Preparing a business plan

Business Planning

"In preparing for battle I have always found that

plans are useless, but planning is indispensable."
-Dwight Eisenhower

“Those who fail to plan, plan to fail.”

-George Hewell
 The Basic Business Model

The Infrastructure Value

Money Addition
Money
Cycle Cycle
Collection

Procurement
Billing

Consumption
Finishing

People

Financing is required
for all the three
components
Financing a business
• Finance raised has to be equal to
investments (resources) required
• Finance would include that provided by
entrepreneur & others, both
– Colour of money is the same
• Credit from suppliers reduces the need for
borrowed funds
• If we can reduce the resource requirement,
we can reduce the need for finance
Business Plan

It is a roadmap of launching a
business initiative based on a
thorough analysis of external
environment & need and a
thorough scheme for execution of
the initiative. It covers both
operational (marketing &
processing) & financial dimensions.
Business Plan : audiences

• Entrepreneurs themselves: for achieving

clarity about the direction & steps
• Key executives: as above
• Investors & Lenders: for raising funding
for the project
Contents of the business
plan
• Executive Summary
• Table of Contents
• Mission & Vision
• Company Information
• Products & Services
• Industry Analysis
• Target markets
• Marketing Plan
Executive Summary
• Most important section of business
plan
• First to be read, could be last
• Brief description of company, the
product or service, and the unique
opportunity your company
• Key management team members
• Outline of the investment sought &
returns
What an executive summary is
not
• Not an abstract of the business plan
• Not an introduction to the business plan
• It is not a preface
• It is not a random collection of highlights
What is an executive
summary
• It is a business plan in miniature.
• It should be able to stand alone
• Logical, clear, interesting - and exciting.
• Reader should be able to go through it in
four or five minutes
• Limit the length of your executive summary
to no more than 2 to 3 pages and stick to
the facts.
Table of contents

• Enables reader to focus on the

information they are most interested
in.
• It should be easy enough to help
navigate the document
• Could be immediately after the
executive summary
• List of all major sections & sub-
sections
Mission & Vision
• The mission and vision define the path
• They tell the reader what you and your
business are all about - what your
company stands for, what you believe in,
and what you intend to achieve.
• Vision: Defines your long-term dream. It
should be slightly out of reach.
• Mission: Defines what you intend to
become or accomplish. It should be
challenging but achievable
Company Information
• Outline of company's basic
background information and business
• Legal details such as incorporation,
location
• General overview of the history of
your business
• General time line of events
• Achievements and significant
milestones
• Company genesis
Company Information

• Driving force behind its inception

• Change in business mix over time
• Historical data on sales, profits, units
sold, employees, etc.
• Snapshot of current status
• Strengths & weaknesses
• Goals over next 1, 3, 5 and 10 years
• Relate these to the investment sought
Products & Services
• Section that discusses product/service
features & the needs or problems they
address in the market
• Products:
– Pictures
– Size, shape, colour
– Cost
– Design, capabilities, technological life-span
– Patent protection
– Components
• Services Overview
Industry Analysis
• Industry: Entire supply chain is included
• Outline of the industry : size, number of firms
• Basic trends and growth
• Factors influencing growth or decline
• What trends are expected in the coming years?
• What are the barriers of entry for your industry?
• Government regulations
• Distribution system for products and services
• How easy is distribution access
Target Market
• Identification of current and prospective buyers
• How the products meet the need of the market
place
• Size
Both in terms of value as well as number of
customers
• Demographics
Consumer- Income, Occupation, Gender, etc.  
Business- Industry, Product/ Service, Revenue,
Private/Public
• Geographic
Location spread
• Other Characteristics
Shifts taking place in the market
Marketing Plan
• Target market and Marketing
Programme two important
component
• Target Market
– Targeted customers
– Characteristics
– Research based on primary and
secondary sources.
Marketing Plan
• Marketing Programme
– Defines how to reach the customers
– Steps necessary to reach potential
customers
– Specific marketing media to reach the
customer
– How often, why
– Costs of marketing material
Competitiveness Analysis
• An objective overview and comparison between
your company and your competitors
• Identify competitors
• Analysis of their strengths & weaknesses
• How is the market penetration proposed to be
achieved
• Present comprehensive information and point
out how your unique strengths and tight market
niche will result in your success
Management Team
• Investors expect a well-rounded team of professionals
• Founder/s & their credentials
• Specific Team Members
– Key 3 to 5 people
– Background & intended contribution of each
– Title of this position, duties and responsibilities of this position
– Previous industry and related experience
– Previous Successes, educational background
• Board of Directors
– People on the Board
– Their backgrounds, and contributions
• Consultants
Accountants, lawyers and experts such as technology advisors
Operational Plan
• Location : Size of the area, number of locations, type of
space: Office, warehouse, manufacturing, advantages,
layout of the facility

• Equipment: Description, cost. Capacity, purchase or

lease, include vehicles, computers, and office equipment.

