Entrepreneurial Finance. Robert D. Hisrich

      These numbers are taken directly from the pro forma income statement summary in the financial plan in Section 2. Note the exact calendar year is not used but rather year 1, 2, 3, 4, and 5, with 1 indicating the first year of company operations after the investment is received so that dates do not have to be changed based on the receipt of the investment.

      The two-page executive summary closes with a statement of the resources needed, the increments of capital accepted, and contact information. An example two-page executive summary is indicated in Figure 2.1.

      Description

      Figure 2.1 Example Executive Summary

      Section 2: Body of the Business Plan

      Following the executive summary, which is the end of Section 1 of the business plan, Section 2 starts on a new page with its first part—1.0—Description of Business. In this section, the nature of the venture is described to provide an understanding of how the venture will operate and deliver the products/services to solve the problem identified. Information on the products/services should be in enough detail to be easily understood; this will be expanded on in two places in Section 3. If it is a technological product/service that employs a unique/new technology, it will be described with a summary copy of the patent as well as in the product section of the marketing plan (Section 4). Every product/service will be further discussed here regardless of its degree of technology. The mission statement of the company should be described as well as the business model—the entire picture of how the company does business—and if this business model significantly differs from the model of the way business is presently being done in the industry.

      Section 2.0—Description of Industry—follows; this section discusses the characteristics and size of the industry, industry trends for the past 3 to 5 years, future outlook and growth rate, and a thorough analysis of competition presently filling the same need as the new idea. This is a large section with significant use of data from secondary sources. Sometimes there are so much data that only part appears in the body of the plan, with the rest appearing in an appendix at the end of Section 3. Graphs, charts, histograms, and other graphics should be used to thoroughly explain the industry, its growth projection, and the competitors. A graph showing the market growing is important based on the trends of this market to date. The market, the market segment, and target market for the first year will be further discussed in the first section of the marketing plan.

      Following the description of the industry is Section 3.0—Technology Plan. Some business plans where there is not a technological advancement in the product/service being offered might not have a technology plan. For example, one author founded a rainbow decal and sticker company with no significantly new technology, so there was no technology plan in the business plan of the company. Whenever the product/service has a patent or patent pending or application, there will always be a technology plan as the patent adds value to the venture. A general rule is if you are having a hard time deciding whether to have a technology plan, then put one in, as it is better to have one than not in this circumstance. The technology plan describes the state of the technology presently available and how the new technology revolutionizes the way things are done. This was the case for the traveling wave reactor (TWR) technology running on depleted uranium of TerraPower, discussed in the opening of this chapter.

      The marketing plan, the next section, begins with a discussion of the market segment and target market for the product/service. It defines, usually through using one or more segmentation techniques, the most appropriate overall market and target market and its size. Of the many available segmentation techniques (demographic, geographic, psychological, benefit, volume of use, and controllable market elements), the two most widely used ones, particularly for entrepreneurs and small- and medium-sized enterprises (SMEs), are demographic and geographic, as this is the way that much of the secondary data are published. SMEs are smaller enterprises defined by size category that varies by the industry the company is in; it is established by the government of the country. In the United States, the U.S. government allows SMEs in the construction industry to be larger than SMEs in consulting.

      If the venture is BtoC (business to consumer), then the most important market data are the demographics of the selected geographic market. The most widely used demographic variables are age, income, and gender to determine the size of the market and a typical customer profile. For a BtoB (business to business) venture, then the business market needs to be identified using the classification (country) system of the country for the industrial (business) customer being served. The North American Industry Classification System (NAICS) code in the United States, the Standard Industrial Classification (SIC) code in Korea, and the SIC code in China each use a numbering system to classify each industry and specific products/services in that country. A sum of all the output of these numbers is the gross national product of the country. This procedure will provide the trends, size, and growth rate of the particular industry market, which can be used to develop the typical customer profile.

      Following the delineation of the target market, a marketing plan needs to be developed to successfully reach and sell to that target market. The marketing plan has four major areas—product/service, price, distribution, and promotion—as indicated in Table 2.2. The product/service part describes the characteristics and quality of the offering, the assortment of items to be offered, the guarantee, any servicing provided if needed, and the packaging. The latter can be very important for entrepreneurs and SMEs in the BtoC market as it can be a major area of distinctiveness as well as a sales tool in the distribution center(s) used.

      The second variable, price, is closely related to the product/service, particularly the quality level. The price, the most badly executed of the marketing areas by entrepreneurs and SMEs, needs to reflect the competitive prices, the costs, and the consumer reaction to the price. If a distribution system is used, then there will be a chain of markups on the cost, as indicated in Chart 2.2.

Table 2.2

      The distribution area has two major aspects: distribution channels and physical distribution, which together is called supply chain management. The distribution channels include entities handling the product, such as retailers, wholesalers, and representatives. The physical distribution, or logistics, is becoming an increasingly important area and includes transportation, storage (warehousing), and inventory.

      The final area of the marketing plan is the promotion area, which is composed of advertising, personal selling, publicity, sales promotion, and social media. The latter three are particularly important for entrepreneurs and SMEs as they can be used to produce multiple exposures cost-effectively. Social media, including the website of the new venture, are a particularly useful area. A marketing budget needs to be prepared for the first year indicating where the money will be specifically allocated to promote the company and achieve the initial sales of the first year. This first-year sales figure concludes the marketing part of the business plan and is a good start for the next section—the financial plan.