chapter 6

Question 1

business plan

Answer 1

a written narrative, typically 25 to 35 pages long, that describes what a new business intends to accomplish and how it intends to accomplish it. it is a mistake to write it too early. it must be substantive enough and have sufficient details about the merits of the new venture to convince the reader the business is exciting and should receive support. however, a large % of entrepreneurs do not write business plans for their new ventures.

Question 2

internal reason

Answer 2

a business plan forces the founding team to systematically think through every aspect of its new venture.

Question 3

external reason

Answer 3

a business plan communicates the merits of a new venture to outsiders such as investors and bankers.

Question 4

structure of a business plan

Answer 4

should be in a conventional format. investors want to be able to find critical information easily. along with facts and figures, a business plan needs to project a sense of anticipation and excitement about the possibilities that surround the new venture.

Question 5

content of the business plan

Answer 5

should give clear and concise information on all the important aspects. it must be long enough to provide sufficient information, yet short enough to maintain reader interest. for most plans, 25 to 35 pages is sufficient. it should be reviewed for grammar, spelling, and that no critical information has been omitted.

Question 6

summary business plan

Answer 6

10 to 15 pages and works best for companies that are very early in their development and are not prepared to write a full plan.

Question 7

full business plan

Answer 7

typically 25 to 35 pages long. this type spells out a company’s operations and plans in much more detail than a summary business plan, and it is the format that is usually used to prepare a business plan for an investor.

Question 8

operational business plan

Answer 8

intended primarily for an internal audience. some established businesses will write it. it is a blueprint for a company’s operations commonly running between 40 to 100 pages in length, these plans can obviously feature a great amount of detail that provides guidance to operational managers.

Question 9

cover letter

Answer 9

should accompany a business plan that is sent to an investor or other stakeholders. it should briefly introduce the entrepreneur and clearly state why the business plan is being sent to the individual receiving it.

Question 10

cover page

Answer 10

should include the company’s name, address, and phone number; the date; the contact information for the lead entrepreneur; and the company’s website address if it has one. the bottom should include information alerting the reader to the confidential nature of the plan.

Question 11

table of contents

Answer 11

should follow the cover letter. it should list the sections and page numbers of the business plan and the appendices.

Question 12

executive summary

Answer 12

a short overview of the entire business plan. it provides a busy reader with everything they need to know about the new venture’s distinctive nature. it is important to remember that the executive summary is not an introduction to the business plan but rather a summary of it. it should not exceed two single-spaced pages. the cleanest format is to provide an overview of the business plan on a section-by-section basis. the topics should be presented in the same order as in the plan. there should be two identical versions; one that is part of the business plan and one as a stand-alone document. it should be written as the last part.

Question 13

mission statement

Answer 13

defines why a company exists and what it aspires to become. some businesses also include a tagline.

Question 14

tagline

Answer 14

a phrase that a business plans to use to reinforce its position in the marketplace.

Question 15

product or service’s position

Answer 15

how it is situated relative to its rivals.

Question 16

current status section

Answer 16

should reveal how far along your company is in its development. this could be framed in milestones.

Question 17

milestone

Answer 17

a noteworthy or significant event.

Question 18

legal status and ownership section

Answer 18

should indicate who owns the business and how the ownership is split up. if possible, you should also indicate what your current form of business ownership is.

Question 19

market analysis

Answer 19

breaks the industry into segments and zeroes in on the specific segment (or target market) to which the firm will try to appeal. the firm task is to segment the industry the business will be entering and then identify the specific target market on which it will focus through market segmentation. it is important to include a section that deals directly with the behaviour of the consumers in a firm’s target market. the more a start-up knows about the consumers, the more it can gear products or services to accomodate their needs.

Question 20

market segmentation

Answer 20

the process of dividing the market into distinct segments.

Question 21

competitor analysis

Answer 21

a detailed analysis of a firm’s annual sales and market share. there are four basic ways for a firm to estimate its annual sales; (1) multiplication method, (2) find a comparable firm, (3) contact industry trade associations, and (4) conduct internet research. more than one method should be used.

Question 22

economics of the business section

Answer 22

begins the financial analysis of the business, which is further fleshed out in the financial projections. it addresses the basic logic of how profits are earned in the business and how many units of a business’ product or service must be sold to break even and start earning profit.

