Headline
foundation From the business idea to start2grow! within a few months with
The new Dortmund.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. Business plan basics: Why do I need a business plan?
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Tips for preparing a professional business plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Structure and main elements of business plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Business plan structure: 1. Executive Summary
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......................................................................... 3.1 Benefit and utility to the customers 3.2 Development of the product or service 3.3 Manufacturing the product / rendering the service
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Recommended literature
Introduction
You are looking to found a company and start2grow offers you a wealth of support when doing so. We are pleased to be able to help you turn your business idea into reality and want to extend a cordial welcome to start2grow. At the www.start2grow.de website you will find a complete survey of the services we offer. Now, having a good business idea is one thing, but implementing it successfully in practice is an entirely different story. Along your and our joint path toward this goal, one central topic will arise again and again in every phase of the competition and well beyond the actual founding of your company, in cooperation with your mentor, in discussions with any of a number of experts or in the online coaching context: It all revolves around your business plan! This plan can be your passport to one of the lucrative prizes in the start2grow Founders Contest. But above all, this document is the basis for your future entrepreneurial success. The effort you invest here will pay off in any case because without a business plan hardly any new enterprise can be founded successfully. As the basis for working out your business plan, start2grow is making available to you this manual (as hardcopy but also ready for downloading at www.start2grow.de). It is intended to help you develop your business idea, to examine it in light of various aspects, and finally to depict your idea convincingly both for yourself and for others.
In the section discussing the Business plan structure you will find key questions that are to help you make a critical assessment of your business plan. These key questions are valid for all types of business and can be applied to a wide range of business ideas. You should, however, see them as inspiration to formulate your own questions and put your business plan to the test! The requirements in regard to content and scope become more demanding during the two phases in the competition and the questions in this manual are tailored to match those two phases. In spite of this, you can enter the contest in progress at any time and can often make use of the recommendations regardless of the particular phase in which you are working. Nor do we leave you on your own in mastering the many questions. In exchanges of ideas with your mentor, the experts and other start2grow participants you will find the fertile soil upon which your idea will thrive, readying it to pass the first tests before implementation in the real market arena. One urgent request in conclusion: Be absolutely sure to use the forms and tables provided for participants in the start2grow contest (found as a download at www.start2grow.de). Standardisation such as this helps simplify the work of your coaches, the experts and ultimately the jury in their evaluation, but also helps you to reach a clear and understandable depiction of your business plan.
The business plan is your calling card in the business world; it facilitates making new contacts and reveals the strategy you intend to apply when using an idea to either found a new company or expand an existing firm. The business plan explains your overall entrepreneurial concept in detail. It describes the business setting, the stated objectives and the ways and means to be applied. Originally, the business plan served in the United States as an aid when acquiring capital from private investors and venture capitalists who are involved as co-owners and as such contribute equity capital. Submitting a written concept for founding a business such as this has been a matter of good practice for some time now in Germany whenever dealing with professional backers. As a rule, backers will only promote projects that are based on a properly crafted business plan. Formulated and used correctly, the business plan becomes the key document in evaluating and steering the company. The business plan is used: for submission to investors for planning and monitoring attainment of corporate objectives and to present the company in the business world. The great significance assigned to the business plan is not a matter of accident. In submitting it you demonstrate your capability to depict both clearly and understandably the many and varied aspects involved in founding and managing a business. Preparing the business plan forces you to think systematically through your business idea, will disclose gaps in knowledge, demands decisions and thus fosters a structured and focused approach. With its clear analysis of the situation the business plan promotes the effectiveness of your operations and, moreover, serves as a guideline for your efforts. You can align your activities with the plan and determine the extent to which you have reached the goals that you had originally set for yourself.
The project for which the business plan is written and the purpose for which it is intended will have decisive influence on its design. If the plan is being written in preparation for founding a new company, for example, it will look different than for a company intending to launch activities in a new business sector. In spite of the differences, business plans all exhibit some common features. They should make it possible to undertake a comprehensive estimate of the opportunities and risks inherent to the business activity while at the same time remaining clear and concise. This is a major challenge that implies certain requirements in terms of form and content. Observing some instructions and basic rules can promote the success of a business plan.
every plan whenever possible should be presented to a test audience (e.g. coaches in the course of the contest) before its ultimate submission. This will help to cull out fuzzy passages and to identify areas that require additional clarification. A business plan convinces by way of objectivity. When presenting your own good idea you might be tempted to go over the top. In spite of all the very desirable enthusiasm, the tone should remain objective and the representation should allow the reader to carefully weigh the arguments presented one against the other. An overly effusive depiction, similar to advertising copy, is more likely to be distracting; it provokes suspicion, scepticism and prejudice.
