CHAPTER SIX
Conducting a Feasibility
Analysis and Crafting a
Winning Business Plan
Learning
Objectives
Upon completion of this
chapter, you will be able to:
1 Present the steps involved in
conducting a feasibility
analysis.
2 Explain the benefits of
creating an effective business
plan.
3 Explain the three tests every
business plan must pass.
4 Describe the elements of a
solid business plan.
5 Explain the “five Cs of
credit” and why they are
important to potential
lenders and investors
reviewing business plans.
6 Understand the keys to
making an effective business
plan presentation.
Before you build a better mouse trap, it helps to know if there are
any mice out there.
—Mortimer B. Zuckerman
Good fortune is what happens when opportunity meets with
planning.
—Thomas Alva Edison
159
160
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
For many entrepreneurs, the easiest part of launching a business is coming up with an idea for a
new business concept or approach. Business success, however, requires much more than just a
great new idea. Once entrepreneurs develop an idea for a business, the next step is to subject it
to a feasibility analysis to determine whether they can transform the idea into a viable business.
A feasibility analysis is the process of determining whether an entrepreneur’s idea is a viable
foundation for creating a successful business. Its purpose is to determine whether a business idea
is worth pursuing. If the idea passes the feasibility analysis, the entrepreneur’s next step is to build
a solid business plan for capitalizing on the idea. If the idea fails to pass muster, the entrepreneur
drops it and moves on to the next opportunity. He or she has not wasted valuable time, money, energy, and other resources creating a full-blown business plan, or worse, launching a business that
is destined to fail because it is based on a flawed concept. Although it is impossible for a feasibility study to guarantee an idea’s success, conducting a study reduces the likelihood that entrepreneurs will waste their time pursuing fruitless business ventures.
A feasibility study is not the same as a business plan; both play important, but separate,
roles in the start-up process. A feasibility study answers the question, “Should we proceed with
this business idea?” Its role is to serve as a filter, screening out ideas that lack the potential for
building a successful business, before an entrepreneur commits the necessary resources to
building a business plan. A feasibility study primarily is an investigative tool. It is designed to
give an entrepreneur a picture of the market, sales, and profit potential of a particular business
idea. Will a ski resort located here attract enough customers to be successful? Will customers
in this community support a sandwich shop with a retro rock-n-roll theme? Can we build the
product at a reasonable cost and sell it at a price customers are willing and able to pay? Does
this entrepreneurial team have the ability to implement the idea successfully?
A business plan, in contrast, is a planning tool for transforming an idea into reality. It builds
on the foundation of the feasibility study but provides a more comprehensive analysis than a feasibility study. It functions primarily as a planning tool, taking an idea that has passed the feasibility analysis and describing how to turn it into a successful business. Its primary goals are to guide
entrepreneurs as they launch and operate their businesses and to help them acquire the financing
needed to launch.
Feasibility studies are particularly useful when entrepreneurs have generated multiple ideas
for business concepts and must winnow their options down to the “best choice.” They enable entrepreneurs to explore quickly the practicality of each of several potential paths for transforming
an idea into a successful business venture. Sometimes the result of a feasibility study is the realization that an idea simply won’t produce a viable business—no matter how it is organized. In
other cases, a study shows an entrepreneur that the business idea is a sound one but it must be organized in a different fashion to be profitable.
Research suggests that, whatever their size, companies that engage in business planning outperform those that do not. A business plan offers:
䊏
䊏
䊏
䊏
A systematic, realistic evaluation of a venture’s chances for success in the market
A way to determine the principal risks facing the venture
A “game plan” for managing the business successfully
A tool for comparing actual results against targeted performance
䊏 An important tool for attracting capital in the challenging hunt for money
The feasibility study and the business plan play important but separate roles in the start-up
process. This chapter describes how to build and use these vital business documents, and it will
help entrepreneurs create business plans that will guide them on their entrepreneurial journey and
help them attract the capital they need to launch and grow their businesses.
Conducting a Feasibility Analysis
1. Present the steps involved in
conducting a feasibility analysis.
A feasibility analysis consists of three interrelated components: an industry and market feasibility analysis, a product or service feasibility analysis, and a financial feasibility analysis (see
Figure 6.1). “Making a critical evaluation of your business concept at an early stage will allow
you to discover, address, and correct any fatal flaws before investing time in preparing your
business plan,” says Timothy Faley, managing director of the Samuel Zell & Robert H. Lurie
Institute for Entrepreneurial Studies at the University of Michigan.1
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
161
FIGURE 6.1
Elements of a Feasibility
Analysis
Product or
Service Feasibility
Industry and
Market Feasibility
Financial
Feasibility
Industry and Market Feasibility Analysis
When evaluating the feasibility of a business idea, entrepreneurs find a basic analysis of the
industry and targeted market segments a good starting point. The focus in this phase is twofold:
(1) to determine how attractive an industry is overall as a “home” for a new business and (2) to
identify possible niches a small business can occupy profitably.
The first step in assessing industry attractiveness is to paint a picture of the industry with
broad strokes, assessing it from a “macro” level. Answering the following questions will help
establish this perspective:
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
How large is the industry?
How fast is it growing?
Is the industry as a whole profitable?
Is the industry characterized by high profit margins or razor-thin margins?
How essential are its products or services to customers?
What trends are shaping the industry’s future?
What threats does the industry face?
What opportunities does the industry face?
How crowded is the industry?
How intense is the level of competition in the industry?
Is the industry young, mature, or somewhere in between?
Addressing these questions helps entrepreneurs determine whether the potential for sufficient
demand for their products and services exists.
A useful tool for analyzing an industry’s attractiveness is Porter’s Five Forces model developed by Michael E. Porter of the Harvard Business School (see Figure 6.2). Five forces interact
with one another to determine the setting in which companies compete and hence the attractiveness of the industry: (1) the rivalry among competing firms, (2) the bargaining power of suppliers,
FIGURE 6.2
Porter’s Five Forces
Model
Potential Entrants
Threat of New Entrants
Source: Adapted from Michael E.
Porter, “How Competitive Forces
Shape Strategy,” Harvard Business
Review, Volume 57, No. 2,
March–April 1979, pp. 137–145.
Reprinted by permission of Harvard
Business School Publishing.
Industry
Competitors
Suppliers
Bargaining Power
of Suppliers
Bargaining Power
of Buyers
Rivalry Among
Existing Firms
Threat of Substitute Products or Service
Substitutes
Buyers
162
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
(3) the bargaining power of buyers, (4) the threat of new entrants, and (5) the threat of substitute
products or services.
RIVALRY AMONG COMPANIES COMPETING IN THE INDUSTRY. The strongest of the five
forces in most industries is the rivalry that exists among the businesses competing in a particular
market. Much like the horses running in the Kentucky Derby, businesses in a market are jockeying for position in an attempt to gain a competitive advantage. When a company creates an innovation or develops a unique strategy that transforms the market, competing companies must
adapt or run the risk of being forced out of business. This force makes markets a dynamic and
highly competitive place. Generally, an industry is more attractive when:
䊏
䊏
The number of competitors is large, or, at the other extreme, quite small (fewer than five).
Competitors are not similar in size or capability.
䊏 The industry is growing at a fast pace.
䊏 The opportunity to sell a differentiated product or service is present.
BARGAINING POWER OF SUPPLIERS TO THE INDUSTRY. The greater the leverage that suppli-
ers of key raw materials or components have, the less attractive is the industry. For instance,
because they supply the chips that serve as the “brains” of PCs and because those chips make up
a sizeable portion of the cost of a computer, chip makers such as Intel and Advanced Micro
Devices (AMD) exert a great deal of power over computer manufacturers such as Dell, HP, and
Gateway. Generally, an industry is more attractive when:
䊏
䊏
䊏
Many suppliers sell a commodity product to the companies in it.
Substitute products are available for the items suppliers provide.
Companies in the industry find it easy to switch from one supplier to another or to substitute products (i.e., “switching costs” are low).
䊏 When the items suppliers provide the industry account for a relatively small portion of the
cost of the industry’s finished products.
BARGAINING POWER OF BUYERS. Just as suppliers to an industry can be a source of pressure,
buyers also have the potential to exert significant power over businesses, making it less attractive. When the number of customers is small and the cost of switching to competitors’ products
is low, buyers’ influence on companies is high. Famous for offering its customers low prices,
Walmart, the largest company in the world, is also well known for applying relentless pressure
to its 21,000 suppliers for price concessions, which it almost always manages to get.2 Generally,
an industry is more attractive when:
䊏
䊏
䊏
䊏
䊏
Industry customers’ “switching costs” to competitors’ products or to substitutes are
relatively high.
The number of buyers in the industry is large.
Customers demand products that are differentiated rather than purchase commodity products
that they can obtain from any supplier (and subsequently can pit one company against
another to drive down price).
Customers find it difficult to gather information on suppliers’ costs, prices, and product
features—something that is becoming much easier for customers in many industries to do
by using the Internet.
The items companies sell to the industry account for a relatively small portion of the cost
of their customers’ finished products.
THREAT OF NEW ENTRANTS TO THE INDUSTRY. The larger the pool of potential new entrants
to an industry, the greater is the threat to existing companies in it. This is particularly true in
industries where the barriers to entry, such as capital requirements, specialized knowledge,
access to distribution channels, and others are low. Generally, an industry is more attractive to
new entrants when:
䊏
The advantages of economies of scale are absent. Economies of scale exist when companies
in an industry achieve low average costs by producing huge volumes of items (e.g.,
computer chips).
䊏 Capital requirements to enter the industry are low.
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
163
䊏
䊏
Cost advantages are not related to company size.
Buyers are not extremely brand-loyal, making it easier for new entrants to the industry to
draw customers away from existing businesses.
䊏 Governments, through their regulatory and international trade policies, do not restrict new
companies from entering the industry.
THREAT OF SUBSTITUTE PRODUCTS OR SERVICES. Substitute products or services can turn an
entire industry on its head. For instance, many makers of glass bottles have closed their doors in
recent years as their customers—from soft drink bottlers to ketchup makers—have switched to
plastic containers, which are lighter, less expensive to ship, and less subject to breakage. Printed
newspapers have seen their readership rates decline as new generations of potential readers turn to
online sources of news that are constantly updated. Generally, an industry is more attractive when:
䊏
䊏
Quality substitute products are not readily available.
The prices of substitute products are not significantly lower than those of the industry’s
products.
䊏 Buyers’ cost of switching to substitute products is high.
After surveying the power these five forces exert on an industry, entrepreneurs can evaluate the
potential for their companies to generate reasonable sales and profits in a particular industry. In other
words, they can answer the question, “Is this industry a good home for my business?” Table 6.1
provides a matrix that allows entrepreneurs to assign quantitative scores to the five forces influencing industry attractiveness. Note that the lower the score for an industry, the more attractive it is.
The next step in assessing an industry is to identify potentially attractive niches. Many small
businesses prosper in a market by sticking to niches that are too small to attract the attention of
large competitors. Occupying an industry niche enables a business to shield itself to some extent
from the power of the five forces. The key question entrepreneurs must address is “Can we identify a niche that is large enough to produce a profit, or can we position our company uniquely in
the market to differentiate it from the competition in a meaningful way?” Entrepreneurs who have
designed successful focus or differentiation strategies for their companies can exploit these niches
to their advantage.
TABLE 6.1 Five Forces Matrix
Assign a value to rate the importance of each of the five forces to the industry on a 1 (not important) to
5 (very important) scale. Then assign a value to reflect the extent to which each force poses a threat to
the industry. Multiply the importance rating in column 2 by the threat rating in column 3 to produce
a weighted score. Add the weighted scores in column 3 to get a total weighted score. This score measures
the industry’s attractiveness. The matrix is a useful tool for comparing the attractiveness of different
industries.
Force
Importance
(1 Not Important,
5 Very Important)
Threat to Industry
(1 Low, 3 Medium,
5 High)
Weighted Score
Col 2 Col 3
Rivalry among companies
competing in the
industry
5
2
10
Bargaining power of
suppliers in the industry
2
2
4
Bargaining power of
buyers
2
4
8
Threat of new entrants
to the industry
3
4
12
Threat of substitute
products or services
4
1
4
Total
38
Minimum Score 5 (Very attractive)
Maximum Score 125 (Very unattractive)
164
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Questions entrepreneurs should address in this portion of the feasibility analysis include:
䊏
䊏
Which niche in the market will we occupy?
How large is this market segment, and how fast is it growing?
䊏 What is the basis for differentiating our product or service from competitors?
䊏 Do we have a superior business model that will be difficult for competitors to reproduce?
Companies can shield themselves from some of the negative impact of these five forces by
finding a niche and occupying it.
