Business plan preparation
Training program for Entrepreneurs
AGENDA
Short introduction to the use of business plans
Preparation guidelines for business plans
Wrap-up
AGENDA
Short introduction to the use of business plans
Preparation guidelines for business plans
Wrap-up
TYPES OF NEW BUSINESSES
Existing
New
Business system
Existing
New
Product/ service
Source: Planen, gründen, wachsen (McKinsey)
New high-growth ventures
EXAMPLES
New product
Palm
Smart
Sony Playstation
Rollerblades
New industry
Direct satellite TV
Netscape
Mobile telephony
Existing indus-tries and busi-nesses
New business system
Dell
Fotolabo
Charles Schwab
FedEx
USE OF BUSINESS PLANS
Source: McKinsey
Start-up companies:
Application for venture capital
Search for management team members
Communication with partners, suppliers, …
Established, developed businesses for investment decisions
In-house budget allocations
External financing
High insecurity concerning technology, timing, and cash need
Difficult data situation due to newness of innovative products
Necessity of external know-how transfer
Lack of skills/motivation/ time
Standard use
Complications for New Venture projects
Start-up business plans to be tailored to new venture needs
GENERIC REQUIREMENTS
Source: McKinsey
Constantly adapting
Impressing by clarity
Convincing by facts
Understandable even for non-experts
Consistent and concise
Optically compelling
Explanation
Business planning is an iterative and adaptive process that requires constant update and adjustment work
Not the quantity of analyses, but the clarity and preciseness of the pack are important
No hype, but factual statements. Enthusiasm will be generated by the investor realizing the opportunity on his own
Those who allocate investment resources rarely are technical experts for the technology used in the proposal
The storyline and all the facts presented must fit together and generate a well rounded impression
A clear, precise structure is a courtesy to those investing their time in reading the proposal
DEVELOPMENT STEPS FOR BUSINESS PLANS
Source: McKinsey
Milestones
Completion of financing
Step 3:
VC-tailored business plan
Step 2:
Rough business plan
Step 1: Idea description
External evaluation (due diligence)
Deal structuring
Management team
Implementation plan
Financing
Marketing and sales
Business system
Opportunities and risks
New decision
on further proceeding when next milestone is reached
Level of maturity of business idea
Time
Product/service
Market and competition
AGENDA
Short introduction to the use of business plans
Preparation guidelines for business plans
Wrap-up
CHAPTERS OF COMPLETE BUSINESS PLAN
Source: McKinsey
Executive summary
Product/ service
Manage- ment team
Market and com- petition
Marketing and sales
Business system
Imple-
mentation
plan
Financ- ing
Opportunities and
risks
CONTENT OF EXECUTIVE SUMMARY
Source: McKinsey
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni-ties and
risks
Financ-
ing
Gives a brief overview of the concept's most important aspects
Describes idea as clearly, compellingly, and concisely as possible
Raises interest of decision makers
Is not more than 5 - 10 minutes to read
Quality of summary decides if rest of business plan is read
EXECUTIVE SUMMARY – KEY QUESTIONS
Source: McKinsey
Idea description
What is your business idea? In what way does it fulfill the criterion of uniqueness?
Who are your target customers?
What is the value for those customers?
What market volume and growth rates do you forecast?
What competitive environment do you face?
What additional stages of development are needed?
How much investment is necessary (estimated)?
What long-term goals have you set?
Most important questions an investor asks!
STEP 1
EXECUTIVE SUMMARY – ADDITIONAL QUESTIONS*
* In addition to key questions answered by idea description (step 1)
Source: McKinsey
Rough business plan
How high do you estimate your financing needs?
What are the sales, cost, and profit situations?
What are the most important milestones along the way to your goal?
What test customers have you approached/ could you approach?
What distribution channels will you use?
What partnerships would you like to enter into?
What opportunities and risks do you face?
What is the picture on patents?
Most important questions an investor asks!*
STEP 2
RUSMAR – EXECUTIVE SUMMARY
* See following blank form sheets
Source: Inc. Magazine
Product/service
Potential foam plus applicator to replace expensive and space consuming earth that must be spread over garbage dumps every day
Space savings of ~30% for dump operators
Costs of coverage reduced by ~50% for dump operators
Market and competition
Customers: household garbage dump operator
Market: 300 to 500 dumps in Eastern USA with capacity of 500 to 10,000 tons/day
Major competitor: 3M/Sanifoam (application takes longer and is more complicated)
Marketing and sales
1997: Investments of USD 850,000 required
1998: Sales of USD 2 million (break-even)
2002: Sales of USD 15 million, profit of USD million
Business system
Sale of foam and applicators (product business)
Opportunities and risks
Necessary approval from authorities
Proof of system's operational efficiency
Exercise 1: Training participants check quality of executive summary with key questions*
CASE EXAMPLE
EXERCISE 1 – EXECUTIVE SUMMARY (1/2)
Source: McKinsey
Key questions for idea description
What is your business idea? In what way does it fulfill the criterion of uniqueness?
Who are your target customers?
What is the value for those customers?
What market volume and growth rates do you forecast?
What competitive environment do you face?
What additional stages of development are needed?
How much investment is necessary (estimated)?
