Sahlman, Bill. 1997, Harvard Business Review, "How to Write a Great Business Plan"Excerpt:
"...business plans rank no higher than 2 - on scale from 1 to 10 - as a predictor of a new venture's success...
Why do we do them? 1) They're the "ticket of admission" to capital providers (debt or equity); 2) They're the format for examining opportunities.
What's wrong with most business plans? Most waste too much ink on numbers and devote too little the information that really matters to intelligent investors. As every investor knows, financial projections for a new company - especially detailed, month- by-month projections that stretch out for more than a year - are an act of imagination.
An entrepreneurial venture faces far too many unknowns to predict revenues, let along profits. Moreover, few if any entrepreneurs correctly anticipate how much capital and time will be required.Typically, they are wildly optimistic. Investors know about the padding effect and therefore discount the figures ... creat[ing] a vicious cycle of inaccuracy that benefits no one. ...
... business plans should include some numbers. But those numbers should appear mainly in the form of a business model that shows the key drivers of the venture's success or failure. In manufacturing, such a driver might be the yield on a production process; in magazine publishing, the anticipated renewal rate...
A business plan shows if you can really carry out the plan if you got the money. in many subtle ways.
The model should also address the break-even issue: At what level of sales does the business begin to make a profit? And even more important, When does cash flow turn positive? Without a doubt, these questions deserve a few pages in any business plan. Near the back.
Raw basics of business really matter when you're risking your "time, your talent, and your treasure". The Finance Director will get a new appreciation of the meaning of leverage, both financial leverage and operating leverage. You'll also learn how to try to beat the normal tradeoffs. Large companies take on higher fixed costs (operating leverage) in order to get lower variable costs; entrepreneurs have to figure out how to keep both low. One of the most crucial skills in financing new firms is minimizing the need for financing.
I recommend... the [following] framework... [that] systematically assesses the four interdependent factors critical to every new venture. [Assumption behind this: great businesses have attributes that are easy to identify but hard to assemble: it's the execution.]
The People. The men and women starting and running the venture, as well as the outside parties providing key services or important resources for it, such as lawyers, accountants, and suppliers. [Great businesses] have an experienced, energetic managerial team from the top to bottom. The team's members have skills and experiences directly relevant to the opportunity they are pursuing. Ideally, they will have worked together in the past.
Fourteen "Personal" Questions Every Business Plan Should Answer
- Where are the founders [coming] from?
- Where have they been educated?
- Where have they worked, and for whom? [apprenticeship model]
- What have they accomplished - professionally and personally - in the past?
- What is their reputation within the business community?
- What experience do they have that is directly relevant to the opportunity they are pursuing?
- What skills, abilities, and knowledge do they have?
- How realistic are they about the venture's chances for success and tribulations it will face?
- Who else needs to be on the team?
- Are they prepared to recruit high-quality people?
- How will they respond to adversity?
- Do they have the mettle to make the inevitable hard choices that will have to be made?
- How committed are they to this venture?
- What are their motivations?
- [not in list but in text:]Whom do they know? [What is their network?]
The Opportunity. A profile of the business itself - what it will sell and to whom, whether the business can grow and how fast, what its economics are, who and what stand in the way of success.
[Great businesses are based on an] opportunity [that] has an attractive, sustainable business model;
it is possible to create a competitive edge and defend it.
Many options exist for expanding the scale and scope of the business, and these options are unique to the enterprise and its team.
Value can be extracted from the business in a number of ways either through a positive harvest event - a sale - or by scaling down or liquidating.
Nine Questions About the Business Every Business Plan Should Answer
- Who is the new venture's customer?
- How does the customer make decisions about buying the product or service?
- To what degree is the product or service a compelling purchase for the customer?
- How will the product or service be priced?
- How will the venture reach all the identified customer segments?
- How much does it cost (in time and resources) to acquire a customer?
- How much does it cost to produce and deliver the product or service?
- How much does it cost to support a customer?
- How easy is it to retain a customer?
[Perhaps the key point here] Economically viable access to customers is the key to business, so do not] take the Field of Dreams approach...
The list of questions about the venture's opportunity focuses on the direct revenues and the costs of producing and marketing the product. That's fine, so far as it goes.
A sensible proposal, however, also assesses the business model from a perspective that takes into account the investment required - that is, the balance sheet side of the equation. [Note that this is largely a timing issue.]
The following questions should also be addressed so that investors can understand the cash flow implications of pursuing the opportunity:
- When does the business have to buy resources, such as supplies, raw materials, and people?
- When does the business have to pay for them?
- How long does it take to acquire a customer?
- How long before the customer sends the business a check?
- How much capital equipment is required to support a dollar of sales?
[As noted, it is crucial that one consider
competition.]:
- Who are the venture's current competitors?
- What resources do they control? What are their strengths and weaknesses?
- How will they respond to the new venture's decision to enter the business?
- How can the new venture respond to its competitors' response?
- Who else might be able to observe and exploit the same opportunity?
- Are there ways to co-opt potential or actual competitors by forming alliances?
The Context. The big picture - the regulatory environment, interest rates, demographic trends, inflation, and the like - basically, factors that inevitably change but cannot be controlled by the entrepreneur.
[Great businesses have a] context [that] is favorable with respect to both the regulatory and the macroeconomic environment.
The Deal and Risk and Reward. An assessment of everything that can go wrong and right, and a discussion of how the entrepreneurial team can respond.
[In great businesses,] risk is understood, and the team has considered ways to mitigate the impact of difficult events."