• People: No. of employees, classification by function, shift

working, salary levels

• Manufacturing & Service Process: Description of the

processes including procurement, quality, storage

• Other Issues to Consider: Insurance, inventory

handling, quality
Financial Projections
• Financial plan invites highest scrutiny
• All operational plans culminate into financial
numbers
• Follow the accounting standards & forms
• Financial projections for 3 to 5 years
• Income Statements
– Year 1 - Monthly Projections
– Years 2 thru 5 - Quarterly or Yearly Projections
– Existing businesses for last 3 years
• Balance Sheets
– Year 1 - Quarterly Projections
– Years 2 thru 5 - Yearly Projections
– Existing business for last 3 years
• Cash Flows
– Year 1 - Monthly Projections
Financial Projections
• Assumptions
Form basis for financial numbers

• Break-Even Analysis
Graphs could be included

• Investment Structure and Objectives

Outlines the amount of capital needed, proposed
investment structures, and estimated return to your
investor.

• Financial Ratios
Existing performance, comparison with others
 Balance Sheet Profit & Loss Account

Liabilities Assets Infrastructure

Capital
Revenue
Costs
Reserves Fixed Assets Money
Borrowings from Collection
Banks / FIs Current Assets
Procurement
or Outstanding
Current & Inventory
Working Capital
Liabilities
Finishing
Consumption Net Profit/
& WIP Net Loss
Human Assets & Billing

People

Two financial statements are used to understand the financial position

of a business enterprise. Balance Sheet shows the cumulative position
of resources (assets) and sources of funds (liabilities). Profit & loss
Account show ‘Revenue & Cost’ performance during last one year.
 Balance Sheet Profit & Loss Account

Liabilities Assets Infrastructure

Capital
Revenue
Costs
Reserves Fixed Assets Money
Borrowings from Collection
Banks / FIs Current Assets
Procurement
or Outstanding
Current & Inventory
Working Capital
Liabilities
Finishing
Consumption Profit
& WIP
Human Assets & Billing

People

Profits build up reserves & enable an enterprise to

acquire new assets without borrowing money.
Exactly the way we can acquire assets for our use
without borrowing.
Where is the money coming
from & where is it going ?

Operating Financing Investing

Cash Flow Cash Flow Cash Flow

Cash generated Cash received & Cash paid out in

in regular paid out in making fresh
course of raising money investments in
business net of for the business Long Term
taxes and net of & servicing Assets or
inventories previously realized sale of
piled up & raised funds from previously
receivables respectively invested
accumulated Cash Flow Statement avenues
 Relationship between
Balance Sheet and Profit
Statement
BALANCE SHEET AS ON
31.12.2003

Assets Acquired /
Revenue Disposed off
generating
activities of P&L A/c
business add to or Funds borrowed /
deplete reserves paid-off

BALANCE SHEET AS ON
31.12.2004
 Relationship between
Balance Sheet and Cash Flow
Statement Cash Flow
BALANCE SHEET AS ON Statement

31.12.2003

Assets Acquired /
Revenue generating Disposed off
activities of (Investing Cash Flow)
business (Operating
Cash Flow) Funds borrowed / paid-
off (Financing Cash
Flow)

BALANCE SHEET AS ON
31.12.2004
Behaviour of costs

• Some costs are linked with time

– They are called as Fixed Costs
• Some costs are linked with volume
of work or production
– They are called as Variable Costs
Variable Costs
Change in direct proportion to changes in activity
• Examples,
• Cost of Materials
– Fuel
–
Cost per unit of activity remains the same whereas the aggregate cost changes linked with activity / volumes
•

Cost Aggregat
s e
Variable
Costs
Per Unit
Variable Cos
Activity/ Volume
Fixed Costs
Remains unchanged for a given time period, may step up beyond a certain
• activity level
Costs of capacity creation
• Costs of capacity creation
Aggregate is first known, per unit is derived based on the activity / volume
•

Costs Aggregat
e Fixed
Costs
Per Unit
Fixed
Costs
Activity/ Volume
Contribution Income
Statement including interest
costs
Sales/ Revenue
(-) Variable Costs*
Contribution (1)
(-) Fixed Cost*
Profit Before Tax (2)
(-) Tax
Profit After Tax (3)