What long-term goals have you set?
Evaluation of Rusmar summary
–
Answered questions
Missing element
See appendix for proposed solutions
EXERCISE
EXERCISE 1 – EXECUTIVE SUMMARY (2/2)
* In addition to key questions answered by idea description (step 1)
Source: McKinsey
Additional questions* for rough business plan
How high do you estimate your financing needs?
What are the sales, cost, and profit situations?
What are the most important milestones along the way to your goal?
What test customers have you approached/ could you approach?
What distribution channels will you use?
What partnerships would you like to enter into?
What opportunities and risks do you face?
What is the picture on patents?
Evaluation of Rusmar summary
–
Answered questions
Missing element
See appendix for proposed solutions
EXERCISE
CONTENT OF PRODUCT/SERVICE SECTION
Source: McKinsey
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
Describes the function the product/service fulfills and the benefits the customer will gain from it
Product/service description
Customer value
Explains status and next steps of product/service development
Addresses patents/IP protection issues
Product/service section has to prove that entrepreneur can integrate the customers' perspective
PRODUCT/SERVICE – KEY QUESTIONS
Source: McKinsey
Idea description
What end customers will you address?
What are the customers' needs?
What customer value does your product/service provide?
What is the nature of your innovation? Why is it unique?
What partnerships are necessary to achieve full customer value?
What competitor products already exist or are under development?
What stage of development has your product or service reached?
Do you have patents or licenses?
What further development steps do you plan to take? What milestones must be reached?
STEP 1
PRODUCT/SERVICE – ADDITIONAL QUESTIONS*
* In addition to key questions answered by idea description (step 1)
Source: McKinsey
Rough business plan
Which versions of your products/services are designed for which customer groups and applications?
What patents/licenses do the competitors have?
What kind of service/maintenance will you offer?
What product or service guarantees will you grant?
Compare the strengths and weaknesses of comparable products/services with yours in an overview!
STEP 2
DESCRIPTION OF THE PRODUCT/SERVICE
Source: The American Heritage Dictionary, Duden
A device that converts incident electromagnetic radiation of mixed frequencies to one or more discrete frequencies of highly amplified and coherent ultraviolet, visible, or infrared radiation
High-performance device for the creation of a narrowly bundled beam of light
Better:
Technical description of lasers:
EXEMPLARY
SUCCESSFUL PRODUCT POSITIONING
Source: McKinsey
Identify relevant customer needs and problems
Address subjective perception of customers
Define uniqueness and position offering vis-à-vis competition
Define clear, sufficiently large customer segments
EXERCISE 2 – CUSTOMER VALUE IN RUSMAR CASE
* See Appendix for proposed solution
Source: McKinsey
Customer needs of dump operators
Degree of fulfillment by Rusmar foam
Fulfilled
Not fulfilled
Exercise 2:
Training participants describe needs of Rusmar's customers*
CASE EXAMPLE
CONTENT OF MANAGEMENT TEAM SECTION
Source: McKinsey
Outlines educational background and professional experience of founders
Describes how existing skill gaps can be closed in the future
Convinces potential investors that both managerial and technological expertise is present to run the venture
Venture capitalist will invest only if the venture is managed by an excellent team
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
MANAGEMENT TEAM – KEY QUESTIONS
Source: McKinsey
Complete business plan
Who are the members of your management team and what distinguishes them: education, professional experience, success, standing in the business world?
What experience or abilities does the team possess that will be useful for implementing your concept and setting up your company?
What experience or abilities are lacking? How will the gaps be closed? By whom?
What targets do the team members pursue by starting up the business? How high is the motivation of the individual team members?
REASONS FOR BUSINESS PLAN REJECTION –
BIOTECHNOLOGY VENTURES*
Percent**
Weak management team
Not market-driven
Long time frame
Money commitment too large
Not patentable
Inadequate technical expertise
Other
"If you find good people, they can always change the product. Nearly every mistake I have made has been picking the wrong people, not the wrong idea"– Arthur Rock
Arthur Rock & Co.
