Entrepreneurship Workbook (2 Ed) - Legge

Web support material to accompany Entrepreneurship: Context, Vision and Planning © John Legge & Kevin Hindle 2004, published by Palgrave Macmillan.

Entrepreneurship: Context, vision and planning

Contents 1

Using this workbook

1

2

The product and its market

3

3

Intellectual property

26

4

SOPA

32

5

The financial feasibility model

42

6

Spreadsheet tips

54

7

The management team

62

8

Writing the plan

68

9

Presenting the plan

75

iii

1 Using this workbook  This workbook is intended to guide both entrepreneurship students and people planning their first entrepreneurial venture towards the completion of their entrepreneurial business plan. For a student the result may be their major class project, while the novice entrepreneur will be guided to the completion of an advanced feasibility study and a comprehensive accountant’s brief. If the plan is to be used within a corporation, or as a memorandum of understanding between joint venturers with no outside equity, little further work will be needed. If the plan is to be used as the basis of a prospectus, or as the basis of an approach to unrelated professional investors, a full set of pro-forma accounts will have to be prepared by a properly qualified accountant. Planning is not the prerogative of accountants, but money is: the entrepreneurial business plan is intended to bring the entrepreneur and a sufficient sum of money together to start an enterprise. Entrepreneurs need not be flamboyant, but they must have imagination and the ability to look beyond the details while good accountants never overlook details and can still be good accountants without ever being imaginative; creativity creativity in an accountant is never an unmixed blessing. An entrepreneurial venture must blend these two opposites, and one of the rules to successful mixing is to avoid ‘turf wars’. This workbook assumes that the planner is not a qualified accountant and the financial planning described stops short of the point where a qualified accountant should be brought in to develop and manage the accounts. Chapters 2 to 6 of the workbook are intended to guide the student or entrepreneur in the collection of essential planning data and in the completion, or at least the initiation, of  a number of essential preliminary actions. Chapters 7 and 8 discuss the writing and presentation of an entrepreneurial business plan. The workbook has been written as a companion to Entrepreneurship: How Innovators Create the Future and users of the workbook who have not read Entrepreneurship will find themselves being told to do certain things with very little explanation as to why.

Entrepreneurial business planning Every entrepreneurial business plan shares a common emphasis on economic growth: the entrepreneur plans to create a venture, either involving a new organisation or a new initiative from within an established one, which will, in the first instance, represent the most productive and socially valuable use of the resources needed by the venture, and in the second instance create new resources that can support higher levels of consumption and investment in the future. The entrepreneurial business plan serves two main purposes: Ë it shows that a proposed initiative is commercially feasible Ë it is used to enlist the support of various people who currently control the resources that the new enterprise will need.

1

 A plan that succeeds in enlisting the support of the necessary resource controllers can then be used as a basis for establishing the staffing and management structures at the launch of the new enterprise, setting up an initial Chart of Accounts for the financial control of the enterprise, and establishing initial targets for internal costs and external revenue generation. As the new enterprise develops, problems will be encountered and opportunities discovered that are almost certain to lead the enterprise in directions and to achievements that have little if any relationship to those described in the original business plan. This tendency of the real world to rewrite plans does not reduce the value of the entrepreneurial business planning process: without the plan the resources the enterprise needed could not have been put under its control and the enterprise would not have got started at all. Planners who forget that they are describing a possible outcome, which is one of many possible outcomes, may be surprised by reality if their venture ever gets started; more often, their excessive confidence in their ability to control the future will so diminish the conviction of their plan that the enterprise will never be more than a paper one.

2

2 The product and its market The tables on the succeeding pages allow the users of this workbook to capture some of the data needed to quantify the market opportunity that they are facing.  An essential step in establishing the feasibility of a concept and then in proceeding to develop a plan to exploit it is to estimate the size of the potential market, both in numbers and in value. The immediate outcome of this exercise will be an estimate of the available annual gross margin (AAGM), the absolute maximum annual yield potential of the market. This sets a long term limit to the size of a planned enterprise, and in the short term sets a limit on the amount a rational investor or entrepreneur should be willing to spend in pursuing the opportunity. If the AAGM is sufficient to justify the necessary investment, the entrepreneur must prepare an entrepreneurial business plan, and one of the first steps in the preparation of  such a plan is the preparation of phased sales and revenue forecasts. The marketing data captured while completing this part of the workbook is fundamental to the preparation of  such forecasts.

Product Details Table 2.1 (see page 5) will look far too small if you are a committed innovator: the essence of  your new product can’t be captured on a single page! This page is designed to let you capture the what, how and why of new product marketing: what are our customers going to receive; how are they going to receive it, and why will they want it.

Basic product description Getting the basic product description into a box the size that we provide here will seem almost impossible. You must make the effort: although the ultimate entrepreneurial business plan will have rather more description, and the full product documentation may run into books rather than pages, there must be a concise way of describing the product that captures its most important unique attributes. If you can’t find a concise way of at least introducing the product it will prove impossible to sell it in the real world: people just won’t sit still for an hour or so waiting to find out what it is that they are listening to.

Basic method of distribution Just having a product that people want generates no sales: there must be a practical way for them to obtain it. Distribution covers both the way an order will be placed by the final customer or user and the way in which the actual product will be delivered. If the product is a packaged good to be sold through supermarkets then the acts of ordering and delivery are combined into the action of picking the goods off the shelf and putting them into a 3

trolley. By contrast a sophisticated industrial service might be sold in one place by one group of people and delivered in another by a completely different group.

Frequencies We suggest that you put some effort into deciding how often the new product will be used and how often it will be purchased. This information will affect many of your subsequent planning and operating decisions. Products that are purchased regularly can be marketed in different ways from products that are purchased unpredictably; similarly, the expected income variance and therefore the appropriate investment hurdle rates are affected by the frequency and regularity of purchase. The frequency of use can be used to develop an estimate of the demand for consumables and associated services. There are many products, including the famous example of the Gillette Safety Razor, where the initial sale of the product cannot sustain a business case but the consumable items and related services can.

Value to user  The value to the user is close to the price at which a typical user would be indifferent between owning this product (or any reasonably close substitute) and doing without. Taken with some of the other data collected in subsequent tables, this sets an absolute limit on the price that can be charged and the potential revenue that the new enterprise can earn.

Cost of acquisition and ownership Nothing is entirely costless to own, but often the specific ownership costs are slight enough to be ignored. Other products can involve their owners in considerable ongoing expense, in the form of taxes, licence fees, upgrade charges, maintenance contracts, site preparation, essential training and other costs associated with putting the new product to use. It is naive to think that buyers are unaware of these costs, and even if they were, it could well be an offence under the Trade Practices Act in Australia and similar laws in other jurisdictions to take advantage of them. The costs of purchase and ownership reduce the limit price that a supplier can charge.

4

Table 2.1

Product details

Basic product description

Basic method of  distribution

Frequency

Of use G Regular G Stochastic

Of purchase G Regular G Stochastic

G

G

Often/month G Often/year G  Annually

Often/month G Often/year G  Annually

Expected annual purchases per user

....... Significance

G

. . . ./. . . .

G

Consumer product Sustains life Sustains prestige Enhances prestige Preserves property Enhances property Preserves quality of  life Enhances quality of  life

G G G G G G G

G

G

. . . ./. . . .

Other . . . . . . . . . . . . .

Estimate of value (not price) to user

Estimate of costs of  acquisition and ownership (other than price)

5

G

G

Intermediate product Sustains production Enhances throughput Enhances product value Sustains asset value Enhances asset value Preserves reputation Enhances reputation

G

Other . . . . . . . . . . . . . .

G G G G G G

Consumables Many products need auxiliary or ancillary products if the user is to gain the full benefits of  ownership. Motor cars need petrol and oil, safety razors need blades, photocopiers need blank paper. Heavy industrial equipment may need spare parts. Often, particularly for a new product line, the supply of these products can be a useful source of profit in their own right as well as a source of steady cash flow: economic cycles will affect the readiness of  buyers to make large purchases, but they won’t, in general, change their readiness to keep their existing equipment operating. Tables 2.2 and 2.4 are provided to capture the anticipated revenue for the sale of the consumable supplies required by a durable product. The cash flow from consumables and spares is not absolutely guaranteed, particularly for successful products: competitors are likely to be attracted to any substantial aftermarket and there may be no legal way to stop them entering it.

General nature of consumables   A few words in this section of the workbook should be sufficient to summarise the consumables; a full description can be saved for the written plan or even a supporting document. Don’t waste space and effort listing consumables that you have no intention of  supplying because they are already widely available from many competing suppliers; do give some thought to essential consumables that no one else currently supplies.

Basic method of distribution Consumables can’t, in general, be made to order: there must be stocks, a physical distribution system, a way of placing orders and settling accounts. Spare parts may be ordered from a price list or supplied under an inclusive warranty or ongoing maintenance agreement. There will be associated costs and revenue opportunities.

Frequencies Frequency data should be estimated for those consumables that the venture intends to supply. This information will be needed to establish both the size and the stability of the associated cash flows.

6

Table 2.2

Ancillary consumables

General nature of  associated consumable products

Basic method of  distribution

Frequency

Table 2.3

Of use G Regular G Stochastic

Of purchase G Regular G Stochastic

G G G

Often/month Often/year  Annually

G G G

Often/month Often/year  Annually

G

. . . ./. . . .

G

. . . ./. . . .

Expected annual purchases per user

.......

Ancillary services

General nature of  associated services

Basic method of  distribution

Frequency

Of use G Regular G Stochastic

Of purchase G Regular G Stochastic

Expected annual purchases per user

G G G

Often/month Often/year  Annually

G G G

Often/month Often/year  Annually

.......

G

. . . ./. . . .

G

. . . ./. . . .

7

Services Services provide a further way of generating stable cash flows after the sale of a product to a user. Some services, such as emergency repairs and routine maintenance, preserve the buyer’s investment. Others, such as training and the fitting of enhancements, increase the value of the investment, improving the supplier’s reputation and making repurchases and recommendations more likely. Tables 2.3 and 2.5 are provided to capture service data.

Nature of services Services can be value-preserving, as with maintenance and repair, or value-adding, such as training and upgrading. It may be difficult to record all the service options on one sheet: we provide two in this workbook but more may be needed. In a full operating plan for a business, every separately priced service should be analysed, but during the early stages of  preparing an entrepreneurial business plan similar services can be grouped to keep the plan concise.

Service delivery Users generally place a high value on services that are delivered at their premises by highly trained staff. In general, moving away from this level reduces the perceived value of the service, but it also reduces the cost of delivery: part of the art of service design is in picking the level of service where the gap between the perceived value and the actual cost is highest. The contractual arrangements can be summarised here: some services will be charged for as they are delivered, others will be provided under warranty at no cost, while others may be offered as part of an extended warranty or maintenance service where the user pays a standard charge irrespective of the amount of service actually delivered. Extended warranties can be extremely profitable — if the incidence and cost of actual service delivery has been estimated correctly.

Frequency information Knowing the frequency and regularity of service opportunities will enable the planner to estimate the quantity and the quality of the cash flow that each service element can contribute. It will also be important in estimating the costs of providing warranty and extended warranty service.

8

Table 2.4

Ancillary consumables (second box)

General nature of  associated consumable products

Basic method of  distribution

Frequency

Table 2.5

Of use G Regular G Stochastic

Of purchase G Regular G Stochastic

G G G

Often/month Often/year  Annually

G G G

Often/month Often/year  Annually

G

. . . ./. . . .

G

. . . ./. . . .

Expected annual purchases per user

.......

Ancillary services (second box)

General nature of  associated services

Basic method of  distribution

Frequency

Of use G Regular G Stochastic

Of purchase G Regular G Stochastic

G G G

Often/month Often/year  Annually

G G G

Often/month Often/year  Annually

G

. . . ./. . . .

G

. . . ./. . . .

9

Expected annual purchases per user

.......

Competition and value The modern business planner needs to take a very broad view of the possible competition; competitive threats are not limited to physically similar products. Table 2.6 is provided to help the planner consider: Ë What are the benefits users will expect from purchasing and using the new product? Ë What alternative ways are there for users to obtain similar benefits? The alternatives are remarkably broad for industrial products, and broader still for consumer ones: consumers may not set out their needs in a product-oriented fashion at all.  A parent with children requiring entertainment can buy them a toy, or take them to the movies, or the zoo, or to a fast food restaurant, or the museum, or a park, or lock the study door and ignore the sounds of breaking glass from the kitchen.

Alternatives We have provided four lines on Table 2.6 to list probable competitors for the new product. Planners should take a broad view of what may constitute competition: limiting their views to physically similar products may miss the point. Competition is anything that offers users an alternative way of obtaining a similar benefit. The ‘price’ column in this section of the table should be based on this value equivalence, that is, how much the user would have to pay to receive the competing benefit, not simply a price list entry. The right hand column should get the market share of the nominated competitor for consumer products and the industry rank of the competitor for industrial ones.

