Looking at an entrepreneur in the real world, we assess how realistic their ideas about financial growth and business model are. At the College competition, we focus on business concepts and product developments. Finance as an area in which novice entrepreneurs do not have much experience, remains in the background.
Mark Gorenberg, venture capitalist and jury member
New businesses are opening in record numbers today.
Entrepreneurs receive much more respect and understanding from the business community than in the recent past. Many Americans hope to one day create and manage their own company. More than 500,000 companies appear in the country every month. Entrepreneurship is developing all over the world.
Increasingly, people are not just creating a company, but are seriously preparing for business. There has been a surge in interest in courses on how to open new companies and manage them, and a new area of research has emerged. Business schools in the United States and other countries have introduced “Entrepreneurship” courses, and in some educational institutions this discipline has become a profile.
Do business plans for classes and competitions differ from actual business plans?
The main distinguishing feature of a business plan for classes or competitions is that when you create it, you are likely to work in a team — as one of its members, and not as an entrepreneur with his own vision. In the real world, the organization’s leader is usually responsible for making final decisions.
In this context, it is particularly important to manage the processes associated with the preparation of a business plan and decision-making. One of your first tasks will be to imagine how you will make decisions, distribute tasks, and meet payment deadlines. In fact, in some classes, your score may be determined by how well you manage team interaction. This complicates the process of creating a business plan, but it will help you develop the group skills needed to create a real business.
Another difference between a business plan for classes or competitions and reality is how your business plan is evaluated by a teacher or a member of the competition jury. The criteria for evaluating business plans adopted by banks and venture companies may differ significantly from those used in the educational process. In classes and competitions, special attention is paid to the quality of the written business plan itself. In the real world, a company that is truly successful can get funding, even if its business plan is drawn up somewhat carelessly. In addition, potential investors make most decisions based on the assessment of the business abilities of key figures of the company, rather than the content of the business plan or business concept. You may have a terrific plan that would get you a top grade in class or a prize in a competition, but potential funding sources may not believe in your ability to implement it.
However, perhaps the most important difference is the passion that the person working on the business plan brings to the process. When you create a business plan for your own business, you have a vision for the company; you are driven by a desire to create something new or realize a lifelong dream of your own business. The downside of this passion is that an entrepreneur may not be completely objective when evaluating the concept of their business and the likelihood of success, since it is about their dreams. If possible, bring a little passion to the process of drawing up a business plan in classes or competitions — but do not lose objectivity!
As already noted, one of the main problems when drawing up a business plan for classes or competitions is working in a team. Mastering the dynamics of working together in a group (how to make decisions, distribute tasks, communicate, etc.) will help you prepare for various situations that you will face when creating a real enterprise.
Key steps in the management process of developing a business plan include:
development of the decision-making process;
choosing a business;
identifying key issues;
distribution of tasks;
re-analysis of assumptions;
completion: preparation and presentation of the plan.
Teams that win University competitions are formed from representatives of various professions. Engineers communicate with trade or industry specialists, and business school teachers communicate with representatives of other disciplines. The most successful plans are developed by people who are knowledgeable in various fields of knowledge. Teams with almost all members representing the same discipline tend to be group-minded.
Mark Gorenberg, venture capitalist and jury member
One of the most important decisions you make is the choice of participants, since the success of developing a business plan is determined by the results of joint activities of team members.
This is also true when you open a real business — with only one difference. If you start a business and your Vice President of marketing is not up to the job, you can fire him. But you don’t always have the opportunity to get rid of team members in class or during a competition. So select them very carefully. (In some classes, team members are assigned, and you don’t have a choice.) When choosing members of your team, you may be tempted to make it up of your friends. Don’t give in to this temptation!
A group of people who know each other well can be very effective, but you have to put together the best team. And your teammates don’t always have the knowledge or skills needed in a well-balanced team. And some of them may not be responsible enough. When selecting a team, look for a balance between the functional areas that you consider in the business plan. Think about this process as to the formation of the management team for their new venture. The presence of three experienced marketing specialists in it is a clear overkill: you risk leaving the production, financial or technological aspects of your company without proper support. If you are creating a business plan for a high-tech company, try to balance your technological capabilities with your managerial abilities. Of course, the entire production activity of an enterprise can revolve around a single technological genius. However, to achieve business success, you need competent managers.