* Reasons for rejecting business plans by firms experienced in biotechnology venture capital
** Multiple responses given
Source: Coopers and Lybrand, McKinsey
TEAM RAMP-UP – EXAMPLES
CEO
Technology
Sales
Finance
Marketing
Idea and team devel-opment
Venture
begins
Proof of economic viability
Explosive revenue growth
Technol-ogy & mkt. validation
Sustained earnings growth
ü
ü
ü
ü
ü
ü
X
X
X
X
X
X
Source: McKinsey analysis, external interviews
EXEMPLARY
PERCENTAGE OF FOUNDERS OF FAST GROWING COMPANIES*
Unemployed
or recent graduate
* 4-year growth rate of 573% or higher, 1984 - 1990, 456 companies
Source: McKinsey
Not from business
Running other businesses
Small established companies
Midsize to large companies
(including Fortune 1000)
Start-ups
Examples include
Intel
Microsoft
Lotus
Sun Microsystems
Mattel
CompuServe
Advanced Micro Devices
Raytheon
Fairchild Semiconductor
TRW
CondeNast
News Corp
NECESSARY EXPERIENCE FOR VENTURE MANAGEMENT
Traditional corporate experience does not fit new venture needs …
Skills aligned to achieving near term earnings and sustained revenue growth
Processes based on internal milestones
Staff support allows extensive delegation (., HR, finance, marketing)
Decision making enabled by significant capital resources
Catherine Hapka, CEO Rhythms NetConnections
Former EVP of US West
Responsible for business and telecommunications units with USD billion in revenues
Started and built US West’s INTERPRISE Networking Services Unit to USD 400 million in revenue
Established partnerships with 15 leading hardware and software providers
Richard Thompson, CEO Aradigm
Former President of Johnson & Johnson subsidiary, Lifescan
Built Lifescan from the ground up
Led within Johnson & Johnson expansion into Europe and Japan
Business building roles, .,
Led expansion into new geographic markets
Built new product line or division
Provided marketing leadership to develop a new brand
Relevant industry sector experience
Source: Executive search firm and VC interviews
… but corporate experience is valuable when it includes
SKILL SET OF TEAM MEMBERS
High skill level
Medium skill level
Team members
Technology
Finance
Project management
Contacts
Marketing/sales
Production
Human resources
Social competence
Initiative
Communication
Sales/negotiation skills
Hard factors
Soft factors
Obvious skill gaps to be filled with additional team members
EXAMPLE
J. Chapuis
S. Fischer
M. Tscharner
Source: Planen, gründen, wachsen (McKinsey)
Skill gaps
CONTENT OF MARKET AND COMPETITION SECTION
Source: McKinsey
Provides thorough understanding of markets and competitors:
Market size and growth
Market segmentation
Competition
Positioning of product vis-à-vis the competition
The market and competition section has to outline the full economic potential of the venture
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
MARKET AND COMPETITION – KEY QUESTIONS
Source: McKinsey
Idea description
How is the industry developing?
What role do innovation and technological advances play?
How will you segment the market?
What market volumes do the individual market segments have, now and in the future (rough estimates)?
Who are your target customer groups?
What major competitors offer similar products/services?
How sustainable will your competitive edge be?
STEP 1
MARKET AND COMPETITION –
ADDITIONAL QUESTIONS (1/2)*
* In addition to key questions answered by idea description (step 1)
Source: McKinsey
Rough business plan
What market volume (value and amount) do you estimate for your individual market segments over the next five years?
What will influence growth in the market segments?
What is your estimate of current and future profitability of the individual market segments?
What market shares do you hold in each market segment? What segments are you targeting?
Who are your reference customers? How do you plan to get reference customers?
What are the key buying factors for customers?
STEP 2
MARKET CHARACTERISTICS
Most vertical specialty market-places expected to consolidate
Attractive
Market size and growth
Market competitiveness
Market growth
percent
Potential market size
USD millions
Total revenues of B2B marketplaces estimated to grow at over 100% per year – revenue potential ~ USD 50 bn in 2004
Number of B2B marketplaces
1999
2009
~ 100 - 200
~ -
100
50
0
10
100
1000
1
Unattractive
Source: McKinsey
EXAMPLE
ROUGH ESTIMATES
RUSMAR, INC. – TARGET CUSTOMERS
* Basic data on following page
Source: Inc. Magazine
Target customers: Operators
Operators of one or more "larger" dumps for household garbage
Eastern USA (approx. 300 to 500), beginning 2002, whole USA
Throughput of 500 to 10,000 tons per day
Fee of USD 65 per ton
"Target customers": Agencies
Environmental Protection Agency (federal regulatory body)
Department of Natural Resources (state regulatory body)
Local licensors
Consent required of three additional agencies
Exercise 3:
Training participants estimate market volume for Rusmar's foam*
CASE EXAMPLE
EXERCISE 3 – MARKET VOLUME
Potential market volume for Rusmar foam?**
* Assumption
** See appendix for proposed solution
Source: Inc.-Magazine
Number of dumps: 300 to 500 (eastern USA)
Daily capacity of garbage dump: 500 to 10,000 tons per day
Capacity per truck: roughly 5 - 10 tons*
Average distance between cover layers: ~ 5 m* Used area per day?
Price of foam: 54 US cents per m2
Price of garbage transportation: USD 150 per household per year
Price of applicators: USD 150,000 per applicator
CASE EXAMPLE
MARKET AND COMPETITION –
ADDITIONAL QUESTIONS (2/2)*
* In addition to key questions answered by idea description (step 1)
Source: McKinsey
Rough business plan
How does the competition operate? What strategies are pursued?
What are the barriers to market entry and how can they be overcome?
What market share does your competition have in the various market segments?
How profitable are your competitors?
What are your competitors' marketing strategies?
What distribution channels do your competitors use?
How will competitors react to your market launch? How will you respond to this reaction?
Profile the strengths and weaknesses of your major competitors with your own in the form of an overview!
STEP 2
COMPETITIVE ADVANTAGE
Revolutionary improve- ment in performance
Steep drop in price
Creation of unusually
emotional bond with customer
Number of hypergrowth companies*
with unique competitive advantage
Source: McKinsey
Unique competitive advantage
RUSMAR, INC. – ANALYSIS OF THE COMPETITION
Source: Inc. Magazine
Fulfilled
Not fulfilled
Rusmar 30 min./3M 60 min.