Superiority For each of the four possible competitors we have provided space to list two reasons why the new product should, at least some of the time, be preferred. Technical arguments should be avoided: these are ‘sales messages’, not formal arguments.

Value premium If the new product is better than all the probable alternatives, this should be worth money to its users. There may be no practical way of the supplier capturing this value premium in cash, particularly if part of it is indirect or inferred, but it does represent a buying incentive.   Alternatively, if the planner cannot identify a value premium at all, there have to be questions about the likely market take-up of the new product.

Acceptable price There is room in this box to set out the price of the primary product and some of its major after-market and service auxiliaries. The ‘natural’ point for this price will be the average level of the prices charged by the product’s established competitors, when there are close competitors: any premium will require a strong justification and powerful sales arguments, while a discount will cast doubt on the product’s quality.

10

Table 2.6

Competition and value

 Alternatives

Main points of  superiority of  new product

Price

Share

1

.........................

.....

.....

2

.........................

.....

.....

3

.........................

.....

.....

4

.........................

.....

.....

1 (a)

. . . . . . . . . . . . . . . . . . . . . . . .. . . . . .. . . . . . .. . . . . . .. . . . . . ..

(b)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

(a)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

(b)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

(a)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

(b)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

(a)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

(b)

. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. ..

2

3

4

Estimated value premium for new product Estimate of  maximum sustainable price

For a genuinely novel product with no close competitors, the price, for planning purposes, can be set at about half way between the perceived value and the variable cost.

Consumer demographics Table 2.7 is intended to be used for products marketed to final consumers as distinct from businesses. Business-to-business product concepts will generally use Table 2.8, following. The consumer demographics study attempts to identify every person who could reasonably be considered a potential customer for the new product: an absolute limit on the size and value of the market. Most products, even very successful ones, fail to reach more than a fraction of their potential customers before the product is replaced or withdrawn.

11

Geographic range The starting point is a simple population count for the regions in which the product is going to be marketed, either at launch or within one or two years of the initial launch. Many products have wider potential than this, but so many things are likely to have changed in two years that a new business and marketing plan should be used for these stages of market expansion. Often the product concept will have a wide market potential, but sufficient details will have to be changed for linguistic, cultural or regulatory reasons to make the launch product unsuitable for the expanded market.

Sex Some classes of product are much more likely to be sold to persons of one sex than to persons of the other. Failure to take this into account, when appropriate, leads to an erroneous doubling of the potential user population.

Household Some products will be bought for household use, and so their ultimate success will be limited by the number of households in the targeted region, while others will be bought for personal use. Even with modern small families, getting the basis of purchasing wrong can throw the market size estimate out by a factor of three or so.

Parenting Some products, such as creche services, only appeal to people with children. Where these factors are significant, failure to take them into account leads to errors in estimating the customer population and in conducting promotional campaigns.

Age and income ranges The appeal of a new product may be highest for people in a particular age and/or income range. Counting or targeting people outside this range can lead to expensive mistakes.

Other distinguishing features Many products have their main appeal to people with specific interests, disabilities, singular physical characteristics or particular occupations. This part of Table 2.7 can be used to record this, and then to estimate the proportion of the populations that meets the particular requirement for interest in the product. These conditions may be additive or multiplicative: if the appeal is to tall bricklayers, short bricklayers and tall people in other trades are excluded from the market, while if it is to tall people and to bricklayers then tall bricklayers may, if care is not taken, be counted twice.

12

Table 2.7

Consumer demographics

Criterion

%

Population in geographic range

Sex

G

Male

G

Household

G

Household G

Personal

Parenting

G G

N/A  No. of ch.

 Ages . . . . to . . . .

G

From . . . . . to . . . . . .

G

N/A 

G

From . . . . . to . . . . . .

G

N/A 

G

Female

G

N/A 

 Age

Income (’000s pa)

Other (1)

Other (2)

Other (3)

Other (4)

Cohort size

Entry rate

Exit rate

Sources (1)

Sources (2)

Sources (3)

13

Pop. b/f

 

For example: Tall people Bricklayers minus tall bricklayers

30% 20% –6%

Total market

44%

Cohort size, entry and exit rates The major result of the consumer demographic analysis will be an estimate of the number of people, living within the targeted regions, who meet the minimum criteria for being potential customers for the product. The entry and exit rates allow the planner to make future year estimates of the number of new customers entering the market and the number of established ones leaving. This, in turn, gives the planner the ability to forecast the number of ‘virgin’ customers in the market at a future date, and therefore the likely response to sales and advertising campaigns, as well as estimating the rate of loss of customers and their associated revenue streams and beneficial influence. For the Australian population as a whole, the exit rate is about 0.75 per cent (deaths and residents departing permanently) while the entry rate is about 2 per cent (births and inbound migration). The rate1 of passage through most markets will be substantially more rapid than this. For many markets entry occurs at a certain age or income level; within this level, population movements may also cause entry and exit.

Information sources It is an excellent idea to document the sources of information relied on, and not just for students trying to impress their lecturer. When a plan is being reviewed by a potential investor, the sources quoted may be referred to as a check on the planner’s work; also, other sources may be used to corroborate the planner’s forecasts.

1

These rates are determined by dividing the numbers entering or leaving by the number left in the market. When a segment is defined by age range, the narrower the range the faster the turnover of the members of it. The population of the ‘age 21’ cohort changes by 100 per cent every year. 14

Business demographics  A consumer demographic study will be about counting people: while different people might buy at different frequencies, the unit of sale will be about the same. With business sales this is not the case. Australian businesses vary from part time hobbies turning over $10 000 or less to firms like BHP and Telstra, with annual sales measured in the billions. The task of  the planner is not, therefore, to count firms but to count sales opportunities. Table 2.8 is provided to assist the planner in this task.

Customer firm size   A few products will appeal equally to firms of every size, but most won’t. Even those products that do have near universal appeal will generally have to be sold differently when offered to firms of different sizes. These differences may be, but do not have to be, so significant as to require a separate business plan. Planners should try to avoid glossing over any problems in this area.

Industry type We have provided a list of industry types, not an exhaustive one, where the business operations are sufficiently different to make it likely that they will respond to a new product differently. Professional statisticians and econometricians will want to use ISIC (International Standard Industry Classification) codes to carry out such a study, but most readers of  business plans have not memorised the significance of the many codes. A planner may have to use the codes in order to make sense of census data, but such details may not be needed in the finished plan.

Scaling metric In general terms the number of units of a product a firm is likely to buy will depend on some characteristic other than its simple turnover. The demand for payroll services will, for example, reflect the number of employees while the number of cash registers required will tend to reflect the number of transactions rather than their total value: Woolworths have far more people collecting money than BHP does.

Geographic segments  Very few firms can afford the expense of launching a new product ‘everywhere’. Even those that do launch their new products in many countries at once often find that their product must be customised to some extent for different markets for linguistic, regulatory or other reasons, and so multiple launch and marketing plans are required. When a segment is not going to be addressed for two or more years from the date of the product launch, it is better to leave it out and make it the subject of a separate plan to be produced nearer to the time when it will be implemented. Markets and technology simply change too fast for assumptions made two years in advance to be a reliable basis for planning and action.

15

Two years after the first launch of a new product a great deal more will be known about the way users respond to it than could possibly be known on the day of the initial launch. If this response suggests that the product should be offered to new market segments, it will be possible to produce a far more accurately targeted business plan closer to the time of the extended launch. If the original plan went into too much detail about the extended markets, and the initial launch was successful, an enterprise may be tempted to follow the initial plan too uncritically.

Aggregated financial data Bringing together some financial numbers about the targeted segments gives the reviewer a feel for the market: profitable, rapidly growing industries are a much softer sales target than marginally profitable and declining ones. The aggregates also serve as a broad check on the sales and marketing forecasts. For the plan to succeed, some part of the target industry’s added value must be diverted to the new enterprise. When this fraction starts to get significant, reviewers are going to wonder whether firms in the target industry have the capacity, much less the wish, to pay for the new product.

Information sources It is an excellent idea to document the sources of information relied on, and not just for students trying to impress their lecturer. When a plan is being reviewed by a potential investor, the sources quoted may be referred to as a check on the planner’s work; also, other sources may be used to corroborate the planner’s forecasts.

16

Table 2.8

Business demographics

Firm size

G

Small

G

Medium

G

Industry type

G

Retail W/H and dist Education Health Com. services Public admin.

G

G

G

Mfg Transport Public Public Cons. services

G

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

G G

Profit Transactions

G

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

G G G G G

Scaling metric

G G G

G G G

Revenue Employees  Assets

Geographic segments

Financial data (all segments in plan)

G G G G

G

Large Mining  Agriculture Private Private Bus. services

 Value added

Sales potential 1

......................

..........

2

......................

..........

3

......................

..........

4

......................

..........

Gross revenue

Total VA

Revenue growth

Total profit

Profit growth % pa

Entry rate

% pa Exit rate

% pa

% pa

Information sources (1)

(2)

(3)

17

Uplift calculation Planners working within corporations should ask their controller’s department what uplift to use and skip Table 2.9. We have put it here for new entrepreneurs as a reminder that wages are only part of the cost of employing someone.

Leave and holidays In less well regulated parts of the world, and possibly Australia too, unscrupulous employers can avoid some or all of their paid leave obligations. People starting new enterprises should be very cautious about such sharp employment practices, even when they are tempted to use them: a high level of employee commitment is often critical to the success of the new enterprise, and employees bearing grudges seldom make such commitments. Many slave owners in America’s ante-bellum south believed that their ‘servants’ were loyal and adoring, until they saw them rushing to cheer the Union’s General Sherman and help Sherman’s soldiers pillage and fire the slave-owners’ mansions.

Incentive provision  Australian workers have a long tradition of expecting ‘the rate for the job’ and a party at Christmas, but in many cultures much larger annual bonuses are offered to the employees of a successful business; perhaps as much as six months pay. As the Australian labour market becomes less comprehensively regulated such arrangements will become more common in Australia too.

Overtime provision   Very few businesses have a perfectly even flow of work, and there will be times when employees will be asked to work longer than normal hours so as to handle peaks or to eliminate backlogs. Workers in most countries expect to be paid at a higher rate for overtime: in some countries such rate supplements are legally obligatory; in others they are a matter of discretion, but employers who want a committed work force will make provision for rewarding exceptional effort.

Idle time provision Most businesses will experience some slack time, and in many businesses employees will inevitably be involved in non-income-generating activity for part of the time. Service employees may have to travel between customer premises, for example, and customers will be unwilling to pay for the travelling time, although the employees expect to be paid while travelling. Service businesses with a ‘single server’2 must be prepared for at least 30 per cent idle time if they are to deliver a quality response to 95 per cent of their customers; businesses with multiple servers can plan on a higher peak period utilisation.

2

For example, a single cash register operator in a shop, or a single skilled service employee at a given location. 18

Table 2.9

Uplift calculations Days

Subtotal %

Total %

 Annual leave Sick leave Special leave Long service leave Public holidays Incentive provision Overtime provision Idle time provision Payroll tax Insurance Superannuation  Amenities Supervision Training Other Other Other

Total

Table 2.10

Primary product cost and margin Hours

Rate

Uplift

Price Labour Materials Distribution Total costs Contribution

19

Subtotal

Total

Be careful with percentages: a 30 per cent idle time provision needs a 43 per cent (

) uplift on wage rates.

Payroll tax and superannuation In Australia and many other countries employers are liable to various taxes and contributions. Failure to collect these may be a criminal offense: they must c ertainly be allowed for in any plan.

Amenities  At the very least, employers must provide towels, soap and toilet paper; in many countries, and even in some Australian industries, they are expected to provide considerably more than that: subsidised canteens, subsidised housing, schools, scholarships, medical and hospital insurance or clinics, or other necessities and comforts. As a very general rule, the lower the nominal wages, the higher may be the relative and even the absolute cost of the amenities an employer is expected to provide.

Supervision Military-style span of control calculations are very unfashionable, but even self directed work teams take a certain amount of time away from revenue-generating activities to direct themselves. Broadly speaking, the lower the wages and the less skilled the work force the higher the level, and quite possibly the cost, of the supervision that will be required. Do not confuse this entry with allocated overheads (overhead allocation is an obsolescent accounting technique used to handle fixed costs as if they were variable ones). This covers direct costs of supervision: if one person, paid 50 per cent more than the average worker, can supervise ten of them the direct supervision cost is 15 per cent uplifted. (If the total uplift is 60 per cent and the basic supervision overhead is 15 per cent, the uplifted overhead is 160 per cent of 15 per cent or 24 per cent. This raises the total uplift from 60 per cent to 69 per cent and the supervision overhead to 25 per cent. It is pedantry to go around the loop a second time.)