* Including Variable & Fixed Interest Cost

Components
Contribution Margin %

Aggregate Contribution
______________________
Total Revenue
Break - Even

• A level of volume or activity at which the

organization has, on the positive side, the
critical mass to move into a profit zone and on
the negative side, the risk of slipping into losses
• Lower the break-even point the better
• Each organization has to monitor how far it is
from BEP : Check its safety zone
Break Even Chart
2500
Costs and Revenue ( Rs. )

2000
Variable Costs
1500 Fixed Costs
FC + VC
1000 Revenues

500

0
0 250 500 750 1000
Output
Calculation of Break Even Point
(Revenue)

Fixed Costs
______________________
Contribution Margin %
Exit Strategy
• For an investor, liquidity is very critical, the exit route should
be clear

• This will also depend on the intentions of the founder

• Venture Capitalists : Look for a high return and an exit

strategy of 3-7 years

• Angel Investor: Willing to work with the firm & more

flexible

• Exit strategies:
– Initial Public Offering
– Merger/Acquisition
– Buyout by partner
Appendices
• Management resumes
• Pictures of products, locations, etc.
• Floor plans
• Marketing materials
• Details of the manufacturing process and
machinery
• Highlights of Market research surveys
results
• Any other supporting documents
Typical mistakes to avoid …
1
• Boring, unconvincing business plan
• Unclear positioning
• Exaggerated claims
• Too detailed, move to appendices
• Mixing facts with personal opinions
• Disorganized presentation
Typical mistakes to avoid …
2
• Lack of understanding of the industry
• Underestimating competition
• Too ambitious financial assumptions
• Lack of integration of financial & operational
plans
• Under-budgeting of expenses
Financing a New Venture
• Financial assistance to entrepreneurs is
available from institutions such as
Nationalized banks, Small Industries
Development Bank of India, Regional
Rural Banks,etc…. depending upon the
project requirement and promoters
background.
• Financial assistance has two
components :
– Loan for Fixed Capital
– Loan for Working Capital
Typical New Venture Funding
Sources

• Who are they?

• What drives their investment
decision?
• What do they expect to get?
• Where does their money come from?
Typical New Venture Funding
Sources

• Self-financed
• Angel Investors
• Venture Capitalists
• Private Equity
• Public Equity
• Banks
Self-financed

• From where?
– Family
– Friends
– The entrepreneur
• What drives their investment decision?
– Based on a belief in, or relationship with, the
entrepreneur
– Based on a belief that the idea is at least
feasible
Self-financed

• What do they expect to get?

– Their original investment returned
– Maybe interest
– Less often equity
• Where does their money come from?
– Usually funded from personal savings or
new borrowings (mortgage on real
estate)
Angel Investors

• Who are they?

– Wealthy individuals
– Often successful entrepreneurs
• What drives their investment decision?
– A belief that the entrepreneur has done her
homework
– A belief that the idea holds great upside
potential
Angel Investors

• What do they expect to get?

– Equity
– A large return on their investment (>
30%)
• Where does their money come from?
– Usually funded from personal savings
Professional Investors

• They Include: Venture Capitalists, Private

Equity, Public Equity, Banks
• What are they looking for (maturity):
• Significant shareholder value growth (“$”) for expansion
capital or reliable cash earnings
• Consideration of: transparency, honesty, creativity,
responsibility, accountability, teamwork, etc.
• Appropriate industry, investment size, stage of company
development – can vary depending on risk tolerance and
desired ROI.
Venture Capital Investors

• Who are they?

– Professionally managed investment vehicles
– Usually in the form of a limited partnership
• What drives their investment decision?
– A belief that the entrepreneur is very capable
• Management team
• Business model
– A belief that the idea and market conditions
allow for significant revenue and profit growth
Venture Capital Investors

• What do they expect to get?

– Equity
– Significant return on investment (~ 30%)
– A clearly pre-defined exit for 5 – 7 years later
• Where does their money come from?
– Pension funds
– Wealthy individuals
What is a Venture
Capitalist?
• Investment fund for private equity
– Such as large pension funds that have long-term
investment horizons
– Typically a VC fund lasts 10-12 years, before it is closed
out
• Looking for larger returns than offered by world-
wide stock and bond markets
– Require fast growth
– Require large market opportunities
– Rewards must outweigh risks
– VCs may reject 99% of all proposals.
What is a Venture
Capitalist?
• General George Doriot
– Founded American Research & Development in 1946
• Key investment principles:
1. New technology, new marketing concepts, and new product
application possibilities.
2. A significant, although not necessarily controlling, participation by
the investors in the company’s management.
3. Investment in ventures staffed by people of outstanding competence
and integrity.
4. Products or processes which have passed through at least the early
prototype stage and are adequately protected by patents, copyrights,
or trade secrets.
5. Situations which show promise to mature within a few years to the
point of an initial public offering or a sale of the entire company.
Think Big – Venture Capital
• Why do VC’s look for big opportunities to offset
large risk.
– 40% will fail.
– 30% will become “living dead.”
– 30% will become successes.
– Most important: The failures almost always happen more
quickly than the success!
• VC determine their exit strategy before they
invest:
– Public offering
– Sale to a strategic partner
What Do VCs Offer?
• Investment money from pension funds or
university endowments
• Suitable management or technical expertise
• Help finding strategic partners or customers
• Strategy planning
• In return: a large percentage of ownership, plus
seats on the board
Private Equity Investors