ENTREPRENEURIAL
Profile
Patrick Gottsch and
RFD-TV
Patrick Gottsch has found success in a niche in the competitive cable television business that is
dominated by giant companies. His RFD-TV, a television network he founded in 1988 in Omaha,
Nebraska, specializes in programming aimed at rural communities, broadcasting an unusual mix of
shows in four categories: agriculture (“This Week in AgriBusiness”), equine, (“Training Mules and
Donkeys”), entertainment (reruns of the 1970s variety show “Hee Haw” and new shows such as
the “Big Joe Polka Show”), and rural lifestyle (“Ms. Lucy’s Cajun Classroom”). Gottsch’s RFD-TV
has become one of the most successful networks you’ve never heard of, reaching 40 million homes
in 20 countries and generating $25 million in annual revenues.3
One technique for gauging the quality of a company’s business model involves business
prototyping, in which entrepreneurs test their business models on a small scale before committing
serious resources to launch a business that might not work. Business prototyping recognizes that
every business idea is a hypothesis that needs to be tested before an entrepreneur takes it to full
scale. If the test supports the hypothesis and its accompanying assumptions, it is time to launch a
company. If the prototype flops, the entrepreneur scraps the business idea with only minimal
losses and turns to the next idea.
The Internet is a valuable business prototyping tool because it gives entrepreneurs easy and
inexpensive access to real live potential customers. Entrepreneurs can test their ideas by selling
their products on established sites such as eBay or by setting up their own Web sites to gauge
customers’ response.
ENTREPRENEURIAL
Profile
Jennifer and Brad
Fallon and My Wedding
Favors
Jennifer and Brad Fallon were looking for a business that Jennifer could run from home. The idea
for an online wedding favors business came to Jennifer, whose corporate job required extensive
travel, while she was planning their wedding. She began to research the potential for her business idea and discovered that more than 100,000 people per month conduct online searches for
the term “wedding favors.” At that point, she says, “I knew the idea had potential.” Her research also revealed more than 822,000 existing Web sites that sold wedding favors, which
meant that a successful search engine marketing strategy would be a key success factor.
Fortunately, her husband Brad was a leading expert in that field!
To test their business idea, the Fallons set up a simple online store for just $50 per month
with Yahoo! In its first month of operation, My Wedding Favors generated $10,000 in sales.
Within 3 months, sales had grown to $80,000, and the Fallons knew that their business idea had
passed the feasibility test. The couple worked hard to refine their search engine optimization
strategy, and as sales continued to climb, they expanded their product line and rented a warehouse in which to store their inventory.
Jennifer continues to work from home even though My Wedding Favors has become a
leader in the market with a full-time staff of six employees and sales of $350,000 per month.4
Product or Service Feasibility Analysis
Once entrepreneurs discover that sufficient market potential for their product or service idea actually exists, they sometimes rush in with their exuberant enthusiasm ready to launch a business
without actually considering whether they can actually produce the product or provide the
service at a reasonable cost. A product or service feasibility analysis determines the degree to
which a product or service idea appeals to potential customers and identifies the resources necessary
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
165
to produce the product or provide the service. This portion of the feasibility analysis addresses
two questions:
䊏
䊏
Are customers willing to purchase our goods and services?
Can we provide the product or service to customers at a profit?
Entrepreneurs need feedback from potential customers to successfully answer these questions.
Conducting primary research involves collecting data firsthand and analyzing it; secondary
research involves gathering data that has already been compiled and is available, often at a very
reasonable cost or sometimes even free. In both types of research, gathering both quantitative and
qualitative information is important to drawing accurate conclusions about a product’s or service’s
market potential. Primary research tools include customer surveys, focus groups, prototypes, and
in-home trials.
CUSTOMER SURVEYS AND QUESTIONNAIRES. Keep them short. Word your questions care-
fully so that you do not bias the results and use a simple ranking system (e.g., a 1-to-5 scale, with
1 representing “definitely would not buy” and 5 representing “definitely would buy”). Test your
survey for problems on a small number of people before putting it to use. Web surveys are
inexpensive, easy to conduct, and provide feedback fast.
FOCUS GROUPS. A focus group involves enlisting a small number of potential customers (usu-
ally 8 to 12) to provide feedback on specific issues about your product or service (or the business
idea itself). Listen carefully for what focus group members like and don’t like about your product or service as they tell you what is on their minds. The founders of one small snack food company that produced apple chips conducted several focus groups to gauge customers’ acceptance
of the product and to guide many key business decisions, ranging from the product’s name to its
packaging. Once again, consider creating virtual focus groups on the Web; one small bicycle
retailer conducts 10 online focus groups each year at virtually no cost and gains valuable marketing information from them. Feedback from online customers is fast, convenient, and real-time.
PROTOTYPES. An effective way to gauge the viability of a product is to build a prototype of it. A
prototype is an original, functional model of a new product that entrepreneurs can put into the hands
of potential customers so that they can see it, test it, and use it. Prototypes usually point out potential
problems in a product’s design, giving inventors the opportunity to fix them even before they put the
prototype into customers’ hands. The feedback customers give entrepreneurs based on prototypes
often leads to design improvements and new features, some of which the entrepreneurs might never
have discovered on their own. Makers of computer software frequently put prototypes of new products into customers’ hands as they develop new products or improve existing ones. Known as beta
tests, these trials result in an iterative design process in which software designers collect feedback
from users and then incorporate their ideas into the product for the next round of tests.
IN-HOME TRIALS. One technique that reveals some of the most insightful information into how
customers actually use a product or service is also the most challenging to coordinate: in-home
trials. An in-home trial involves sending researchers into customers’ homes to observe them as
they use the company’s product or service.
Secondary research, which is usually less expensive to collect than primary data, includes the
following sources.
TRADE ASSOCIATIONS AND BUSINESS DIRECTORIES. To locate a trade association, use
Business Information Sources (University of California Press) or the Encyclopedia of
Associations (Gale Research). To find suppliers, use The Thomas Register of American
Manufacturers (Thomas Publishing Company) or Standard and Poor’s Register of Corporations,
Executives, and Industries (Standard and Poor Corporation). The American Wholesalers and
Distributors Directory includes details on more than 18,000 wholesalers and distributors.
DIRECT MAIL LISTS. You can buy mailing lists for practically any type of business. The
Standard Rates and Data Service (SRDS) Directory of Mailing Lists (Standard Rates and Data)
is a good place to start looking.
166
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
DEMOGRAPHIC DATA. To learn more about the demographic characteristics of customers in
general, use The Statistical Abstract of the United States (Government Printing Office). Profiles
of more specific regions are available in The State and Metropolitan Data Book (Government
Printing Office). The Sourcebook of Zip Code Demographics (CACI, Inc.) provides detailed
breakdowns of the population in every zip code in the country. Sales and Marketing
Management’s Survey of Buying Power (Bill Communications) has statistics on consumer, retail,
and industrial buying.
CENSUS DATA. The Bureau of the Census publishes a wide variety of reports that summarize
the wealth of data found in its census database, which is available at most libraries and at the
Census Bureau’s Web site at www.census.gov.
FORECASTS. The U.S. Global Outlook traces the growth of 200 industries and gives a 5-year
forecast for each one. Many government agencies, including the Department of Commerce, offer
forecasts on everything from interest rates to the number of housing starts. A government librarian can help you find what you need.
MARKET RESEARCH. Someone may already have compiled the market research you need. The
FINDex Worldwide Directory of Market Research Reports, Studies, and Surveys (Cambridge
Information Group) lists more than 10,600 studies available for purchase. Other directories of
business research include Simmons Study of Media and Markets (Simmons Market Research
Bureau Inc.) and the A.C. Nielsen Retail Index (A.C. Nielsen Company).
ARTICLES. Magazine and journal articles pertinent to your business are a great source of infor-
mation. Use the Reader’s Guide to Periodical Literature, the Business Periodicals Index (similar
to the Reader’s Guide but focuses on business periodicals), and Ulrich’s Guide to International
Periodicals to locate the ones you need.
LOCAL DATA. Your state Department of Commerce and your local Chamber of Commerce will
very likely have useful data on the local market of interest to you. Call to find out what is available.
THE INTERNET. Entrepreneurs can benefit from the vast amount of market research information
available on the Web. This is an efficient resource with up-to-date information, and much of it is free.
Financial Feasibility Analysis
The final component of a feasibility analysis involves assessing the financial feasibility of a proposed business venture. At this stage of the process, a broad financial analysis is sufficient. If the
business concept passes the overall feasibility analysis, an entrepreneur should conduct a more
thorough financial analysis when creating a full-blown business plan. The major elements to be
included in a financial feasibility analysis include the initial capital requirement, estimated earnings, and the resulting return on investment.
CAPITAL REQUIREMENTS. Just as a Boy Scout needs fuel to start a fire, an entrepreneur needs
capital to start a business. Some businesses require large amounts of capital, but others do not.
Typically, service businesses require less capital to launch than manufacturing or retail businesses. Start-up companies often need capital to purchase equipment, buildings, technology, and
other tangible assets as well as to hire and train employees, promote their products and services,
and establish a presence in the market. A good feasibility analysis provides an estimate of the
amount of start-up capital an entrepreneur will need to get the business up and running.
ENTREPRENEURIAL
Profile
Shawn Donegan and
Mike Puczkowski and
Trac Tool Inc.
Before launching Trac Tool Inc., a Cleveland, Ohio-based business that markets Speed Rollers, a
paint application system aimed at professional paint contractors, entrepreneurs Shawn Donegan
and Mike Puczkowski estimated that they needed $150,000 to launch the company and bring
the Speed Rollers paint system to market. Their invention features an airless paint pump that
feeds paint onto one of two rollers, eliminating the need to dip the rollers into a paint tray and
making the system three times faster than using traditional rollers. They spent most of their start-up
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
167
capital to develop and test the prototype and to introduce the product at the Painting and
Decorating Contractors of America trade show.5
You will learn more about finding sources of business funding, both debt and equity, in
Chapter 14, “Sources of Equity Financing,” and in Chapter 15, “Sources of Debt Financing.”
ESTIMATED EARNINGS. In addition to producing an estimate of the start-up company’s capi-
tal requirements, an entrepreneur also should forecast the earning potential of the proposed
business. Industry trade associations and publications such as the RMA Annual Statement
Studies offer guidelines on preparing sales and earnings estimates. From these, entrepreneurs
can estimate the financial results they and their investors can expect to see from the business
venture.
RETURN ON INVESTMENT. The final aspect of the financial feasibility analysis combines the
estimated earnings and the capital requirements to determine the rate of return the venture is
expected to produce. One simple measure is the rate of return on the capital invested, which is
calculated by dividing the estimated earnings the business yields by the amount of capital
invested in the business. Although financial estimates at the feasibility analysis stage typically
are rough, they are an important part of the entrepreneur’s ultimate “go” or “no go” decision
about the business ventures. A venture must produce an attractive rate of return relative to the
level of risk it requires. This risk-return trade-off means that the higher the level of risk a
prospective business involves, the higher the rate of return it must provide to the entrepreneur
and investors. Why should an entrepreneur take on all of the risks of starting and running a
business that produces a mere 3 or 4 percent rate of return when he or she could earn that much
in a risk-free investment at a bank or other financial institution? You will learn more about
developing detailed financial forecasts for a business start-up in Chapter 7, “Creating a Solid
Financial Plan.”
Wise entrepreneurs take the time to subject their ideas to a feasibility analysis like the one
described here, whatever outcome it produces. If the analysis suggests that transforming the idea
into a viable business is not feasible, the entrepreneur can move on to the next idea, confident that
he or she has not wasted valuable resources launching a business destined to fail.
If the analysis shows that the idea has real potential as a profitable business, the entrepreneur can pursue it, using the information gathered during the feasibility analysis as the foundation for building a sound business plan. We now turn our attention to the process of developing
a business plan.
A Business Plan: Don’t Launch Without It
A recent study by the Small Business Administration
reports that entrepreneurs who create business plans in
the early stages of the start-up process are more likely to
actually launch companies and complete typical start-up
activities such as acquiring a patent, attracting capital,
and assembling a start-up team more quickly than entrepreneurs who do not. “Early formal planners are doers,”
write the study’s authors. “Challenging prospective entrepreneurs to accomplish a formal business plan early in
the venture creation process enables them to engage in
additional start-up behaviors that further the process of
venture creation.”
Geo-Logical
Daniel Stewart is one entrepreneur who believes in the
value of building a business plan. Stewart was running a
sink-hole remediation business, Geo-Logical, that he had
created with a partner in Port Richey, Florida, when he
realized that operating their business effectively required
a unified software platform rather than the hodgepodge
of software applications that they had been using to
manage the projects on which the company was working. Stewart worked with a software developer to create
a program that allowed his company to create proposals,
168
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
track projects’ status, send invoices promptly, and, most
important, complete projects on time and within budget.
The engineering companies and other businesses with
which Geo-Logical worked took notice and began asking
to purchase the software.