Training Enlightened employers set aside 2 per cent or more of their payroll for employee training. Unenlightened ones spend even more in extra supervision of poorly trained employees and in sorting out the problems that they cause. Industries where there are rapid product line changes and a high skill level is expected of employees may spend 10 per cent or more of the payroll on education and training of various kinds.

Other  The rows in Table 2.9 should not be regarded as a complete list of oncosts: three rows are provided to encourage planners and entrepreneurs to make an appropriate allowance for other direct costs of employment, such as tools, transport, cleaning of uniforms and work clothes and, in general terms, any cost which is directly incurred when an additional worker is employed. 20

Table 2.11

Spares and consumables

Group 1 Hours

Rate

Uplift

Subtotal

Total

Hours

Rate

Uplift

Subtotal

Total

Hours

Rate

Uplift

Subtotal

Total

Price Labour Materials Distribution Total costs Contribution

Group 2

Price Labour Materials Distribution Total costs Contribution

Group 3

Price Labour Materials Distribution Total costs Contribution

21

Primary product cost and margin Table 2.10 on page 19 is intended to help the planner capture the direct costs and contribution margin from each sale of the main product.

Price This can be the recommended retail price, in which case retailer and/or distributor margins should be included in the distribution cost, or the shipping price, in which case only those transport costs included in the price should be treated as distribution costs. We recommend using the former method, as by exposing the cost of the distribution channel the entrepreneur is in a position to evaluate alternative distribution strategies.

Labour  This line should record: Ë the direct labour hours required to produce one unit of the product (if it is a good) or deliver one unit (if it is a service) Ë the average hourly pay rate for employees directly engaged in product manufacture and delivery Ë the uplift as calculated in Table 2.9. The result is the direct labour cost.

Materials This is the cost of materials (including average scrap and cutting allowances) required for each unit of product manufactured and/or delivered.

Distribution The treatment of this entry will depend on how the price is treated (see above). If the price quoted is the final purchaser price, this line should include all the normal costs of physical delivery, the reseller margins, and any ‘routine’ incentives and reseller allowances. If the quoted price is the wholesale or ex-factory price this should only include uncharged delivery costs.

Spares and consumables The detail lines in Table 2.11 on page 21 are as for the main product. We have provided space for three separate categories. Many real products will require a large number of different spares and types of consumable item. For planning purposes, the different spares and consumable items can be allocated to a manageable number of  groups. One group could be warranty service, one for rarely used spares, and one for regularly used spares and consumables.

22

Table 2.12

Ancillary services

Group 1 Hours

Rate

Uplift

Subtotal

Total

Hours

Rate

Uplift

Subtotal

Total

Hours

Rate

Uplift

Subtotal

Total

Price Labour Materials Distribution Total costs Contribution

Group 2

Price Labour Materials Distribution Total costs Contribution

Group 3

Price Labour Materials Distribution Total costs Contribution

23

Ancillary services Table 2.12 on page 23 also allows for three entries, and the services might be grouped in a similar way to that suggested for Table 2.11. One set of services might be offered once per customer, one on a regular basis, and the third infrequently or on a warranty basis.

Computing the AAGM Table 2.13 has places for data on the main product, three ancillary services, three sets of  spares and consumables, and two rows for ‘other’. The frequencies are the annual frequency of purchase, and so the total in the bottom row should be the absolute maximum amount of revenue and gross margin that the market could produce in a year. Most real markets do not delivery this much money, and almost never in the first year. Table 5.1 from Entrepreneurship 3, reproduced below, shows the maximum amount a prudent entrepreneur or firm will spend on an opportunity once the AAGM is known. Product security

Launch day value (fraction of AAGM) The product is an unbreakable, unavoidable and indefinite monopoly 14% Competitive entry will not occur for at least four years from the full 7% launch (that is, after market testing completed) Otherwise 4%

This is the total amount of money that should be committed from the time the number is calculated until the product has been on the market long enough for the user response to be estimated with some confidence, including  the manufacture and/or purchase of initial trading stocks but excluding the variable costs of forecast sales and the forecast promotional expenditure. It is possible to estimate user response after the expected repurchase interval has elapsed by observing whether trial users are, in fact, repurchasing it, or after six to twelve months by surveying users and asking whether they intend to repurchase and/or recommend the new product, or by waiting two years and deducing the value of Bass’sq, the recommendation rate, from the sales data.

Example  A new product is expected to appeal to an ultimate population of 10 000 users, each of whom will spend $200, of which 50 per cent will be contribution, on it per year. The AAGM is 50% × $200 × 10 000 = $1 million. The budget for completing the business plan, starting the business, purchasing initial trading stock, and paying fixed costs for a year should not exceed $40 000.

3

Entrepreneurship: How Innovators Create the Future by John M. Legge and Kevin Hindle, Melbourne: Macmillan, 1997. Reproduced by permission. 24

Table 2.13

The AAGM Frequency

Price

Margin

Revenue

Contrib.

Main product

Spares and consumables (1) Spares and consumables (2) Spares and consumables (3)  Ancillary services (1)  Ancillary services (2)  Ancillary services (3) Other (1)

Other (2)

TOTAL

A note on interpretation The AAGM concept was developed relatively recently by John Legge and Kevin Hindle, and so planners should not assume that everyone that they meet will be familiar with it, or that those who are familiar with it will agree with its use or with the suggested values in Table 5.1 from Entrepreneurship. Two aspects of the AAGM have already caused some confusion and the following points are an attempt to clarify these: Ë the AAGM is the total amount of gross profit that a complete monopolist with an unlimited marketing resource could possibly extract from the fully developed market. It is not the maximum profit a particular enterprise could generate Ë Table 5.1 from Entrepreneurship was developed under the assumption of a novel product entering an untapped market, and therefore facing the maximum possible marketing risk. When the product is a line extension or leverages an established brand in some other way the marketing risk may be much less and the day one value correspondingly higher.

25

3 Intellectual property One of the major threats to most new ventures comes from imitators: if a well-funded ‘fast follower’ can enter a new market or match an innovative product within two or so years of  its launch the returns to the innovator may fall dramatically. When the innovation is launched by a well funded corporation that commits adequate resources to the launch and early marketing, it may create an early mover advantage that is sufficient to safeguard its investment. Many innovations come from cash-strapped new ventures, carrying out what is little more than a market trial while they try to demonstrate the viability of their enterprise to venture and development capitalists. For such struggling entrepreneurs intellectual property protection is critical.

Patents and designs Table 3.1 opposite may be used to record information about patents and designs, either held, applied for or licensed. We have provided room for three entries: many enterprises will have more.

Patent/design number  Record the actual number of the patent or registered design and note whether it is a pending application, a patent or design registration already granted, or a patent or registered design licenced from someone else.

Description Try, in this part of the table, to indicate what is protected. Do not simply transcribe part of  the official patent documentation. When this information eventually turns up in an entrepreneurial business plan, the reviewer will not, in general, be an expert at interpreting patent specifications. Be careful not to over-state the protection actually granted: a successful business plan may lead to investors placing money with the entrepreneur, and care should be taken not to deceive them, even inadvertently.

Countries Patents are granted by countries and are not respected in countries where no patent has been granted. Similarly, licensors of patents often limit the licensee’s rights to a specific list of countries. Record any such limitations here.

26

Table 3.1

Patents and designs

Patent/design number

9 Held

9 Licensed

exp:

exp:

9 Held

9 Licensed

exp:

exp:

9 Held

9 Licensed

exp:

exp:

9  Applied for

Brief description

Countries

Budget

Patent/design number

9  Applied for

Brief description

Countries

Budget

Patent/design number

9  Applied for

Brief description

Countries

Budget

Budget Patents are not cheap. Unless they have already been granted and paid for there will need to be a provision for them. Design registrations cost less than patents, but there is still a continuing need to monitor the market for potential infringers and to persuade them to desist.

27

Copyright Copyright exists in instruction manuals, software, drawings and the like. Entrepreneurs who rely on subcontractors to produce any essential material of this nature need to make sure that they have secured the right to copy it for their own purposes and have some security against the producer selling additional copying licences to third parties. When material subject to copyright is produced by employees in the course of their duties, copyright normally passes to the employer, but this leaves open the possibility that disputes could arise about the nature of the employees’ duties. Explicit steps to set out the duties of creative employees and to secure copyright over their work may be advisable. Table 3.2 lists some of the common materials potentially subject to copyright. The author is implicitly the copyright owner: if the author is not the entrepreneur or someone employed by the entrepreneur specifically to write the designated material there will have to be an explicit licence or assignment executed. Where the ‘authority’ column shows assigned or licenced, the status column should indicate whether the assignment is complete, has been agreed, or is yet to be negotiated.

Trade marks and business names There is no point in marketing an excellent product if users can’t remember who you are when the time comes to buy more of it or to recommend it to a potential new user. The link between the firm and its users is often a trade mark or trade name. Once a business is well established, people who use similar names or marks may be committing an offence under the Trade Practices Act and it may also be possible to sue them under the common law; in both cases a successful action relies on the possibility of deception. When a business is new and has very few customers there is no one to have been deceived, and such legal actions may fail. The new business can protect itself by registering its business name(s) and trade marks. Note that the definition of a registrable trade mark is broad: the Coca Cola bottle is a trade mark, as is the McDonald’s ‘golden arches’ symbol and the exhaust note of the HarleyDavidson motor bike. Table 3.3 has space to record some of the trade names and trade marks that the business will use together with their registration dates.

28

Copyright

Table 3.2

Material

Author

Authority

Status

Staff instruction manuals

User manuals

Sales brochures

Training courses for staff 

Training courses for users

Computer systems – operational

Computer systems – user Other

Table 3.3

Business names and trade marks

Name or mark

Date registered

29

Other formal IP Plant breeders and designers of integrated circuits and printed circuit boards have specialised intellectual property regimes. From time to time and from country to country new forms of statutory intellectual property may be created. Table 3.4 should be used to make notes of any formal intellectual property, not recorded earlier, that can be used to assist the new enterprise.

Trade and other secrets Informal intellectual property includes development plans and status reports, market survey reports and market intelligence summaries, customer lists, details of proposals to key prospects and special contractual arrangements with key customers, summaries of  customer problems and their resolution, and many other items of information routinely generated and circulated within businesses. All of this would be useful to a rival who made the effort to understand its significance; some of it could be critical in tight sales or contractual situations. People often exaggerate the benefits of good intelligence and the risks from espionage. During the Second World War the British General Crewel commanded a tank division defending the Egyptian frontier against the German Afrika Corps commanded by General Rommel. The British decrypted a command from Hitler to Rommel ordering him to abandon his advance on Egypt: this intelligence was passed to Crewel, who stood his men down. Rommel, however, ignored Hitler’s order, continued to advance, and destroyed Crewel’s unprepared division. Trying to keep everything secret often means that nothing is: the most successful firms are often very open with information in general, and the status of the few matters which must be kept secret is known to the firm’s staff and information about these is kept secure by them. The law provides strong remedies against departing staff or defaulting contractors who publish or distribute secret information causing damage to a firm. These legal remedies won’t protect information that wasn’t secret, and staff and other people who are not told that certain information is highly sensitive may have no legal obligation to protect it.   A successful information security policy protects secrets whose release could be genuinely damaging without disrupting normal communication inside the firm and between the firm and its customers, suppliers and even rivals. Table 3.5 provides space to set out the key details of the new enterprise’s information security policy.

30

Table 3.4

Other formal intellectual property

Other intellectual property

Table 3.5

Information security

Key features of information security policy 

31

4 SOPA The strategy a new venture or new product marketer adopts determines the organisation that must be built to implement it. The product, defined in Chapter 2 of this workbook, and the organisation lead to the definition of a process. The three together imply the control of  some assets and the creation of more.

Strategy Strategic directions (or goals) Firms need a strategy, or at least some agreed strategic goals, to give direction to the rest of their planning. Table 4.1 is intended to help the entrepreneur capture the key elements of the entrepreneur’s strategic objectives. A number of possibilities, not all mutually exclusive, are included in the table. There is also space for others. Reasonably or otherwise, some people will find it hard to publicly acknowledge some of  their objectives, but it is very important for entrepreneurs to be honest with themselves when considering these issues. A plan to establish a new lobby group or entertainment venue for plutocrats will differ significantly from a plan to help the underprivileged. In every case confusing the actual strategic directions of an enterprise with such more socially acceptable ones as may need to be displayed in public will lead to a poorly functioning organisation, even when calamitous failure is avoided.

Strategic targets In Table 4.2 we set out some common business metrics and invite the entrepreneur to put numbers in the appropriate squares. As with the previous table there is space for different metrics to be added. We have put columns for the launch year, the third trading year, and the tenth trading year to let the entrepreneur paint a ‘number picture’ of his or her ambitions for the firm or the product. Once the business is operating this chart should be revisited once a year or so, progress against ambition noted, and a new set of projections drawn up. The strategic ambitions are recorded here as a guide to planning, not as a set of  immovable goal posts. They serve to remind the growing business that it has ambitions, and that at every stage there is a necessary tension between resolving current problems and laying the foundations for future growth.

