In the last three decades, a substantial part of the innovations has been produced through companies created expressly to exploit technological and market opportunities detected by its promoter team.
This phenomenon has occurred both in Spain and in other developed countries and has been especially important in sectors such as software, telecommunications, the internet, renewable energy, biotechnology, medical devices or nanotechnology.
Business plans are an essential tool to justify a new business project and describe the actions and resources necessary to deploy it, whether it is a new company, a new line of business or a spin-off.
By supporting the project, the actions and means required and their estimated impact, business plans become a useful instrument to judge its potential.
Purpose of business plans
Business plans have three purposes. The first is to plan actions when faced with an opportunity and evaluate its viability. The second is to justify and communicate the project to people or organizations that can contribute funds. And the third is to set your development goals and milestones.
Developing a business plan is a valuable exercise that gives its promoter the opportunity to make a strategic reflection on the project. This allows you to consider relevant aspects for your future success such as:
- Analyze the industry and the market.
- Define the necessary actions, resources and organization.
- Anticipate and prevent obstacles and risks.
- Establish objectives to evaluate the progress of the project.
- Simulate the financial impact of the actions and resources used to assess the viability of the company.
Likewise, the business plan is an essential element to communicate and obtain funds for said project, whether it is capital that comes from investors, loans from financial entities or grants, soft loans or investments by public entities of economic promotion.
When the business plan serves to attract resources, it becomes a commitment against which the investors and creditors of the project will commit the funds and evaluate the project itself. In addition, it becomes a point of reference for company valuations and equity entry negotiations.
The business plan not only communicates in detail how the promoter intends to act to take advantage of the opportunity. It also reflects your level of understanding of the market, operations, resource needs and challenges, as well as the quality of your thinking and creativity.
Failure factors in new initiatives
Numerous studies have analyzed the causes of success and failure of new business projects. The most mentioned causes of failure are:
- Organizational and business problems.
- Insufficient sales level.
- Financial problems.
Organizational and business problems can hinder the development of the project. If a clear organization and processes are not established, it will be more difficult for the organization to detect and resolve key competitive issues. Nor can these obstacles be overcome if the company does not obtain the resources and personnel with the ideal capacities, at a technical and managerial level, to carry out the project successfully.
A insufficient sales will cause the company can not cover its fixed costs, which will create a problem in the income statement, sooner or later will affect the treasury.
These lower sales may be due to the market growing at lower rates than expected. But they can also be derived from the fact that the effective penetration of the new product in the market is lower. This lower adoption would be the result of overvaluing the value proposition of the new product in relation to its competitors and substitutes.
As for financial problems, they can be due to two main causes. The first is the difficulties in obtaining financing for the project. And the second are the problems in the management of the cash flow generated by it.
These problems in the cash flow generated can be derived from problems in the income statement. Apart from coming from insufficient sales, the costs may have been forecast optimistically. Thus, costs may have been estimated that are too low, either for product development, for the commercial effort to introduce it, or for having oversized the organization for the demand actually materialized.
Finally, the timing of collections and payments can be deferred from what is expected. Delays in the project postpone the time to start commercialization, but a shorter sales cycle may also have been estimated than the one that actually ends up.
Once the sale is made, the effective collection periods may be lengthened due to a greater bargaining power of the buyer, due to delays in the delivery of the product or service, or due to delays in the customer's collection.
On the other hand, the payment terms of the company may end up being shorter than those foreseen if the negotiating capacity with the suppliers is overestimated.
Thus, if adequate levels of sales, funds and a cash cycle are not achieved, the new company will gradually consume its financial resources until it is exhausted.
Criteria for evaluating business plans
The criteria that investors seek in new projects are those that counteract previous risks. The list of valued elements is very extensive but, in summary, the most important refer to the personality and experience of the entrepreneur, the characteristics of the product and market, and financial aspects.
Venture capital firms especially value the personality, experience and capacity of the entrepreneurial team. They are looking for a well-rounded team that has skills in the business functions necessary for the project to succeed: business and marketing experience, administration and finance, and operations and R&D.
This team must have a reputation for the results obtained in its previous career and a relevant experience, if possible in the sector. Industry experience provides a good understanding of business and operational constraints and requirements, as well as market gaps and opportunities.
Investors value that the project is connected with the needs of the clients, especially that they start from their problems. Projects based on offering oversized solutions to minor problems or with irrelevant differentiation are doomed to failure.
High profitability in a high growth market is very attractive to investors, as it is easier to penetrate a growing market than a stable one.
Finally investors greatly value clarity and realism. The business plan is required to be simple and precise explaining the project. An entrepreneur who is confused when explaining his project, may not be clear about the business model or the priority with which it is necessary to develop its different possibilities.