Question 23

gross margin

Answer 23

selling price minus cost of goods sold. the size of the overall gross margin for each revenue driver should be determined in the economics of business section.

Question 24

cost of goods sold

Answer 24

the materials and direct labour needed to produce the revenue driver.

Question 25

contribution margin

Answer 25

the amount per unit of sale that is left over and is available to contribute to covering the business’ fixed costs and producing a profit (also called gross margin).

Question 26

operating leverage

Answer 26

an analysis of its fixed versus variable costs, which should be discussed in the economics of business section. it is highest in companies that have a high proportion of fixed costs relative to their variable costs.

Question 27

marketing plan

Answer 27

focuses on how the business will market and sell its product or service. it deals with the nuts and bolts of marketing in terms of price, promotion, distribution, and sales. the best way to describe it is by articulating the marketing strategy, positioning, and points of differentiation, as well as how these overall aspects of the plan will be supported by price, promotional mix and sales process, and distribution strategy.

Question 28

marketing strategy

Answer 28

refers to a firm’s overall approach for marketing its products and services. it typically boils down to how its positions itself in its market and how it differentiates itself from competitors.

Question 29

price

Answer 29

a particularly important issue to discuss in the economics of the business section, since it determines how much money a company can make.

Question 30

product (or service) design and development plan

Answer 30

if you are developing a completely new product or service, you need to include a section on the status of your development efforts. the first issue to address is describing the present stage of development of your product or service. most follow a logical path of development with product conception, prototyping, initial production, and full production. in the early stages with only an idea, you should explain how a prototype will be produced and tested.

Question 31

product prototype

Answer 31

the first physical manifestation of a new product, often in a crude or preliminary form. the idea is to solicit feedback and then iterate.

Question 32

virtual prototype

Answer 32

a computer-generated 3D image of a product or service idea. it displays the idea as a 3D model that can be viewed from all sides and rotated 360 degrees.

Question 33

operations plan

Answer 33

outlines how your business will be run and how your product or service will be produced. a useful way to illustrate this is by articulating your general approach to operations in terms of what is most important and what the make-or-break issues are. you can then frame the discussion in terms of back stage or behind-the-scenes activities, and front stage or what the customer sees and experiences.

Question 34

management team

Answer 34

typically consists of the founder or founders and a handful of key management personnel. a brief profile of each member should be provided, starting with the founder(s). if the start-up has a board of directors and/or board of advisors, their qualifications and roles should be explained.

Question 35

board of directors

Answer 35

a panel of individuals elected by a corporation’s shareholders to oversee the management of the firm.

Question 36

board of advisors

Answer 36

a panel of experts asked by a firm’s management to provide counsel and advice on an ongoing basis.

Question 37

organisational chart

Answer 37

a representation of how authority and responsibility are distributed within the company. it illustrates how a company is structured.

Question 38

overall schedule

Answer 38

shows the major events required to launch the business. the schedule should be in the format of milestones critical to the business’ success.

Question 39

pro forma financial projections

Answer 39

the final section, which includes a sources and uses of funds statement and assumptions sheet.

Question 40

pro forma financial statements

Answer 40

the heart of the financial section of the business plan. they are similar to historical statements an established firm prepares, except they look forward rather than track the past. they include the pro forma income statement, pro forma balance sheet, and the pro forma cash flow statement. most business plan writers interpret historical or pro forma financial statements through ratio analysis.

Question 41

ratios

Answer 41

computed by taking numbers out of financial statements and forming ratios with them.

Question 42

appendix

Answer 42

contains any material that does not easily fit into the body of a business plan.

Question 43

sources and uses of funds statement

Answer 43

a document that lays out specifically how much money a firm needs, where the money will come from, and how the money will be used.

Question 44

assumptions sheet

Answer 44

an explanation of the most critical assumptions on which the financial statements are based. some assumptions will be based on general information, and no specific sources will be cited to substantiate the assumption.

Question 45

oral presentation

Answer 45

typically consists of 20 minutes of formal remarks, accompanied by approximately 12 PowerPoint slides, and 40 minutes of questions and answers. the presentation should be smooth and well-rehearsed. the slides should be sharp and not cluttered.