Equally inappropriate is an overly critical depiction of ones own project, referring to various misjudgements and errors in the past. This A business plan is a living thing! can instil doubt regarding capabilities and motivation. Information The business plan also matures, bit by bit, along with your business in the business plan should be objectively correct and given accordidea. At the beginning you will work through just a few topics; ing to best of your knowledge and belief. Weak points should more will join them as time passes. New findings will make it necesnever be discussed unless accompanied by the steps for improvesary to rework and update individual aspects again and again. ment that are being planned or have already been undertaken. The assumptions, projections and results will have to be harmonised one with another in order to avoid errors in content. The work will be simplified by using processes incorporating forward A business plan must also be understandable to technical laypersons. looking planning. Here it is necessary to number the topics and to Never attempt to impress readers with your expertise by including note all the cross-references. All source material should be sorted by exhaustive technical details, complex engineering drawings or assubject. sessment sheets with lots of fine print. Only in very rare cases will technical specialists or engineers be reviewing the explanations. The A business plan impresses with its clarity. readers are usually not technical people and they will appreciate a The business plan has to deliver a suitable answer to all the readers simplified depiction and, where appropriate, an explanatory drawquestions. When reviewing it, the reader must be able to detect ing or photo. Technical details on the product or manufacturing specific accents, depending on the investors interest in your busiprocess belong in the appendix, if mentioned at all. ness project. This means that the plan must be clearly structured in Remember: you are fully familiar with the material and run the danorder to enable quick orientation and decision-making. ger of assuming too much knowledge on the part of your readers. A business plan does not convince its readers by the extent of the analytical and data material, but rather by prioritizing individual A business plan needs to be as though from a single pen. As a rule, several persons will work on the preparation of a business statements and concentrating on the essentials. All the topics that plan. At the end all the contributions will have to be unified so might be of interest should therefore be dealt with concisely, but that you do not wind up with a document that appears to have nonetheless completely. A scope of about 35 pages appears approbeen thrown together haphazardly, with its parts differing in the priate for a detailed business plan. Five pages more or less would type and depth of depiction. Thus it is beneficial for a single person certainly be permissible. You should use the space afforded in the to be made responsible for final copy and uniform layout. annexes to provide supplementary information such as organisation charts, important calculations, patents, rsums for members of management, advertisements and articles from the press. Pay A business plan is the visual calling card. Finally, the business plan should also present a uniform appearance. careful attention to ensuring that the annex remains manageable Important here is the use of typefaces and fonts associated with and does not become a data graveyard. particular structures and content, clean inclusion of graphics that Since you will not be present while the business plan is being read present clear information and, if appropriate, a header incorporatand you will not be immediately available for questions and explaing the companys logo. nations, clear and unequivocal wording is important. Consequently
When preparing a business plan it is important to know how backers work and what they pay attention to. This applies both to classical bank financing and public subsidies and to the socalled intelligent capital that is invested by venture capital companies and business angels. Many new companies, often technology-oriented, require participatory capital even in a very early phase just before or after founding in order to fully exploit their (great) growth potential. Their preparedness to take on both silent and active partners during the difficult start-up phase has risen markedly in recent years. Whats more, new technology companies also require support in various disciplines during the initial years in business in regard to business strategy, day-to-day operations and active management consulting. At this point in time commercial consulting companies are usually too expensive. Public consulting agencies, by contrast, can render only very limited support. Young high-tech companies are indeed deemed to be very risky but, when compared with new start-ups in many other fields, they exhibit a high survival rate. They also exhibit expansion potentials that make them extremely lucrative for investors. Successful growth rates among technology-oriented companies show that even in the setting in Germany, in the past deemed fairly unfavourable, good returns are possible for investors who get in on the ground floor. This is the intention pursued by venture capital companies. These are investment funds specialising in growth industries,
contributing risk capital to young companies and providing support services in the early years. At first glance venture capitalists behaviour might seem to be curious. They commit capital without demanding either a fixed interest rate or repayment schedule and demand no security. When studied more closely, however, this behaviour makes sense. Those who sink risk capital acquire in return for their financial support holdings in a company that is felt to have great growth potential over the medium term. The anticipated, calculated growth in value of the invested capital is, as a rule, between 25 and 50 per cent per year! By contrast, the advantage for the young company is that it obtains equity capital at a very early point in time, when other backers can hardly be persuaded to undertake a larger financial commitment due to the lack of security and the uncertain prospects for the future. Venture capitalists help companies in which they have holdings not only with funding; they are also available for assistance and support for example by arranging contacts and advising in difficult situations. That is often why venture capital is also referred to as intelligent capital. When seeking capital for your business project you are naturally interested in forfeiting the smallest possible share of the project that you see as promising great success. Start-up financing for an innovative new company is therefore fostered, in addition to risk capital, by way of numerous schemes to promote new companies; these are operated both by the federal and state governments in Germany. This is also of benefit to venture capitalists, who are not terribly fond of seeing