Stewart realized that to capitalize on this business
opportunity he needed a business plan. Although Stewart
and his partner were not seeking external financing, they
decided that developing a business plan would be a crucial
element in the company’s success. “We’re our own investors,” says Stewart, “but to be a responsible entrepreneur, you have to see things as they are.” Their first task
was to conduct a feasibility analysis of their business idea,
which involved analyzing the software package’s market
potential and preparing a fundamental financial forecast.
Enthusiastic feedback from potential customers convinced
them that a significant market existed for the product.
Stewart and his partner also created three sets of financial
projections: a most likely forecast, an optimistic one, and a
disaster scenario. Creating the plan also brought them to
the realization that they needed to add to their team someone who was experienced in starting and managing a software company. Stewart and his partner recruited to their
board of directors Jim Eddy, who had started and managed
to profitability three technology start-ups, before launching their software company, Envala. All of their planning
paid off. Envala, which targets small companies with its
productivity software, is growing rapidly and now has customers across North America, Europe, and the Caribbean.
Roaring Lion Energy Drink
When Sean Hackney began writing his business plan, his
intent was not to start a company but to convince a softdrink maker to hire him. When Hackney, who had worked
for Red Bull North America, showed the plan to his father,
a corporate attorney, and a family friend who had been a
managing director for Red Bull, “they said, ‘Don’t send this
to Coke or Pepsi. Start the business, and we’ll help you,’”
he recalls. Hackney took their advice and launched Roaring
Lion Energy Drink. Based on customer feedback, he chose
to distribute the energy drink as a boxed syrup that distributors can serve with a soda-dispensing gun rather than
in cans, which restaurants, bars, and nightclubs dislike
because of the storage space they require and the wasted
product they create. In its first year of operation, Roaring
Lion generated $900,000 in sales. It reached its break-even
point within 16 months. The company now boasts sales of
$6.2 million and has customers across the United States
and Europe. “We’ve grown the business from a $62,000
investment to the number two energy drink in bars and
nightclubs,” says Hackney. He credits the original business
plan he wrote and has since updated several times with
much of Roaring Lion’s success. “I had a lot of stuff in my
head that needed to be put on paper,” he says. Hackney
still relies on a regularly updated plan to guide the company, which now has 32 employees.
1. Some entrepreneurs claim that creating a business
plan is not necessary for launching a successful
business venture. Do you agree? Explain.
2. What benefits do entrepreneurs who create business
plans before launching their companies reap?
3. Suppose that a friend who has never taken a course
in entrepreneurship tells you about a business that
he or she is planning to launch. When you ask about
a business plan, the response is, “Business plan? I
don’t have time to write a business plan! I know this
business will succeed.” Write a one-page response to
your friend’s comment.
Sources: Based on Mark Henricks, “Do You Really Need a Business
Plan?” Entrepreneur, December 2008, pp. 93–95; Ricardo Baca, “Red
Bull vs. Lion in Bar Mixer Duel,” BevNet, September 24, 2003,
www.bevnet.com/news/2003/09-24-2003-redbull.asp; Kelly Spors, Advance
Planning Pays Off for Start-Ups,” Wall Street Journal, February 9, 2009,
http://blogs.wsj.com/independentstreet/2009/02/09/advance-planningpaysoff-for-start-ups.
The Benefits of Creating a Business Plan
2. Explain the benefits of an effective business plan.
Any entrepreneur who is in business or is about to launch a business needs a well-conceived and
factually based business plan to increase the likelihood of success. For decades, research has
proved that companies that engage in business planning outperform those that do not. A recent
study by the Small Business Administration reports that entrepreneurs who write business plans
early on are two-and-a-half times more likely to actually start their businesses than those who do
not.6 Unfortunately, many entrepreneurs never take the time to develop plans for their businesses,
and the implications of the lack of planning are all too evident in the high failure rates that small
companies experience.
A business plan is a written summary of an entrepreneur’s proposed business venture, its
operational and financial details, its marketing opportunities and strategy, and its managers’
skills and abilities. There is no substitute for a well-prepared business plan, and there are no
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
169
shortcuts to creating one. The plan serves as an entrepreneur’s road map on the journey toward
building a successful business. As a small company’s guidebook, a business plan describes the
direction the company is taking, what its goals are, where it wants to be, and how it’s going to
get there. The plan is written proof that an entrepreneur has performed the necessary research,
has studied the business opportunity adequately, and is prepared to capitalize on it with a sound
business model. A business plan is an entrepreneur’s best insurance against launching a business
destined to fail or mismanaging a potentially successful company.
A business plan serves two essential functions. First, it guides the company’s operations by
charting its future course and devising a strategy for following it. The plan provides a battery of
tools—a mission statement, goals, objectives, budgets, financial forecasts, target markets, and
strategies—to help the entrepreneur lead the company successfully. A solid business plan provides managers and employees a sense of direction when everyone is involved in creating and updating it. As more team members become committed to making the plan work, it takes on special
meaning. It gives everyone targets to shoot for, and it provides a yardstick for measuring actual
performance against those targets, especially in the crucial and chaotic start-up phase of the business. Creating a plan also forces entrepreneurs to subject their ideas to the test of reality. The
greatest waste of a completed business plan is to let the plan go unused. When properly done, a
plan becomes an integral and natural part of a company. In other words, successful entrepreneurs
actually use their business plans to help them build strong companies.
ENTREPRENEURIAL
Profile
Rhonda Abrams and
The Planning Shop
3. Explain the three tests that every
business plan must pass.
Rhonda Abrams, founder of The Planning Shop, a small publisher of books and tools for entrepreneurs, says that the business plan that she and her employees craft every year has played an
important role in her company’s success. “Developing a business plan is a key to long-term business survival and success,” she says. Abrams credits her company’s strategic plan for helping her
team identify a new market opportunity that later allowed the business to survive the bankruptcy
of its former distributor.7
The second function of the business plan is to attract lenders and investors. A business plan
must prove to potential lenders and investors that a venture will be able to repay loans and produce an attractive rate of return. They want proof that an entrepreneur has evaluated the risk involved in the new venture realistically and has a strategy for addressing it. Unfortunately, many
small business owners approach potential lenders and investors without having prepared to sell
their business concepts. Kristie Price, founder of Noah’s Arf, a pet day-care center in Portland,
Oregon, credits the business plan she created with the help of Business Plan Pro for helping her
land the financing she needed for her company. “That business plan is what sold me to the bank
and got me my first $200,000,” she says.8 A collection of figures scribbled on a note pad to support a loan application or investment request is not enough. Applying for loans or attempting to
attract investors without a solid business plan rarely attracts needed capital. The best way to secure the necessary capital is to prepare a sound business plan. The quality of an entrepreneur’s
business plan weighs heavily in the final decision to lend or invest funds. It is also potential
lenders’ and investors’ first impression of the company and its managers. Therefore, the finished
product should be highly polished and professional in both form and content.
Building a plan forces a potential entrepreneur to look at his or her business idea in the harsh
light of reality. To get external financing, an entrepreneur’s plan must pass three tests with potential lenders and investors: (1) the reality test, (2) the competitive test, and (3) the value test. The
first two tests have both an external and internal component:
REALITY TEST. The external component of the reality test revolves around proving that a market
for the product or service really does exist. It focuses on industry attractiveness, market niches,
potential customers, market size, degree of competition, and similar factors. Entrepreneurs who
pass this part of the reality test prove in the marketing portion of their business plan that there is
strong demand for their business idea.
The internal component of the reality test focuses on the product or service itself. Can the
company really build it for the cost estimates in the business plan? Is it truly different from what
competitors are already selling? Does it offer customers something of value?
170
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
COMPETITIVE TEST. The external part of the competitive test evaluates the company’s relative posi-
tion to its key competitors. How do the company’s strengths and weaknesses match up with those of
the competition? Do competitors’ reactions threaten the new company’s success and survival?
The internal competitive test focuses on management’s ability to create a company that will
gain an edge over existing rivals. To pass this part of the competitive test, a plan must prove the
quality, skill, and experience of the venture’s management team. What other resources does the
company have that can give it a competitive edge in the market?
VALUE TEST. To convince lenders and investors to put their money into the venture, a business
plan must prove to them that it offers a high probability of repayment or an attractive rate of
return. Entrepreneurs usually see their businesses as good investments because they consider the
intangibles of owning a business—gaining control over their own destinies, freedom to do what
they enjoy, and others; lenders and investors, however, look at a venture in colder terms: dollarfor-dollar returns. A plan must convince lenders and investors that they will earn an attractive
return on their money.
Even after completing a feasibility analysis, entrepreneurs sometimes do not come to the realization that “this business just won’t work” until they build a business plan. Have they wasted
valuable time? Not necessarily! The time to find out that a business idea will not succeed is in the
planning stages before committing significant money, time, and effort to the venture. It is much
less expensive to make mistakes on paper than in reality. In other cases, a business plan reveals
important problems to overcome before launching a company. Exposing these flaws and then addressing them enhances the chances of a venture’s success. Business plans can help nascent entrepreneurs nail down important aspects of their concept and sometimes prevent costly mistakes.
The real value in preparing a plan is not as much in the plan itself as it is in the process the
entrepreneur goes through to create the plan. Although the finished product is extremely useful,
the process of building the plan requires entrepreneurs to explore all areas of the business and subject their ideas to an objective, critical evaluation from many different angles. What entrepreneurs
learn about their industry, target customers, financial requirements, competition, and other factors is essential to making their ventures successful. Building a business plan is one controllable
factor that reduces the risk and uncertainty of launching a company.
The Battle of the Plans
The four members of In Context Solutions (ICS), a start-up
market research company that has developed the technology to create customized virtual stores that allow retailers
to understand their customers’ behavior quickly and inexpensively, were feeling the pressure of the high-stakes competition. More than 300 teams had submitted business
plans to the Rice Business Plan Competition, one of the
largest and richest business plan competitions in the world,
and just 42 of them had made the final cut. Over the course
of the next 3 days, the ICS team would be competing
against some of the most promising start-up companies in
the world, and the stakes were high—$800,000 in cash
and prizes and, more important, valuable exposure to wellconnected judges with money of their own to invest and
access to the financing they needed to enable their companies to grow. “There are no toy businesses here,” says one
judge, himself a successful technology entrepreneur. In fact,
since the Rice Business Plan Competition began in 2001,
more than 228 teams have competed, and nearly 90 of
them have launched their companies successfully, raising
more than $150 million in early stage financing.
The ICS team stumbled in the practice round but came
back strong when the scores counted, securing one of the
12 spots in the final competition. One of the team’s toughest competitors was Dynamics, a company founded by
Jeffrey Mullen, a patent attorney and electrical engineer.
Mullen has developed a magnetic strip that can be placed
on a credit card that supports a constantly changing number, a technology that the credit card companies have been
trying to accomplish for years. Overcoming a major obstacle of previous attempts to improve credit card technology,
Dynamics’ system allows companies to use their existing
credit card readers. Not only does Dynamics’ technology
provide enhanced security by making credit card theft
more difficult, but it also allows users to combine multiple
cards onto one piece of plastic, giving them the ability to
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
171
BiologicsMD, a company created
by students at the University of
Arkansas that is commercializing
a new drug to treat osteoporosis,
was the winner at a recent Rice
Business Plan Competition.
Source: 2007 Rice Alliance\Rice
University
charge purchases to different accounts using just one card.
Mullen’s Pittsburgh-based company already had seven employees, had been negotiating with several venture capital
firms, and was working with several banks to bring his
technology to market.
At the awards banquet at the end of the Rice Business
Plan Competition, ICS came in 12th, but the team was not
downcast. “We came in 12th out of 300-plus teams that
submitted plans,” said Kristine Wexler. The team was already
talking about how to use the feedback from the judges to
improve their business plan for the business plan competition
at their own school, the University of Chicago’s Booth School
of Business, and in meetings with potential investors. Many
judges were impressed with ICS’s technology and business
plan. “I think they’re as likely to succeed as any startup I’ve
seen,” said Tim Berry, founder of Palo Alto Software.
In the end, Dynamics proved to be the competition’s
winner, taking first prize of $20,000 and $305,000 in investments and business services. Dynamics also received the
prestigious $100,000 Technology Award from Opportunity
Houston (which it can collect only if it moves from Pittsburgh
to Houston) and a $125,000 investment from the GOOSE
Society of Texas. The ICS team, which raised $200,000 from
family and friends to start the company, went back to the
same source for $225,000 more in capital. However, one
judge in the business plan competition is negotiating
with ICS for a $100,000 investment. Another judge from
software giant Oracle has promised to set up meetings
with some of Oracle’s clients as another possible source of
capital for ICS.
1. What benefits do entrepreneurs who compete in
business plan competitions such as the one at Rice
University gain?
2. Work with a team of your classmates to brainstorm
ideas for establishing a business plan competition on
your campus. How would you locate judges? What
criteria would you use to judge the plans? What
prizes would you offer winners?