When selecting team members, you must find participants who have:
abilities in a specific functional area;
responsibility when performing tasks, the habit of bringing things to the end;
high intelligence, ability to evaluate facts and think creatively;
communication skills and developed communication skills;
ability to work in and with a group;
willingness to work hard and for a long time to complete the task.
Before finally forming a team, you may need to interview potential members to see what personal skills and abilities they have and whether you will work together as a group.
The first decision that any group must make is the question of the decision-making procedure. Developing a clear and fair way of making decisions simplifies any further decision-making and improves group relationships. All team members should be involved in developing a consistent decision-making process. This does not mean that decisions must necessarily be approved unanimously or by a majority vote — the team can agree that one of the participants will always have the last word. It’s just that all team members have to agree on the process itself. If you go far ahead in developing a business plan without defining the decision-making procedure in advance, you may find that your disputes over certain issues have not ended by the end of the project.
One of the main questions is what decisions the group members can make individually and which ones should be approved by the entire team. If you want to make coordinated decisions-discussing the problem as a group until a solution is found — you need to understand whether the participants are able to solve the problem in a reasonable time, whether all team members will participate in the discussion, and whether they respect each other’s opinions. We need to discuss what you will do if you can’t come to an agreement. If you decide to base your work on unanimous decisions, you are essentially giving each team member a veto.
If you have a strong team leader-perhaps a person who has engaged others to form a common vision-you can expect him to make most of the decisions. Discuss how this suits the other members of the group.
What company are you planning to create a business plan for? In some classes or competitions, a limited selection of enterprise types for the project is offered as a task, but more often there are a great many options. Since the quality of your plan is largely determined by the nature of your business, choose your business type carefully.
It may be that one of your team members has a clear vision of the business that the group has chosen. It is even possible that the team was formed with a certain business concept in mind. In this case, you are in a good position. However, this should not affect the thoroughness of the analysis of incoming offers. Careful consideration of all options will help you identify possible obstacles to the implementation of the idea.
To develop a business concept, a brainstorming method is usually used, involving all team members who offer a variety of options. Moreover, teachers usually require the team to submit several business plan projects. You will probably drop some of the options and focus on the most reasonable, from the point of view of the team members, offers. To make the final choice, ask yourself additional questions:
How do the experience, skills, and knowledge of team members relate to each business under consideration? Do we have enough experience to understand the principles of each business?
What is particularly interesting for the group members?
Do team members have unique talents or knowledge that allow them to have an obvious competitive advantage in a particular business?
Are you able to get the necessary information about each business in the allotted time?
Do the companies in question correspond to the values (not only business, but also social) of the team members?
What other factors affect our ability to prepare a plan for each business?
And the most important question:
Which company has the highest chance of success?
Identifying key issues
Once you have decided what the company you want to develop a business plan for will do, you need to identify the key issues related to that business.
You should consider the business concept in detail. Critically analyze your business idea, decompose it into its component parts. Ask yourself all the difficult questions that will inevitably arise from readers of the plan-a teacher, a jury member, or a potential investor or lender. The best way to identify key issues is to ask yourself questions. To come up with these questions, brainstorm.
Once you have compiled a list of issues, you will also identify the main issues that need to be addressed.
Distribution of tasks
When assigning tasks, the first decision to make is to choose the group leader. As a rule, it is much easier to work in a group when there is a person assigned to the role of leader, the team itself determines the nature and scope of the leader’s duties, but usually they are responsible for preparing reports, holding meetings, etc.
As part of preparing a plan, you can assign tasks either to functional areas or complete them as a team. Some teachers require team members to share tasks with each other, which allows participants to gain experience in all areas.
Functional distribution. This method is much like the real world, when employees prepare parts of the plan related to their job responsibilities. For example, the Vice President of marketing deals with the Marketing section, the Deputy Director of production deals with operational issues, and so on. the Advantage of the task allocation method for functional areas is that it makes the best use of the team members ‘ talents and available time. The main drawback of the functional distribution is that the information contained in the plan can be contradictory, since team members are well oriented only in their areas, and If one of the team members failed to complete the task, this will inevitably affect the quality of the plan as a whole.