3M two components
Rusmar 6 cents per sq. ft., 3M 13 cents
Rusmar days/3M 3 days
3M USD 12 billion – company
Rusmar h/3M 4h
Customer requirements
Covering layers with low volume
Short application times (longer dumping time)
Simple application
Cost advantage per application
Equal performance as layer of earth regarding
Odor absorption
Erosion from weather
Protection from pests
Constant availability of foam
Applicator licence available quickly, at low cost, and without concern (without reassessment of the dump by regulators)
Rapid and high-quality maintenance
Degree of fulfillment
Rusmar
3M/Sanifoam
Reason
Rusmar leading
3M
leading
CONTENT OF MARKETING AND SALES SECTION
Source: McKinsey
Outlines planned marketing and sales activities (four "Ps" framework):
Product
Price
Place
Promotion
Marketing and sales section has to explain how market is developed
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
MARKETING AND SALES – KEY QUESTIONS
Source: McKinsey
Idea description
What final sales price do you want to charge (estimated)? What criteria did you use to arrive at this final sale price? How high is the profit margin (estimated)?
What sales volumes and sales revenues are you aiming for (estimated)?
Marketing and sales only briefly touched in idea description; more details in rough business plan (stage 2)
STEP 1
QUANTIFYING THE CUSTOMER VALUE
Dimensions of customer value
Time
Quality
Cost
Evaluate and quantify customer value for all 3 dimensions
Display value clearly
Quantify wherever possible
Source: "Profitable pricing: guidelines for management", , R. Holden
Advantages of new product (customers' point of view)
Reference price (currently available product)
Switching cost and dis-advantages (customers' point of view)
Incentive for buying new product
Selling price of new product
EXERCISE 4 – PRICING OF CIENA CORPORATION
Facts
Ciena offers technology to multiply the transmission capacity of fiber-optic cables
Total costs of equipment to multiply capacity by a factor of 24 are < DM 10,000
Total costs of traditional method to increase capacity (new cable) are DM 50 to DM 100 per meter
Exercise 4:
What is the appropriate price for the Ciena product?*
* See appendix for proposed solution
Source: Planen, gründen, wachsen (McKisney)
EXAMPLE
MARKETING AND SALES – ADDITIONAL QUESTIONS*
* In addition to key questions answered by idea description (step 1)
Source: McKinsey
Rough business plan
In which partial market segments will you make your market entry? How do you plan to turn this "toehold" into a high-volume business?
What sales volumes are you targeting (detailed data by market segment)?
Describe the typical process of selling your product/service. Who, among your buyers, ultimately makes the purchasing decision?
How will you win reference customers?
How much, in time and resources, will it cost to acquire a customer?
Which advertising materials will you use to do so?
What other planning steps are necessary in the run up to launching your product/service? Draw up a schedule with the most important milestones!
STEP 2
DETERMINING TARGET SEGMENTS
Source: McKinsey
Select clearly separate and segments with a strong proposition
Select segmentation criteria
Determine segment volume
Arrive at market segments plausibly and validate it
Identify competition per segment
Determine target segment and evolution strategy
Consider direct competitors and substitutions
Make focus clear for market launch
Anticipate evolution path
Segment 1
Segment 2
Segment 3
Analyse customer value per segment
Understand customer value per segment
++
+
o
+
++
++
o
++
+
o
Very high
High
Medium
Critical
POSSIBLE CUSTOMER SEGMENTATION CRITERIA (EXAMPLES)
Source: McKinsey
Demographics: company size, industry, location
Operations: technology employed (., digital, analog)
Buying habits: centralized or decentralized purchasing, purchasing criteria, supplier agreements
Situational factors: urgency of need, order size, etc.
Location: country, urban/rural (population density)
Demographics: age, sex, income, profession, company size
Lifestyle: techies, counterculture, active seniors
Behavior: frequency of product use, product application
Buying habits: brand preferences, price consciousness
Consumer goods markets
Industrial goods markets
CONTENT OF BUSINESS SYSTEM SECTION
Source: McKinsey
Outlines what parts of the value chain are covered by the venture
Discusses organizational issues
Describes necessary partnerships
Makes "make or buy" decisions
Business system section describes all necessary elements that enable the venture to physically deliver the customer value
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
BUSINESS SYSTEM – KEY QUESTIONS
Source: McKinsey
Rough business plan
What does the business system for your product/service look like?
What activities do you want to handle yourself?
Where will the focus of your own activities lie?
What business functions make up your organization, and how is it structured?
What resources do you need (quantitative and qualitative) to create your product/service?
How high is your need for technical input (raw materials, materials to create your service)?
What will you make, what will you buy?
Which partners will you work with? What are the advantages of working together for you and your partners?
