The Emergence of the Business Plan

In today’s environment, the business plan is the entrepreneur’s most important document when setting up a new business. No company can express its business goals or secure financing without the help of a well-conceived and well-presented business plan. Without a business plan, it is almost impossible for someone to take your business idea seriously or even consider investing in it. Because this thesis is about setting up a business plan for the start-up of a new kind of social network, we will first start with an overview about the concept business plan throughout the literature. In this literature study the term business plan is defined as well as the main functions of the business plan followed by an overview of the typical structure of the business plan. Furthermore, a problem discussion on the topic business plan in the literature is displayed. In the next part the main focus will lay on the composition of the financial plan.

Subsequently, in the section Location Based Social Network a brief explanation is given about LBSN to give the reader an idea about what the business idea is all about. An entrepreneur willing to start his own enterprise stands before a lot of obstacles. Building up a company does not happen over one night. Theoretical framework Introduction There was a time that entrepreneurs only had to write a letter to propose their business idea and send it to some investors to secure funding. Nowadays, investors are far more demanding and expect a far higher level of expertise and preparation from the entrepreneurs they choose to fund. Eugene Kleiner, a legendary venture capitalist states that when examining a proposal, investors want to see much more than just a good idea and a bright young man or woman: they want to see a business plan showing that the concept has been thoroughly assessed and that the entrepreneur has carefully thought through the issues for taking the necessary steps of taking the idea and transform it into a successful company.

The term business plan is a word that found its origin during the Second World War period. Back then it was mostly used to define the long term strategies of big firms.

The Business Plan was a highly confidential document and was only exposed to a very limited audience. During the 80’s the term business plan became more popular and it was then that the first articles appeared discussing the issues behind the business plan. From that decade on, the term business plan was mainly used to indicate the start-up of new and emerging companies. (Karlsson, 2005). This may be the reason that when the term business plan is mentioned the first image that crosses people’s minds is the start-up business, which has not to be especially so because The Ernst and Young Business Guide (1987) points out that even established firms can have formal written business plans to determine or evaluate the accomplishment of business goals.

Definition of a Business Plan The literature on the topic business plans is awash with information. Essentially these definitions have all the same meanings. Abrams & Barrow (2005) define the business plan as a roadmap to the company’s targeted destination.

Ideally, it enables the entrepreneur to get from the basic business concepts to a healthy, successful business. Barringer (2009) describe it as a “written document that carefully explains every internal and external aspects of a new venture” (Barringer, 2009, p. 1) The format of the business plan The format of the business plan depends mainly on the purpose for which the BP is elaborated. (Barringer,2008) For instance, a BP for a start-up business wanting to raise funds may somewhat differ from that of a business in expansion or from one designed to establish the feasibility of a venture. Mason and Stark (2004) argue that whether the entrepreneur is pursuing capital from a bank, a business angel or even a venture capitalist, the format of the business plan should be adapted accordingly. So we can conclude that depending on what purpose the business plan serves, i.e. to raise capital or for internal purposes, the emphasis on the topics will be different. The format will also depend on the firm’s level of development. For example, a start-up firm will not be able to dwell much about the company’s history or past successes.

Uses of the BP Abrams and Barrow (2005) argue that they see creating a business plan more as an opportunity rather than a chore. While developing the business plan, it gives the entrepreneur the chance to: 1) Learn about the industry and the market.

When setting up the business plan the entrepreneur will have go through the process of writing a marketing plan. No matter how good the business idea is, without effective marketing the venture will not succeed. The marketing planning process is an opportunity for the entrepreneur to get hold of some facts of the market. After doing the market research the entrepreneur should have some valuable insights in who are the most important competitors, who will be the main customer. The main topics that will have to be investigated are facts about the industry, for instance what is the market size, restrictions entering the market.

Who will be your main customer, who is the main competition, and so on 2) Getting control over the business. While developing the business plan, one will increase the understanding of the many forces that have an impact on your business’s success, which in turn will give a stronger sense of control. For example in the Financial Plan: By realistically projecting Sales Forecast and a Profit and Loss Forecast you will get a better understanding in what drives the main streams of revenue. 3) Obtain a competitive edge. Evaluating the competition and your business’s strengths and weaknesses provides you with a better sense of how to position your business in relation to competitors. Developing a business plan enables the entrepreneur to: Make the crucial business decisions that focus the entrepreneur’s activities and maximize his resources.

Understand the financial aspects of the business, including cash flow and break-even requirements. Gather crucial industry and marketing information. Anticipate and avoid obstacles the business is likely to encounter. Set specific goals and measurements to assess progress over time.