General tasks. The shared tasks method assumes that each team member is involved in solving all or almost all of the problems that arise. Tasks can be distributed over time, with everyone working on marketing issues for the first week, operational issues for the second week, and so on.the Advantage of this approach is that team members begin to understand business issues better, and plan topics can be covered in more detail, since all participants are working on them. In addition, there is an opportunity to stimulate a creative multi-functional approach. The disadvantage of this method is that the actions of the project participants largely duplicate each other. Accordingly, the team needs more time, which leads to a decrease in the quality of research in each area.
It is possible that you will choose a combination of responsibilities. For example, each participant will have primary responsibility for completing a specific part of the task, while the group as a whole will work on each question for a limited period of time.
After you have defined the task allocation method, make a list of tasks, specifying which team members are assigned to complete them, and set deadlines.
Re-analysis of assumptions
At the end of the business plan preparation process-before combining all parts of the business plan in a written text or presentation — you may need to review the initial assumptions and select the sections of the plan that need to be changed. Analysis of the data obtained in the course of research allowed you to expand your knowledge of the industry, market and competitors. Now you have a much better understanding of where the paths to success lie. It’s time for the entire group to get together, re-evaluate the initial assumptions, and make adjustments to the business concept or strategy.
When making a business plan, set aside time for such an evaluation meeting. It is obvious that as the project deadline approaches, you will be more and more in a hurry to finish the work.
In some classes, the teacher may require you to re-evaluate the assumptions as part of the training assignment. Be prepared for changes. When you have prepared all the sections of a written business plan and you want to get rid of it quickly, it is very difficult to go back and rewrite certain chapters again. But when you overcome yourself, you will find that you have improved not only the quality of planning, but also the likelihood of getting a good grade.
Completion of the work: preparation and presentation of the business plan
After each task has been completed and each separate section has been written, it is necessary to bring them together in a written business plan and/or in a computer presentation. Even if each team member writes and submits their own section, the work on the plan is far from complete. You will probably find that you have received a very uneven document: the design of the sections differs, the way and manner of presentation, and so on.
First, you must determine how the group handled those sections that are considered non-essential. Usually, your future is tied to your teammates (whether it’s about evaluation or competition), so you probably don’t want one section to be noticeably weaker than the others. Assign one or two team members to be responsible for polishing the text of the written plan. It is almost impossible to write a good document as a group. Other participants may be responsible for graphics, computer slideshows, and so on.
Finally, decide who will make the presentation of the business plan. You will prepare an oral presentation or prefer to get a choice (provide it!)? Conduct a trial presentation of the plan. You don’t want to be caught off guard when at the last minute it turns out that you don’t know who of the team members have to speak before an audience?
You may decide to prepare a pitch for the company…
Additional considerations for training business plans
Many business, Finance, or entrepreneurship training programs assume that at the end of the course, you are assigned to prepare a business plan. Performing this task, you demonstrate your ability to use the knowledge gained during a variety of activities, link them together and apply them in a real life situation.
As a rule, preparing an educational business plan and getting a good grade are associated with the same problems that arise when creating a real business plan. However, there are several differences. Teachers especially take into account the following points:
how well do the various sections of the plan fit together;
are the sources of information specified correctly;
how realistic is the plan and whether it corresponds to the market situation;
are clear assumptions included in the document and are they realistic;
whether the risk assessment is adequate.
The training score will probably also depend on the level of interaction in your group. Therefore, pay special attention to how team members work together.
And the last one. The quality of the written plan that you draw up as part of the learning process is essential. Be very careful. Pay attention not only to the content of the plan (full coverage of all sections), but also to the appearance and quality of the written document.
Additional considerations for business plan contests
Secrets of victory? Show that you are creating a business plan to start a real business, not just to practice. Create a team of representatives from different professions. Performing “homework” is very important in the competition, as there are usually errors in financial documents. The presence of reports that reflect the real state of Affairs in the business is perceived as a positive thing. Most contests are won by plans that focus on the market rather than the product. Plans for businesses with unique technologies tend to be priced higher than in the real world, where the focus is on market size.