STEP 2
BUSINESS SYSTEM – VALUE CHAIN
Research & Development
Source: Planen, gründen, wachsen
EXEMPLARY
Production
Marketing & Sales
Distribution
Service
Generic value chain
Case example City Scape
City Scape
system design
Acqui-sition
General infor-mation
Busi-nesses
Internet pro-duction
Marke-ting
Con-sumers
Busi-nesses
Develop- ment of Internet tech- nology
Business sales
Updates, services
Licensing
Covered by City Scape
BUSINESS MODEL – REVENUES SOURCES
Source: McKinsey
EXEMPLARY
Highest scalability
Revenue potential
Revenue sources
Description
Product line 1
Product line 2
Product line 3
Product business
., sale of software tools
Services
Revenues resulting from service provision or consulting
Contract development
Development of customer-specific solutions
Others
Customer training
Support/Maintenance
IP sale/license fees
CONTENT OF IMPLEMENTATION PLAN SECTION
Source: McKinsey
Describes the most important activities and milestones for the development of the business
Lists the planned short- and long-term investments
Links the investment needs with major milestones
The implementation plan section gives the investor a clear roadmap to control the business development
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
IMPLEMENTATION PLAN – KEY QUESTIONS
Source: McKinsey
Complete business plan
What are the most important milestones for the development of your business, and when must they be reached?
How do you plan to structure the work to reach these targets?
For which tasks/milestones do you anticipate bottlenecks?
How many new employees will you need in the individual business areas over the next five years? What will this cost?
How much real capital is necessary to achieve initial sales?
List your planned short-term investments!
List your planned longer-term (3 - 5 years) investments!
What investments will be required when which milestones are reached?
How high is the annual depreciation for each investment?
STEP 3
IMPLEMENTATION PLAN
Source: McKinsey
Main activities
Activity 1
Activity 2
Activity 3
…
Investment need
Milestones
Responsible
Key success factors
KSF 1
KSF 2
KSF 3
12/04
01/00
02/00
03/00
…
Milestone 1
USD xxx
…
USD xxx
…
USD xxx
Time frame year 1 - 5 with decreasing level of detail
…
Gantt timeline to show the interdependence of the activities and the eventual bottlenecks
Main milestones that pushes the business to the next level; focus on external milestones (., market entrance, product launch etc.)
Detailed explanation of investment needs:
Main activities
Expenses
Activities 1 - 3
…
Personnel
Material
…
USD xx
USD xx
USD xx
EXEMPLARY
CITYSCAPE EXAMPLE – IMPLEMENTATION PLAN
Development
Software development
CityScape server setup/operation
Demo software development
Test/debugging Nuremberg
Catalog development
Development of transaction module
Marketing
Build up customer relationships
Develop marketing campaign
Launch marketing campaign
Start in Nuremberg
Start in Munich
Start in Würzburg
Start in Regensburg
Management
Founding of CityScape
Formation of team
Setup of operations
Recruiting of software specialists
Start of alliances with internet providers
First financing round
Second financing round
Third financing round
1998
Milestones
1
2
3
4
5
6
7
8
9
10
11
12
1999
2000
2001
2002
First CityScape prototype
Start of CityScape Nuremberg
Four cities
Ten cities
30 cities
60 cities
100 cities
Source: "Planen, Gründen, Wachsen"
BACKUP
CONTENT OF FINANCING SECTION
Source: McKinsey
Provides rough cash-flow forecasts
Outlines forecasts of profit and loss statements
Gives overview of future balance sheet structure
The finance plan explains the timing and volume of necessary financing rounds
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Financ- ing
Opportuni-
ties and
risks
FINANCIAL PLANNING – KEY QUESTIONS
Source: McKinsey
Complete business plan
How will your revenues, expenses and income develop?
How will your cash flow develop? When will you expect to break even (= sum of all revenues greater than the sum of all expenses)?
How high is your need for financing based on your liquidity planning? How much cash is needed in the worst case scenario?
What assumptions underlie your financial planning?
Which sources of capital are available to you to cover your financing needs?
What deal are you offering potential investors?
What return can investors expect?
How will they realize a profit (exit options)?
Financial plan outlines
Cash flow statement
Income statement
Balance sheet
STEP 3
APPLICATION OF FINANCIAL PLANNING INSTRUMENTS
Invoice
Can I fulfill my financial obligations at any time?
Am I profitable?
Where has my capital been invested, and where has it come from?
Invoice
Invoice
Cash flow statement
Deposits
...
...
...
Payments
...
...
...
Income statement
Proceeds
...
...
...
Expenses
...
...
...
Profit/loss
Balance sheet
Assets
...
...
...
Equity + liabilities
...
...
...