themselves as the only investors. Thus, as a rule, venture capitalists will acquire less than 50 per cent of the shares in the business. They signal that they view themselves more as partners than as financial backers and co-owners. Venture capitalists sell off their shares after about five to seven years. Those who might be considered to acquire the shares could be the other partners in the company or other companies and even direct competitors (provided that this is not expressly prohibited in the contract with the venture capitalists). In some cases the company floats an initial public offering on the stock exchange. Venture capitalists hope to achieve very high returns from the sale, at rates that exceed many times the yields expected by conventional lenders (such as banks). Successfully financed companies can achieve value growth of at least 25 per cent annually. This can more than compensate for any investments in flops. Particularly in the early phases of a companys development, however, financial bottlenecks may arise whenever it is necessary to lend precision to the companys concept, talk with potential customers about their needs and expectations, clarify the patent situation and negotiate with investors and lenders. At this juncture there will be hardly any bank (and often no venture capital companies, either) willing to finance the prevailing capital requirements, which can easily rise into the six-figure range. Deemed to be the ideal solution in this situation are therefore private investors who bring with them pertinent professional, industry and management experience and who, with both financing and know-how, can set the course for successful company development at an early date. These so-called business angels are successful, well-to-do individuals entrepreneurs for example who become something of a patron for the new project, supporting it with money but, above all, with advice and counsel. They have usually put their own company on the stock market or have sold their shares and are now investing their intelligent capital preferably in industries in which they have experience. In addition, they are usually interested in taking an active role in the company, at least in a consulting capacity (on an advisory council, for instance). Moreover, experience in other countries shows that their expectations in regard to yields are more moderate, their rejection rate is lower and their participation usually over a longer period than for venture capital companies. The American high-tech landscape is no longer conceivable without informal participatory capital (i.e. business angels); many renowned companies such as Microsoft and SAP started up with informal capital.
These observations make clear what venture capitalists, private investors and the financial professionals at banks are looking for in a business plan: The business idea must have a clearly definable benefit for customers, expressed most simply as lowered costs for known benefits, or novel utility with a reasonable amount of expenditure for market participants. The company is to supply, on the medium term, a large and growing market, one that is usually also international in its orientation. The project or service should be innovative. A thoroughly new technology or a superior manufacturing process has significant advantages because this makes market entry more difficult for competitors. The business concept used to penetrate the market has to be consistent and accurate. Projections and estimates should be precise, i.e. based on convincing assumptions and facts. A high degree of confidence in planning is a basic requirement for business success. It can be a major contribution to avoiding liquidity problems and thus can even fend off a bankruptcy. Every investor and lender pays particular attention to management because ultimately the business project will stand or fall, based on the capability of company management to implement the business concept. To be taken into account here is in particular the mixture of capabilities required for innovative companies, a mix that those who are involved in founding the company can only rarely cover entirely on their own. That is why the key people, their training, experience, creativity, motivation, nerves of steel and naturally their ability to handle money are carefully scrutinised. Successes already achieved are assigned greater weight than academic titles. The ability to work in a team is also deemed to be an additional yardstick for the investment decision. All in all, the management team should be interdisciplinary (e.g. including specialists for development, production, marketing, sales and business administration) and should accept participation by venture capitalists.
Investors and lenders are interested in the finished business plan and not in the process that resulted in its creation. They value a document that is well prepared and from which they can clearly see the opportunities and risks in an enterprise right from the first skim. Consequently, when writing this document you should always keep sight of the business objective, the utility for customers and the potentials for returns on capital investment. The following notes are intended to help you when preparing a professional business plan: Proceed according to a plan! Preparing a business plan is a complex assignment. Many individual aspects will have to be taken into consideration and systematically analysed in a logical sequence. Thus detailed planning should be undertaken for the preparation of the document. This begins immediately after sketching out the initial ideas. It is advisable either to follow this manual (see the section on Structure and main elements in business plans) or to follow the business system (e.g. research and development, manufacturing, marketing, sales, delivery and administration). Key questions tailored to your own project! When preparing a business plan it is helpful to refer to a list of questions. Which of the individual questions are to be posed and what answers are incorporated into the business plan will derive from the product and the service as well as the degree of technology orientation, the nature of value addition, and also the knowledge required by the target group made up by the readers. The basis for compiling the blueprint for your own work could be the key questions that are listed in this manual, subject
by subject. These key questions are to provide inspiration for thinking and are only exemplary in character; they lay no claim to completeness. Keep the final product in mind! In the framework of a project such as this there is always the danger of losing ones way in a thicket of individual analyses. Thus it is advisable to lean back from time to time and examine critically whether the amount of information compiled in the meantime is sufficient and what additional value could be contributed by additional analyses. In this context we would note once again that the complete business plan should not encompass more than about 35 pages (plus an annex if appropriate). Seek support at an early date! When working on the business plan it is important to obtain support in many fields. Thus it is highly advisable to join forces early in founders teams (contacts can be found, for example, in the Online Coaching area at www.start2grow.de). In teams with complementary technical and business backgrounds the tasks can be distributed among the team members depending upon their capabilities; this simplifies preparation commensurate with the subject matter. Neither should you be shy about calling on external help and doing so at an early date. You can recruit support from the start2grow network! Test your own draft again and again! Decisive for success are the understandability and the consistency of the document. That is why it is important to present it, repeatedly, to a test audience. Outsiders who look through the document can contribute, in advance of the presentation, to identifying weak points and, under certain circumstances, can even provide important new inputs for subsequent work.