Mark Gorenberg, venture capitalist and jury member
In the United States, leading universities and business schools conduct dozens, if not hundreds, of business plan competitions. The Massachusetts Institute of technology, Stanford University, the University of Texas, and the University of California, Berkeley are just a few of them. Some contests are sponsored by private businesses or consulting firms, while others are sponsored by small business development centers, chambers of Commerce, and business magazines.
In most cases, the winners of contests receive cash prizes, sometimes very significant. But more importantly, the most well-known business plan contests attract the attention of venture investors and corporations who need new promising objects for investment. Success in the business plan competition may be the key to attracting investors.
Each business plan contest has its own rules and requirements. In most cases, only students (sometimes graduates) participate in business school competitions. There are contests only for new businesses and only for entrepreneurs seeking to expand their business.
What else do you need to win the business plan competition
Determine the nature of competition. In the business plan competition organized by the Massachusetts Institute of technology, and in the plan competition for new small businesses, the requirements are different (and the jury is different).
Select a multi-functional team. The experience and skills of team members should be complementary. Members of the jury would like to make sure that you have a sufficiently deep knowledge. If you specialize in marketing, enter players who have experience performing other functions (technology, operations, Finance) into the team.
If you are planning to take part in the annual competition, talk to the winners or participants of competitions of previous years (if possible). You will learn how the competition is held and what the judges pay attention to. If the contest organizer allows you to get acquainted with previously won business plans, review some of them — you will better understand how they differ from other plans.
Study the jury members. What are their interests and experiences? If the jury includes representatives of investors (for example, venture capital investors), which companies are financed by their company? This information will help you assess the amount of industry and technology knowledge that may affect the estimates.
If you are planning to take part in a University competition, contact the graduates for advice or information. They may include representatives of banks or venture capital companies.
Be realistic. If the competition does not aim to find business plans for fantastic businesses, the jury will be impressed by a realistic business concept, even if it is not particularly new.
Internal planning in enterprises and corporations
If you already have a business
The business planning process we are considering is focused on both new and long-standing businesses. The latter have the ability and need to carefully analyze key issues of marketing, operations, and Finance. We strongly recommend that companies that use the business plan for internal planning conduct an in-depth analysis of the state of Affairs.
Internal planning is necessary for any business, as it is the key to competitiveness. In-depth planning encourages you to carefully consider the dynamics of the current market situation, which allows you to timely review the main assumptions on which your business is based. Regular planning allows the company to quickly adapt to new market forces, and encourages the introduction of new technological advances.
Internal planning encourages consideration of new methods for reducing costs and increasing profitability. If you find time to reflect on your actions and the direction of the company’s development in the rush of everyday Affairs, you will get additional levers of control over its future and information necessary for making important business decisions.
Purpose of internal planning
First of all, you need to define the purpose of internal planning. Internal planning usually has one of three goals:
Evaluation. Processing information about the company’s performance.
Goal setting. Setting goals for a year or for a specific period.
Solve problems. Addressing a specific issue.
Plans of different types differ from each other only in terms of goals and scope, while the actual planning process is almost identical. All three types of planning assume that you use a sufficient amount of information to assess the current state of Affairs in the company, involve relevant employees in the assessment of data, and honestly, from a critical angle, consider the situation.
The evaluation plan allows management to get the information needed to make decisions. This type of plan focuses on collecting and evaluating data (rather than recommending specific actions or setting specific business goals).
An evaluation plan is particularly useful for a company that has not conducted operational or market research for a long time. It is also necessary for a company that seeks to study such factors on a regular (for example, annual) basis. Perhaps the evaluation plan best meets the needs of a company where all decisions are made only at the top management levels.
Plan for setting goals
The most widely used type of corporate business plan is a plan that focuses on annual or periodic goal setting.
Its functions consist not only in analyzing past results, evaluating the current situation inside and outside the company, but also in setting specific, measurable goals for departments and/or individual employees.
Goals can be set in the following areas:
sales per employee;
revenue per customer;
payment collection activities.