Equity
Outside capital
Liquid funds
Total assets
Capital invested
Balance sheet total
=
=
Cause of bankruptcy: excessive debt
(equity < 0)
Cause of bankruptcy: illiquidity (liquid funds < 0)
Source: McKinsey
CASH FLOW AND INCOME STATEMENT
Deposits and payments refer to the amount of liquid cash and are not entered into the books until actual payment takes place
Proceeds generated and expenses (consumption of resources) are entered into the books for the period under review – irrespective of concrete payments
Cash flow statement
Liquid funds
Deposits
Payments
–
=
Income statement
Profit/loss
Income
Expenses
–
=
Constantly safe- guarding liquidity takes top priority for start-up companies
Source: McKinsey
BALANCE SHEET STRUCTURE
Assets
Fixed assets
Intangible assets
Real estate and buildings
Technical equipment, plant,
and machinery
Other equipment and fixed assets
Current assets
Raw materials and supplies
Semi-finished and finished goods
Accounts receivable
Other receivables
Liquid funds
Equity + liabilities
Equity
Nominal capital
Additional paid-in capital
Net earnings/losses brought forward
Net income
Liabilities
Provisions
Long-term bank loans
Short-term bank loans
Accounts payable
Other liabilities
Total assets
Total equity + liabilities
=
DM thousands
20
0
1,936
0
0
20
400 0
5,945
8,560
0
-7,229
2,470
0
4,500
0
20
0
8,321
8,321
Source: McKinsey
EXAMPLE BIOCHALLENGE
STRUCTURE OF INCOME STATEMENTS IN DIFFERENT INDUSTRIES
Percent
Source: Planen, gründen, wachsen (McKinsey)
Food
Research and development
Consulting
Leasing
Electronics
Automobiles & machinery
Chemicals
Publishing/ printing
Textiles
Revenues
Profit
Sales
Other operat-ional income
Extraordinary income
Explanation necessary if business plan numbers are significantly different than industry average
Expenses
Cost of materials
–
–
Personnel expenses
Wages and salaries
Social security
Rent
Interest
Depreciation of fixed assets
Other depreciation
Other operating expenses
VALUATION METHODS
* Assumption: FCF in year 5 is 1,100, growth rate 6%, discount rate 16%
Source: McKinsey
-150
Valuation with DCF method
EUR thousands
Free cash flows
1
2
3
4
5
Continuing value*
Discount factor
Today's value
Entity value
Debt
Total value
65%
55%
45%
35%
25%
25%
-1,188
-275
-49
115
289
3,608
2,500
+
+
+
+
+
+
0
2,500
Year
Profit for relevant period (year 5)
Valuation with multiples
EUR thousands
1
2
3
4
5
Year
Discount factor (IRR = 65% for 5 years)
Total value
905
x
3,190
x
Discount rate
Different methods possible
-660
-1,960
380
880
11,000
43
(multiple)
EUR 38,900
POSSIBLE SOURCES OF FUNDING
Financing stages
Seed
Start-up
Expansion
Personal savings
Loan by family
Government subsidies
Bank loans
Leasing
Venture capital
Stock market
Source: Planen, gründen, wachsen (McKinsey)
TYPICAL VC FINANCING PROCESS
Letter of intent
Business plan
Preselection
First visit and discussion
Further discussions, evaluations
Term sheet
Due diligence
Contract negotiation
Contract, financing
Support, coaching, and control
Exit
Source: Planen, gründen, wachsen (McKinsey)
CONTENT OF OPPORTUNITIES AND RISK SECTION
Source: McKinsey
Describes the venture's specific opportunities
Identifies the venture's main challenges
Tries to assess and quantify risks (., with sensitivity analysis)
Develops countermeasures for "killer" risks
Consideration of risk involved will win the confidence of a potential investor
Executive summary
Product/ service
Manage-ment team
Market and com-petition
Marketing and sales
Business system
Implemen-tation
plan
Opportuni- ties and
risks
Financ- ing
OPPORTUNITIES AND RISKS – KEY QUESTIONS
Source: McKinsey
Rough business plan
What basic risks (market, competition, technology) does your business venture face?
What measures will you take to counter these risks?
What extraordinary opportunities/business possibilities do you see for your company?
How could an expansion of your capital base help?
STEP 2
TYPICAL RISKS – EXAMPLES
Source: McKinsey
Management team of the venture cannot be completed
Important team member (., CTO) leaves venture
Slow prototype development delays early market entry
Strategic partner cannot be found
No agreement with sales channel partner
Lead customer does not accept prototype
Inside the venture
Outside the venture
SENSITIVITY ANALYSIS
Source: McKinsey
Cumulated cash flows
Year
1
2
3
4
5
DM
Determinants of different scenarios have to be well understood
Payback period
Financing need
Best-case scenario
Base-case scenario
Worst-case scenario
EXEMPLARY
AGENDA
Short introduction to the use of business plans
Preparation guidelines for business plans
Wrap-up
APPENDIX 1
Additional questions for complete business plan (step 3)
EXECUTIVE SUMMARY – ADDITIONAL QUESTIONS*
* In addition to questions for rough business plans (steps 1 and 2)
Source: McKinsey
Additional questions for complete business plan
Summarize the results of your detailed business planning and state your exact financing needs!
How will you delegate management tasks?
How much production capacity is necessary?
How will the implementation of your business idea be organized?
List your next, concrete steps!
Most important questions an investor asks!*
STEP 3
PRODUCT/SERVICE – ADDITIONAL QUESTIONS*
* In addition to questions for rough business plans (steps 1 and 2)
Source: McKinsey
Additional questions for complete business plan
What resources (time, personnel, materials) do you require for each subsequent development?
What share of sales do you expect from your various products/services (if applicable)? Why?
What income from royalties/sales do you estimate from possibly marketing the property rights? Who would be your licensees/buyers?
STEP 3
MARKETING AND SALES – ADDITIONAL QUESTIONS*
* In addition to questions for rough business plans (steps 1 and 2)
Source: McKinsey
Additional questions for complete business plan*
What demands (employee number, qualifications, and outfitting) must the operation meet in order to effectively implement its marketing strategy? What is your estimated expenditure for this area?