Business plans, in spite of all their differences, have ten main elements in common; these are divided again into individual sub-elements. This is augmented with an annex or appendix. You should use the space available in the annex to your business plan for supplementary information such as organisational charts, important supporting calculations, patents, rsums of the members of management and advertisements and articles from the press. Ensure that the annex remains manageable in scope and does not become a data graveyard. The structure of a business plan, divided into main elements and individual elements respectively, is depicted in the illustration below.
This depiction involves a recommendation for the length of the business plan. The degree of detail with which each of the ten major elements in the business plan will be worked out will depend on the significance in each case. The recommended number of pages for the fundamental business plan (Phase 1) and the detailed business plan (Phase 2) are based on values gained in practical experience; they have proven their correctness in previous contests. The weighting of the main elements, the recommended number of pages in each case and the key areas for the work in phases 1 and 2 are also depicted in the following illustration.
Cope in pages
Phase 1 2 2 4
Cope in pages
Phase 2 3 3 5
1. 2. 3. 3.1 3.2 3.3 4. 4.1 4.2 4.3 5. 5.1 5.2 5.3 6. 7. 8. 9. 9.1 9.2 9.3 9.4 10.
Executive Summary Corporate objectives and profile Product or service Benefit and utility to the customers Development of the product or service Manufacturing the product / rendering the service Industry and market Analysis of the industry / overall market Market segments / Target groups Competitive situation Marketing (sales and distribution) Market entry strategy ales concept Sales promotion Management and pivotal positions Planning for realization Opportunities and risks Five-year planning Personnel planning Investment / depreciation planning Planning for profit and loss statement Liquidity planning Financing requirements
1 1
2 2 2 6
2
~18 ~35
Within the structure depicted above, which is largely fixed, the business plan will grow organically. At the beginning, only certain key elements and individual topics will be dealt with. Then new elements will join them; at the same time the content already present will be expanded. By and by the business plan will in this way be filled with content. Ultimately the individual observations will be drawn together to form an overall picture whose individual components are harmonised one with another.
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In order to simplify your efforts, the following chapters provide key questions for the main and individual elements in the business plan. This does not mean that you need to answer each and every question. It is left to your discretion, which questions are the right ones for your project, the ones needed to understand the business project. You yourself must think about whether additional questions not listed here ought to be answered.
II. B u s i n e s s p l a n s t r u c t u re
1. Executive Summary
The Executive Summary should spark the readers interest and particularly that of backers. It contains a concise review of all the major aspects in the business plan. In particular it should give insights into the product or the service along with benefits to the customer, the pertinent markets, management competence and investment requirements with potential returns. This summary is what a venture capitalist will look at first; usually he or she will only skim it. The quality of the presentation alone will hardly persuade a venture capitalist to support your project. Poor quality can, however, turn the backer away. With a clear, objective and consistent depiction of your project, which has to be understandable for the technical layperson, you can demonstrate that you understand your business. Thus you should be particularly careful when preparing the executive summary. It is decisive for whether the entire business plan will be read.
The summary is a separate element; do not confuse it with an introduction or brief description of your business idea on the cover sheet. Write this summary last; only after all the other sections are complete will you be able to formulate your ideas and objectives concisely and precisely. It should be possible to read and understand the Executive Summary within five to ten minutes. Test this by submitting your Executive Summary to a person who has no previous knowledge of your business idea or of its technical and scientific background.
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The purpose here is not to anticipate the business plan or to give a second summary. Instead you should draw up a vision of your company for your readers. Ideas and objectives are in the foreground here. The primary emphasis in your depiction should be the companys future positioning. Explain the strategy, success factors and important milestones.
Clarify the nature of your business and show that you understand it. Experience already amassed in regard to your future business sectors should be mentioned briefly here. Describe clearly what you are thinking about, do not get lost in details and make no references to other sections in the business plan. Show the expansion possibilities for your business, based on an estimate of the market potential.
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3. Product or service
Your business will be based on an innovative product or services idea. This idea and its advantages for the customers will have to be depicted in detail; also needed is a comparison with
competitors capabilities. In addition to this, you should provide information on the development of the product or service and on the requirements for manufacturing.
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3. Product or service
protection (by way of patents or registered utility models) against duplication or imitation. If there are any problems or open questions regarding development, always indicate the way in which you intend to overcome these difficulties.
A further source of uncertainty is represented by legal requirements for products and services. Describe the certification (e.g. by the TV, Federal Health Office etc.) you have already been awarded, have applied for or have yet to apply for.