3. Using the ideas you generated in question 2, create a
two-page proposal for establishing a business plan
competition at your school.
Sources: Based on Adriana Gardella, “Rice Business Plan Awards 2009,”
FSB, June 2009, pp. 80–85; Shara Rutberg, “Student Grudge Match:
Wirelessly Zapping Pain,” CNNMoney, May 22, 2008, http://money.cnn.com/
galleries/2008/fsb/0804/gallery.rice_b_plan_competition_08.fsb/4.html; “Rice
Business Plan Competition Announces $111 Million in Funding Raised by
Past Competitors,” Rice Alliance Digest Newsletter, March 5, 2009, p. 2.
The Elements of a Business Plan
4. Describe the elements of a solid
business plan.
Wise entrepreneurs recognize that every business plan is unique and must be tailored to the specific needs of their business. They avoid the off-the-shelf, “cookie-cutter” approach that produces
a look-alike business plan. The elements of a business plan may be standard, but the way entrepreneurs tell their stories should be unique and reflect their enthusiasm for the new venture. In
fact, the best business plans usually are those that tell a compelling story in addition to the facts.
For those making a first attempt at writing a business plan, seeking the advice of individuals with
experience in this process often proves helpful. Accountants, business professors, attorneys, and
consultants with Small Business Development Centers (SBDCs) are excellent sources of
172
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Source: The Wall Street Journal/
Cartoon Features Syndicate
“I love the business plan. I can see a lot of scheming went into it.”
advice when creating and refining a plan. (To locate an SBDC, visit the Small Business
Administration’s Web SBDC Web page at www.sba.gov/aboutsba/sbaprograms/sbdc/sbdclocator/
SBDC_LOCATOR.html.) Remember, though, that you should be the one to author your business
plan, not someone else.
Initially, the prospect of writing a business plan may appear to be overwhelming. Many
entrepreneurs would rather launch their companies and “see what happens” than invest the
necessary time and energy defining and researching their target markets, outlining their
strategies, and mapping out their finances. After all, building a plan is hard work—it requires
time, effort, and thought. However, it is hard work that pays many dividends, and not all of them
are immediately apparent. Entrepreneurs who invest their time and energy building plans are
better prepared to face the hostile environment in which their companies will compete than
those who do not.
Entrepreneurs can use business planning software available from several companies to create their plans. Some of the most popular programs include Business Plan Pro* (Palo Alto
Software), PlanMaker (Power Solutions for Business), and Plan Write (Business Resources
Software). Business Plan Pro, for example, encompasses every aspect of a business plan—from
the executive summary to the cash flow forecasts. These packages help entrepreneurs organize
the material they have researched and gathered, and they provide helpful tips on plan writing
as well as templates for creating financial statements. Business planning software may help to
produce professional-looking business plans, but there is a potential drawback: the plans they produce may look as if they came from the same mold. That can be a turn-off for professional investors who review hundreds of business plans each year. Entrepreneurs will benefit by making
the content and appearance of their plan look professional and unique.
A business plan typically ranges from 20 to 40 pages in length. Shorter plans may be too brief
to be of value, and those much longer than this run the risk of never getting used or read! This
section explains the most common elements of a business plan. However, entrepreneurs must recognize that, like every business venture, every business plan is unique. An entrepreneur should
use the following elements as the starting point for building a plan and should modify them, as
needed, to better tell the story of his or her new venture.
*Business Plan Pro is available at nominal cost with this textbook.
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
173
Title Page and Table of Contents
A business plan should contain a title page with the company’s name, logo, and address as well
as the names and contact information of the company’s founders. Many entrepreneurs also include the copy number of the plan and the date on which it was issued on the title page. Business
plan readers appreciate a table of contents that includes page numbers so that they can locate the
particular sections of the plan in which they are most interested.
The Executive Summary
To summarize the presentation for each potential financial institution or for investors, the entrepreneur should write an executive summary. It should be concise—a maximum of two pages—and
should summarize all of the relevant points of the proposed business. After reading the executive
summary, anyone should be able to understand the entire business concept and what differentiates
the company from the competition. The executive summary is a synopsis of the entire plan, capturing its essence in a condensed form. It should explain the basic business model and the problem
the business will solve for customers, briefly describing the owners and key employees, target market(s), financial highlights (e.g., sales and earnings projections, the loan or investment requested,
how the funds will be used, and how and when any loans will be repaid or investments cashed out),
and the company’s competitive advantage. Much like Abraham Lincoln’s Gettysburg Address,
which at 256 words lasted just 2 minutes and is hailed as one of the greatest speeches in history, a
good executive summary provides a meaningful framework for potential lenders and investors of
the essence of a company.
The executive summary is a written version of what is known as “the elevator pitch.” Imagine
yourself on an elevator with a potential lender or investor. Only the two of you are on the elevator,
and you have that person’s undivided attention for the duration of the ride, but the building is not
very tall! To convince the investor that your business idea is a great investment, you must condense
your message down to its essential elements—key points that you can communicate in no more
than 2 minutes. In the Babcock Elevator Competition at Wake Forest University, students actually
ride an elevator 27 floors with a judge, where they have the opportunity to make their elevator
pitches in just 2 minutes. “The competition was designed to simulate reality,” says Stan Mandel,
creator of the event and director of the Angell Center for Entrepreneurship. Winners receive the
chance to make 20-minute presentations of their business plans to a panel of venture capitalists,
who judge the competition using criteria that range from the attractiveness of the business idea and
the value proposition it offers to the quality of the plan’s marketing and financial elements.9
Like a good movie trailer, an executive summary is designed to capture readers’ attention
and draw them into the plan. If it misses, the chances of the remainder of the plan being read are
minimal. A coherent, well-developed summary introducing the rest of the plan establishes a favorable first impression of the business and the entrepreneur behind it and can go a long way toward
obtaining financing. A good executive summary should allow the reader to understand the business concept and how it will make money as well as answering the ultimate question from investors
or lenders: “What’s in it for me?” Although the executive summary is the first part of the business
plan, it should be the last section you write.
Mission and Vision Statement
As you learned in Chapter 2, a mission statement expresses an entrepreneur’s vision for what his
or her company is and what it is to become. It is the broadest expression of a company’s purpose
and defines the direction in which it will move. It anchors a company in reality and serves as the
thesis statement for the entire business plan by answering the question, “What business are we in?”
Every good plan captures an entrepreneur’s passion and vision for the business, and the mission
statement is the ideal place to express them.
Company History
The owner of an existing small business should prepare a brief history of the operation, highlighting the significant financial and operational events in the company’s life. This section
should describe when and why the company was formed, how it has evolved over time, and
what the owner envisions for the future. It should highlight the successful accomplishment of
past objectives and should convey the company’s image in the marketplace.
174
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Business and Industry Profile
To acquaint lenders and investors with the industry in which a company competes, an entrepreneur
should describe it in the business plan. This section should provide the reader with an overview of the
industry or market segment in which the new venture will operate. Industry data such as market size,
growth trends, and the relative economic and competitive strength of the major firms in the industry
set the stage for a better understanding of the viability of a new business. Strategic issues such as ease
of market entry and exit, the ability to achieve economies of scale or scope, and the existence of cyclical
or seasonal economic trends further help readers to evaluate the new venture. This part of the plan also
should describe significant industry trends and key success factors as well as an overall outlook for its
future. Information about the evolution of the industry helps the reader comprehend its competitive
dynamics. The U.S. Industrial Outlook Handbook is an excellent reference that profiles a variety of
industries and offers projections for future trends in them. Another useful resource of industry and
economic information is the Summary of Commentary on Current Economic Conditions, more commonly known as the Beige Book. Published eight times a year by the Federal Reserve, the Beige Book
provides detailed statistics and trends in key business sectors and in the overall economy. It offers valuable information on topics ranging from tourism and housing starts to consumer spending and wage
rates. Entrepreneurs can find this wealth of information on the Web at www.minneapolisfed.org/bb/.
This section should contain a statement of the company’s general business goals and then
work down to a narrower definition of its immediate objectives. Together they should spell out
what the business plans to accomplish, how, and when. Goals are broad, long-range statements
of what a company plans to achieve in the future that guide its overall direction. In other words,
they address the question, “Where do I want my company to be in 3 to 5 years?”
Objectives are short-term, specific performance targets that are specific, measurable, and assignable. Every objective should reflect some general business goal and include a technique for
measuring progress toward its accomplishment. Recall from Chapter 2 that to be meaningful, an
objective must have a time frame for achievement. Both goals and objectives should relate to the
company’s basic mission. In other words, accomplishing each objective should move a business
closer to achieving its goals, which, in turn, should move it closer to its mission.
Business Strategy
An even more important part of the business plan is the owner’s view of the strategy needed to
meet—and beat—the competition. In the previous section, an entrepreneur defined where he or
she wants to take the business by establishing goals and objectives. This section addresses the
question of how to get there—business strategy. Here an entrepreneur explains how he or she
plans to gain a competitive edge in the market and what sets his or her business apart from the
competition. A key component of this section is defining what makes the company unique in the
eyes of its customers. One of the quickest routes to business failure is trying to sell “me-too” products or services that offer customers nothing newer, better, bigger, faster, or different. The foundation for this part of the business plan comes from the material in Chapter 2, “Strategic
Management and the Entrepreneur.”
This section of the business plan should outline the methods the company will use to meet
the key success factors cited earlier. If, for example, making sales to repeat customers is critical
to success, an entrepreneur must devise a plan of action for achieving a customer retention rate
that exceeds that of existing companies in the market.
Description of Firm’s Product or Service
An entrepreneur should describe the company’s overall product line, giving an overview of how
customers use its goods or services. Drawings, diagrams, and illustrations may be required if the
product is highly technical. It is best to write product and service descriptions so that laypeople
can understand them. A statement of a product’s position in the product life cycle might also be
helpful. An entrepreneur should include a summary of any patents, trademarks, or copyrights that
protect the product or service from infringement by competitors. Finally, the plan should include
an honest comparison of the company’s product or service with those of competitors, citing specific advantages or improvements that make its goods or services unique and indicating plans for
creating the next generation of goods and services that will evolve from the present product line.
Ideally, a product or service offers high-value benefits to customers and is difficult for competitors to duplicate.
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
175
TABLE 6.2 Transforming Features into Meaningful Benefits
For many entrepreneurs, there’s a big gap between what a business is selling and what its customers
are buying. The following exercise is designed to eliminate that gap.
First, develop a list of the features your company’s product or service offers. List as many as you
can think of, which may be 25 or more. Consider features that relate to price, performance, convenience, location, customer service, delivery, reputation, reliability, quality, features, and other aspects.
The next step is to group features that have similar themes together by circling them in the same
color ink. Then translate those groups of features into specific benefits to your customers by addressing
the question “What’s in it for me?” from the customer’s perspective. (Note: It usually is a good idea to
ask actual customers why they buy from you. They usually give reasons that you never thought of.) As
many as six or eight product or service (or even company) features may translate into a single customer
benefit, such as saving money or time or making life safer. Don’t ignore intangible benefits, such as
increased status; they can be more important than tangible benefits.
Finally, combine all of the benefits you identify into a single benefit statement. Use this statement
as a key point in your business plan and to guide your company’s marketing strategy.
Product or Service Features
Product or Service Benefits
Benefit Statement:
Source: Based on Kim T. Gordon, “Position for Profits,” Business Start-Ups, February 1998, pp. 18–20.
One danger entrepreneurs must avoid in this part of the plan is the tendency to dwell on the features of their products or services. This problem is the result of the “fall-in-love-with-your-product”
syndrome, which often afflicts inventors. Customers, lenders, and investors care less about how much
work, genius, and creativity went into a product or service than about what it will do for them. The
emphasis of this section should be on defining the benefits customers get by purchasing the company’s products or services, rather than on just a “nuts and bolts” description of the features of those
products or services. A feature is a descriptive fact about a product or service (e.g., “an ergonomically designed, more comfortable handle”). A benefit is what the customer gains from the product or
service feature (e.g., “fewer problems with carpal tunnel syndrome and increased productivity”).
Advertising legend Leo Burnett once said, “Don’t tell the people how good you make the goods; tell
them how good your goods make them.”10 This part of the plan must describe how a business will
transform tangible product or service features into important but often intangible customer benefits—
for example, lower energy bills, faster access to the Internet, less time writing checks to pay monthly
bills, greater flexibility in building floating structures, shorter time required to learn a foreign language, or others. Remember: Customers buy benefits, not product or service features. Table 6.2
offers an easy exercise designed to help entrepreneurs translate their products’ or services’ features
into meaningful customer benefits.