On the other hand, investors are looking for realistic plans. Nothing raises more suspicion about promoters' abilities and motivations than business plans with huge funding needs that have exceptionally high sales and profit forecasts.
Business plans and success
Various studies have highlighted the importance of business plans for the success of business projects.
Delmar and Shane_ have found a positive correlation between having formal plans and receiving external capital. They also found that having developed business plans increases the chances of survival and facilitates product development and organization of the company.
However, as these authors warn, it is not only important to have a formal plan but also the quality of its content and its implementation. In this sense, Reid and Smith_ did not find that having a business plan had an effect on the performance of new business projects. But they did find that planning improved said performance, understanding this as the number of months that managers projected the effects of their decisions to evaluate their impact.
Content and scope of the business plan
The typical business plan contains a series of sections that describe the basics of the planned operation of the new initiative.
The level of detail in these sections may vary depending on the purpose of the plan, its recipient, the resources required, and the novelty of the project. Some of the more accessory sections may even disappear.
Thus, a plan that requires few resources to deploy can afford to be more synthetic than one that requires large investments.
Likewise, a document aimed at attracting foreign investment should be more exhaustive than one that only wishes to order thinking about an opportunity.
On the other hand, the familiarity with the sector that the recipients of the plan have also determines its breadth. An investor with knowledge of the sector will take for granted certain aspects that will need to be clarified to investors without that experience.
Finally, projects that present totally new products or services for the market should make more detailed explanations, since the recipient must be educated on the characteristics of the market and product, the business model, the operations and the financial model that is derived..
Below are the typical sections of a business plan:
1. Summary.
to. Executive summary of the project.
2. Company details.
to. Background and justification of the project.
b. Promoter team.
c. Actual state.
3. Company activity and product.
to. Description of the product / service.
b. Business model.
c. Product comparisons.
d. Schedule.
4. Analysis of the sector and strategy.
to. Market definition. Data of interest.
b. Competitors.
c. Customers.
d. SWOT analysis.
and. Proposed strategy.
5. Marketing plan.
to. Marketing strategy.
b. Value proposition of the product or service.
c. Pricing policy.
d. Sales forecast.
and. Channels and distribution.
F. Communication plan.
g. Commercial plan.
6. Operations and technology.
to. Operations strategy.
b. Product development.
(i) Features and architecture.
(ii) Development map.
(iii) Development costs.
c. Operations plan.
(i) Process map.
(ii) Production plan.
(iii) Operating resources. Description and forecasts.
(iv) Technological resources.
(v) Operating costs.
(vi) Suppliers and partners.
(vii) Quality plan.
7. Organization
to. Organization.
(i) Proposed organization chart.
(ii) Definition of functions.
(iii) Roles and assignment.
(iv) Management control.
b. Human Resources.
(i) Human resources policy.
(ii) Compensation plan.
(iii) Workforce plan.
8. Legal and social aspects.
to. Legal form.
b. Patents and trademarks.
c. Fiscal, labor and administrative obligations.
d. Prevention of occupational hazards and environmental aspects.
and. Corporate social responsibility.
9. Financial plan. to. Financial strategy.
b. Calculation basis.
c. Social security income statement.
d. Pension balances.
and. Treasury budget.
F. Investment plan.
g. Financial needs and use of funds.
h. Main ratios and conclusions.
10. Investment.
to. Current own funds.
b. Requested investment and proposed conditions.
c. Corporate governance bodies.
d. Corporate agreements.
and. Exit strategy.
11. Next steps.
to. Objectives, phases, activities and milestones for the deployment.
b. Risks
12. Annexes.
According to needs.
Conclusions
Business plans are documents that allow entrepreneurs to analyze market opportunities and design the ideal organization to exploit them.
They serve to describe how promoters intend to overcome obstacles to the viability of the initiative, especially commercial, financial, operational and organizational. Therefore, they become an ideal tool to communicate and justify these initiatives to investors.
Business plans must prove that they establish a clear and reasonable strategy and organization for significant market needs, through a team trained to deal with foreseen and unforeseen vicissitudes.
For these reasons, business plans are not just a prerequisite for targeting the market to raise funds. As various studies show, they can become a sound planning exercise that increases your company's chances of success.
Notes:
1: Macmillan, IC, Siegel, R. and Narasimha, PNS: "Criteria Used by Venture Capitalist to Evaluate New Venture Proposals." Journal of Business Venturing, (1985), 1 (1).
2: Delmar, F. and Shane, S.: “Does Business Planning Facilitate the Development of New Ventures?”. Strategic Management Journal, (2003) 24 (12).
3: Reid, GC and Smith, JA (2000): “What makes a New Business Start-up Succesful?”. Small Business Economics, (2000), 14 (3).