Many companies annually set goals for performance in these and other areas based on past data and future forecasts. Performance goals should be:
measurable (related to specific natural or cost indicators, not just subjectively perceived qualitative or quantitative characteristics);
reasonable (based on fair assessments of current and past activities and a restrained forecast for the future, rather than an unattainable ideal);
accurate in time(defining a clear time frame for the process of achieving goals);
motivating (setting achievable and not too simple goals-otherwise, employees ‘ motivation will be reduced).
The plan to solve the problems
It is critical to take into account the stages of development. If we have a $1 million deal, we first give them only $500,000, and then when they reach their quarterly figures, we check the plan and give them another 20%, and so on.
Damon Dow, managing partner at Montage Capital
Another option for internal planning is to limit yourself to solving a few key problems. Management’s focus is primarily on improving operations, rather than on the overall assessment of the company’s performance. However, solving planning problems should not substitute for integrated planning; you must still consider the activities of the enterprise as a whole. But you get a method that allows you to focus resources and creativity in one or two areas in order to significantly improve performance.
The problem can be solved by a Department or division, but it is most appropriate to create a special group. As a rule, such groups are formed from employees of various divisions and departments of the company.
Keep in mind that the membership of the ad hoc group largely determines the outcome. Consisting exclusively of company veterans, such a group is unlikely to offer new approaches to solving the problem. However, if most members of the group do not have the necessary knowledge and experience of running a real business, their recommendations will be perceived as insufficiently authoritative.
The problem solving process includes the following steps:
Problem definition. Management or employees identify areas of interest or problems.
The selection of the team. Limit the number of team members; it should include those who will actually contribute to the solution of the problem; choose team members based on the intelligence, attitudes, and knowledge of employees, rather than their position or access to data.
Review of decisions. Persistent problems often require creative solutions; be prepared for change.
Recommendations for specific actions. Suggest changes or improvements that are necessary to solve the problem.
Many, if not most, large corporations make annual business plans at the level of the company as a whole, divisions, departments, or teams. This book serves as a guide for preparing a plan at any of these levels. If planning is performed at the Department or team level, some sections will need to be modified to meet specific conditions. You may decide to drop some of the sections altogether.
As you read the book, you should adjust the materials presented in it to the specific situation. Although the book uses the word “you”, individual tasks can be performed by your subordinates, research Department, or other members of the planning team. However, the official who makes the final decisions must have the necessary planning competence and access to the source data to evaluate the action plans recommended by employees.
If you are running a large business, you may need to divide the business plan into two parts. One of them identifies specific financial goals, while the other addresses the company’s strategic and long-term challenges.
Upstream / downstream planning
One of the main conditions for the effectiveness of the business plan process in large corporations is the joint efforts of those who are at the top of the hierarchical pyramid, and those who implement decisions. A one-sided planning process, involving either management or ordinary employees, leads to formalism, indifference, and poor performance.
In the process of drawing up a business plan, management must:
formulate specific goals and emphasize the importance of the planning process;
set deadlines for completing and executing the plan;
define tasks for employees and allocate them the time needed to participate in the development of the business plan;
if necessary, invite outside experts;
allocate the resources necessary for the planning process;
be objective and sensitive to the results and recommendations presented in the business plan.
The company’s employees are assigned a number of specific responsibilities:
identifying areas of concern and specific problems;
identify the resources required for the planning process, including expertise;
providing the necessary data and information;
honest and thorough assessment of available data;
treating the planning process as necessary and useful;
awareness of the limitations of their role in the decision-making process.
Analysis of the factors
If you are satisfied with your own products, you may not notice that no one else likes them.
Primal Shah, President of Kiva
Surprisingly, relatively simple calculations allow you to get very interesting information about your company and its profitability. Even if you now believe that complex mathematical calculations are the lot of short-sighted accountants, you will soon find that numbers are vital business tools. Key coefficients that indicate the relationship between activities and quantitative indicators are particularly useful.
For example, the key return on equity ratio shows the ratio of gross net profit after tax to the total amount of money invested in the company. Attributing the profit to the company’s capital allows you to find out the “earnings” of each invested dollar. This indicator reflects the efficiency of using the money you should have spent. The return on equity ratio is particularly important for investors who would like to know how effectively their invested money is being used to make a profit.