Expand in new and increasingly profitable directions. Be more persuasive to funding sources. To write or not to write a business plan. The relationship between Pre-start-up Formal Business Plans and Post-start-up Performance The opinions on the topic whether a business plan is a useful document or whether it is more a waste of time are not unanimous throughout the literature. Despite a lot of researches that have been conducted within this field, the efficiency of the BP still has not been proved empirically. The word efficiency in this particular circumstance means that it has not been proved that the Business Plan will help a new venture in succeeding. According to Abrams and Barrow (2005) a good business plan for a sound business concept helps achieving the business goals.

Furthermore, it saves you time and money by focusing your business activities, giving you more control over your finances, marketing, and daily operations, and helps you raise the capital you need. Or as Eugene Kleiner states: “Even if you have all the money you need, you still need a business plan. A plan shows how you’ll run a business. Without a plan, you don’t know where you’re going, and you can’t measure your progress.” It typically takes several weeks to complete a good plan.

Most of that time is spent in research and re-thinking ideas and assumptions. But the real value of creating a business plan is not in having the finished product in hand; rather, the value lies in the process of researching and thinking about your business in a systematic way. The act of planning helps you to think through things thoroughly, study and research if you are not sure of the facts, and look at your ideas critically. It takes time now, but avoids costly, perhaps disastrous, mistakes later. The adversary: Although it has not yet been proved that the Business Plan effectively helps a new venture in succeeding, it has been proved that there is no relationship between the BP and performance. A study conducted by Lange et al. examined whether writing a business plan before launching a new venture affects the subsequent performance of the venture.

The dataset comprised 116 new ventures started by Babson College alums who graduated between 1985 and 2003. The analysis revealed that there was no difference between the performance of new businesses launched with or without written business plans. The authors suggest that unless a would-be entrepreneur needs to raise substantial start-up capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business. Instead, Lange et al. (2007) suggest that entrepreneurs should make financial projections, especially cash flow. It means that they should look at expected sales revenue and operating costs including material, labour and capital assets and open their business. That advice implies that they should do business planning but not write formal plans before starting their businesses. Then, if their business grows and needs external funding, they will be able to write a business plan that is more persuasive.

Many business people or entrepreneurs defend that the time that is needed to produce a formal written BP, would be better spent on pushing the new venture forward instead of writing a plan that no one will read. (Allen 2006) This might be true if we take into consideration that the venture capitalist or the firms that provide finance to businesses receive piles and piles of business plans and have no time to read them all. Furthermore, it is a fact that if you want your BP to be noticed by investors, the chance is greater if you get a personal introduction, instead of approaching them on your own (Barringer, 2008). This is definitely the case for all businesses in China. If you want to look for capital, or even if you just want to do business, you will need ‘Guanxi’. Guanxi literally means “relationships”, and is the basis for conducting succesfull business in China. If you have the right connections and build a network they can indirectly link you to new acquaintances and information resources, thus helping you to develop other right “Guanxi” you need. Since “Guanxi” and relationship could function as an information network, companies with wide “Guanxi” and relationship networks often have much higher performance than companies with little or no relationship with the Chinese. We can state that is not about having a good or a bad business plan per s© to secure finance but more about knowing the right people.

This is why startup businesses have the disadvantage over established firms because they may not have such contacts. Three functions of the Business Plan According to the Ernst & Young’s Business Plan Guide (1987) a business plan serves three functions: Determine the Viability of the Future Business First, and foremost, it is a plan which can be used to develop ideas about how the business should be conducted. It is a chance to refine strategies and “make mistakes on paper” rather than in the real world by examining the company from all perspectives, such as marketing, finance, and operations. Determine/Evaluate the Accomplishment of the Business Goals Second, a business plan is a retrospective tool, against which a businessperson can assess a company’s actual performance over time. For example, the financial part of a business plan can be used as the basis for an operating budget, and can be monitored carefully to see how closely the business is sticking to that budget. In this regard, the plan can and should be used as the basis for a new plan. After some time has elapsed, and thereafter on a periodic basis, the business plan should be examined to see where the company strayed, whether that straying was helpful or harmful, and how the business should operate in the future.

Raising finance The third reason for writing a business plan is the one most people think of first, that is, to raise money. Most lenders or investors will not put money into a business without seeing a business plan.