32

Table 4.1

Strategic directions

Improve the entrepreneur’s lifestyle  Add excitement to the entrepreneur’s life Prove a point about the entrepreneur Create a new growth venture Support the continued growth of an existing venture Prevent or halt the decline of an existing venture Commercialise a new technology Commercialise a new service concept Popularise a new idea Improve the situation of an underprivileged group within society Maintain the privileges of an entrenched group within society Other

Table 4.2

Strategic targets

Targeted metric

1 year

Gross revenue from sales Gross revenue from other activities Gross value of assets controlled  Value of net assets (shareholders’ equity) Cash flow Profit Return on assets Number of customers/users/clients/adopters  Annual units sold Number of countries firm/product available in Market share Other

33

3 years

10 years

Organisation We distinguish the organisation from the process as another example of separating present from future considerations. There are organised people involved in the process of delivering goods and/or services for the firm, but if this was all the firm consisted of there would be no way for it to change and adapt as its customers changed on the one hand and the technologies, services and components available to it changed on the other. The organisation also has a current management role, in that it has the ability to correct minor perturbations before they degrade current operations. Both kinds of  management should be present in any organisation that intends to be around for a significant time. Both kinds are ‘overheads’ paid for out of fixed expenses, and the cost only varies slowly as the revenue of the business changes. Cutting back on both the strategic and operating parts of an organisation is a quick way to improve its current profit, although this is often at the expense of its future growth potential. Table 4.3 is intended to capture some broad indications of the size, scope and cost of  the fixed part of the proposed organisation. Three points in time are suggested: at the moment the project starts and the current plan is put into operation; at the time the new product is first placed on the market; and after the product has been on the market for three years. It is quite acceptable to use fractions when a function is being carried out by a part-time appointee, or when one person is covering two or more areas, but it is not, in general, satisfactory to assume that any of the key organisational elements in Table 4.3 can be omitted entirely.

34

  y   t   r   e   a  g   s    l   a   d   r    S   u   a    b   e   y    3    f   s    f   u   a    l    t   p    S   s    h    d   c   a   n   e   u   H  .   a   c   e    L   x    E   y   t   r   e   g   a   d    l   a  u    h    S   b   c   n   u    f   a    l    f   a    t    t   c    S   u   s    d    d   o   a   r   e    P   H  .   c   e   x    E   y   t   r   e   g   a   d    l   a  u    S   b    t   r   a    t    f   s    f    t   a   c    t   e    j   s    S   o    d   r   a    P   e  .    H   c   e   x    E   n

  o    i   s    i   v   r   e   p   u   s    d   n   a   n   o   g   i    t   n   c    i   n   n   u   n   f   a    l    l    P   a

  n   o    i    t   a    3   s  .    i    4   n   e   a    l   g    b   r   a   O    T

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   t   n   e   m   e   g   a   n   a   m   s   m   e    t   s   y   s   n   o    i    t   a   m   r   o    f   n    I

   d   n   a    t   n   y   e   r   m   e   p   v    i   o    l    l   e   e   v  g    d   e   n    d    d   i    t   n   n   c   n   a  n   u  a   n   o   o   i    d   l   p    i   s    t   i   o   t   r   e   c   v   p   k   u  r    d  e   w  r   e   a   o   r   p    N  m    P  u   s

35

  g   n    i    t   r   o   p   e   r    d   n   a    t   n   e   m   e   g   a   n   a   m   s   e    l   a    S

   d   n   a    t   n   e   m   e   g   a   n   a   m  g   n   e   i    t   c    i   r   v  o   r   p   e   e    S  r

   t   n   e   m   e   g   a   n   a    )   m   s   e   n   o   c   i   r   t   u  c   o   s   n   u   e   f   r   l   n  a   r   a   t   m  n   u  e   c    H    (

  r   e    h    t    O

Process ‘The process’ refers to the value-adding and revenue-generating activities undertaken by a venture. The process needs to be analysed in two dimensions at least: there is the definition of the functions that must be carried out, and there is the definition of a scaling metric and ratio for each of these functions. The number of sales staff, for example, may be related to the number of new customers expected to be gained per period, while the number of service staff may be related to the total number of customers or the aggregate value of equipment installed or to some other measurable factor. Table 4.4 allows the planner to define three scaling metrics which will then be used to qualify the entries in the subsequent process design table. Table 4.5 can be used for manufacturing or service businesses: in some cases of either class the scaling factor on some lines will be zero. The intention is to capture the number of heads that must be recruited for a given level of business, and to give some indication as to how this number will vary as the business expands or contracts. The line ‘Supervision and management’ is intended to capture the direct overhead costs, such as works payroll, HR and amenities as well as foremen and supervisors.

36

Table 4.4

Process scaling metrics

No

Description

Unit

1

2

3

Table 4.5

Process decomposition Function

Metric

Transforming operations Goods inwards and stores Operations Warehousing and dispatch Supervision and management Customer service operations Equipment, vehicles and stores Service to customers Staff education and training Supervision and management Sales operations Sales personnel Product management and merchandising Sales training Supervision and management

37

Factor

Unit budget

Tangible assets  A firm consists of people and things and cannot operate unless both are present. The ‘things’ dealt with in this subsection are those necessary to the operation of the business, such as premises, equipment, work in progress, finished goods inventory, customer goodwill and brand equity and the various core competencies implicit in a successful business. Purely financial assets, such as the debtors ledger, are dealt with in the financial section of the plan. The scaling metrics are those defined in Table 4.4, above. Many of the assets listed will be leased rather than owned, but this is, again, a financial issue to be dealt with in the financial section of the plan: who the legal owners are is less important to practical business operations than the fact that the firm has the use of the asset. Occasionally a firm is able to share a critical but lightly used asset: sophisticated test equipment often falls into this category. Where guaranteed part-time access to an asset would be as useful as full control, this should be noted.

38

Table 4.6

Tangible assets

Asset description

Metric

Premises: administration Premises: manufacturing Premises: warehousing Premises: service and repair Premises: sales  Vehicles: benefit  Vehicles: goods transport  Vehicles: sales and service reps Equipment: office Equipment: manufacturing Equipment: service and repair Equipment: sales Materials and components  Work in progress Finished goods Information technology (central) Information technology (user) Other

39

Unit

Factor

Deprcn (yrs)

 Acquire cost

Intangible assets Successful companies are worth more as a ‘going concern’ than the value of their physical assets: for listed companies, the share price is usually higher than the net assets per share. (If the share price falls below the value of the assets, the shareholders would be better off  winding up the company and selling the assets, or accepting a takeover offer from an asset stripper, which amounts to much the same thing.) Intangible assets should not be confused with undervalued assets: land and buildings, and sometimes patents and other elements of intellectual property, may be recorded in a company’s accounts at their acquisition value, which may be far lower than their market value. Asset strippers are always on the lookout for companies where the gap between the value of the shares and the recorded value of the assets is caused by such undervaluations. Broadly, intangible assets consist of the firm’s human capital, its customer goodwill and/or brand equity, and the market value of any of its protected intellectual property such as patents, registered designs and copyrights.

Human capital Human capital has been used in a fairly amorphous way: obviously money that is invested in employee training must have some lasting effect, or no one would do it. One way of  estimating it is: Ë capitalise training expenditure using a fairly sharp depreciation rate (such as 25 per cent or even 33 per cent: training is forgotten, staff leave or change tasks, technology advances) Ë add an amount representing the cumulative value of the staff’s experience: take the log to the base 10 (log , not ln when using a spreadsheet or calculator) of the total number of years all current employees have been with the organisation and multiply it by half the average annual salary.1

Goodwill and brand equity  A firm’s goodwill is the capital value of the future income stream that is reasonably expected to be generated by the firm’s current customer base, over and above the cost of providing the product including the ‘rent’ of all the assets used in the delivery process. It should be approximately equal to the accumulated sales and promotional expense depreciated at a rate consistent with customer turnover. These ways of estimating goodwill and the value of a firm’s core competence are extremely tentative at the time of writing, but their relative magnitudes may serve as a check on the realism of the planner’s assumptions.

1

This is a quick way of valuing a 15 per cent experience curve. 40

Table 4.7

Human capital  After 1 year

3 years

10 years

Number of employees  Average period of service Total employee years Log of total employee years  Average employee salary Experience value (= (salary) × (log cum years) × 0.5) Cumulative employee-years of training Depreciated value of training

Table 4.8

Goodwill and brand equity  After 1 year

Cumulative sales and promotional expense Estimated annual rate of customer loss Depreciated value of sales and promotional expense

41

3 years

10 years

5 The financial feasibility model This chapter does not include tables for the entrepreneur or planner to fill out, since we assume from the start that no serious planner would fail to take advantage of a modern personal computer with a spreadsheet program. This chapter will describe how to construct a model, which can then be used to generate pro-forma income and cash flow statements and balance sheets. Entrepreneurs and planners who follow these guidelines should produce a set of printed pro-forma accounts that will be sufficient to demonstrate the financial feasibility of a proposal. Such accounts will generally be adequate when accompanying a business case seeking support for an internal project from the senior managers of a corporation. They should also be sufficient, in general, for an entrepreneurial business plan prepared as an exercise by students in entrepreneurship programs.  A limited model such as this one will not provide an adequate set of pro-forma accounts for an entrepreneur seeking finance from an unrelated party such as a bank, a venture capitalist or a business angel. While a conscientious lecturer might spend up to an hour evaluating a student’s business plan, a venture capitalist could take two days. Chapter 14 of Entrepreneurship: How Innovators Create the Future gives an overview of the depth of  accounting detail needed to survive such a detailed examination. Entrepreneurs who wish to use their plan to raise capital may choose to develop this planning model into a full set of accounts, or they may ask their accountant to do it for them. Accountants should not be asked to develop the planning model, although their help can be very useful: the planning model is an essential part, some say the heart, of the business plan. Students working in teams, or students with an accounting qualification undertaking an entrepreneurship program, should also go beyond this relatively simple financial model and prepare a more complete one. In general terms, the difference between a feasibility model and a full set of accounts is the way figures are sourced, whether actual or pro-forma. A proper business accounting system can be audited to the point that named workers and suppliers are shown to have received money in return for specific activities, with a similar level of detail on the income side. A feasibility model relies on ratios to generate appropriate cost and income figures, driven off a limited number of key assumptions. There should be two principal results obtained from a feasibility model: it should be possible to show that the project is viable and prospectively reasonable, and it should be capable of developing an investment offer which can be used to answer the questions a potential investor might reasonably ask.

General spreadsheet structure Modern spreadsheet packages have a multi-sheet capability, with formulae linked across sheets but the formatting of each sheet independent from the rest. An entrepreneur or

42

planner should take advantage of these facilities and make the financial feasibility model as easy to examine and understand as possible. The first sheet should normally be used to set out the principal assumptions and results. Since this sheet will not normally need to be printed, full use should be made of the spreadsheet package’s colour and font facilities. The spreadsheet’s cell protection facilities can be used to stop users accidentally modifying cells containing text or formulae, and annotation on this sheet should encourage prospective investors to experiment with the user parameters. The second sheet could reasonably be used to present income statements, cash flow projections and balance sheets. Columns near the left edge of the sheet can be used for annual figures, with the same projections but in monthly form further to the right and the notes to the accounts further over still. The third sheet can be used for monthly or annual schedules projecting key financial numbers, such as investment timing and employment levels. In a full set of working accounts, such schedules would lie behind practically every row on the main accounts: often there will be schedules contributing to schedules, but this level of detail is seldom appropriate for a financial feasibility forecast. We suggest that the projections be carried forward for five years (or for the balance of  the current financial year plus five further years) except where there is a clear reason for using a different period. A plan for a show or a major event does not need to continue past the completion of the event or run of performances and the settling of accounts; on the other hand, a major corporate initiative might not even start generating cash inside five years and a longer timescale will be essential. Five years seems to be a reasonable limit for detailed forecasts, and so even when a plan is part of a strategy that will run for a much longer period, dealing with the problems and opportunities in five-year chunks will often prove a satisfactory approach. The spreadsheet calculations should be carried out on a monthly basis and summed (or replicated, in the case of the balance sheets) to make up the annual reports. Modern personal computers have adequate power to complete such calculations without causing performance to suffer visibly, and an annual sweep can miss periods of strained liquidity which monthly budgeting would have revealed. Our preference is for the marketing model described in the previous chapter to be added after the financial projections, since it generates the sales figures that the financial projections require. The promotional budget projection might even be displayed on the very front sheet to allow users to experiment with the effect of modifying it. The last few sheets can be used for formatting reports and graphs for printing. This allows the planner to make the screen presentation of the reports as attractive as possible without compromises inflicted by the limitations of the available printing technology.