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3. Product or service
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Massive expansion of the value of your company is to be expected only if there is commensurate market potential. It is necessary to ascertain this potential by analysing the industry and the market. For your potential financial backers it will not be sufficient to simply quote the figures. They will be looking for information on those factors that influence demand and the sales strategy so that the feasibility of the companys objectives can be examined and the risk better estimated. Thus it is necessary for you to make it clear how you arrive at your conclusions. You can limit your amount of effort by following an organised plan for your industry and market analyses. Work with hypotheses and compile questions that you would like to answer. List what information you require for this purpose and where you can obtain that information. The data required for the analysis is often easier to obtain than you might assume. Make use of all the available sources (e.g. literature, trade journals, market studies, monographs),
industry directories, associations and government authorities (statistical offices, chambers of commerce, patent office), banks (industry reports), databases and the Internet. Often it is helpful just to pick up the phone and make a number of calls. Sketching out a script will boost your own efficiency and productivity along with willingness of your interviewees to provide information. The individual items of information might under certain circumstances not provide a direct answer to your question. Thus it is necessary as a rule to arrive at certain estimates on developments in the industry or the market. You should always substantiate these estimates. While evaluating the information including the analysis of the industry, segmenting the market and identifying individual target groups and the sales volumes that could be realised in those groups you achieve a step-by-step refinement of your picture of the industry. Indicate with an analysis of the competition what difficulties are to be anticipated in exploiting the market potential.
Key questions on the analysis of the industry and the market as a whole
In Phase 1 How does your industry develop and how dynamically does it change? What part do innovations and technological advance play there? How large is total turnover and total sales in your industry? What is the current trend? What direction are prices taking? In Phase 2 What economic developments exert an influence on your industry? How does legislation influence your industry? What determines the growth rate in your industry? Describe the competitive arena. What strategies are being pursued? What barriers exist in regard to market entry and how can these be overcome? What yields are realised in your industry?
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II. B u s i n e s s p l a n s t r u c t u re
In the marketing concept you explain how you intend to distribute your products or services. Distribution efforts and all the measures you intend to undertake to exploit the market potential identified for your company will be explained in greater detail here. Assign great significance to these subjects and by no
means underestimate the amount of effort involved. You should depict convincingly and in detail your strategy for market entry, the sales concept and the sales promotion work you have planned.
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Potential backers will often turn to the subject of management right after reading the Executive Summary since they want to know whether the management team has the know-how necessary to run a promising enterprise. That is why you should deal carefully with the topic of management and pivotal positions. When depicting the qualifications of management staff, emphasise those aspects that are significant for implementing your project. Professional experience and successes already attained count for more than academic titles. Indicate what persons you intend to place in pivotal positions within the enterprise. Also sketch out how authority is to be assigned within the company and indicate those positions for which you are planning reinforcement. If inexperienced persons are to be entrusted with pivotal positions, you should substantiate the decision in detail.
Nobodys perfect! That is why you should not have any qualms about naming your most important consultants, as well. No one can possess all the qualifications and experience needed to found a company. Selective involvement of outside professionals, from the fields of auditing, public relations or management consulting, for example, indicates a degree of professionalism and will reassure potential backers. You should also deal openly with planned remuneration schedules for management. Be sure that you do not exceed salaries that are typical for the industry. Also consider the possibility of performance-based bonuses that are tied to achieving certain milestones, sales levels or profit objectives, which will make venture capitalists confident that the required degree of lan will be devoted to pursuing the targets you have set.
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Milestone planning for the realisation of your business project will have an essential influence on the financing and risks associated with the business. Planning helps you and your potential backers to think their way through all the aspects and to analyse the effects of individual steps in implementation. Realistic planning is, however, not simple, above all when founding a new company. Attempt in spite of that to sketch carefully the individual steps needed to implement the business plan. In this way you gain credibility among your backers and business partners and enhance the chances for the success of your business. Four simple rules can help simplify realistic planning for you:
Ask the experts! Utilise the advice of specialists in order to underpin major steps in planning. Marketing specialists, for example, could show you how long it will take to develop and conduct a given campaign. Set priorities! Every overall planning concept comprises a series of events and assumptions that in some cases run in parallel and are linked one with another. Certain activities can, if delayed, endanger the entire project similar to assembly line production that comes to a halt, if certain parts are lacking. Activities such as these are referred to as the critical path. You should devote particular attention to them in your planning.
Subdivide the tasks into packages! Reduce risks! Try to schedule activities that will reduce risks for the beginning Since there is a great deal of detail work to be carried out when of the realisation phase. You could, for example, carry out marsetting up a company, there is always the danger of losing sight ket studies immediately or just shortly after market entry. If you of the big picture. Thus you should always organise the individo not carry out such surveys or polls until a later point in time dual activities in packages. The business plan should, howand find that there are not enough customers for your product, ever, not contain more than ten such packages; you can specify all the previous work may have been in vain. them further at a later date. A concrete objective is to be set for each package.