Coefficients are a tool for planning, finding new ways to improve productivity, reducing sales-related expenses, reducing debt, and increasing the profitability of each sale. From the company’s point of view, the main value of calculating coefficients is that they open up the possibility of analyzing the dynamics of indicators over time — and this allows you to assess progress in cost management, increasing profitability, and detect new trends.
In addition, the company gets the opportunity to compare its key coefficients with similar indicators of other industry participants. These comparisons allow you to identify problem areas and evaluate the company’s competitive position. The form “Analysis of key coefficients” presents the most important indicators of your company’s performance. Below, we briefly describe four groups of coefficients.
Liquidity ratios reflect the company’s ability to repay current debt using its readily available assets. The company should strive to increase liquidity and reduce the amount of cash invested in inventory. Liquidity ratios include:
Current liquidity ratio. Reflects the company’s ability to cover current debt with short-term assets. (Make sure that you use the balance sheet of current assets, not total assets and debt, when calculating.)
Quick liquidity ratio, or “acid test”. The company’s ability to pay current debt with current assets less inventory. The value of the quick liquidity ratio must always be greater than one.
The ratio of inventory to own working capital. The share of the company’s cash invested in inventory.
The profitability coefficients show the company’s earnings and the profit received from the sale of products. The goal is to maximize those expressed in the indicators of interest. The coefficients of profitability is referred:
The ratio of profit to sales. The ratio of total sales to actual profit after deducting all expenses.
Return on equity. Profit attributable to shareholders ‘ investments.
The profitability of these assets. Profitability in comparison with investments and loans; displays the efficiency of the company’s total assets in terms of generating profit.
Net gross profit. Revenue after deducting all direct expenses related to sales.
The net profit margin. Income after deducting all expenses.
Earnings per share. The amount of income per common share.
Debt management ratios
Debt management ratios reflect the size of the company’s debt and its ability to attract new loans. The lower these percentages, the more stable the company’s financial position is. Debt management ratios include:
The ratio of debt to assets. An indicator of the extent to which a company’s operations are based on borrowings.
Debt-to-capital ratio of the company. The company’s debts to creditors in comparison with the value of the shares held by its owners.
The coefficients of business activity
Business activity ratios show how efficiently a company uses its existing assets and how much value it gets from its inventory or other assets. The greater the value of these coefficients, the longer, and therefore less effective each dollar works (except for a short, ideally average debt collection period). The coefficients of business activity include:
Inventory turnover. The cost of inventory required for sales.
Use of inventory. The amount of money (on average) invested by the company in inventory.
Inventory turnover in units. The ratio of the company’s remaining inventory to the realized inventory of finished products.
Use of fixed assets. Cost of structures and equipment used to generate sales.
Use of total assets. The number of assets the company needs to generate sales.
Average debt collection period. The period of time during which the company’s revenues are preserved in accounts receivable.
Most companies are subject to the “80-20” rule, according to which 80% of revenue is generated by 20% of consumers. Thus, in many cases, the company’s success is determined by a relatively small number of customers.
In most cases, these 20% are real individual consumers. But sometimes consumers of a certain type come to the fore.
If your business is really dominated by several key consumers (or types of consumers), you should carefully analyze their purchasing patterns and motivation. Obviously, these consumers are key to your financial well-being, and you should thoroughly study their behavior as buyers.
Valuable information about purchasing behavior can be obtained by studying recently attracted and recently lost significant consumers. Research of trends in the consumer base allows you to learn about how the market evaluates your company, and determine the most profitable sales directions. To evaluate the activity of the most important customers for the company, use the “Analysis of key consumers” form.
Control over the implementation of the business plan
As a rule, employees spend a lot of time and energy on making plans. However, when the planning process is complete, they immediately forget about their conclusions and return to normal practice. The company not only wastes significant resources, but also risks that employees develop a cynical attitude to the development and execution of business plans.
To ensure that the business plan is perceived as an important working document, hold periodic meetings to monitor its implementation. For example, progress can be assessed at monthly staff meetings. The plan execution process should be reviewed at least once a quarter at meetings with management and employees. Don’t let the business plan get dusty on the shelf; execute it.
Chapter from the book ” 100% Business plan: Strategy and tactics of effective business»
Publishing House “Alpina Publisher»