Since this business plan is written in order to raise finance, its ultimate test will be how much interest it can generate from reviewers in as little time as possible. Therefore it should convey the company’s basic goals and methods in a clear, readable, and light digestible form. Putting the Plan to Work Evaluating the business plan Sources of Finance Business Angels Attracting Human Capital Zetterberg, Christer assigns In “How to write a successful business plan – a practical guide” (2004) another internal function to the business plan: it will also be a tool for attracting human capital. It is not uncommon that a potential employee wants to see the company’s business plan before making a decision whether joining or not. The external stakeholder’s category includes investors, potential business buyers or partners, potential customers, government and potential workers.

Because each of the mentioned stakeholders has its own interest in the business, BP should be produced taking into account all of these stakeholders. Business Plan Structure The Executive Summary The most important section of the business plan, the executive summary, is the first part of the plan that is going to be read by a potential investor or lender. Time is money for businessman and businesswomen and although you can have spent three months at preparing the plan, the cold, hard fact is that an investor or lender can dismiss it in less than five minutes. Therefore it is crucial that this part is very clear and gives a compelling distillation of the business so that the reader will be persuaded to wade through the rest of the plan. A typical venture capitalist can expect to read more than 1000 business plans in a year. Andrew Anker, partner of August Capital – one of America’s most respected venture capital firms- explains: “The first thing I read are the first two paragraph of the executive summary. If I can’t be dragged in, there is no way the next five million people can be dragged in. It doesn’t take me more than one minute to decide whether a business is interesting or not.” The Summary reflects the results of the entire planning and should be crafted after having considerated all the other aspects of the business, so it has to be written last.

The topics that have to be included in the executive summary are everything that would be covered in a five-minute interview. The following fundamentals of the proposed business have to be explained and formulated in a positive and confident tone: What will your product be? Who will be your customers? Who are the owners? What do you think the future holds for your business and your industry? If applying for a loan or pursuing investor’s capital, there has to be clearly stated how much money is needed, how it is going to be used, and how the money will make the business more profitable, thereby ensuring repayment. For example, an investor interested to fund a start-up company will be interested in seeing the potentiality of the business in terms of return of the capital and how the risk will be minimized. Business Description To be completed “Strategic planning is part of the ongoing management job.

The plan itself is only a snapshot; planning should be going on all the time.” George James Former Sr. CFO Levi Strauss & Co. Location Based Social Networks 3.0 The Financial plan: “Nobody plans to fail but many fail to plan” This expression is to be interpreted in many ways but according to the authors of “Corporate Finance” it means that the failure is often attributable to a lack of systematic management. The problem with a lot of entrepreneurs is that they are most often does rather than writers. They prefer the action – doing business – than behind their desk drafting up business and financial plans. Financial reports display the financial status of the company. When will the company be profitable, how much cash will the company be generating, what is the value of the company? The financial plan gives answers to these questions.

This information is also valuable the relations outside the company like banks, investors, customers, the government. Parts of the financial plan: Profit and loss account The profit and loss account is one of the four basic statements that a company has to make. It keeps track of the financial result for a certain period in time. It answers the basic questions about the financial performances of a company such as: How much money did the company make? The profit and loss account comprises, as the name suggests two category’s in the profit and loss account, namely revenues and expenses.

There are a lot of terms for revenue: sales, turnover, return, income, Costs arise from using the production resources. Costs can be booked referring to the costs they rely with, like the costs of goods sold. (COGS) Or they can be booked in the period the costs are incurred. And finally costs can be booked so that a attribution to the period is displayed. According to Cornwall et al. (2005) A written business plan is virtually a universal requirement for entrepreneurs who are seeking formal venture capital.

However, very few entrepreneurs ever have formal venture capital in hand at the moment they start their ventures – Bygrave and Hunt (2004), for example, estimated that fewer than one in 10 000 new ventures are funded at the outset with formal venture capital. Thus it is puzzling why so many entrepreneurs bother to write business plans if the principal purpose of a plan is to raise venture capital, because in almost every case they come up empty handed. Part of the explanation may be that there are other financing sources, such as angels, bankers and corporate strategic partners that require written business plans from entrepreneurs. It seems unlikely that the pursuit of financing is the sole justification for writing a formal business plan. Timmons et al. (1985) in successive editions of New Venture Creation: A Guide to Entrepreneurship and in a Harvard Business Review article (Timmons, 1980) argued that a business plan is much more than a fundraising device. It has intrinsic value in articulating ‘what the opportunity conditions are, why the opportunity exists, the entry and growth strategy to seize it, and why you and your team have what it takes to execute the plan’. In a study of 65 participants who completed a business plan, Wyckham and Wedley (1990) found that 46 used it as an internal planning document, 32 used it as a marketing plan, 27 to get financing and 12 to attract a partner. Many used it for more than one purpose.

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