Business Plan and Financial Management in Entrepreneurship

6. Business Plans

6.1 Purpose of a Business Plan

• A business plan is a written narrative outlining a new business's objectives and strategies.

• Dual-purpose document:

  • Internal Use: Guides the company in executing its strategies.

  • External Use: Informs potential investors and stakeholders about the business opportunity.

6.2 Audience for Business Plans

• Primary Audiences:

  1. Employees

  2. Potential investors and external stakeholders

• Types of Business Plans:

  • Summary Business Plan:

    • 10 to 15 pages, for early-stage companies to gauge investor interest.

  • Full Business Plan:

    • 25 to 35 pages, detailed operations and plans for investors.

  • Operational Business Plan:

    • 40 to 100 pages, serves as a blueprint for internal operations.

6.3 Guidelines for Writing an Effective Business Plan

1. Structure: Use a conventional structure to aid decision-making for investors.

2. Clarity: Be concise; include all vital information and check for errors.

3. Style and Format: Maintain a professional appearance without suggesting excessive costs in preparation.

6.4 Suggested Outline of a Business Plan

1. Executive Summary: Overview of the business plan; critical for gaining investor interest.

2. Industry Analysis: Overview of the industry the business will enter.

3. Market Analysis: Focus on specific target markets within the industry.

4. Management Team and Company Structure: Critical section for assessing management strength.

5. Sources and Uses of Funds Statement: Details financial requirements and allocations.

6. Assumptions Sheet: Lists critical assumptions underpinning financial analysis.

6.5 Presenting the Business Plan to Investors

• Oral Presentation:

  • 20 minutes of formal remarks, 12 PowerPoint slides, 40 minutes for Q&A.

• Preparation: Ensure presentation is smooth and slides are clear and uncluttered.

7. Building an Ethical Culture

7.1 Actions to Establish a Strong Ethical Culture

1. Lead by Example:

   • Leaders incorporate ethics in daily discussions and decisions.

   • Supervisors emphasize integrity and peer accountability.

2. Establish a Code of Conduct: Outlines values and specific ethical rules.

3. Implement Ethics Training Program: Guides employees in dealing with ethical dilemmas.

7.2 Addressing Legal Issues in New Firms

• Selecting an Attorney: Consider expertise in start-up processes and completion timeliness.

• Founders' Agreement:

  • Defines equity splits, compensation for contributions, and share vesting.

• Avoiding Litigation:

  • Meet contractual obligations, avoid undercapitalization, and enforce business ethics.

7.3 Business Licenses and Permits

• Importance: Needed before launching a business.

• Variability: Depend on locality and business type.

7.4 Forms of Organization for New Firms

• Comparison of Business Structures:

  • Sole Proprietorships

  • Partnerships

  • Corporations

  • Limited Liability Companies

• Common Choices: Fast-growth firms prefer corporations or LLCs for liability protection and ease of capital raising.

8. Financial Management

8.1 Importance of Financial Management

• Essential for acquiring financial capital and achieving efficient operations.

8.2 Financial Objectives of Entrepreneurial Ventures

1. Profitability

2. Liquidity

3. Efficiency

4. Stability

8.3 Process of Financial Management

• Involves:

  • Financial Statements: Quantitative reports on firm health.

  • Forecasts: Future estimates of sales, income, and expenses.

  • Budgets: Itemized forecasts for income and expenses.

8.4 Historical vs. Pro Forma Statements

• Historical Statements: Reflect past performance, required for public companies.

• Pro Forma Statements: Future projections based on forecasts.

8.5 Historical Financial Statements

1. Income Statement: Tracks revenues and expenses during a specific period.

2. Balance Sheet: Snapshot of assets, liabilities, and equity at a point in time.

3. Statement of Cash Flows: Summarizes changes in cash position over time.

8.6 Role of Forecasts

• Provide basis for pro forma statements and guide financial strategies.

8.7 Purpose of Pro Forma Financial Statements

• Helps anticipate future activities and evaluate strategy effectiveness.

9. New Venture Teams

9.1 Liability of Newness

• Refers to challenges faced by new ventures due to inexperience and lack of a track record.

9.2 Composition of a New Venture Team

• Includes founders, key employees, boards (directors and advisors), lenders/investors, and other professionals.

• Diversity: Heterogeneous teams often have a better chance of success.

9.3 Role of Professional Advisors

• Advisory Board: Experts providing ongoing counsel.

• Lenders and Investors: Support business traction, help recruit employees.

9.4 Using Consultants

• Consultancies offer expertise that new firms may not afford, sometimes for low or no cost.

10. Financing for Entrepreneurial Success

10.1 Importance of Financing

• Necessary for operational functionality and growth.

10.2 Need for Early Funding

• Driven by cash flow challenges, capital investment, and lengthy development cycles.

10.3 Sources of Personal Financing

1. Personal Funds: Own investment alongside sweat equity.

2. Friends and Family: Loans or gifts from close contacts.

3. Bootstrapping: Creative cost-reduction strategies to minimize need for external funding.

10.4 Steps to Prepare for Raising Financing

1. Determine the exact amount of capital needed.

2. Identify appropriate financing types (debt vs. equity).

3. Develop a strategy to engage with potential investors.

10.5 Sources of Equity Funding

1. Business Angels: High-net-worth individuals investing personal capital.

2. Venture Capital: Funds from firms for startups with growth potential.

3. Initial Public Offering (IPO): Raising capital by offering shares publicly.

10.6 Common Sources of Debt Financing

• Commercial banks, SBA loans, vendor credit, factoring, and crowdfunding.

10.7 Creative Financing Sources

• Leasing: Accessing property without significant upfront costs.

• Grant Programs: Such as SBIR and STTR for technology ventures.