General spreadsheet rules Balancing  Accountants invented the concept of balance to give warning of any arithmetic errors in a set of accounts. A modern computer is very unlikely to make any arithmetic errors, but human programmers, including spreadsheet users, are very prone to logical ones. Testing for balance, by arriving at each main result by two different routes, remains extremely important and under no circumstances should spreadsheet formulae simply assume it in order to generate a result.

43

Figure 5.1

Spreadsheet structure

Rounding and conditioning Digital computers are ‘finite automata’ (amaze your friends with that one) and under certain circumstances will, while working correctly, produce results that do not seem to be those prescribed by the laws of arithmetic. In financial applications this can become apparent by a failure to achieve balance or when columns of numbers which appear to sum to a different number than the computer-generated total. The correct way to make sure that this does not happen is for the spreadsheet writer to take positive control of rounding and truncation. ROUND and TRUNC functions or their equivalents are provided in spreadsheet packages to facilitate this. All spreadsheet expressions involving division, or multiplication by a number with a fractional component (like a percentage) should be protected by a ROUND or TRUNC function, ensuring that the answer is an exact number of dollars. Figure 5.2 shows the use of the ROUND function, both to define the precision of the monthly percentage rate and to ensure that the ‘interest due’ is always an exact number of  dollars.

Zeros By accounting convention, zero quantities are presented as a blank field in the accounts of  a business. An option (in Microsoft Excel®, for example, Tools, Options, V iew, zero values) allows users to select this option and make the screen and printed output from the model more accountant-friendly. If blanked zeros are selected and a zero appears in a money field this generally means that the rounding and conditioning controls have failed and the cell contains a small value other than zero. 44

Interest rate

9.70% (Annual) 0.81% (Monthly)

Principal Interest due

Figure 5.2

Interest rate 0.097 =ROUND(B1/12,5)

$105,131 $849

(Annual) (Monthly)

Principal 105131 Interest due =ROUND(B4*B2,0)

The ROUND function

The same spreadsheet fragment is shown in normal and in ‘formula’ view.

Annotation Modern spreadsheet packages allow their users a rich variety of annotation devices. In Microsoft Excel®, for example, each cell can have a note stored in it; in addition, drawings, arrows, and text boxes can be added to the spreadsheet. These facilities should be used freely, both to help subsequent users who may inherit the model and to help the initial user if it becomes necessary to amend or review it after it has been set aside for a period. Cells can be named and the name used in formulae instead of the simple reference: this can also make a spreadsheet easier to follow. The printed presentation of the accounts should normally have a note for practically every line, explaining how the figures were derived and including, or referencing, any relevant auxiliary tables.

The income statement The Income Statement (or ‘P&L’ in American-speak) should be the primary reference point for someone examining a plan. We strongly urge planners to keep the number of lines in the statement low enough to fit on a printed page in a reasonable font size; where (as will usually be the case) more information is required it can be developed in an auxiliary schedule and the fact noted by a note in ‘Notes to the accounts’ for the printed version and drawn on the spreadsheet for the screen version. The ‘value-adding’ format outlined here works, but it is not intrinsically superior to the various alternative layouts. Planners working for a corporation with an established standard for the presentation of accounts should follow their employer’s instructions wherever they differ from the suggestions below. Guides to planners preparing accounts (including this one) will suggest rows that, in some cases, will not be needed. It is usually better to omit them altogether rather than waste a precious line on a row of blanks.

Revenue This may be a single line, but often a few more add clarity. Even when only a single product is covered by a plan, as with a new line of packaged consumer goods, it is often useful to have a second line for co-promotion allowances and incentives, distinguishing revenue booked from amounts actually received. When there is a manufactured product with associated spare parts and service sales, it is a good idea to show primary sales revenue separately from service and spare parts revenue, since the former is much more volatile than the latter. An ‘other’ revenue line can

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be helpful as a place to put income such as grants and licence and franchising fees which may significantly improve the viability of a proposal. By convention, sales taxes are recorded as negative amounts under the revenue heading rather than an expense. The firm receives the money, but only as trustee for the tax authorities, and the sales tax is not treated as an operating expense but rather as a correction to the nominal revenue.

Direct costs Direct costs are costs that vary directly with the level of business. They always include purchased materials and components and transport contractors’ charges. By convention, they include the wage costs of the staff directly involved in producing and delivering the goods and services which make up the product offering. This is reasonable for casual staff, outworkers and employees on piece rates, but it is a very dubious assumption when salaried professionals or highly skilled blue collar workers are involved. Compass Airlines (mk I) performed a competitive evaluation of Australian and Ansett airlines, assuming that flight and cabin crew were direct costs, and that Compass’s competitors would not be able to lower their prices below these levels: on this basis, Compass forecast fabulous profits for its operation. Ansett and Australian, on the other hand, observed that their pilots and cabin crew drew the same salary on the ground and in the air, and aircraft leases had to be paid whether the aircraft was flying or not, and their direct costs, and therefore their minimum prices, were much lower than Compass had assumed. Compass went broke in approximately a year. In general, staff whose wages are not closely related to the level of output, and who have skills, knowledge or experience that would be difficult or costly to replace, should be accounted below the gross margin line under general expenses and not treated as a direct cost, no matter how directly they are involved in the value-adding activities of the business. Sales commissions, but not sales salaries, can be included as a direct cost if they are likely to be a significant amount.

Gross margin The difference between the revenue after allowances and the direct costs is the gross margin: this should always be reported as a percentage as well as a dollar figure. The reciprocal of the gross margin is, implicitly, the price elasticity of demand which in turn is an indication of the expected sensitivity of the market to price cutting.

General expenses General expenses should be broken down into at least the following elements: Ë sales and marketing staff and related costs Ë manufacturing staff and related costs (where relevant) Ë promotion Ë administration Ë new product development Ë depreciation.

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Each of these lines will normally need to be supported by an auxiliary schedule. Additional lines may be needed if there are major expenses expected that are not easily assigned to one of these headings.

Earnings before interest and tax (EBIT) The EBIT is the difference between the gross margin and the total of the general expenses. It should be presented both as a dollar figure and as a percentage of sales: prospective buyers of an established business are keenly interested in the EBIT, and so a strong value will be an indication that the entrepreneur and/or the venture investors will find it relatively easy to make a profitable exit by way of a trade sale in due course.

Interest Interest income and expense should be shown below the EBIT line. Separate lines for interest earned, and short and long term interest obligations are generally considered desirable.

Taxable income and tax Taxable income should be stated after deducting the net interest expense from the EBIT. Tax should be shown at the appropriate rate, remembering that the Tax Office does not pay money to companies that have trading losses, and that profits are sheltered from tax until all past losses have been exhausted. A little care is needed in programming the appropriate calculations. Novices sometimes show negative tax being received while a firm is making losses: such errors rob a plan of any credibility. Tax is an annual matter, and so while most of the calculations should be done on a monthly basis and aggregated to form the annual data, company tax should be calculated from the annual data and shown as being due in the last month of each financial year. In  Australia, companies over a certain size are required to make progressive company income tax payments during each year based on the previous year’s tax assessment. Unless these payments are properly planned for, they may place stress on a growing company’s cash reserves.

Profit and distributions Profit, like company tax, is an annual matter: earnings before tax can be calculated monthly, or even more frequently, but since a firm’s income tax liability is based on its whole-year business, so is its after tax profit. It is often convenient to describe the disposition of the profit, basically the split between dividends and retained profits, on the Income Statement.

Cash flow statement There are many possible formats for a cash flow statement: the ‘functional area’ format presented here is adequate; but an alternative format may be used if necessary.

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Trading (or operations) Three lines can show trading receipts, operating expenses, and net cash flow from operations. Sales for cash may be booked in the month that they are incurred, but sales on credit should be booked after ninety days. Cash purchases should be booked as they are incurred, while payment to creditors should not be delayed more than thirty days. Wages and taxes should be shown in the month that they fall due.

Capital transactions Three lines, backed up as necessary by auxiliary schedules, suffice to show the purchase and disposal of assets and the net cash flow from asset sales and purchases.

Finance Separate lines can be used to show loans raised, loans repaid, net interest, equity capital subscribed, company income tax paid, dividends paid, and net cash flow from financing.  A line should be provided for capital returns if the plan envisages making them.

Extraordinary items Extraordinary receipts and disbursements should usually appear, even when no such items are forecast in the plan, as an indication that the planner is aware of their possibility.

Non-operating There should be provision to show non-operating receipts and disbursements.

Cash flow summary Net cash flow from operating, capital, financing and extraordinary activities can be summed to produce a forecast of operating cash flows; these, adjusted for non-operating receipts and disbursements, show a net cash flow. This in turn should represent the difference between the opening and closing cash balance.

Balance sheets While the income and the cash flow statements reflect activities that take place over a period, the balance sheet reports an instant in time. The first function of a balance sheet is to demonstrate balance, both vertically and horizontally. Vertical balance requires that the total of all liabilities, plus the value of the shareholders’ equity, are exactly matched by the value of the firm’s assets. Horizontal balance requires that the changes from the previous balance sheet correspond exactly to the transactions recorded in the income and cash flow statements. It is important, when programming a balance sheet, to make these checks and to demonstrate balance.

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The second role of the balance sheet is to give a reviewer an idea of the value and stability of the business. The nominal value is, of course, shown as shareholders’ equity, but an analysis of the asset statement will give an idea of what the value might be if the business was wound up and the assets put on the market. The balance sheet also gives an indication of the ability of the business to meet its obligations, the degree to which current assets are adequate to discharge short term liabilities. There are a number of ways in which a balance sheet may be laid out: our preference is for shareholders’ equity at the top, followed by assets, followed by liabilities, followed by a statement of net assets which should exactly match shareholders’ equity. Entrepreneurs working in a corporation should, of course, use their employer’s standard form of  presentation, and entrepreneurs who engage an accountant to prepare their pro-forma accounts should accept the layout that the accountant is happiest with.

Shareholders’ equity Shareholders’ equity consists of the capital shareholders have subscribed plus retained profits: a complicated capital structure may involve multiple equity classes and several reserve accounts. During the entrepreneurial planning phase, a simple statement of equity and retained profits should suffice; although once capital is raised and a venture commences a more complex structure may be needed to satisfy the various stakeholders. The equity should be calculated by taking the equity from the previous balance sheet, adding capital subscribed (from the cash flow statement) and profits earned (from the income statement) during the intervening period, and subtracting dividends paid and capital returned. When accounts are provided on disk this is easily checked (in Excel® use Tools, A uditing, Trace…) and will be when accounts are provided on disk to a conscientious examiner or venture capitalist.

Assets The most important division in the asset statement is that between current and noncurrent, or fixed, assets. Current assets include cash at bank and short term deposits, accounts payable, and marketable inventory. One or two additional lines may be needed, depending on the nature of the proposed business. Non-current assets are not available for the settlement of current liabilities, and in general will represent property, plant and equipment needed if the business is to operate normally. Goodwill, and other forms of  intellectual property can be put onto balance sheets, but professional venture investors will usually reverse these during their evaluation and mutter curses about the trouble to which they are being put. If a business is expected to derive actual cash income, such as license or franchise fees from its intellectual property, a modest valuation supported by a clear explanation is likely to be acceptable. The entries under assets can also be derived from the previous balance sheet and the income and cash flow statements: accounts receivable, for example, is the entry from the previous balance sheet plus the value of sales from the income statement less amounts received as shown on the cash flow statement.

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Liabilities Liabilities must also be divided clearly between current and short term liabilities, such as amounts owing to creditors and overdrafts at the bank, and long term liabilities such as secured loans. Provisions are a special form of liability: there will usually be a provision for company income tax and other taxes; and there may need to be provisions for interest due and for dividends voted but not yet paid. Provisions serve to reconcile the income and the cash flow statements and to keep the spreadsheet programming ‘clean’. Interest affects taxable income, while tax payments affect the current cash balance and therefore the tax and interest due. Careful creation of  provisions will prevent the spreadsheet program complaining about circular references.  As with the previous two sections of the balance sheet, the entries should be calculated from the previous balance sheet via the income and cash flow statements.