ENTREPRENEURIAL
Profile
Håkan and Annika
Olsson and First
Penthouse
While renovating their top-floor apartment in Stockholm, Sweden, civil engineers Håkan and
Annika Olsson came up with a unique idea for creating high-quality modular penthouses
that could be manufactured in factories and installed atop existing flat-roof buildings. When the
couple moved to London, they purchased aerial photographs of the city and marked all of the
flat-roof buildings in red ink. “We knew we had a good business idea when the whole picture
was red,” says Håkan. After conducting more research and building a business plan, the Olssons
launched First Penthouse, a company that specializes in rooftop development. Their business
model adds value both for tenants, who get penthouse living quarters where none existed
before, and for landlords, whose property values are enhanced by the addition of the modular
penthouses. The entire process, from design to open house, takes just 10 weeks, one-fourth the
176
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
time required to complete a similar structure using conventional techniques. First Penthouse
offers the benefit of a convenient 1-day installation and guarantees no disturbances to existing
residents. To avoid disturbing current tenants, the Olssons use special “quiet” tools and place
soundproof mats over the roofs as they work. As sales grow, the Olssons plan to take their
concept into other large urban markets around the world.11
Marketing Strategy
One of the most important tasks a business plan must fulfill is proving that a viable market exists
for a company’s goods or services. A business plan must identify and describe a company’s target customers and their characteristics and habits. Defining the target audience and its potential
is one of the most important—and most challenging—parts of building a business plan.
Narrowing its target market enables a small company to focus its limited resources on serving the
needs of a specific group of customers rather than attempting to satisfy the desires of the mass
market. Creating a successful business depends on an entrepreneur’s ability to attract real customers who are willing and able to spend real money to buy its products or services. Perhaps
the worst marketing error an entrepreneur can commit is failing to define his target market and
trying to make the business “everything to everybody.” Small companies usually are much more
successful focusing on a specific market niche or niches where they can excel at meeting customers’ special needs or wants.
Proving that a profitable market exists involves two steps: showing customer interest and
documenting market claims.
SHOWING CUSTOMER INTEREST. An important element of any business plan is showing how a
company’s product or service provides a customer benefit or solves a customer problem.
Entrepreneurs must be able to prove that their target customers actually need or want their goods
or services and are willing to pay for them. Venture capitalist Kathryn Gould, who has reviewed
thousands of business plans, says that she looks for plans that focus on “target customers with a
compelling reason to buy. The product must be a ‘must-have.’”12
Proving that a viable market exists for a product or service is relatively straightforward for a
company already in business but can be quite difficult for an entrepreneur with only an idea. In
this case, the key is to find a way to get primary customer data. For instance, an entrepreneur
might build a prototype of the product and offer it to several potential customers to get written
testimonials and evaluations to show to investors. The entrepreneur also could sell the product to
several customers, perhaps at a discount, on the condition that they provide evaluations of it.
Doing so proves that there are potential customers for the product and allows customers to experience the product in operation. Getting a product into customers’ hands is also an excellent way
to get valuable feedback that can lead to significant design improvements and increased sales
down the road.
ENTREPRENEURIAL
Profile
Charley Moore and
RocketLawyer
Charley Moore originally launched RocketLawyer, a Web site that targets entrepreneurs with a
variety of legal documents ranging from basic contracts and corporate documents to noncompete agreements and Web site design contracts, using a fee-per-downloaded-document business model. After several months in business, the site’s analytics showed Moore that even
though the site was attracting large numbers of visitors, its abandonment rate was stifling the
company’s revenue. “We were charging [our customers] a couple of hundred dollars less than
other sites or the cost of hiring a lawyer,” says Moore, “but we were asking them to pay for every
document they wanted to download. It was still a lot of money for most folks.” Based on feedback from customers, Moore changed the business model that he had developed in his business
plan. “We decided to go with a ‘first one free’ model to accommodate customers who wanted
to try our service,” he explains. RocketLawyer also added a $40 monthly membership that gives
customers unlimited access to legal documents and to online document storage. The revamped
business model produced results immediately. Sales increased from $1 million to $5 million in
just 1 year, and the number of RocketLawyer customers climbed from 150,000 to 900,000.13
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
177
DOCUMENTING MARKET CLAIMS. Too many business plans rely on vague generalizations
such as, “This market is so huge that if we get just 1 percent of it, we will break even in
8 months.” Statements such as these usually reflect nothing more than an entrepreneur’s unbridled
optimism, and, in most cases, are quite unrealistic! In The Art of the Start, entrepreneur and venture capitalist Guy Kawasaki calls this the Chinese Soda Lie: “If just 1 percent of the people in
China drink our soda, we will be more successful than any company in the history of
mankind.”14 The problems with this reasoning are (1) few markets, especially the niche markets
that small businesses often pursue, are as large as that, and (2) capturing 1 percent of a big market is extremely difficult to do, especially for a small company. Capturing a large share of a
small, well-defined niche market is much more realistic for a small company than is winning a
small share of a huge market.
Entrepreneurs must support claims of market size and growth rates with facts, and that requires market research. Results of market surveys, customer questionnaires, and demographic
studies lend credibility to an entrepreneur’s frequently optimistic sales projections. (Refer to the
market research techniques and resources in Chapter 9.) Quantitative market data are important
because they form the basis for all of the company’s financial projections in the business plan.
As you learned earlier in the section on conducting a feasibility analysis, one effective
documentation technique involves business prototyping, in which entrepreneurs test their
business models on a small scale before committing serious resources to a business that might not
work. Business prototyping recognizes that every business idea is a hypothesis that should be
tested before an entrepreneur takes it to full scale. If the test supports the hypothesis and its
accompanying assumptions, it is time to launch a company. If the prototype flops, the entrepreneur
scraps the business idea with only minimal losses and turns to the next idea.
One of the main purposes of the marketing section of the plan is to lay the foundation for
financial forecasts that follow. Sales, profit, and cash forecasts must be founded on more than
wishful thinking. An effective market analysis should address the following items:
Target Market. Who are the company’s target customers? How many of them are in the com-
pany’s trading area? What are their characteristics (age, gender, educational level, income, and
others)? What do they buy? Why do they buy? When do they buy? What expectations do they
have about the product or service? Will the business focus on a niche? How does the company
seek to position itself in the market(s) it will pursue? Knowing customers’ needs, wants, and
habits, what should be the basis for differentiating the business in their minds?
Advertising and Promotion. Only after entrepreneurs understand their companies’ target markets
can they design a promotion and advertising campaign to reach those customers most effectively
and efficiently. Which media are most effective in reaching the target market? How will they be
used? How much will the promotional campaign cost? How will the promotional campaign position the company’s products or services? How can the company benefit from publicity? How large
is the company’s promotional budget?
Market Size and Trends. Assessing the size of the market is a critical step. How large is the poten-
tial market? Is it growing or shrinking? Why? Are customers’ needs changing? Are sales seasonal? Is demand tied to another product or service?
ENTREPRENEURIAL
Profile
Neil Malhotra and NP
Solutions
One of the largest potential markets in the world of biotechnology is patients who suffer from
lower back pain. Many people experience some form of degenerative disc disease beginning in
their late twenties, but the majority of sufferers are not disabled enough for highly invasive and
risky treatments, such as spinal fusion. Neil Malhotra, a neurosurgeon and cofounder of NP
Solutions, spotted a business opportunity and developed a much less invasive treatment called
RejuvaDisc, which involves injecting a small amount of hydrogel (a biocompatible polymer) into
the affected disc. “Lower back pain is responsible for 15 million physicians’ visits a year,”
Malhotra told the judges in a recent business plan competition at the University of Pennsylvania’s
Wharton School of Business, in which the company placed first.15
Location. For many businesses, choosing the right location is a key success factor. For retailers,
wholesalers, and service companies, the best location usually is one that is most convenient to
178
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
their target customers. Using census data and other market research, entrepreneurs can determine
the sites with the greatest concentrations of their customers and locate there. Which sites put the
company in the path of its target customers? Maps that show customer concentrations (available
from census maps and other sources), traffic counts, the number of customers using a particular
train station and when, and other similar types of information provide evidence that a solid and
sizable customer base exists. Do zoning regulations restrict the use of a site? For manufacturers,
the location issue often centers on finding a site near their key raw materials or near their primary
customers. Using demographic reports and market research to screen potential sites takes the
guesswork out of choosing the “right” location for a business. We will discuss the location decision in more detail in Chapter 16, “Location, Layout, and Physical Facilities.”
Pricing. What does the product or service cost to produce or deliver? Before opening a restaurant,
for example, an entrepreneur should know exactly what it will cost to produce each item on the
menu. Failing to know the total cost (including the cost of the food as well as labor, rent, advertising, and other indirect costs) of putting a plate in front of a customer is a recipe for failure. As
we will discover in Chapter 11, “Pricing and Credit Strategies,” cost is just one part of the pricing equation. Another significant factor to consider is the image a company is trying to create in
the market. “Price really is more of a marketing tool than it is a vehicle for cost recovery,” says
Peter Meyer, author of Creating and Dominating New Markets. “People will pay more for a high
value product or solution, so be sure to research your [product’s or service’s] total value.”16
Other pricing issues that a plan should address include: What is the company’s overall pricing strategy? Will the planned price support the company’s strategy and desired image? Given the
company’s cost structure, will the price produce a profit? How does the planned price compare to
those of similar products or services? Are customers willing to pay it? What price tiers exist in
the market? How sensitive are customers to price changes? Will the business sell to customers on
credit? Will it accept credit cards? Will the company offer discounts?
Distribution. This portion of the plan should describe the channels of distribution that the busi-
ness will use (the Internet, direct mail, in-house sales force, sales agents, retailers, or others) to
distribute its products and services. Will distribution be extensive, selective, or exclusive? What
is the average sale? How large will the sales staff be? How will the company compensate its sales
force? What are the incentives for salespeople? How many sales calls does it take to close a sale?
What can the company do to make it as easy as possible for customers to buy?
Competitor Analysis
An entrepreneur should describe the new venture’s competition. Failing to assess competitors realistically makes entrepreneurs appear to be poorly prepared, naive, or dishonest, especially to potential lenders and investors. The plan should include an analysis of each significant competitor.
Entrepreneurs who believe they have no competitors are only fooling themselves and are raising
a huge red flag to potential lenders and investors. Gathering information on competitors’ market
shares, products, and strategies is usually not difficult. Trade associations, customers, industry
journals, marketing representatives, and sales literature are valuable sources of data. This section
of the plan should focus on demonstrating that the entrepreneur’s company has an advantage over
its competitors and address these questions:
䊏
䊏
䊏
Who are the company’s key competitors?
What are their strengths and weaknesses?
What are their strategies?
䊏 What images do they have in the marketplace?
䊏 How successful are they?
䊏 What distinguishes the entrepreneur’s product or service from others already on the market,
and how will these differences produce a competitive edge?
Firsthand competitor research is particularly valuable.
Owners’ and Managers’ Résumés
The most important factor in the success of a business venture is its management, and financial
officers and investors weight heavily the ability and experience of a company’s managers in
financing decisions. A plan should include the résumés of business officers, key directors, and
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
179
any person with at least 20 percent ownership in the company. This is the section of the plan in
which entrepreneurs have the chance to sell the qualifications and the experience of their management team. Remember: Lenders and investors prefer experienced managers. Ideally, they look
for managers with at least 2 years of operating experience in the industry they are targeting.
A résumé should summarize each individual’s education, work history (emphasizing managerial responsibilities and duties), and relevant business experience. Lenders and investors look
for the experience, talent, and integrity of the people who will breathe life into the plan. This portion of the plan should show that the company has the right people organized in the right fashion
for success. One experienced private investor advises entrepreneurs to remember the following:
䊏
Ideas and products don’t succeed; people do. Show the strength of your management team.
A top-notch management team with a variety of proven skills is crucial. Arthur Rock, a
legend in the venture capital industry, says, “I invest in people, not ideas.”17
䊏 Show the strength of key employees and how you will retain them. Most small companies
cannot pay salaries that match those at large businesses, but stock options and other incentives can improve employee retention.
䊏 Enhance the strength of the management team with a capable, qualified board of advisors.
A board of directors or advisors consisting of industry experts lends credibility and can
complement the skills of the management team.
Plan of Operation
To complete the description of the business, an entrepreneur should construct an organization
chart identifying the business’s key positions and the people who occupy them. Assembling a
management team with the right stuff is difficult, but keeping it together until the company is
established can be even harder. Thus, entrepreneurs should describe briefly the steps taken to
encourage important officers to remain with the company. Employment contracts, shares of
ownership, and perks are commonly used to keep and motivate key employees.
Finally, a description of the form of ownership (sole proprietorship, partnership, joint venture, C corporation, S corporation, or LLC, for example) and of any leases, contracts, and other
relevant agreements pertaining to the operation is helpful.
