TIPS FOR A SUCCESSFUL BUSINESS
PLAN DEVELOPMENT
1. It should be user-friendly.
2. Keep it respectably short
3. Organize and package the plan appropriately
– Appearance
– Critical elements are table of contents, an
executive summary, an appendix, graphs, a
logical arrangement or segments, and overall
neatness.
TIPS FOR A SUCCESSFUL BUSINESS
PLAN DEVELOPMENT
4. Avoid exaggeration
5. Highlight critical risks
6. Give evidence of an effective entrepreneurial
team
– By identifying clearly the skills of each key person
and demonstrate how all such people can
effectively work together as a team to manage
the venture
TIPS FOR A SUCCESSFUL BUSINESS
PLAN DEVELOPMENT
7. Do not over-diversify
8. Identify the target market
9. Keep the plan written in the third person
– Instead of writing “I,” “we,” or “us,” the
entrepreneur should phrase as “he,” “she,”
“they,” or “them.”
– Avoid personalizing the plan.
TIPS FOR A SUCCESSFUL BUSINESS
PLAN DEVELOPMENT
10.Capture the reader’s interest
– Capture the reader’s interest right away by
highlighting the uniqueness of the venture.
– Use the title page and executive summary as key
tools to capture the reader’s attention and create
a desire to read more.
ELEMENTS OF A BUSINESS PLAN
1. Executive Summary
– Business plan readers like this section a lot when
it features its most important parts.
– It should reflects its name
– It should be written only after the entire business
plan has been completed.
ELEMENTS OF A BUSINESS PLAN
2. Business Description
i. The name of the venture should be identified
ii. The industry background should be presented in
terms of current status and future trends
iii. Discuss the potential advantages the new
venture possesses over the competition.
ELEMENTS OF A BUSINESS PLAN
3. Marketing Segment
– Convince investors that a market exists, that
sales projections can be achieved, and that the
competition can be beaten.
– Market niche and market share – explain the
bases of customer purchase decisions: price,
quality, service, personal contacts, or some
combination of these.
– Competitive analysis
– Pricing policy
ELEMENTS OF A BUSINESS PLAN
4. Operations
– Identify location: advantages e.g. labor
availability, wage rate, proximity to suppliers and
customers, and community support.
– Discuss facilities required to handle the new
venture (e.g. plant, warehouse storage, and
offices), as well as any equipment that needs to
be acquired (e.g. machinery, computers, vehicles
etc).
ELEMENTS OF A BUSINESS PLAN
5. Management
– The discussion should be sufficient so that
investors can understand
i. Organizational structure
ii. Management team and key personnel and their
experience and technical capabilities.
iii. Ownership structure and compensation
agreements.
ELEMENTS OF A BUSINESS PLAN
6. Financial forecast
– Projected balance sheet
– Projected income statement
– Cash flow statement
– Break-even analysis
– Ratio analysis
ELEMENTS OF A BUSINESS PLAN
7. Critical risks
– Discuss potential risks before investors point
them out e.g.
• Price cutting by competitors
• Sales projections not achieved
• Difficulties or long lead times encountered
– Provide some alternative courses of action
ELEMENTS OF A BUSINESS PLAN
7. Harvest Strategy (Exit strategy)
– Outline a plan for a liquidity event – (IPO or sale)
– Describe the plan for transition of leadership if the
plan is to grow and develop it.
– Continuity of business strategy
– Entrepreneurs should keep their dreams alive,
ensure the security of their investors, and
strengthen their businesses.
ELEMENTS OF A BUSINESS PLAN
8. Milestone schedule
– Time table for major events e.g. Incorporation of
the venture.
9. Appendix and / or Bibliography Segment
– This is not a mandatory segment but it allows for
additional documentation that is not appropriate
in the main parts of the plan e.g. diagrams,
financial data, vitae of management team
members, and any bibliographical information.
PROJECT EVALUATION TECHNIQUES
• There are more than five but the main ones
are:
1. Net Present Value (NPV)
2. Index Profitability
3. Internal rate of return (IRR)
NET PRESENT VALUE (NPV)
• The net present value of an investment is the
present value of its cash inflows minus the
present value of its cash outflows.
• Since NPV is the difference between the PV of
the cash inflows and the cash outflows, then
NPV’s rule is: Accept investment project if its
NPV is positive, otherwise reject it.
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NET PRESENT VALUE (NPV)
1. Identify all cash flows associated with the
investment—all inflows and outflows.
2. Determine the appropriate discount rate or
opportunity cost, r, for the investment
project.
3. Using that discount rate, find the present
value of each cash flow.
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NET PRESENT VALUE (NPV)
4. Sum all present values. The sum of the
present values of all cash flows (inflows and
outflows) is the investment’s net present
value.
5. Apply the NPV rule: If the investment’s NPV
is greater than zero, the project will add
value and should be accepted, but if the
NPV is negative, it should be rejected.
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NET PRESENT VALUE (NPV)
• CF0 = Initial cash flow, which is typically a cash outflow that
is represented by a negative number.
• CFt = the expected net cash flow at time t
• N = the number of periods of cash flows for the project
being evaluated
• r = the discount rate or opportunity cost of capital
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NET PRESENT VALUE (NPV)
• EXAMPLE: Project B requires an initial investment
of $100,000 and is expected to generate a cash
flow of $70,000 in year one, $30,000 per year in
years two and three, $25,000 in year four, and
$10,000 in year 5. The discount rate is 17 percent.
Is project B a good investment opportunity?
i = 17%
Time Period 0 1 2 3 4 5 Years
Cash Flow -$100,000 $70,000 $30,000 $30,000 $25,000 $10,000
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SOLUTION
•
• CF0 = $100,000; CF1 = $70,000; CF2 =$30,000;
CF3 =$30,000; CF4 = $25,000; CF5 = $10,000;
N= 5; r = 17%
$70,000 $30,000 $30,000 $25,000 $10,000
NPV = −$100,000 + + + + +
(1.17)1 (1.17)2 (1.17)3 (1.17)4 (1.17)5
= $18,378
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PROFITABILITY INDEX
• This is the benefit-cost ratio equal to the PV of
an investment’s future cash flows divided by
its initial cost.
CF1 CF2 CFN
+ + ⋯ +
(1 + r)1 (1 + r)2 (1 + r)N
PI =
Initial Cash outlay (CF0 )
• PI and NPV are closely related. PI = PV of cash
flows/Initial Cash outlay; and NPV = PV of cash
flows – Initial Cash outlay.
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PROFITABILITY INDEX
• PI Decision Rule: When the PI is greater than
one, the NPV will be positive, so the project
should be accepted. When the PI is less than
one, which indicates a bad investment, NPV
will be negative and the project should be
rejected.
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INTERNAL RATE OF RETURN (IRR)
• IRR is the discount rate that results in a zero
NPV for the project.
• For example, if you invest $100 today in a
project expected to return $120 in one year,
the IRR for the investment is 20%.
• NPV= CF0 + CF1/(1+IRR) = 0
• = -$100 + $120/1.2 = 0
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INTERNAL RATE OF RETURN (IRR)
• Solving for IRR when there are multiple future
periods can be done on try and error basis
using the formula below.
CF 1 CF 2 CF N
NPV = CF0 + 1 + 2 + ⋯+ =0
(1+IRR ) (1+IRR ) (1+IRR )N
• IRR Decision Rule: Accept the project if the IRR
is greater than the required rate of return or
discount rate used to calculate the NPV of the
project, and reject it otherwise.
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