Financing requirement For a business to be solvent, the current assets must exceed the current liabilities (meaning that the business has the means to pay its debts as they fall due) and the total assets must exceed the total liabilities (meaning that the value of the shareholder’s equity is positive). The second condition can be fudged (for a time) by putting intangible assets on the balance sheet; but the first is a legal requirement of continuing trading. If a firm’s current assets fall below its current liabilities and it continues to trade the directors are committing an offence and may be prosecuted as well as being sued personally by creditors the company can no longer pay. During the development of the financial feasibility model, it is quite likely that the net assets will be predicted to be negative and the current assets will be predicted to be inadequate to cover current liabilities. The planner must project appropriate equity subscriptions and long term debt financing arrangements to bring net assets back to positive and raise current assets to a prudent level. In a reasonable plan, the total value of long term loans must always be less than the value of tradeable non-current assets. In practice this will be made a condition of any loan that the eventual venture may receive, and since the lender will wish to examine the financial forecasts they should always show that the security available exceeds the loan requested. The short term balance of current assets less current liabilities must always be greater than zero, to show that the business has a measure of stability against the random events, such as a default by a significant debtor or a demand for cash payment by a major creditor.  At this, the financial feasibility stage, it is important not to be excessively clever in structuring the proposed financing arrangements. This is particularly so if finance, whether equity or debt, is to be sought from an unrelated party. Such parties will have their own ideas about how capital should be raised and how the capital of a venture should be structured, and since ‘them as has the gold makes the rules’ the wise entrepreneur does not set up a conflict in advance. The end result of this process will be a timed schedule of equity subscriptions and loan draw-downs which ensure that the proposed venture can operate legally while achieving its forecasts for sales and profits.

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Venture valuation There are two measures of the value of a venture. One simply takes the cash flows that the venture will absorb and generate, puts a notional disposal value (or cost) in the month after the end of the plan projections, and uses the spreadsheet function IRR to compute the internal rate of return, and the function NPV to calculate the current value at the venture start date using an appropriate risk-weighted rate of return. The risk weighted rate of  return can be calculated using the formula developed by Dixit and Pindyck, and the venture only represents a rational use of the capital it will require when the risk-weighted net present value is positive and the venture’s internal rate of return exceeds the appropriate risk-weighted rate. Timing of proposed investment cash flow New market or first entry by supplier

More than one year before product launched Product launch day Market acceptance proved Two years’ profitable trading

Annual rate

100% 70% 30% 20%

Line extension or replacement of successful product

More than one year before product launched Product launch day Market acceptance proved Two years’ profitable trading

Figure 5.3

35% 25% 20% 18%

Minimum rates of return

Figure 5.3 lists typical rates of return (or hurdle rates) that a venture should be able to exceed at various stages. These values are based on particular assumptions and should be regarded as approximations only in any real proposal. The exact values can be calculated when necessary. The value of the venture in the month after the plan period ends should be taken as the greater of the net assets and the net c urrent assets plus a multiple of the cash flow in the preceding year. The multiple can be as high as six if there have been two years of profitable trading running into the end of the plan and three otherwise. The equity part of the financing schedule described above can be used to construct a spreadsheet row showing the flow of capital and dividends, and a separate calculation of the IRR offered to the investors at each financing stage should be made, showing, in each case, that the offer exceeds the rate of return from Figure 5.3 or as calculated specifically for the current plan. Figure 5.4 shows one way of displaying the stages of equity finance and showing the return to the investors at each financing stage. In this table it is assumed that there are no dividends paid during the currency of the plan, and the investors’ return is calculated on the basis of an assumed sale of the business as a going concern for $12 million immediately following the end of the fourth year in the market. This assumption allows the rather simple rate of return formula as shown in Figure 5.4 to be used.

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If the plan envisaged paying a dividend a slightly more complex calculation would be needed and an IRR or equivalent function would have to replace the simple calculation shown in Figure 5.4. Spreadsheet prepared for printing Month

-12

0

18

30

Stage

1

2

3

4

Subscription Shares Final value

$100 000

$500 000

$1 000 000

$2 000 000

500 000

500 000

500 000

500 000

$12 000 000

Return to investors Stage 1

97.44%

Stage 2

56.51%

Stage 3

34.04%

Stage 4

31.04%

Spreadsheet with formulae exposed A

B

C

D

E

1

Month

-12

0

18

30

2

Stage

1

2

3

4

3

Subscription

100000

500000

1000000

2000000

4

Shares

500000

500000

500000

500000

6

Final value

=12000000

7

Return to investors

8

Stage 1

=($B$7/(4*B3))^(1/(4-B1/12))-1

9

Stage 2

=($B$7/(4*C3))^(1/(4-C1/12))-1

10 Stage 3 11 Stage 4

=($B$7/(4*D3))^(1/(4-D2/12))-1

5

Figure 5.4

=($B$7/(4*E3))^(1/(4-E1/12))-1

Investor returns

The deal  An entrepreneurial business plan is a proposal, not a set of commands, and the people to whom the proposal is being made may decline it or accept it subject to modification or under special conditions. Plans may be prepared for one or more of a number of reasons — some of the more common include: Ë the plan may have been prepared in order to convince a bank or other lending institution that the proposed venture will generate an adequate cash flow to service the lender’s desired schedule of interest payments and principle repayments without  jeopardising the lender’s access to the agreed security Ë the plan may have been prepared with a view to securing equity investment from an unrelated party, either a ‘business angel’ or an investment fund: in either case they

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will want to be assured that their returns are likely to be commensurate with the risk that their investment is being exposed to, that there is a reasonable probability that they will be able to withdraw their investment and their share of the profits at or after an agreed date, and that they will be kept properly informed of the progress of the enterprise and be able to take steps to protect their investment should this become necessary Ë the plan may be intended to be presented as a business case to the senior management of a major corporation, in which case they will wish to know that the rate of return that they will get meets or exceeds the relevant hurdle rate, that the plan conforms to the agreed corporate strategy, and that the other strategic objectives of the corporation will not be put at risk Ë the plan may be intended to be presented to a prospective colleague whose unique skills and experience make him or her vital to the venture’s success: such people generally wish to be assured that the rewards they may expect, in terms of money and experience, are commensurate with the career and other risks that they may be asked to run, as well as the assurance that they will receive a proper degree of  respect and authority within the venture. Sometimes the same planning effort will lead to more than one target audience being addressed. A moment’s consideration suggests that a proposal which would be suitable for one audience might fail to interest another one. It is very dangerous to prepare versions of  the same plan incorporating different assumptions to different audiences; at the least, when the audiences compare notes their discovery of the trickery will totally destroy the plan authors’ credibility, while it is possible that a criminal fraud may have been committed. It is, on the other hand, almost mandatory to tailor the  presentation of the plan to each audience that it will be offered to. In general the entrepreneur will be in no position to command cooperation, and the deal offered must be a suggestion put up for consideration, not a take it or leave it proposition. It is, in general terms, unwise to put the entrepreneur’s negotiating limits into the plan, but the deal as described should be one that the entrepreneur would be prepared to live with and one which the entrepreneur would accept if the roles of plan receiver and sender were reversed.

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6 Spreadsheet tips It is vitally important that any set of accounts a prospective entrepreneur shows to any financier or accountant balances, but this is not easily achieved by relying on trial and error during the construction of the underlying financial model. Often, the attempt to link the different reports and schedules provokes the spreadsheet program into complaining that some references are circular and that calculation is impossible. The diagrams that follow represent an attempt to explain the way a spreadsheet should be linked to give a reasonable chance of balance while retaining the very important capability to change a parameter and see the effect ripple through to the various tables and charts. The convention used here is based on the Excel® auditing function: a blob at the end of a line indicates that the cell that it is located in is referenced by the cell where the arrowhead is located. It says nothing about how the references are used by the formula in the target cell.

Ordinary expenses The first diagram shows the general handling of an ordinary expense (direct or indirect).

The general principle is that expenses must be divided into salary-related, which must be paid in the current period, and ‘other’, part of which may be parked in a balance sheet cell for payment in a later period or periods. Cells in the ‘Accounts payable’ line, along with most lines on a balance sheet, take a carried forward amount, add or subtract the appropriate transactions, and report a brought forward amount in the next period. The amount is then withdrawn from the balance sheet when it appears as a paid item on the cash flow statement. 54

Integrating the marketing and financial model The following diagram shows how the marketing model and the financial model may be integrated:

Marketing expenditure drives the marketing model; as before, this must be divided into salary related expenses, to be paid in the current period, and other expenses, part of which may be parked on the balance sheet as a liability until they are paid in a later period or periods. When linking the marketing model back to the income statement, the generated numbers must be divided two ways. Some sales will be for cash, and are therefore taken into cash flow in the period in which they are completed; while other sales will be on credit, and may have to be parked as an asset on the balance sheet until the cash is received. The second division of the revenue projections recognises that the marketing communication process is not instantaneous. Externally influenced packaged consumer goods sales track the advertising expenditure pretty closely: most consumers either respond to an advertisement that they have seen on their next visit to a supermarket or they never do. Some durable consumer goods sales may occur in the same period as the advertising that triggered them, but many will occur later, while significant industrial purchase orders may not be signed until weeks, months or even years after an in-principle decision has been secured, while payment can be delayed still further. Taxation and interest cause several problems for spreadsheet builders; they are complex subjects in themselves, and they can be a source of circular references. Interest is paid on the balance in the bank, and if the constructor is not careful, the interest will affect the balance and the spreadsheet program will complain about a circular reference. Taxation can also trigger this effect: tax depends on profits; some profits are retained and add to cash 55

balances; and an increased cash balance earns additional interest creating an additional tax liability.

Company income tax The following diagram describes how company income tax can be handled safely; strictly speaking, this method is correct for a monthly or quarterly set of accounts, but if the planner decides not to prepare monthly accounts for a particular proposal, this method is accurate enough at the pro forma stage to be used on annual projections:

The taxation authorities, at least in Australia, but as a fairly general rule in many countries, take a ‘lifetime’ approach to corporate taxation, with the proviso that they never give anything back without a monstrous fight. Accumulating income from day zero, and accumulating tax from the first payment, makes it easy to calculate the additional tax due in any single year. Note that if the accumulated income is negative, no tax is payable; similarly, if the accumulated income at the end of one year is less than that at the start of  it, no extra tax will apply. This model can cope with different tax rates; the tax calculation used should avoid negative amounts. Some firms treat the notional negative tax on a loss as a future tax benefit on their balance sheet: this is the sort of shonky accounting that makes potential investors in a venture suspicious. Even when this trick is deemed acceptable, there is no actual cash returned from the Tax Office and so the negative income tax should have no effect on the firm’s cash position.

Interest and debt Interest and cash balance projections cause a lot of grief. Real corporations, and even medium sized companies, have many different debt instruments and accounts, each of which has its own interest rate and repayment schedule. The official accounts of such companies

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report these debts under two headings: ‘Short term’, meaning that the company is obliged to have the resources to repay or refinance them during the next accounting period, and ‘Long term’, meaning that, assuming no breach of the loan conditions, the debts need not be repaid in the next accounting period.

 At the pro forma level it is generally sufficient to divide debt into current, or ‘Overdraft at bank’, and long term. Net cash flows go to the bank, where they may move the account from positive, and reported as ‘Cash at bank’ to negative and reported as ‘Overdraft at bank’, or vice versa. The solvency condition is then that current liabilities, including any bank overdraft, must be less than current assets, so that the enterprise will be able ‘to meet its debts as they fall due’. This can leave net assets, and equity, negative with the firm trading on hope and its long term debt. If the long term creditor is not a family friend or statutory investor, however, the conditions of any general purpose loan are likely to include a requirement that net assets remain positive, ensuring that the loan is not exposed to the

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same risks as equity. Creditors whose debt is secured on a specific asset may not be quite as concerned about the general condition of the firm. The interest/debt diagram is one of the most complex; two points to notice are: Ë interest should be calculated in the way that is most favourable to the creditors, so that the minimum balance should determine interest earned and the maximum balance should determine interest payable. In the diagram, this is shown by taking the current and previous balance sheet figures into the calculation Ë because interest payments affect balances which affect interest payments, interest calculated for one period and shown on the income statement for that period must be parked on the balance sheet until the next period before appearing in the cash flow and from there affecting the current account at the bank. On the interest/debt diagram the principle of accumulating rows on the balance sheet and showing current period values elsewhere is maintained.

Materials Materials usage is fairly straightforward:

 A sale (or possibly a shipment) triggers a draw-down of materials creating an inventory movement; a related, but notionally independent, purchasing decision replenishes the inventory and generates a payment, part of which may occur in the current period and part of which may be deferred to a subsequent period or periods. In this diagram the running value of the inventory is maintained in the balance sheet and slaved elsewhere if needed. It would be bad programming to maintain such a balance in two different parts of the spreadsheet.

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The inventory model outlined here and described in Entrepreneurship1 is suitable for a set of pro forma accounts, but is very simple compared to the inventory control and management systems needed by an operating business.

Fixed assets Firms will generally need a number of ‘fixed’ assets, and for an operating firm the maintenance of an asset register is a major task, never performed perfectly and often performed perfunctorily. The clerical effort needed to record the acquisition, movement and disposal of fixed assets is often a prime candidate for downsizing as it is easily seen as an activity with no direct link to a firm’s value adding operations. An extreme case of this occurred at the Budget Rent-a-Car company before its reorganisation under an administrator in 1989, with some 600 vehicles known to have been purchased but whose whereabouts was a mystery. The managers of the company were even prosecuted for selling vehicles that were still under lease, but successfully defended themselves by showing that it was impossible to determine which vehicles were under lease and which were not, given the state of the firm’s information systems, and the incident was an honest mistake.