• Who are they?

– Professionally managed investment vehicles
– Can be in the form of a limited partnership,
also mutual funds
• What drives their investment decision?
– Track record of the business
– A belief that market conditions allow for
expansion of the business
Private Equity Investors

• What do they expect to get?

– Equity
– Significant return on investment (up to 30% CAR)
– May or may not seek a pre-defined exit
• Where does their money come from?
– Pension funds
– Insurance companies
– Mutual funds
– University endowment funds
Public Equity Investors

• Who are they?

– Retail investors
• Individuals
– Institutional investors
• Pension funds, mutual funds, corporations
• What drives their investment decision?
– Retail investors
• Emotion, hot tips, their own analysis
– Institutional investors
• Investment policy (hurdle rates, sector & country
allocations, etc.)
Public Equity Investors

• What do they expect to get?

– Shares
• Usually no role in management of the business
– Return on investment (??%)
• Where does their money come from?
– Retail investors
• Personal savings or borrowings (mortgage on real
estate, or margin on brokerage account)
– Institutional investors
• Pension contributions, insurance premiums, etc.
Banks

• Who are they?

– Lending institutions
• What drives their investment
decision?
– The creditworthiness of the borrower
• Ability of the business to service the loan
(make payments of interest & principal)
• Collateral (can be supplied by a third party)
Banks

• What do they expect to get?

– Their original loan returned
– Interest
• Where does their money come from?
– Depositors
Funds often are applied to
different purposes
Source Purpose
Research Institutions Basic research, inventions

Self-Financed Initial start-up funds

Angel Investors Initial start-up funds

Venture Capitalists Just after start-up

Private Equity Longer-term growth of an

established company
Public Equity Capital investment requirements of
an established company, exit for
VCs
Industrial Finance in
India
• National Level Industrial Development Banks
– Industrial Development Bank of India (IDBI)
– Industrial Finance Corporation of India (IFCI)
– Small Industries Development Bank of India (SIDBI)
– Industrial Reconstruction Bank of India (IRBI)
– Shipping Credit and Investment Company of India (SCICI)
• Specialized Financial Institutions
– Technology Development & Information Company of India
Limited (TDICI)
– Risk Capital & Technology Finance Corporation Limited (RCTC)
– Tourism Finance Corporation of India (TFCI)
Industrial Finance in
India
• Investment Institutions
– Unit Trust of India (UTI)
– General Insurance Corporation of India (GIC)
– Life Insurance Corporation of India (LIC)
• Other Banks Offering Financial Assistance
– Small Industries Development Bank of India
(SIDBI)
– Industrial Development Bank of India
– Industrial Finance Corporation of India
– ICICI Bank
– National Bank for Agriculture and Rural
Development (NABARD)
– State Bank of India
• Venture Capitalists Generally :
– Finance new and rapidly growing companies
– Purchase equity securities
– Assist in the development of new products or services
– Add value to the company through active participation
– Take higher risks with the expectation of higher rewards
– Have a long-term orientation
• Some Venture Capital Organizations
– ICICI Venture Funds Management Company Limited
– SIDBI Venture Capital Limited (SVCL)
– IFCI Venture Capital Funds Ltd. (IVCF)
– Gujarat Venture Finance Limited (GVFL)
– IL & FS Group Businesses
How to Approach Investors
• Research potential investors
• Only approach appropriate investors
• Prepare a very good Business Plan
• Prepare and rehearse a very good
presentation (no set standard: 30 seconds /
40-45 mins)
• Be clear about what you need (how much,
when, what for) and have some idea about
what you’re prepared to offer (% of equity)
• Progress your venture as much as you can
on your own before approaching investors
How to Approach Investors

• Ask potential investors about their

investment style and expectations
• Spend time with investor’s other investee
partners / companies
• Negotiate hard
• Ensure your interests are aligned with those
of your investor. Agree a written business
plan
• Hire professional help
Thank you for your
participation
Hope you found the content
useful !!