or Roman numerals. The tables and figures should have a separate list, as should the exhibits (appendices).
The last item in Section 1, following the table of contents, is the all-important two-page executive summary. This is by far the most important document in the business plan, as it is often used as the screening section by investors who often decide not to read the entire plan. Many readers, including potential providers of capital, never read beyond the executive summary. One head of a very successful venture fund, who is now managing his eighth fund of over $850 million, indicated that he receives about 1,500 business plans a year, discards 1,400 based on the cover page or executive summary, and, of the remaining 100, will discard 80 after the first 1- to 2-hour examination. Of the remaining 20, about 4 to 6 will receive investment from his fund. So the executive summary needs to be very well written to invite further reading of the business plan.
The executive summary should have the name of the company and address at the top of the first page that appeared on the title (cover) page. It should begin with defining the nature and size of the problem existing. In the case of TerraPower, the problem is a large, critical one—the need for low-cost, clean electrical energy. The larger and more critical the problem, the more interest there will be on the part of investors and others.
This needs to be followed by your proposed solution to the problem. Again, for TerraPower, this is providing low-cost, clean electricity through a new traveling wave reactor (TWR) technology that runs on depleted uranium. In this section, all competitive ways to solve the problem should be discussed showing the uniqueness or the unique selling propositions of your solution. These would include nuclear, solar, cool, and geothermal energy for TerraPower.
Following