 At the level of pro forma accounts it is permissible to simplify the asset register quite drastically, sometimes merely running a single heading for ‘fixed assets’ or possibly three headings, one for plant and equipment used in the production of goods and the delivery of 

1

Legge & Hindle (1997) op. cit. 59

value-adding services, a second heading for ‘Equipment, other’, and a third heading for land and buildings. In Australia, depreciation can be calculated by the diminishing balance method, where each period’s depreciation is a simple fraction of the previous period’s WDV, or by fixed amounts based on the item’s original cost. The first is easiest to calculate; the choice for an actually operating company will be made by its CFO after some agonising, since the Tax Office frowns on companies that choose one method and subsequently start using the other. Continuing to depreciate an asset after the WDV reaches zero is a common error on pro forma accounts. If a projected enterprise plans to dispose of some assets during the life of its plan, any difference between the WDV at the date of disposal and the amount realised becomes an extraordinary profit or loss. In the diagram above, the costs of buying assets are split between the current period and future periods, since many such purchases are on 30 day credit or even more generous terms. Disposals are taken into cash flow in the period that the disposal occurs, since, in general terms, the asset is not disposed of until the cheque is successfully banked.

The capital account   An enterprise’s equity structure can cause novice planners some grief. One point of  potential pain is the dividend: since a dividend reduces a firm’s cash balances it will affect its interest obligations which will eventually affect its after tax profit. Prudent planners who include a check that the proposed dividend is legal, in that accumulated (not just current) profits are adequate to cover it may find that their spreadsheet complains of a

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circular reference. Good practice, as illustrated on the preceding diagram, puts the dividend into a balance sheet provision in the period in which it is declared and draws it down from the cash flow in the following period. By contrast, capital subscriptions and capital returns are taken into cash flow in the period in which they occur, because title to shares issued or surrendered changes when payment is made, not when the transaction is agreed.

Summaries Only potential investors carrying out a complete due diligence examination will wish to examine the monthly pro forma accounts in any detail. Even then monthly projections more than a year or so into the future are more in the nature of informed guesses than definite plans. In a running company, of course, the accounts must be kept current, either in quasireal time with the use of an advanced accounting package or at least monthly for firms with manual or semi-automated accounting systems. Planners may choose to prepare pro forma accounts on an annual basis, saving the effort of preparing monthly ones until a due diligence auditor asks for them, but there is very little extra effort involved in making monthly projections until the end of the plan period and summarising them into an annual presentation. As long as the construction rules set out here are followed, entries in the income and cash flow statements will be the sum of the entries for the months or quarters making the year up, while the balance sheet reports will be those for the last period in each accounting year. Adding up balance sheet rows, or reporting single months in the other statements, can make the annual summaries look very strange.

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7 The management team  A good team can make an ordinary proposition work, while a poor team may wreck an outstanding one. Equity investors, in particular, will rank the quality of the management team ahead of all other considerations when deciding whether to support a venture. Fixed interest lenders can generally look to taking control of some security if the venture does not prosper, but equity investors stand to lose their whole investment if the venture management proves incompetent or untrustworthy. When an investor is considering supporting a venture, or when corporate managers are considering backing an internal proposal, any suspicion about the integrity of the venture’s managers or the honesty of their proposal will usually be sufficient to prevent the venture gaining support. In many corporate environments, even when a venture is successful, if  hindsight reveals that corporate management was deliberately deceived to gain its support, the venturers, even if they keep their jobs, have little chance of ever being supported again. Managerial competence is a more complex matter than managerial honesty, and the gap between the ideal and achievable standard of proof is often going to be wide. Would-be venturers often lack extensive experience: when a venture is pursuing a radical innovation, there may be no living person available with directly relevant experience. Sometimes the lead entrepreneur will have unrivalled experience in some particular aspect of the venture, often the technical ones, but little experience or even understanding of other key areas, such as marketing or finance. The two most acceptable surrogates for experience are appropriate qualifications and the presence of a suitably experienced mentor. In structuring the management team for a proposed new venture it is important to achieve satisfactory cover for each of the key management areas. Every venture needs a chief executive, both as a representative to the world at large and a decision maker of last resort. If the venture plans rapid growth an experienced financial accountant will be essential: shoe boxes to keep the receipts in between annual visits from the local accountant won’t suffice. If the business will be involved in manufacturing an experienced production executive will be essential while if the business has a major service component, someone skilled and experienced in planning service delivery and training the service personnel will be vital. Businesses need customers, and this means marketing and sales staff, and merchandising staff as well if the firm’s products are to be sold through mass-market retailers. As the venture grows it may find that it needs specialist executives in charge of  each of these three areas, but at its launch the venture may have to concentrate on the most important one: this will probably be the sales manager if the business’s customers will be primarily other businesses, the merchandising manager if the main outlet is mass market retailing, and the marketing manager in most other cases.

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   d   e    b    i   r   c   s    b   u    S   s   e   r   a    h    S

  y   r   a    l   a    S

   ?   s   u    t   a    t    S

  r   e    d    l   o    H

  s    t   n   e   m    t   n    i   o   p   p   a    d   n   a    ?   s    l   n   a   c   o    i    i    t    t    i    i   s   r   o    C   p   e   v    i    t   u   c   r   e   y   e   x    t   c   e    i    i    l    f    i    f   y    b   e    i   e   o    l    K   s   n   v   a

   t    t    i   o    i   c   n   p   u   e   s   c   n   a    h   m   g   e    1   e   n  .   x   n   c   p    i    t    7    R   e    i    f   r    l   o   e    f    f   a   e    k   e   s    l   e   e   e   e    i    i   s   v   r    l    b    h    h   e   e   a   a   a    C    C    R    D    M    S    T

  y   r   g   e   n    i   v    i   s    i   n   g    l   e    d    i   o   n    d   n    t    i   s   a   c   a   e   c    h   u    h    i   c    d   c   v   r   o   r   r   e   r   u   e    M   P    P    S 63

  s   m   e    t   s   y   s   n   o    i    t   g   a   n    i   m   1    l   n   a   r    i   e   o   r   a    R   g    f   r   e   n    h    t    T    H    L    I    O

   2   r   e    h    t    O

   3   r   e    h    t    O

If a business is pioneering the application of advanced technology, the quality of its R&D management may be crucial, and there is little reason to hope that the inventor of a new venture’s key products will also be the best person to supervise a professional team engaged in readying it for the market. If it is politically necessary to give the inventor an impressive title, it may be necessary to appoint a separate, suitably experienced, development executive. Table 7.1 lists some executive positions and invites the planner to note their significance and any preemptive appointments. A plan can be acceptable if some of these positions, even necessary ones, have no identified occupant, but the positions described as critical must have a name. The status column can be used to show whether the nominated person has accepted the position, is negotiating, or hasn’t yet been approached. The salary information will be used to demonstrate to a reviewer the seriousness with which the appointment is viewed and the shares held and the amount subscribed will indicate the probable commitment of the appointee to the venture. For the sales director and any other person with a substantial bonus scheme indicate the on-target earnings, a more meaningful number than the salary.

Résumés Table 7.2 (which has space to capture details of four venture executives) allows the planner to capture the most important facts about the key executives for the venture. The table is largely self-explanatory: the ‘mentor’ entries are not essential, particularly when the nominated executive has highly appropriate qualifications and recent, relevant experience. When the nominated executive is relatively young, or has relatively little experience in positions with similar duties and responsibilities to those that participation in the venture will involve, the ability to cite a mentor will greatly improve the credibility of the resulting plan.

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Table 7.2

Executive profile

Responsibility

Name

Most recent appointment

Salary

Relevant qualifications

Age

Significant experience

Mentor

Mentor’s relevant experience

Responsibility

Name

Most recent appointment

Salary

Relevant qualifications

Age

Significant experience

Mentor

Mentor’s relevant experience

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Table 7.2

Executive profile (continued)

Responsibility

Name

Most recent appointment

Salary

Relevant qualifications

Age

Significant experience

Mentor

Mentor’s relevant experience

Responsibility

Name

Most recent appointment

Salary

Relevant qualifications

Age

Significant experience

Mentor

Mentor’s relevant experience

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8 Writing the plan To this point we have told the planner to collect data and to build a marketing and financial model using a spreadsheet program. There has been a certain logic in the order in which we have suggested that the data should be collected, but raw data is never very reader-friendly. The penultimate stage in planning is to prepare a persuasive case to be presented to a target audience: basically, a written plan plus supporting material. The first step is to clarify four main points: Ë Who is presenting the plan? Ë Who is the plan being presented to? Ë What are they being asked to do? Ë What will they get from doing it?

The plan is a message  An entrepreneurial business plan is not a work of art or literature, produced to be valued and admired for its intrinsic excellence. It is a working document, produced as an essential part of an intention to create a new enterprise or to reinvigorate an established one. Occasionally the message is self-directed, formalising the author’s intentions and not intended to be read by any other person. Most entrepreneurial business plans are intended to stimulate another person or group of people into taking some specific action or actions. The first thing any reasonable person asks, when requested to do something is: Who is asking?

 Who is asking? If a plan is a message, someone is sending it. The sender may be the author, but more usually it is the author on behalf of a team of which the author is a member, or sometimes the author has been engaged specifically to prepare a plan by some third person or group of people. When someone sets out to write a document, they seldom start with the question ‘who am I?’ uppermost in their minds. When someone picks up a document and starts to read it, the question ‘who wrote this?’ is, by contrast, very important. Great novelists and storytellers know this, and so books and screenplays almost always start with a passage that identifies the principle actors, or protagonists, and the (supposed) author as well if the author is represented as participating in the action. Business plan writers should not be coy or artful: the authorship and authority should be stated on the title page and amplified, if necessary, at the start of the executive summary. A sentence such as ‘This plan has been prepared by … and … on behalf of …’ will generally suffice.

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Having decided who the author is, and who the author is representing, it is then important to remember this throughout the construction of the plan. We recommend that the plan be written in the first person plural, the editorial ‘we’, partly for readability and partly to keep the reader (and the writer) focussed on the need to make a response to the plan.

 Who is the audience?  A message needs an address: it is discourteous to waste people’s time by exposing them to documents that they have no interest in reading; and it can be a serious waste of the planner’s effort if the people who should read the document fail to realise that its contents may be meaningful to them. Many plans are written to raise money, but money comes from many sources: banks, other lenders, private investors, professional investment funds, business angels, fellow members of a team, public donations, government support schemes and others. If the planner is serious, any reasonable reader will infer from the title page, and be certain by the end of the first paragraph of the executive summary, who the target audience is and whether the current reader is a member of it. If an approach is being made to a bank or investment fund the title page and opening paragraphs should be customised appropriately. The effort required is minuscule on a modern document processing package, and the effect can only be positive. Whoever is being addressed, the plan writer must make an effort to understand the audience’s priorities. For serious plan evaluators these usually are, in order: 1 2 3 4

Is there a market for the product that the plan proposes to introduce, and if so, how big is it? Is the venture management team trustworthy, and competent to carry through the plan?  Are there any major regulatory, technical or moral problems that must be resolved before the venture can be a success? Does the financial plan, as described in the pro-forma statements, describe a reasonable use of the investor’s funds and offer the investor a reasonable return?

Many novice plan writers devote the great bulk of their written plan to a description of their technical proposal: at best, this can impress the reviewers with the author’s technical competence, but misses the investors’ two major concerns entirely. Other inexperienced plan writers devote excessive space to the financial statements and show great ingenuity in devising an investment proposal, failing to show proper concern for any of their potential investors’ top three concerns.

Style  A good business plan is easy to read without being condescending or pompous. Not everyone finds it easy to strike the right note: a good place to find excellent writing in the appropriate style is the business sections of the major broadsheet newspapers, or the reporting (not always the opinion section) in the Australian Financial Review . Indirect expression, such as ‘…it is suggested that…’ when what is meant is ‘…we suggest…’ strikes many readers as a way to evade personal responsibility: it may be meant to be formal, but it just makes the text harder to read and much harder to sympathise with. ‘We’ is quite acceptable, even

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for plans with a single notional author. It suggests the presence of an entrepreneurial team, and avoids the clang of excessive egotism.  An excessive use of short sentences gives text a staccato effect. This is less of a problem than text full of long sentences that ramble on interminably without ever seeming to come to the point. The ancient Romans invented the ‘tricolon’, a sentence formed of a statement followed by two qualifying clauses, and the same technique is the foundation of good English writing. Edward Gibbon was one of the best exponents of the tricolon, but an unbroken series of them, as in the eight volumes of  Decline and Fall of the Roman Empire , can become monotonous or even intimidating. A few short sentences add variety.