How will sales volume and operating results be spread out among the various distribution channels (estimated)?
What are your expenses? At launch – and later.
What price will you charge for your product/service per target group and distribution channel?
What payment policies will you lay down?
STEP 3
BUSINESS SYSTEM – ADDITIONAL QUESTIONS*
* In addition to questions for rough business plans (steps 1 and 2)
Source: McKinsey
Additional questions for complete business plan*
Where will you locate your business?
What capacity for product manufacture and service production do you plan (number of units)?
How much will production and delivery of your product/ service cost?
How, and at what cost, can you adjust your capacity in the short term?
What measures are planned for quality assurance?
If you need a warehouse, how will you organize your inventory?
How much of your product has to be put in storage?
How are your costs structured (fixed, variable)?
STEP 3
OPPORTUNITIES AND RISKS – ADDITIONAL QUESTIONS*
* In addition to questions for rough business plans
Source: McKinsey
Additional questions for complete business plan*
What will your planning look like for the next five financial years under both a best and worst case scenario?
What effect will this have on your need for capital and your return?
In your view, how realistic are these scenarios?
What consequence do they have on your business planning?
STEP 3
APPENDIX 2
Proposed Rusmar case example solutions
EXERCISE 1 – EXECUTIVE SUMMARY (1/2)
Source: McKinsey
Key questions for idea description
What is your business idea? In what way does it fulfill the criterion of uniqueness?
Who are your target customers?
What is the value for those customers?
What market volume and growth rates do you forecast?
What competitive environment do you face?
What additional stages of development are needed?
How much investment is necessary (estimated)?
What long-term goals have you set?
Evaluation of Rusmar summary
–
Answered questions
Missing element
ü
ü
ü
ü
–
ü
( )
ü
–
–
EXERCISE 1 – EXECUTIVE SUMMARY (2/2)
( )
( )
* In addition to key questions answered by idea description (stage 1)
Source: McKinsey
Additional questions* for rough business plan
How high do you estimate your financing needs?
What are the sales, cost, and profit situations?
What are the most important milestones along the way to your goal?
What test customers have you approached/ could you approach?
What distribution channels will you use?
What partnerships would you like to enter into?
What opportunities and risks do you face?
What is the picture on patents?
Evaluation of Rusmar summary
–
Answered questions
Missing element
ü
–
ü
ü
–
–
–
( )
( )
ü
ü
EXERCISE 2 – CUSTOMER VALUE
Source: Inc. Magazine
Customer needs of dump operators
Low-volume layer of coverage
Short application time (longer dumping time)
Simple application
Same performance as a layer of earth regarding
Odor absorption
Erosion from weather
Protection from pests
Applicator license available quickly, at low cost and without concern (without reassessment of the dump by regulators)
Cost advantage per application
Rapid and high-quality maintenance
Constant availability of foam
Degree fulfilled by Rusmar, Inc.
Space savings of some 30%, lifetime improvement of ~10%
More garbage: approx. USD 5,800 per day/ USD million per year
Lower costs: approx. USD 1,100 per day, USD million per year
Fulfilled
Not fulfilled
CASE EXAMPLE
EXERCISE 3 – MARKET VOLUME
* Assumptions
** About 260 working days
*** Assessed price of 54 US cent/m2
Source: Inc. Magazine
Covered area per day
Covered area per year**
Potential market size***
Average daily capacity per dump
~ 5,000 tons*
Average distance between cover layers
~ 5 m*
Average area in use
~ 1,000m2/day*
~ 500,000m m2
(Maximum)
~ 130m m2
(Maximum)
~ 300,000m2
(Minimum)
~ 78m m2 (Minimum)
500 dumps
300 dumps
USD 70 m/year
USD 42 m/year
Additional market for applicators
USD 45 m to USD 75 m (cummulative)
CASE EXAMPLE
EXERCISE 4 – PRICING OF CIENA PRODUCTS
Advantages of new product (customers' point of view)
Reference price of currently available solution (additional cables)
Switching cost and dis-advantages (customers' point of view)
Incentive for buying new product
Selling price of new product
0
0
0
For comparison:
Total cost for Ciena are < DM 10,000
Price of capacity extension equipment
DM millions
Source: Planen, gründen, wachsen (McKinsey)
Assumption
Average cable length of 50 km with costs of DM 50 - 100 per meter
Non-financial incentives
No digging of new cables
Faster installation of new technology
Backup
BUSINESS PLAN ELEMENTS
Source: McKinsey
Idea description (step 1)
Rough business plan
(step 2)
Elements required
Financing
Product/service
Management team
Market and competition
Marketing and sales
Executive summary
Implementation plan
Opportunities and risks
Business system
Venture profile, goals, structure
Nomination of people to take on essential functions
Customer value
Product concept
Market structure
Competitive situation
Competitive advantage
Market access
Market segments
Business concept
Business vision/ strategy
Entry strategy
Learning paths
Required cash
Milestones
3 - 5 year plan
Level of maturity
Description
BACKUP
Complete business plan
(step 3)
SUCCESS FACTORS FOR NEW VENTURES ALONG THE LIFECYCLE
Start-up
Early growth
Pre-IPO
Post-IPO
Large market potential
Solid and sustain-able competitive advantage
Realistic financing and exit options
Strong management team
Flexibility to refine business concept
Internationali-zation of concept
Strong alliances/ partners
Convincing and promising business concept ("equity story")
Reliable history in core business over 1 - 2 years
World-class investor management
Identification and development of new growth options
M&A activities and post merger integration
Clear-cut roles and responsibilities among (top) management team
Operational excellence and performance mindset
Source: McKinsey
High-growth ventures offer in most cases either new products and services or a new business system
The use of business plans became standard even for R&D projects during the last few years
A business plan has to fulfill a set of generic requirements
VC-suitable business plans are developed step-by-step
A complete, VC-tailored business plan consists of nine chapters