Pro Forma (Projected) Financial Statements
One of the most important sections of the business plan is an outline of the proposed company’s
financial statements—the “dollars and cents” of the proposed venture. In fact, one survey found
that 74 percent of bankers say that financial documentation is the most important aspect of a business plan for entrepreneurs who are seeking loans.18 For an existing business, lenders and investors use past financial statements to judge the health of the company and its ability to repay
loans or generate adequate returns; therefore, an owner should supply copies of the firm’s financial statements from the past 3 years. Ideally, these statements should be audited by a certified
public accountant because most financial institutions prefer that extra reliability although a financial review of the statements by an accountant sometimes may be acceptable.
Whether assembling a plan for an existing business or for a start-up, an entrepreneur should
carefully prepare projected (pro forma) financial statements for the operation for the next year using past operating data, published statistics, and research to derive forecasts of the income statement, balance sheet, cash forecast (always!), and a schedule of planned capital expenditures. (You
will learn more about creating projected financial statements in Chapter 7, “Creating a Solid
Financial Plan.”) Although including only most likely forecasts in the business plan is acceptable,
entrepreneurs also should develop forecasts for pessimistic and optimistic conditions that reflect
the uncertainty of the future in case potential lenders and investors ask for them.
It is essential for financial forecasts to be realistic. Entrepreneurs must avoid the tendency to
“fudge the numbers” just to make their businesses look good. Experienced lenders and investors
can detect unrealistic forecasts easily. In fact, some venture capitalists automatically discount an
entrepreneur’s financial projections by as much as 50 percent. After completing these forecasts,
an entrepreneur should perform a break-even analysis for the business.
It is also important to include a statement of the assumptions on which these financial projections are based. Potential lenders and investors want to know how an entrepreneur derived forecasts for sales, cost of goods sold, operating expenses, accounts receivable, collections, accounts
180
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
payable, inventory, taxes, and other items. Spelling out realistic assumptions gives a plan more
credibility and reduces the tendency to include overly optimistic estimates of sales growth and
profit margins. Greg Martin, a partner in the venture capital company Redpoint Ventures, says, “I
have problems with start-ups making unrealistic assumptions—how much money they need or
how quickly they can ramp up revenue. Those can really kill a deal for me.”19
The Loan or Investment Proposal
The loan or investment proposal section of the business plan should state the purpose of the
financing, the amount requested, and the plans for repayment or, in the case of investors, an
attractive exit strategy. When describing the purpose of the loan or investment, an entrepreneur
must specify the planned use of the funds. Entrepreneurs should state the precise amount requested
and include relevant backup data, such as vendor estimates of costs or past production levels.
Another important element of the loan or investment proposal is the repayment schedule or
exit strategy. A lender’s main consideration when granting a loan is the reassurance that the applicant will repay, whereas an investor’s major concern is earning a satisfactory rate of return.
Financial projections must reflect a company’s ability to repay loans and produce adequate returns. Without this proof, a request for funding stands little chance of being approved. It is necessary for the entrepreneur to produce tangible evidence that shows the ability to repay loans or
to generate attractive returns. Developing an exit strategy, such as the option to cash out through
an acquisition or a public offering, is important.
Finally, an entrepreneur should include a realistic timetable for implementing the proposed
plan. This should include a schedule showing the estimated start-up date for the project and noting all significant milestones along the way.
A business plan must present an honest assessment of the risks facing the new venture.
Evaluating risk in a business plan requires an entrepreneur to walk a fine line, however. Dwelling
too much on everything that can go wrong discourages potential lenders and investors from
financing the venture. Ignoring the project’s risks makes those who evaluate the plan see the
entrepreneur as either naive, dishonest, or unprepared. The best strategy is to identify the most
significant risks the venture faces and then to describe the plans the entrepreneur has developed
to avoid them altogether or to overcome the negative outcome if the event does occur. The accompanying “Lessons from the Street-Smart Entrepreneur” feature explains how two simple diagrams
communicate effectively to investors both the risks and the rewards of a business venture.
Visualizing a Venture’s Risks
and Rewards
When reviewing business plans, lenders and investors
naturally focus on the risks and the rewards of a business
venture. Rather than taking dozens of pages of text and
charts to communicate these important concepts to investors, entrepreneurs can use the following simple graphs
to convey accurately both the potential risk and the returns
of their proposed businesses. The first diagram shows the
amount of money an entrepreneur needs to launch the
business, the time required to reach the point of positive
cash flow, and the anticipated amount of the payoff.
In this diagram, the depth of the hole shows lenders
and investors how much money it will take to start the
business, and the length of the chasm shows how long it
will take to reach positive cash flow. Experienced business
Money
Potential Reward
Time
Depth
of Hole
Time to Positive Cash Flow
owners know that cash flow is the lifeblood of any
business. As you will learn in Chapter 7, a company can operate (at least in the short run) without earning a profit, but
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
15%
Probability
it cannot survive without cash flow. Shallow cash holes and
short times to positive cash flow are ideal, but businesses
can tolerate deeper holes and longer cash chasms as long
as their founders have a plan in place to carry the company
through until cash flow does become positive.
The second diagram that follows complements the
first. It shows investors the range of possible returns and
the probability of achieving them. In the following example, investors can see that there is a 15 percent chance
that their investments will be complete losses. The flat
section shows that there is a very small chance that investors will lose only a small amount of money. The
hump in the middle says that investors have a significant
chance of earning between 15 and 45 percent on their
money. (Note the probability of these returns is about the
same as that of a total loss.) Finally, there is a small
chance that their initial investments will yield a 200 percent rate of return.
181
Flat
Section
–100%
(Total Loss)
15%
45%
200%
(Big Hit)
Rate of Return per Year
This diagram portrays what investors intuitively understand: Most companies either fail big or achieve solid
success.
Source: Adapted from William A. Sahlman, “How to Write a Great
Business Plan,” Harvard Business Review, July/August 1997, pp. 98–108.
Reprinted by permission of Harvard Business School Publishing.
There is a difference between a working business plan—the one the entrepreneur is using to
guide her business—and the presentation business plan—the one he or she is using to attract
capital. Although coffee rings and penciled-in changes in a working plan don’t matter (in fact,
they’re a good sign that the entrepreneur is actually using the plan), they have no place on a plan
going to someone outside the company. A plan is usually the tool that an entrepreneur uses to
make a first impression on potential lenders and investors. To make sure that impression is a
favorable one, an entrepreneur should follow these tips:
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
Realize that first impressions are crucial. Make sure the plan has an attractive (but not an
expensive) cover.
Make sure the plan is free of spelling and grammatical errors and “typos.” It is a professional document and should look like one.
Make it visually appealing. Use color charts, figures, and diagrams to illustrate key points.
Don’t get carried away, however, and end up with a “comic book” plan.
Include a table of contents with page numbers to allow readers to navigate the plan easily.
Reviewers should be able to look through a plan and quickly locate the sections they want
to see.
Make it interesting. Boring plans seldom get read; a good plan tells an interesting story.
A plan must prove that the business will make money. In one survey of lenders, investors,
and financial advisors, 81 percent said that, first and foremost, a plan should prove that a
venture will earn a profit.20 Start-ups do not necessarily have to be profitable immediately,
but sooner or later (preferably sooner), they must make money.
Use computer spreadsheets to generate a set of realistic financial forecasts. They allow entrepreneurs to perform valuable “what if” (sensitivity) analysis in just seconds.
Always include cash flow projections. Entrepreneurs sometimes focus excessively on their
proposed venture’s profit forecasts and ignore cash flow projections. Although profitability
is important, lenders and investors are much more interested in cash flow because they
know that’s where the money to pay them back or to cash them out comes from.
The ideal plan is “crisp,” long enough to say what it should but not so long that it is a chore
to read. Entrepreneur and venture capitalist Guy Kawasaki says that for him the ideal business plan is just 20 pages long, including 2 pages of financial projections.21
Tell the truth. Absolute honesty is always critical when preparing a business plan.
Business plans are forecasts about the future that an entrepreneur plans to create, something
that one expert compares to “taking a picture of the unknown,” which is a challenging feat!
182
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
As uncertain and difficult to predict as the future may be, an entrepreneur who launches a business without a plan arguing that “trying to forecast the future is pointless” is misguided. In the
Harvard Business Review, William Sahlman says that “the best business plans . . . are
like movies of the future. They show the people, the opportunity, and the context from multiple
angles. They offer a plausible, coherent story of what lies ahead. They unfold the possibilities
of action and reaction.”22 That’s the kind of “movie” an entrepreneur should strive to create in
a plan.
왘 E N T R E P R E N E U R S H I P
A Plan for BabyCakes
Erin McKenna left her parents and 11 brothers and sisters
in San Diego, California, striking out for New York City to
pursue her dream of becoming a fashion designer.
Several months later, she was working as a fashion assistant at a magazine, a job that not only paid very little but
was so far from her dream that it also “was demoralizing,” says McKenna. She had to take on a second job as
a waitress just to pay her bills. One day, she quit the fashion assistant’s job and prayed, “Let me find a job that
feeds my soul.”
Back in her small apartment, McKenna wanted to
make a batch of her favorite comfort food, chocolate chip
cookies. Unfortunately, several months before, McKenna
had discovered that, like 12 million other Americans, she
suffered from food allergies, particularly wheat gluten,
sugar, flour, and dairy products. That weekend, she attended a children’s birthday party where the hostess offered McKenna some “baby cake” and explained that it
might taste different because her son had food allergies, in
fact, the same ones that McKenna suffered from.
“What a cute name,” McKenna thought. “Perfect for
a bakery for kids with food allergies.” Back at home, she
called her brother, who is a chef in California, and suggested that he start a bakery for people with allergies.
“Why don’t you do it?” he asked.
“Me? You’re in the food business.”
“It’s your idea,” her brother insisted. “You have food allergies. You know how to bake. You can make this work.”
“I tried to talk myself out of it,” admits McKenna, “but
I felt my heart quicken, the way it used to when I sketched
designs for dresses. Was this the job that would feed
my soul?” After talking with her mother about the idea,
McKenna decided to pursue a new dream: to start a bakery for people who suffer from food allergies. She downloaded a business plan format from the Internet and began
researching the industry. McKenna discovered that millions
of people who suffered from food allergies were switching
IN ACTION
왘
to vegetarian and vegan products, sales of which were
$1.2 billion annually.
Launching a bakery that used no flour, soy, sugar, or
other “traditional” baking ingredients meant that McKenna
had to develop new recipes. “There was no cookbook available that was doing what I set out to do, so recipe development was an insanely rocky road,” she recalls. “I never went
to culinary school and had to teach myself not only how to
make my way around the kitchen but also how to play in this
crazy culinary obstacle course I had put myself in.” Working
at a nearby restaurant, she began experimenting to develop
recipes for her bakery. Health food stores near her apartment stocked all of the ingredients she needed, such as coconut oil (which provides a butter flavor), agave nectar (a
natural sweetener with no aftertaste), xanthan gum (a substitute for wheat gluten), and gluten-free baking mix. Many
experiments failed. “There were plenty of cookies that went
into the trash after one bite,” she recalls.
After a year of experimenting, McKenna had developed recipes for a line of delicious all-natural products, including cupcakes, cookies, brownies, and pastries, that
people who suffered from food allergies could enjoy. Late
in 2005 with just $85,000 in capital, she opened the first
BabyCakes bakery in New York City’s Lower East Side in a
building equipped with hardwood floors and a tin ceiling,
ideal for the image she wanted to create for her business.
McKenna painted the walls pink and decorated them
with 1960’s memorabilia. A friend, Wendy Mullin, owner
of the popular clothing label Built by Wendy, designed
BabyCakes’ uniforms.
The store was an instant hit with customers, reaching
its break-even point in just 7 months, despite BabyCakes’
modest gross profit margin. Cupcakes, which cost $2 each
to make, sell for $3. Sales recently hit $1.2 million, which
generated $497,000 in gross profit and $100,000 in net
income. McKenna projects sales for the upcoming year to
be $1.8 million, and by the end of the year she plans to
open a second store in Los Angeles. A second New York
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
183
BabyCakes-branded packaged foods that would sell in
upscale health food stores.
The company also faces challenges. Because BabyCakes
uses highly specialized ingredients, the number of suppliers, although growing, currently is limited, which makes
its ingredient costs high. Other companies have noticed
the rapid growth in the allergy-friendly food market and
are opening competing stores. At least eight other similar bakeries operate in the United States, including one
near Los Angeles that sells vegan products, and many of
them have names that are very similar to BabyCakes.
All of McKenna’s plans for BabyCakes require capital,
however—more capital than the company can generate
internally at this point.
Erin McKenna, founder of BabyCakes.
Source: BabyCakes Bakery
City location is slated for the following year. “I want to focus on growing my business into a brand,” she says. Many
customers have approached McKenna about buying BabyCakes franchises, an idea that she finds intriguing. She
continues to create cookbooks and is considering introducing
1. What steps should Erin McKenna take to secure the
capital she needs to expand BabyCakes and realize
her dream of building a brand?