Structuring the plan Many books on business planning present their readers with a table of contents. For some projects a given table of contents will prove useful to the author and lead to a plan that informs without insulting or distracting the reader, but the same table of contents, when used for a different project, may produce a plan that is hard to follow and even harder to appreciate. There are, we believe, some essential elements in every plan, and as long as they are present in an order that makes sense in the context of the project being described and the audience being addressed the resulting plan is likely to prove acceptable. We present the elements that we consider essential below. The order suits our convenience, but we do not prescribe it.

The title page The title page of a plan serves as an introduction to its audience. To paraphrase Groucho Marx, the only people who must read a given plan are those who are too busy to do so. If  they are presented with a document that says, explicitly or implicitly, ‘I am unimportant’ the people who ought to read the plan are practically directed to ignore it. Some planners may find themselves working for corporations where there is a standard for the front covers of reports laid down. Such standards should be followed, but where the rules permit the use of colour, fonts and layout should be such as to make the document look authoritative and prepared with care. Where no standards exist, it is worth investing a certain amount of effort in making the cover distinctive — and relevant. Dancing girls are an appropriate decoration for a proposal to revive A Chorus Line but are less suitable for a project to develop a new religious retreat.  A few things are absolutely essential on the cover: Ë the title of the plan Ë the name of the author(s) Ë the sponsoring authority or entrepreneur, where this is not the author(s) Ë the confidentiality status. When a plan is being prepared as a student exercise, the appropriate red tape should be placed in a box on the cover, clearly distinguished from the plan itself. The examiner will wish to see that the title page is appropriate in view of the audience and the contents; since the examiner will not, in general, be a prospective investor, partner or employee of the venture, addressing the plan to the examiner should normally mean some loss of impact.

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Executive summary Practically every plan must include an executive summary, and in most cases it should be the first thing that a reviewer sees after the title and possibly the table of  contents. The title page is intended to catch the interest of the people whose attention is essential if the planning document is to succeed in initiating a project: the executive summary persuades these same people to read the rest of the plan.  An executive summary should not be a précis of the plan that it accompanies. It should contain the minimum amount of  information a reviewing executive needs in order to decide whether to read the rest of  the plan, to pass it on to someone else to review, or to pass it over altogether. The following points must be covered: Ë who has prepared the plan, and upon whose authority and/or instructions Ë who constitutes the primary target audience Ë what action members of the target audience are being called upon to take Figure 8.1 Sample title page Ë what the expected result of these actions is, and (unless this is perfectly obvious) why members of the target audience should desire these results. Some points will only be required for specific audiences: Ë when a plan for an initiative is to be presented to the management of an existing business the executive summary must identify the agreed business strategy that this plan supports Ë when a plan is intended to raise venture funding the proposed method of harvest must be outlined Ë when a plan is intended to support an application for debt finance the nature and accessibility of the security and the adequacy of the cash flow to cover the interest and principal repayments must by stated clearly Ë when the plan proposes a novel product or process the executive summary should contain an indication of the technological risk implied Ë when the plan proposes the introduction of a new product the executive summary should contain an estimate of the potential market’s size and the confidence with which this can be stated Ë when a plan requires action by unrelated parties the executive summary should include appropriate highlights of the qualifications and experience of the entrepreneurial team.

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There can be no absolute limits to the size of an executive summary, but any summary that exceeds two A4 pages or 600 words is going to stretch the patience of most of its potential readers.

The project overview By no means all plans need a section headed ‘Project Overview’, but it is essential that the information described in the subsections below is conveyed to any appropriate plan reviewer who reads to the end of the formal plan and before the reviewer starts on any of the possible supplements and appendices.

The gap Two things are necessary before an initiative, whether a product or process, makes sense: there must be some difference between the current state of some identifiable set of people or existing enterprises and a possible, more desirable, state; and the initiative must enable these individuals and enterprises to close that gap at an appropriate cost. A plan reviewer needs to be convinced that the gap exists as well as being convinced of the technical excellence of the proposed solution. Experience shows that far more new enterprises have come to grief because their initiators had dramatically overestimated the demand for their product than have failed because their product was technically unviable. The simple assertion that a gap exists will not convince an experienced reviewer: if it is real, why has no one else taken advantage of  it already?

The market  A gap, as described above, is an essentially technical matter. matter. The market is defined by the number of people and enterprises that experience that gap and the amount of money that they are prepared to pay to have it closed. Since this is a numeric estimate it should have both an absolute magnitude and a confidence interval. Both these numbers should be set out clearly in the plan, together with an account of the research that supports them.  A plan for a process improvement within a corporation may have one customer only: in such cases the reviewer must be told that the designated internal customer acknowledges the existence of the nominated gap and the desirability, desirability, and value, of closing it.

The product The introduction of a new product or process may involve elaborate research and development projects followed by major production and training efforts. These projects are properly the subject of their own project plans, relying on a business plan for their expenditure authority. Their plans are not part of the business plan and should not be bound with it. The business plan should include the minimum amount of information needed to assure the plan reviewer that the project is technically feasible and to convey an appropriate degree of confidence in the cost estimates associated associated with the various stages of the project. There may be many things that the plan authors consider it proper for the plan reviewers to know, but unless these are matters with a direct bearing on the reviewers’ assessment of the plan, they should not be included in it.

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The management team This section is crucial to any plan intended to raise funds in any form from unrelated parties, while it may be of minor importance in a proposal for an internal initiative within within a corporation. Its absolute importance will vary in plans prepared under other circumstances, but even for a purely self-funded expansion of an established small or medium enterprise it offers the opportunity for a critical survey of the strengths and weaknesses of the management team. The section on the management team serves two purposes: it shows that the senior executives of the proposed venture have the experience, supplemented as necessary by qualifications, qualifications, to carry out the tasks to which they are proposed to be assigned; and it shows that the planner has designed a complete management structure. Many student and novice entrepreneurs’ plans raise questions in their reviewers’ minds by appearing to leave no one in charge of some vital business function, such as marketing, finance or sales: such plans are often very strong technically but technical excellence is seldom enough. Other students and novice entrepreneurs prepare plans with an excellent marketing or sales focus but which neglect the product itself, or fail to acknowledge the requirement for training service providers or merchandising a new consumer product. Some sensitivity to the national prejudices of the probable reviewers may be helpful. Forms of expression that might, in one culture, be seen as signs of a properly justified selfconfidence might, in others, be regarded as vainglorious boasting. In the other direction, what reviewers in one culture may regard as proper modesty could be treated in another as an admission of inadequacy.

The marketing overview The world beats no paths to the door of the inventor of a better mousetrap. Except in the particular case of process change entirely internal to an established enterprise, the successful creation, expansion and defence of a customer base is essential to the success of  any new venture. Building an adequate customer base will require substantial expenditure, competently administered. The entrepreneurial team in charge of any serious new venture will prepare a complete marketing plan which will often be much bigger than the business plan that it supports. This will almost certainly be true of a multinational plan, where each country must be allocated its own budget and targets and must develop its own media and sales plans. The business plan should contain an overview of the marketing plan, setting out aggregate phased budgets and targets, outlining the media and sales strategies, and covering key factors such as training of sales and support staff, incentive schemes for sales staff and distributors. It should also state clearly whether the full marketing plan has been completed and made available for inspection, and if it hasn’t, provide a budget in money, time and person power to prepare it before the product is actually launched.

Financial analysis Plans developed within corporations should adopt the style and presentation rules as set out by the corporation’s financial controller’s department; in other cases the layout described here should be used unless there is a sound reason to do otherwise.

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Statements Pro-forma income (P&L), cash flow and Serif fonts (like this) should be used for balance sheets should, in most cases, be body text since they are familiar and displayed covering the first twelve months easy to read. of the enterprise’s existence by month and the first five years by year. They The y should be Sans serif fonts (like this) are suitable for  laid out to fit in a double-page spread for numeric tables, particularly when a lot of  the twelve month figures and on a single numbers must be fitted into a small space. page for the five year figures (note that 9 point type (like this) is easily read accurately by balance sheets need to show an opening people with reasonable eyesight. balance in both the monthly and annual presentation). Fonts smaller than 9 point sans serif should not be needed: if the presentation threatens to spill over one page, lines should be combined and analysed in a separate schedule presented as part of the Notes. The statements should be supported by adequate ‘notes’: one note per line on the income statement would not be excessive.

Charts Charts may be used to support the financial statements when the use of such charts will make it easier for the reviewer to understand the proposal. Two charts are essential in any plan offered to unrelated sources of finance: the breakeven charge and the cumulative cash flow chart. Ë The breakeven chart shows the gross and net margins projected to be earned by the business, either by plotting the margins directly or by showing the revenue and the variable, fixed and total costs against the level of business expressed as a percentage of the planned level . Separate charts may be needed to show the position at the end of  the first year on the market and after three years if the balance between fixed and variable costs is expected to change significantly as the venture develops. Ë The cash position, or cash balance, chart shows, for revenue at the targeted level and at some lower level, often 75 or 80 per cent of target, the projected cash position of  the enterprise. The X-axis of this chart is time. The cash position chart should clearly show the lowest point that the business’s cash balances will fall to and the time when the balance will turn positive. Any negative cash balances must be secured against equity in the form of tradeable assets or enforceable guarantees. The reviewer will inspect the cash position chart to estimate the amount of capital that must be raised or guaranteed and the degree of risk that this capital will be exposed to.

Spreadsheets Reviewers are entitled to receive a copy of the marketing and financial models used to generate the statements and charts. Apple users should note that Apple Mac computers can read IBM format floppy disks but most PC users have trouble reading Mac disks.

Red tape The written plan may usefully conclude with appendices, one listing the principal sources and another listing the (separately bound) supplements that should be examined in a full ‘due diligence’ investigation. investigation.

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9 Presenting the plan  A written business plan is necessarily a relatively formal, structured document, ‘covering all the bases’. Any real reviewer will be comfortable with some sections of a well-prepared plan but have concerns in other areas, and different reviewers will have different concerns, arising out of their own previous experience. Any written plan that attempted to address every possible concern would be so long that no one would read it, and so the written plan needs to be supplemented by a presentation. There is one immutable rule about such presentations: don’t simply read the written plan to the audience. In general a presenter should only recite material from the written plan in response to questions. It is conventional to assume that the audience at a business plan presentation has read the written plan reasonably carefully, and impolite to make a point of proving that anyone hasn’t. In practice, many of the audience will not have opened their copy of the written plan until minutes before the presentation started. The presenter should treat this as a sign of confidence in the general validity of the plan rather than contempt for the effort that went into preparing it. There is a near-immutable second rule, and that is to find out before the presentation how much time has been allowed and spend no more than half of this talking and showing. Half the time should be left for questions and the possible showing of some prepared ‘encore’ material if the audience asks for it. People who go on too long not only irritate their audience; they may see the key decision maker leave before the presentation is completed. By contrast, a well-structured presentation that runs to the allotted time leaves open the possibility that the key decision maker may decide to keep the session going past the allotted time to explore the proposal more thoroughly: in sales parlance, this is a clear ‘buy’ signal, and you wouldn’t want to miss it.

Media The minimum standard acceptable today is a spoken presentation supported by coloured OHP transparencies prepared by an appropriate computer package such as Corel Presentations® or Microsoft Powerpoint®. These packages allow for the preparation of interactive presentations with hot buttons tending towards complete multimedia experiences. Some, but not all, key decision-makers will be happy to use a multimedia system to examine a business proposal. Careful use of video recording can be used to illustrate marketing research results or to demonstrate the operation of a prototype. Care should be taken with the shooting and editing of such video clips: they should aim for a ‘documentary’ appearance, avoiding looking like a home video or a shopping channel promotion.

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Objectives The ultimate objective of a presentation will be to secure the participation of the audience, or key members of it, in the project described in the business plan. Few presentations end like a revivalist meeting, and so the ostensible aim of a presentation should be to secure the agreement of the key decision makers present to proceed to a full due-diligence examination of the entrepreneurial business plan and its supporting documentation. This is not a trivial decision: professional venture funds carry out a full due-diligence examination on less than one in fifty of the proposals put to them. There are probably several viable projects in the forty-nine that don’t make it, but the initial scan of the plan, or the first and only face-to-face presentation, failed to catch those plans reviewers’ imagination. People who commence a presentation with the attitude that the audience is obliged to respond favourably to their proposal are making a serious mistake. The universe of the possible is infinitely larger than the universe of the actual. The people whose cooperation the entrepreneur needs will always have alternative uses for their time and money. Even when there is no current alternative superior to the entrepreneur’s plan, the reviewers know that tomorrow may offer them one. To endorse one plan is to reject an infinite number of alternatives: people who seek such an endorsement should be confident in the quality of their proposal, but they should also respect the serious nature of the decision that they are asking their audience to make.

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