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Young, rapidly growing companies have to set the course for their future at an early point in time. Their development and their latitude for action will be dependent in large part upon the ability to detect risks early on and to counter them effectively. In this chapter we are dealing with the realistic estimate of the opportunities and risks as you see them now, or which are to be expected with great likelihood in the future. Indicate what positive or negative consequences these could have for your company. Sketch out how you intend to respond to risks in order to limit the extent of any damage. Prepare an optional or alternative plan; it will have to mesh with your overall concept. Risks are lurking everywhere: perhaps your competitors will respond to your market entry with a massive counteroffensive. Suppliers with similar and better products could appear. How do you protect yourself against your own employees being pirated off by the competition and taking confidential information with them?
Increase your sensitivity to opportunities that are to be expected. Another company might encounter delivery difficulties and you might be able to cover customers needs; a change in the law might expand latitude for action that had previously been limited. When preparing your alternative plan, attempt to maintain objectivity and do not paint an overly rosy picture. Be sure to go into critical aspects, since this will earn respect among potential backers. A thoroughly founded depiction identifies industry insiders who are prepared to meet every eventuality. The ideal situation is to draft two scenarios, one being the best case and the other representing the worst case. Identify your prime opportunities and major risks. Vary the parameters such as pricing and sales to clarify their influence on your planning.
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9. Five-year planning
Here you examine whether your business concept can be financed and will be profitable. To do this you will have to compile and consolidate the results from all the previous sections. The profit and loss accounts show the increase in value to be expected. Essential to five-year planning is liquidity planning, which shows the needs for interim financing. Before attempting to prepare these plans, you should give some thought to personnel planning and investment planning.
There are many possibilities for presenting this wealth of figures. To simplify this we are providing planning tables in the appendix to this manual; they are also available on our website, ready for downloading.
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9. Five-year planning
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9. Five-year planning
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Liquidity planning will indeed show us how much capital will be required at what time but not, however, the sources from which it is to derive. Here it is important to coordinate individual financing items with suitable and willing suppliers of capital. Among the items requiring financing are the costs for development, investments, production start-up and establishing the warehouse or rendering the service through to the point that a liquidity reserve is established. Choosing from the large number of sources of financing (venture capitalists, holding companies, public agencies and startup business promotion schemes, established companies, private persons, banks, your own private capital etc.), select the proper mix for your enterprise. You have a choice among widely differing financing options. Your short-term financing needs can be met by way of revolv-
ing payments or credit granted by suppliers. When you seek long-term financing, both loaned and equity capital are suitable. Non-equity funds include public funding, bank loans and personal loans. To be counted among equity funding are cash contributions, contributions in kind, shares in the company (to include voting shares) and equity capital assistance (e.g. the Equity Capital Assistance Scheme operated by the European Recovery Program). If you should decide to sell shares in your company, remember that your goal has to be to sell the smallest possible amount of voting capital at the highest possible price.
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III. Annex
Glossary
Assets The wealth available to a company, comprising the circulating assets and fixed assets
Business plan Corporate concept that provides clear and concise information on the all aspects of a new company that are of importance to backers; included here are statements on the product idea, market, team and management of the future company, business administration analysis etc.
Balance sheet Listing of the companys wealth and indebtedness (assets and liabilities) at a given cut-off date
Business system Description of a companys individual activities and their mutual interdependencies; the business system shows what activities have to transpire in what way so that a product can be manufactured or a service rendered
Bankruptcy Termination of all of a companys payments due to insolvency and subsequent dissolving of the enterprise
Cash flow Best case A business scenario based on the assumption of favourable events or series of events in the majority of the cases The excess of liquid funds that are relevant to success and generated within a given period. Cash flow is derived from the data in the annual accounts (or planning figures), and in particular from the profit and loss statement. It is an indicator for the companys own, internal financing capabilities
Break-even point In conjunction with founding a new company: the time at which positive cash flows are achieved and, more generally, the time at which the profit threshold is crossed and a profit is realised CEO Chief Executive Officer
CFO Burn rate Chief Financial Officer The rate at which a newly-formed company spends cash on start-up costs, research and development, and other expenses; this is expressed, for example, in Euros per month
Business angel Wealthy individuals (usually experienced entrepreneurs) who assume something like a godfather position for a company being founded and who provide the company with capital and, above all, with advice (a.k.a. private venture capitalist) Circulating assets Asset items that, in the normal course of business activity, can be converted at short notice into liquid funds
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III. Annex
Glossary
Expansion phase Copyright Protection for the originator of something new and novel in order to prevent imitating an idea, a name or a product Further intensive growth of a (new) company, following initial market successes, for example, (when a new company has been funded, this phase follows the start-up phase)
Credit line An amount of credit that has been granted, up to a specified maximum, that need not be called in whole; interest is due only on the amount that is actually used
Gantt chart Survey of the time schedule for a project, depicting various project activities and showing their sequence and duration (using bars)
Hard money Capital that has to generate returns, e.g. venture capital
Distribution Planning, implementation and monitoring transport of the products and services from the point of origin to the customers sites
Hurdle rate Minimum yields (internal rate of return) that has to be achieved so that an investment appears to be interesting (between 30 and 40 per cent for venture capital)
Distribution channel Physical path along which a product passes from the maker to the customers; there are various types of distribution: direct sales, retail sales, agency sales, franchising, wholesaling
Internal rate of return (IRR) Discount rate at which the net present value of all negative and positive cash flows is equal to zero
Joint venture Early stage Stage in the development of a company from the founding to its debut on the market and first market successes This can be a source of considerable confusion. In English the term is used to denote a common subsidiary founded by two or more parent companies in order to carry out a specific project or activity or conduct specific business. The words joint venture are used far more loosely in German to designate any type of cooperative arrangement between two companies to, for example, exploit synergies, penetrate a new market or promote common projects, often for a specified period of time.