2. Create a business plan outline for Erin McKenna that
would help her sell her ideas for expanding
BabyCakes to potential lenders and investors.
3. Develop a list of at least 10 suggestions for McKenna
to use when she presents her business plan to
potential lenders and investors.
Sources: Based on Erin McKenna, “Sweet Dreams,” Guideposts, December
2009, pp. 80–81; “Erin McKenna: BabyCakes Bakery,” Goop, http://
goop.com/newsletter/49/en/; “The Ultimate Start-up Reality Check,” Inc.,
July 2008, pp. 89–91.
What Lenders and Investors Look for in a Business Plan
5. Explain the “five Cs of credit”
and why they are important to
potential lenders and investors
reviewing business plans.
To increase their chances of success when using their business plans to attract capital, entrepreneurs must be aware of the criteria lenders and investors use to evaluate the creditworthiness of
entrepreneurs seeking financing. Lenders and investors refer to these criteria as the five Cs of
credit: capital, capacity, collateral, character, and conditions.
CAPITAL. A small business must have a stable capital base before any lender will grant a loan.
Otherwise the lender would be making, in effect, a capital investment in the business. Most
lenders refuse to make loans that are capital investments because the potential for return on the
investment is limited strictly to the interest on the loan, and the potential loss would probably
exceed the reward. In fact, the most common reasons that banks give for rejecting small business
loan applications are undercapitalization and too much debt. Investors also want to make sure
that entrepreneurs have invested enough of their own money into the business to survive the
tenuous start-up period.
CAPACITY. A synonym for capacity is cash flow. Lenders and investors must be convinced of a
company’s ability to meet its regular financial obligations and to repay the bank loan, and that
takes cash. In Chapter 8, “Managing Cash Flow,” you will see that more small businesses fail from
lack of cash than from lack of profit. It is possible for a company to be showing a profit and still
run out of cash. Lenders expect a business to pass the test of liquidity; they study closely a small
company’s cash flow position to decide whether it has the capacity required to succeed.
184
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
Entrepreneurs who score high on
the 5 c’s of credit are more likely
to receive the financing they need
to launch their businesses.
Source: David Young\PhotoEdit Inc.
COLLATERAL. Collateral includes any assets an entrepreneur pledges to a lender as security for
repayment of the loan. If an entrepreneur defaults on the loan, the bank has the right to sell the
collateral and use the proceeds to satisfy the loan. Typically, lenders make very few unsecured
loans (those not backed by collateral) to business start-ups. Bankers view an entrepreneur’s willingness to pledge collateral (personal or business assets) as an indication of dedication to making
the venture a success.
CHARACTER. Before putting money into a small business, lenders and investors must be satis-
fied with the owner’s character. An evaluation of character frequently is based on intangible factors such as honesty, competence, polish, determination, knowledge, experience, and ability.
Although the qualities judged are abstract, this evaluation plays a critical role in a lender’s or
investor’s decision.
Lenders and investors know that most small businesses fail because of poor management, and
they try to avoid extending loans to high-risk entrepreneurs. Preparing a solid business plan and
a polished presentation can go far in convincing potential lenders and investors of an entrepreneur’s ability to manage a company successfully.
CONDITIONS. The conditions surrounding a loan request also affect the owner’s chance of
receiving funds. Banks consider factors relating to the business operation, such as potential
growth in the market, competition, location, form of ownership, and loan purpose. Again, the
owner should provide this relevant information in an organized format in the business plan.
Another important condition influencing the banker’s decision is the shape of the overall economy, including interest rate levels, the inflation rate, and demand for money. Although these factors are beyond an entrepreneur’s control, they still are an important component in a lender’s
decision.
The higher a small business scores on these five Cs, the greater its chance will be of receiving a loan or an investment. Wise entrepreneurs keep this in mind when preparing their business
plans and presentations.
The Pitch: Making the Business Plan Presentation
6. Understand the keys to making
an effective business plan
presentation.
Lenders and investors are impressed by entrepreneurs who are informed and prepared when requesting a loan or investment. When entrepreneurs try to secure funding from lenders or investors,
the written business plan almost always precedes the opportunity to meet face-to-face. The written plan must first pass muster before an entrepreneur gets the opportunity to present the plan in
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
The Right Way to Write a
Business Plan
Would-be entrepreneurs quickly learn the importance of
writing a business plan for their prospective ventures.
However, many of them believe that the only reason to create a plan is to attract capital from lenders and investors.
That is a fallacy. The Street-Smart Entrepreneur offers the
following tips about writing a business plan:
1. Write a plan for the right reason. Although a
business plan is an essential tool in the hunt for capital, the primary purpose of writing a plan is to help
the entrepreneurial team to identify its goals, objectives, strategies, tactics, and basis for a competitive
edge in the market—in short, to lay the foundation
for a successful business.
2. Make sure you include the right elements. There
is no “best way” to write a business plan. Like the
businesses they reflect, each one is unique; however,
every plan should contain certain elements to maximize its value to both the entrepreneurial team and
to potential lenders and investors. This chapter explains these elements; make sure that your plan covers them.
3. Demonstrate that you understand the industry’s
key success factors. Every industry is characterized
by key success factors—often just two or three of
them—and your plan must prove that you understand
them. You also must show how your strategy incorporates these key success factors into your company.
4. Obsess over the executive summary. OK,
“obsess” may be a bit extreme, but it emphasizes
the importance of the executive summary. Most
lenders and investors do not read entire plans, but
they do read their executive summaries. If the executive summary hooks them, they are more likely to
read the rest of the plan—and provide the capital to
get the business off the ground. Entrepreneur and
venture capitalist Guy Kawasaki explains the importance of the executive summary this way: “If it isn’t
fantastic, eyeball-sucking, pulse-altering, people
won’t read beyond it to find out who’s on your great
team, what’s your business model, and why your
product is curve-jumping, paradigm-shifting, and
revolutionary.” Remember that the executive summary is a written version of your elevator pitch.
5. Make your financial projections realistic and
keep them under control. Entrepreneurs tend to be
very optimistic, a trait that often shows up in the
185
exuberant (and often unrealistic) financial forecasts for
their companies. Research your industry thoroughly to
make sure that your forecasts are reasonable; few
items turn off potential lenders and investors as
excessively optimistic forecasts. In addition, avoid the
tendency to use spreadsheet programs to churn out
dozens of pages of financial projections. Kawasaki
advises, “Reduce your Excel hallucinations and
provide a forecast of the key metrics of your
business—for example, the number of paying
customers.”
6. Write deliberately, act emergently. When you
write your plan, write deliberately, as though you
know exactly what you are going to do to make your
company successful. (“You’re probably wrong,” says
Kawasaki, “but you take your best shot.”) Because
the reality of start-ups rarely reflects even the best
plans of the entrepreneurs who launch them, entrepreneurs must act emergently, changing their strategies quickly as they execute the plan and learn the
realities of the market.
7. Avoid the most common planning mistakes that
entrepreneurs make. The following are some of
the most common mistakes that entrepreneurs make
when presenting their plans to potential lenders and
investors, and the result is almost always the same—
rejection:
䊏 “Our financial projections are quite conservative.”
Some business plans for start-up companies show
sales growth rates in the thousands of percent
and revenues hitting $100 million in year 3. Then
the entrepreneur presenting the plan claims that
the estimates are conservative.
䊏 “Key employees will be joining us as soon as we
raise the capital to launch.” Remember that
potential lenders and investors are putting their
money into a capable management team and not
merely a great idea for a product or service.
Although it is common for start-up companies to
have some gaps in their organization charts,
entrepreneurs should have a team of committed
managers already in place.
䊏 “All we must do to be successful is to capture
1 percent of the market.” As this chapter
points out, this is known as the Chinese Soda Lie.
The probability that a start-up company will be
able to capture 1 percent of a huge market is
miniscule, and experienced lenders and investors
186
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
know this. Instead, focus on defining your
company’s strategy for capturing a large share of
a niche market.
䊏 “We are confident that customers will be clamoring to buy our product or service.” Market
research is a valuable component of a business
plan, but the best plans offer tangible evidence of
customer interest in a product or service, even if it
is just a product or business prototype. In other
words, be sure to include both primary and
secondary market research in your plan.
Sources: Based on John W. Mullins, “Why Business Plans Don’t Deliver,”
Wall Street Journal, June 22, 2009, p. R3; Julie Fields, “Lies to Make a VC
Groan,” BusinessWeek, December 29, 2000, www.businessweek.com/
smallbiz/content/dec2000/sb20001229_421.htm; Guy Kawasaki, “The
Zen of Business Plans,” How to Change the World, January 21, 2006,
http://blog.guykawasaki.com/2006/01/the_zen_of_busi.html.
person. Usually, the time for presenting a business opportunity is short, often no more than just a
few minutes. (When presenting a plan to a venture capital forum, the allotted time is usually less
than 20 minutes and rarely more than 30.) When the opportunity arises, an entrepreneur must be
well prepared. It is important to rehearse, rehearse, and then rehearse some more. It is a mistake
to begin by leading the audience into a long-winded explanation about the technology on which
the product or service is based. Within minutes most of the audience will be lost, and so is any
chance the entrepreneur has of obtaining the necessary financing for the new venture. A business
plan presentation should cover five basic areas:
1. Your company and its products and services. The presentation should answer in simple
terms the first question that every potential lender and investor has: What does your
company do?
2. The problem to be solved, preferably told in a personal way through a compelling story. Is
it eliminating the time, expense, and anxiety of waiting for the results of medical tests with
a device that instantly reads blood samples or making hearing aids more effective at filtering out background noise while enhancing the dominant sound for the user?
3. A description (again in simple terms) of your company’s solution to the problem. Ideally,
the solution your company has developed is unique and serves as the foundation of your
company’s competitive edge in the marketplace.
4. Your company’s business model. This part of the presentation explains how your company
makes money and includes figures such as revenue per sale, expected gross profit, net
profit margins, and other relevant statistics. This is your opportunity to show lenders and
investors how your company will produce an attractive payback or payoff.
5. Your company’s competitive edge. Your presentation should identify clearly the factors that
set your company apart from the competition.
ENTREPRENEURIAL
Profile
Levi and Tomicah
Tilleman-Dick and
Iris Inc.
Levi and Tomicah Tilleman-Dick, cofounders of Iris Inc., a company they formed to market the
improved internal combustion engine that their father developed before he died, have learned
the importance of these five elements to their business plan presentation. “Know your audience,” says Levi. At a recent business plan competition, with the help of a prototype engine,
the brothers demonstrated not only the 80 percent improvement in efficiency that their
Internally Radiated Impulse Structure (IRIS) engine provides but also its ability to generate more
power and to reduce harmful emissions. They also mention the company’s four patents and its
board of advisors, which includes a former top executive at a major automotive company and
a former consultant to the automotive industry. The essence of their pitch: cheaper, cleaner
transportation for people.24
No matter how good a written business plan is, entrepreneurs who stumble through the presentation will lose the deal. Entrepreneurs who are successful raising the capital their companies
need to grow have solid business plans and make convincing presentations of them. Some helpful tips for making a business plan presentation to potential lenders and investors include:
䊏
Prepare. Good presenters invest in preparing their presentations and knowing the points
they want to get across to their audiences.
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
䊏
187
Practice your delivery and then practice some more.
Demonstrate enthusiasm about the business, but don’t be overemotional.
Focus on communicating the dynamic opportunity your idea offers and how you plan to
capitalize on it. Fight the temptation to launch immediately into a lengthy discourse about
the details of your product or service or how much work it took to develop it. Otherwise,
you’ll never have the chance to describe the details to lenders and investors.
Hook investors quickly with an up-front explanation of the new venture, its opportunities,
and the anticipated benefits to them.
Use visual aids. They make it easier for people to follow your presentation. Don’t make the
mistake of making the visuals the “star” of the presentation, however. Visual aids should
punctuate your spoken message and focus the audience’s attention on the key points.
Explain how your company’s products or services solve some problem, and emphasize the
factors that make your company unique.
Offer proof. Integrate relevant facts into your presentation to prove your plan’s claims, customers’ satisfaction with your company’s products or services, and its profit potential.
Hit the highlights. Specific questions will bring out the details later. Don’t get caught up in
too much detail in early meetings with lenders and investors.
Keep the presentation “crisp,” just like your business plan. Otherwise, says one experienced
investor, “Information that might have caused an investor to bite gets lost in the endless drone.”25
Avoid the use of technical terms that will likely be above most of the audience. Do at least
one rehearsal before someone who has no special technical training. Tell him or her to stop
you anytime he or she does not understand what you are talking about. When this occurs
(and it likely will), rewrite that portion of your presentation.
Remember that every potential lender and investor you talk to is thinking “What’s in it for
me?” Be sure to answer that question in your presentation.