The Executive Summary gives a clear, compelling, and concise overview of the business plan's most important aspects
The summary of an idea description answers basic questions about the business idea, target markets, and future perspectives of the venture
For a rough business plan, the summary has to answer additional questions about the economic viability, milestones, marketing and sales as well as partnerships
Rusmar, Inc. saves space and cuts cost for household garbage dump operators
The training participants use a blank form sheet to check the content of the Rusmar Executive Summary
The training participants use a blank form sheet to check the content of the Rusmar Executive Summary
The product/service section deals with the product description, customer value, development steps, and patent issues
Questions about customer value, product development, and patents have to be answered in the idea description
In the rough business plan, a more detailed description of the offering is needed
A description of the product or service function that is easy to understand is more practical than a list of technical specifications
Understanding customer needs and product uniqueness is important for a successful product positioning
Exercise 2 is about determining the needs of Rusmar's customers
Investors have to be convinced that the venture will be run by an excellent management team
The management team section focusses on the background and professional experience of the founders and on how skill gaps can be closed
Strong teams with the appropriate know-how and skill set are the key to success
Leadership teams for new ventures must be established early and include a wide range of skills
Established companies represent the largest source of entrepreneurs
Business building experience is a prerequisite for new venture leadership
The management team has to outline its strengths and weaknesses
This section provides a thorough understanding of markets and competitors
Investor questions about the venture's industry, market segments and growth, and the competitive situation have to be answered in the idea description
The rough business plan needs a more detailed understanding of the market size and dynamics
Are you targeting an attractive market?
Target customers include consenting authorities, not just dump operators
In exercise 3, the participants estimate the potential market volume for the Rusmar foam
The rough business plan has to provide a detailed discussion of the competitive situation
A unique competitive advantage can be based on three primary categories
Rusmar's most important competitor offers better resistance and availability of the product
The marketing and sales section outlines product offering, pricing, placement, and promotion activities
Market and sales issues are only briefly discussed in an idea description
Quantifying the customer value in terms of quality increases and time and cost savings reinforces the business idea
Exercise 4 deals with value-based pricing
In a rough business plan, a detailed marketing and sales plan has to be developed
Market segmentation is key to determine the right market entry strategy
Customers can be segmented according to different criteria
The business system section describes all necessary elements to physically deliver the product or service
Necessary activities, functions, and resources are discussed in the business system section
One way to describe the business system is to clarify what parts of the value chain are covered by the venture
The business model section has to describe the different sources of revenues
The implementation plan section describes the business development roadmap
Investor questions on next steps, important milestones, and investment planning are addressed by the implementation plan
A realistic and detailed five-year plan will increase credibility among investors and business partners
The implementation plan describes the most important activities and milestones for the development of the business
The financing section derives the timing and the necessary funding amount for the venture's financing rounds
The financial planning section answers questions on future income, cash flows and financing needs
The liquidity calculation, profit and loss statement, and balance sheet answer various financial questions
A liquidity calculation records the amount of available means of payment, while the income statement lists profits and losses
The asset side of the balance sheet lists the allocation of resources in the asset base, the liabilities side lists the sources of these funds
If the financial plan of a start-up company differs from the industry average, further explanation is necessary
Practitioners use different methods to calculate the value of a start-up company
There are several sources of funding for start-up entrepreneurs
Venture capital is typically discussed and negotiated in several steps
Investors want information about potential risks and opportunities
This section of a business plan describes specific opportunities, basic risks, and potential countermeasures
Internal and external risks endanger a new venture's success
Sensitivity analyses serve to understand the impact of uncertain variables on the venture's success
The Executive Summary for a complete business plan includes more operational details
Questions about resources for product development have to be answered in the complete business plan
Investor questions about the future marketing and sales strategy have to be answered in the marketing and sales section
More information on production, logistics, and the cost structure has to be provided by the business system section of a complete business plan
Different scenarios for the next five financial years are discussed in this section of the complete business plan
The executive summary for Rusmar, Inc. is not complete
The Rusmar summary is not sufficient for a rough business plan
Dump operator can save space and cut costs, but might not receive a license for Rusmar's foam
The market potential for garbage dump foam is approximately USD 42 to 70 million per year
A value-based pricing apporach leads to market price of ~ DM m compared to Ciena's total cost of less than DM 10,000
Each development step adds more content to the business plan
Strategy is an important topic in all phases of a venture