Exit Investors or investors withdrawal from an investment by selling shares and realising the profit
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III. Annex
Glossary
Leverage Degree of a companys external indebtedness, usually expressed by the ratio of outside to equity capital
Market analysis Analysis of supply and sales markets made with the objective of determining whether and how a certain market will accept a product
Liabilities Market entry barriers Includes all the sources of capital and the obligations of a company associated therewith Disadvantage of a company newly entering the market in comparison with the vendors already active on that particular market
License Market entry strategy Authorisation acquired by contract to manufacture a patented product or to render a service, usually associated with license fee Strategy for launching new business, i.e. to overcome market entry barriers
License fee Market penetration A fee that has to be paid in order to acquire a license; this is distinguished from royalties, which are ongoing payments based on the number of items produced or the turnover achieved pursuant to using the license Percentage share of a companys sales in relationship to an overall market (which has to be defined exactly)
Marketing mix Liquidation The four elements in marketing: product, price, place, promotion Converting a companys assets into cash, which is then used to pay the companys obligations; this is followed by the dissolution of the company
Net present value (NPV) Net value for a future asset item (e.g. cash flows) from todays point of view; answer to the question of how much tomorrows Euros are worth today
Liquidity Ability to satisfy payment obligations as they become due, for example by having sufficient liquid funds on hand
Non-operating income Make or buy Decision as to whether a product is to be manufactured or a service rendered in-house or is to be bought in from an outside source Normal case Margin Difference between the sales price and prime costs, also called the profit margin Assumption of the most likely business scenario according to the best of ones knowledge and belief; often also referred to as the base case Yields from a companys extraordinary business activity (stock market profits, sale of machinery above book value etc.)
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III. Annex
Glossary
Operating income Yields from a companys normal business activities or profit, less non-operating income Return on investment (ROI)
Substitute Similar products that can satisfy the same customer needs (the classical example being butter and margarine)
Unique selling proposition The ROI indicates the relationship between yields and the invested capital Concept from the field of marketing, i.e. convincing sales argument or special property that gives greater customer utility for a product or a service
Seed capital Capital invested during the seed phase Velocity The speed at which the business plan is implemented; high velocity can create a lead over the competition
Venture capital Skimming-the-market-policy Pricing strategy in which a high price is set in order to achieve the highest possible growth margin and thus high returns; this is used, for example, with innovative products or services where there are few alternatives for the customers Money made available by investors to finance new, highgrowth companies; risk capital
Venture capital company Mutual fund specialised in growth-oriented industries that provides risk capital to your company and supports the company, often through consulting, in the early years
Small and medium-sized enterprises (SME) Small and medium-sized (also known as middle-market) companies with no more than 250 employees
Venture capital fund A fund that is used by the professional venture capitalist to finance his investments
Soft money Capital for which there is no absolute obligation to generate yields; is usually made available by family members, friends and acquaintances, the state, or trusts or foundations
Win-win situation Situation in which all the persons or companies involved in a transaction realise a profit or from which all the participants receive equitably divided utility
Start-up Phase immediately following the founding of a company, often also used to designate a new, growth-oriented company (a start-up)
Worst case Assumption of a business scenario in which a majority of unfavourable conditions, events or parameters come to bear
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III. Annex
Recommended literature