Close by reinforcing the potential of the opportunity. Be sure you have sold the benefits the
investors will realize when the business succeeds.
Be prepared for questions. In many cases, there is seldom time for a long “Q&A” session,
but interested investors may want to get you aside to discuss the details of the plan.
Anticipate the questions the audience is most likely to ask and prepare for them in advance.
Be sensitive to the issues that are most important to lenders and investors by reading the
pattern of their questions. Focus your answers accordingly. For instance, some investors
may be interested in the quality of the management team, whereas others are more interested in marketing strategies. Be prepared to offer details on either.
Follow up with every investor to whom you make a presentation. Don’t sit back and wait;
be proactive. They have what you need—investment capital. Demonstrate that you have
confidence in your plan and have the initiative necessary to run a business successfully.
Conclusion
Although there is no guarantee of success when launching a business, the best way to insure
against failure is create a business plan. A good plan serves as a strategic compass that keeps a
business on course as it travels into an uncertain future. In addition, a solid plan is essential to
raising the capital needed to start a business; lenders and investors demand it. “There may be no
easier way for an entrepreneur to sabotage his or her request for capital than by failing to produce
a comprehensive, well-researched, and, above all, credible business plan,” says one small business expert.26 Of course, building a plan is just one step along the path to launching a business.
Creating a successful business requires entrepreneurs to put the plan into action. The remaining
chapters in this book focus on putting your business plan to work.
Suggested Business Plan Elements
Although every company’s business plan will be unique, reflecting its individual circumstances,
certain elements are universal. The following outline summarizes these components.
I. Executive Summary (not to exceed two pages)
A. Company name, address, and phone number
B. Name(s), addresses, and phone number(s) of all key people
188
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
II.
III.
IV.
V.
VI.
VII.
C. Brief description of the business, its products and services, the customer problems
they solve, and the company’s competitive advantage
D. Brief overview of the market for your products and services
E. Brief overview of the strategies that will make your company successful
F. Brief description of the managerial and technical experience of key people
G. Brief statement of the financial request and how the money will be used
H. Charts or tables showing highlights of financial forecasts
Vision and Mission Statement
A. Entrepreneur’s vision for the company
B. “What business are we in?”
C. Values and principles on which the business stands
D. What makes the business unique? What is the source of its competitive advantage?
Company History (for existing businesses only)
A. Company founding
B. Financial and operational highlights
C. Significant achievements
Industry Profile and Overview
A. Industry analysis
1. Industry background and overview
2. Significant trends
3. Growth rate
4. Barriers to entry and exit
5. Key success factors in the industry
6. Outlook for the future
B. Stage of growth (start-up, growth, maturity)
Business Strategy
A. Desired image and position in market
B. Company goals and objectives
1. Operational
2. Financial
3. Other
C. SWOT analysis
1. Strengths
2. Weaknesses
3. Opportunities
4. Threats
D. Competitive strategy
1. Cost leadership
2. Differentiation
3. Focus
Company Products and Services
A. Description
1. Product or service features
2. Customer benefits
3. Warranties and guarantees
4. Unique selling proposition (USP)
B. Patent or trademark protection
C. Description of production process (if applicable)
1. Raw materials
2. Costs
3. Key suppliers
4. Lead times
D. Future product or service offerings
Marketing Strategy
A. Target market
1. Problem to be solved or benefit to be offered
2. Demographic profile
3. Other significant customer characteristics
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
B. Customers’ motivation to buy
C. Market size and trends
1. How large is the market?
2. Is it growing or shrinking? How fast?
D. Personal selling efforts
1. Sales force size, recruitment, and training
2. Sales force compensation
3. Number of calls per sale
4. Amount of average sale
E. Advertising and promotion
1. Media used—reader, viewer, listener profiles
2. Media costs
3. Frequency of usage
4. Plans for generating publicity
F. Pricing
1. Cost structure
a. Fixed
b. Variable
2. Desired image in market
3. Comparison against competitors’ prices
4. Discounts
5. Gross profit margin
G. Distribution strategy
1. Channels of distribution used
2. Sales techniques and incentives for intermediaries
H. Test market results
1. Surveys
2. Customer feedback on prototypes
3. Focus groups
VIII. Location and Layout
A. Location
1. Demographic analysis of location vs. target customer profile
2. Traffic count
3. Lease/Rental rates
4. Labor needs and supply
5. Wage rates
B. Layout
1. Size requirements
2. Americans with Disabilities Act compliance
3. Ergonomic issues
4. Layout plan (suitable for an appendix)
IX. Competitor Analysis
A. Existing competitors
1. Who are they? Create a competitive profile matrix.
2. Strengths
3. Weaknesses
B. Potential competitors: Companies that might enter the market
1. Who are they?
2. Impact on your business if they enter
X. Description of Management Team
A. Key managers and employees
1. Their backgrounds
2. Experience, skills, and know-how they bring to the company
B. Résumés of key managers and employees (suitable for an appendix)
C. Future additions to management team
D. Board of directors or advisors
189
190
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
XI. Plan of Operation
A. Form of ownership chosen and reasoning
B. Company structure (organization chart)
C. Decision making authority
D. Compensation and benefits packages
XII. Financial Forecasts (suitable for an appendix)
A. Key assumptions
B. Financial statements (year 1 by month, years 2 and 3 by quarter)
1. Income statement
2. Balance sheet
3. Cash flow statement
C. Break-even analysis
D. Ratio analysis with comparison to industry standards (most applicable to existing
businesses)
XIII. Loan or Investment Proposal
A. Amount requested
B. Purpose and uses of funds
C. Repayment or “cash out” schedule (exit strategy)
D. Timetable for implementing plan and launching the business
XIV. Appendices (supporting documentation, including market research, financial statements,
organization charts, résumés, and other items)
Chapter Review
1. Present the steps involved in conducting a feasibility analysis.
• A feasibility analysis consists of three interrelated components: an industry
and market feasibility analysis, a product or service feasibility analysis, and a
financial feasibility analysis. The goal of the feasibility analysis is to determine
whether an entrepreneur’s idea is a viable foundation for creating a successful
business.
2. Explain the benefits of an effective business plan.
• A business plan serves two essential functions. First and more important, it guides
the company’s operations by charting its future course and devising a strategy for following it. The second function of the business plan is to attract lenders and investors.
Applying for loans or attempting to attract investors without a solid business plan
rarely attracts needed capital. Rather, the best way to secure the necessary capital is
to prepare a sound business plan.
3. Explain the three tests every business plan must pass.
• Reality test. The external component of the reality test revolves around proving that a
market for the product or service really does exist. The internal component of the reality test focuses on the product or service itself.
• Competitive test. The external part of the competitive test evaluates the company’s
relative position to its key competitors. The internal competitive test focuses on the
management team’s ability to create a company that will gain an edge over existing
rivals.
• Value test. To convince lenders and investors to put their money into the venture, a
business plan must prove to them that it offers a high probability of repayment or an
attractive rate of return.
4. Describe the elements of a solid business plan.
• Although a business plan should be unique and tailor-made to suit the particular
needs of a small company, it should include the following basic elements: an executive summary, a mission statement, a company history, a business and industry
profile, a description of the company’s business strategy, a profile of its products
or services, a statement explaining its marketing strategy, a competitor analysis,
owners’ and officers’ résumés, a plan of operation, financial data, and the loan or
investment proposal.
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN
191
5. Explain the “five Cs of credit” and why they are important to potential lenders and investors reviewing business plans.
• Small business owners need to be aware of the criteria bankers use in evaluating the
creditworthiness of loan applicants—the five Cs of credit, which are capital, capacity,
collateral, character, and conditions.
• Capital. Lenders expect small businesses to have an equity base of investment by
the owner(s) that will help support the venture during times of financial strain.
• Capacity. A synonym for capacity is cash flow. The bank must be convinced of
the firm’s ability to meet its regular financial obligations and to repay the bank
loan, and that takes cash.
• Collateral. Collateral includes any assets the owner pledges to the bank as security
for repayment of the loan.
• Character. Before approving a loan to a small business, the banker must be
satisfied with the owner’s character.
• Conditions. The conditions—interest rates, the health of the nation’s economy,
industry growth rates, etc.—surrounding a loan request also affect the owner’s
chance of receiving funds.
6. Understand the keys to making an effective business plan presentation.
• Lenders and investors are favorably impressed by entrepreneurs who are informed
and prepared when requesting a loan or investment.
• Tips include: demonstrate enthusiasm about the venture, but don’t be overemotional;
“hook” investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them; use visual aids; hit the highlights of
your venture; don’t get caught up in too much detail in early meetings with lenders
and investors; avoid the use of technological terms that will likely be above most of
the audience; rehearse your presentation before giving it; close by reinforcing the
nature of the opportunity; and be prepared for questions.
Discussion Questions
1. What is involved in a feasibility analysis, and what
value might it provide?
2. Why should an entrepreneur develop a business plan?
3. Why do entrepreneurs who are not seeking external
financing need to prepare business plans?
4. Describe the major components of a business plan.
5. How can an entrepreneur seeking funds to launch a
business convince potential lenders and investors
This chapter begins with
a discussion of the feasibility analysis to test the
viability of your business
concept. The following
exercises will assist you in validating your business idea. You
will also begin to work through the situation analysis part of the
plan to enable you to better understand the market. Be as objective as possible as you work through these exercises. Rely on
your ability to gather information and make realistic assessments and projections as the exercises require.
On the Web
Go to the Companion Web site at www.pearsonhighered.com/
scarborough and click the “Business Plan Resource” tab. If you
that a market for the product or service really does
exist?
6. What are the 5 Cs of credit? How do lenders and
investors use them when evaluating a request for
financing?
7. How would you prepare to make a formal presentation
of your business plan to a venture capital forum?
have not yet done so, find the Standard Industry Classification
Code associated with your industry. You will find a link in the SIC
Code information that will connect you to a resource to help you.
Explore the information and links that are available on that site to
learn more about the size of the industry, its growth, trends, and
issues. Apply Porter’s five forces model based on the industry and
its SIC code. Assess the power of the five forces—the bargaining
power of buyers, the power of suppliers, threat of new entrants,
the threat of substitute products, and the level of rivalry. Again,
you will find additional information on Porter’s five forces model
in the “Strategy” section of this same site. Look for information
on the Web that may assist you with this analysis. Based on this
information, how attractive do you consider this industry? How
would you assess the opportunity this industry presents? Does
this information encourage you to become involved in this industry, or does it highlight significant challenges?
192
SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
In the Software
Your text may have come with “Business Feasibility Plan Pro.”
This software walks you through the essential steps of assessing
the feasibility of your business concept. This software will address the overall feasibility of the product or service, help conduct an industry assessment, review management skills, and
guide you through a preliminary financial analysis. The software provides “feedback-based” input in four components of
the feasibility analysis with a numerical assessment. You can
then export this information directly into Business Plan Pro.
Business Plan Pro is another resource to help you assess the
feasibility of your business concept in the areas of product,
service, market organization, and financial feasibility. For
example, you can enter the initial capital requirements for the
business in the start-up and expenses section. The sales forecast
will help forecast revenues and help to determine the anticipated
return on investment. If you have these estimates available,
enter that information into your plan. Now look at the profit and
loss statement. At what point, if any, does that statement
indicate that your venture will begin generating a profit? In what
year does that occur? Do you find that amount of time acceptable? If you are seeking investors, will they find that schedule
attractive? Is the return on investment promising, and does this
venture merit taking on the associated level of risk? We will talk
more about these sections of the plan in the remaining chapters.
Review the start-up sample plans called “IntelliChild.com”
and “Fantastic Florals.”
1. What was the total amount of the start-up investment for
each of these plans?
2. At what point, in months or years, did the plan indicate
that it would begin making a profit?
3. What was the total profit projected in the following year,
after breakeven occurred?
4. Based on the break-even point, which of these ventures is
most attractive?
5. Based on the projections by year 3, which plan appears to
offer the greatest financial potential?
6. How does the scale and potential of these two opportunities compare to those in your plan?
Building Your Business Plan
Review the information in the “Market Analysis” section.
Continue to add information in this section based on the outline.
Go to the “Sales Strategy” section and find information to help
project expenses. You may enter the numbers in the table yourself or use the wizard that will pop up to assist you with this
process. You may click and drag the visual graph to build that
forecast base or enter the actual data. If the business is a startup venture, expenses will include those figures along with
ongoing expense projections. At this point, do not worry about
the accuracy of the projections. Enter the estimates you have
even if they are just “rough” estimates; you can change them at
any time. Look at the profit and loss statement. At what point in
time will your business begin making a profit? Do you find this
profit picture to be acceptable?
As you build your plan, check to see that the outline and
structure of the plan tells your story. Although the outline in
Business Plan Pro is not identical to the outline presented in the
chapter, right-clicking the outline allows you to move, add, and
delete any topic you choose to modify the plan outline.