Fundamentals of business administration Arbeitsbuch Betriebswirtschaftslehre fr Existenzgrnder 3rd edition, Heinz Kussmaul, Oldenbourg Wirtschaftsverlag GmbH, Munich 2001, 54,80 Einfhrung in die allgemeine Betriebswirtschaftslehre 21st edition, Gnther Whe / Ulrich Dring, Vahlen Verlag, Munich 2002, 29,00 Finanzwirtschaft der Unternehmung 13st edition, Louis Perridon / Manfred Steiner, Verlag Vahlen Franz, Munich 2004, 25,00 Industrielles Rechnungswesen IKR 32nd edition, Siegfried Schmolke / Manfred Deitermann, Winklers Verlag, Darmstadt 2004, 30,80 Jahresabschluss und Jahresabschlussanalyse 19th edition, Adolf Gerhard Coenenberg, Landsberg / Lech 2003, 49,95 Kostenrechnung 1, Einfhrung 11th edition, Lothar Haberstock / Volker Breithecker, Erich Schmidt Verlag, Hamburg 2002, 17,80
Grndungsplanung und Grndungsfinanzierung Voraussetzung fr den Grndungserfolg 3rd edition, Willi K. M. Dieterle / Eike M. Winckler, dtv Beck Wirtschaftsberater, Munich 2000, 14,00 Planen, grnden, wachsen. Mit dem professionellen Businessplan zum Erfolg. 3rd edition, McKinsey & Company Inc., Wirtschaftsverlag Carl Ueberreuter, Zurich 2002, 35,00
Start-ups Das Existenzgrnder Handbuch Von der Geschftsidee zum sicheren Geschftserfolg 5th edition, Carsten Rasner / Karsten Fser / Werner G. Faix, Verlag Moderne Industrie, Landsberg / Lech 2004, 49,90 Erfolgsstrategien deutscher Venture Capital-Gesellschaften 3rd edition, Michael Schefczyk, Schffer-Poeschel Verlag, Stuttgart 2004, 79,95 Existenzgrndung: Die wichtigsten Bausteine fr das eigene Unternehmen Deutscher Industrie- und Handelstag, 2000, order through www.diht.de (Shop), 12,50 Existenzgrndung: Finanzierung und ffentliche Frdermittel. Mit zahlreichen Checklisten und Musterbriefen 3rd edition, Stefan Rdel / Klaus Gersmann / Bernhard Wittemer, mvg Verlag, Landsberg / Lech 2002, 15,24 Existenzgrndung fr Frauen: Frauen grnden anders Angelika Huber, mvg Verlag, 2002, 13,00 Existenzgrndung und Existenzsicherung: Vom Unternehmenskonzept zum erfolgreichen Unternehmen Nicole Manz / Ekbert Hering, Springer Verlag, Heidelberg 2000, 24,95
Business plans Der Businessplan 3rd revised edition, Roman Hofmeister, Wirtschaftsverlag Carl Ueberreuter, Vienna 2003, 17,90 Geschftsplne. Als Voraussetzung fr erfolgreiche Expansions- und Grndungsfinanzierung 3rd edition, Uwe Struck, Schffer-Poeschel Verlag, Stuttgart 2001, 39,95
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III. Annex
Recommended literature
Handbuch Existenzgrndung Fr die ersten Schritte in die dauerhaft erfolgreiche Selbstndigkeit (mit CD-ROM) 4th edition, Friedrich von Collrepp, Schffer-Poeschel Verlag, Stuttgart 2004, 49,95 Selbststndig mit Erfolg: Wie Sie Ihr eigenes Unternehmen grnden, aufbauen, sichern 5th edition, Uwe Kirst (Hrsg.), Deutscher Wirtschaftsdienst, Cologne 2004, 39,90 Starthilfe Der erfolgreiche Weg in die Selbststndigkeit, Junge Unternehmen Die Schritte nach dem Start, Grnderzeiten Can be ordered gratis from: Bundesministerium fr Wirtschaft, Referat ffentlichkeitsarbeit Versand, Postfach 30 02 65, 53123 Bonn, Download at: www.bmwi.de Unternehmer sein heit frei sein Mein Weg in die Unabhngigkeit Theo Lieven, Carl Hanser Verlag, Munich 2000, 19,90
Marketing BWL in der Praxis. Band 4, Marketing 6th edition, Armin Seiler, Verlag Orell Fssli, Zurich 2001, 49,00 Marketing-Management, Analyse, Planung und Verwirklichung 10th edition, Kotler / Bliemel, Schffer-Poeschel Verlag, Stuttgart 2001, 39,95
Human resources management DK Essential Managers Manual Robert Heller / Tim Hindle, Dorling Kinderskey Verlag, London 2000, 36,00 Fhren, Leisten, Leben Wirksames Management fr eine neue Zeit. 13th edition, Fredmund Malik, Deutsche Verlags-Anstalt, Stuttgart / Munich 2002, 25,00
Finances Business Angels. Wenn Engel Gutes tun! Wie Unternehmensgrnder und ihre Frderer erfolgreich zusammenarbeiten. Ein Praxisbuch. Hans Dieter Kleinhckelskoten et. al., BAAR (Hrsg.), F.A.Z.Institut fr Management-, Markt- und Medieninformationen GmbH, o. O. 2003, 25,90 DtA-Finanzberater Der schlaue Wegbegleiter in die Selbststndigkeit Download at: http://www.aknw.de/mitglieder/service_fuer_mitglieder/index. htm?krisenmanagement.htm~content Wirtschaft, Investition und Finanzierung 5th edition, Klaus Spremann, Oldenbourg Verlag GmbH, Munich 1996, 54,80
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Publication information Publisher dortmund-project Editorial staff Udo Mager (responsible for content) Sonja Gtebier Heike Mertins Design and production CP/COMPARTNER Photos dortmund-project Dortmund-Agentur / Alexander Lorenz December 2004