In our last article we wrote about how important it is to investors to see a strong business plan. We spoke about certain key areas that they look for, namely: opportunities, threats, market size and market share, customers, marketing strategy, competitors, suppliers, risk analysis, financial plan, and cash flow. Today, we will look at them in detail, to see where we can improve the business plan to seem appealing to the investors. We recommend using the following guide from Mr Inderjit’s Book, The Art and Science of Entrepreneurship, to reflect over your business idea.
In your business plan, you will need to try to address the following issues:
The more you differentiate yourself from others, the more convinced others will be of your ability to succeed. The more clearly you have defined the opportunities, the easier it will be for others to see it too.
Your ability to identify all the possible threats will show how well you understand the industry and how widely you have thought about things, and hence, ensure a better chance of succeeding with your plan. Your ability to convert the threats others may see in your industry into opportunities for your business to tap will further strengthen your credibility as a true entrepreneur.
One impractical approach some people use when discussing what market share they hope to capture is to come out with an arbitrary percentage.
For example, they will show what the whole universe of market is available, and say, “If I can capture just a small percentage of the market, my business will be so big.” So, market data might show that there are 500 million mobile phone users in the world today. And the company intends to sell software to be used in phones for $1 each. Then they will say, “All I need to do is capture five percent of the market share, which will make my revenue $25 million.” Looks easy? But how do you really do the “all I need to do is capture” part? It is the most difficult part, and while five percent looks like an easy target for a product that sells for only $1, it is never that easy to sell something.
So, I encourage entrepreneurs to avoid using such a simplistic approach to tell investors what market share they intend to capture and what level of business they can generate. The investors have heard it all, so just avoid it and come out with a better analysis of how you intend to do it.
Have a realistic plan.
It is not an easy task to capture market share by engaging customers. It is important to assume that customers have built some loyalties to their existing suppliers, and it is not an easy task to take the customers away from existing competitors who already have built relationships with their customers. These factors regarding loyalty, trust, and proven track record should not be taken lightly.
Many companies fail badly in this area, thus it is important to spend the time to flesh out a good strategy and put in place the best resources to execute the strategy. Without an effective marketing strategy, the best product in the world will lead you nowhere. In fact, more companies fail because of a poor market strategy rather than a poor product strategy. Entrepreneurs tend to underestimate the importance of the marketing role in the whole chain of activities of a business. Often, they assume a good product or service will be able to sell by itself. Most of the time, this is not the case.
I have seen marketing as typically one of the weakest attributes among many entrepreneurs. If the entrepreneur has a weakness in the area of marketing, he or she needs to find someone who can plug this gap in the management team. The investors will definitely make an assessment of whether there is a good marketing person in the team.
I mentioned the factors of loyalty and an established track record as being difficult to overcome, and customers will have to see a much more compelling reason to switch suppliers than a promise of a better product. While a new start-up may identify a compelling reason why their potential customers should switch suppliers, it should not be assumed that their competitors will remain at a status quo position. The competitors will also be improving themselves, and they too will have secret weapons to win in the market place.
Suppliers are your partners for success. Identifying the key suppliers who can help you succeed is important.
Often, suppliers are neglected as an important success factor in many business plans, as well as in many operating businesses. The fact is that suppliers can make a very big difference in how a company executes the business.
For example, sometimes suppliers are willing to give very good payment terms, which will help minimise the company’s cash drain. In other cases, suppliers can help a company with technology that comes with the equipment they provide, which can then help better the execution of the production process.
Suppliers who develop partnership relationships with their customers will also give advance information about new products, equipment, and technologies, which may make a difference in how a company executes its business. For instance, if there is new and much more capable equipment in the pipeline, one may want to wait for the new equipment to be released instead of purchasing older equipment, which may become obsolete sooner than expected. There are many other benefits to be derived from partnering a few key suppliers.
There are many types of risks, and every business has some. The key question is whether you have identified the right risks that could affect the success or failure of your company.
In almost all cases, companies never follow the original path indicated in the original business plan. Things change, and as reality sets in, many changes need to be made.
Unless the business plan had identified the areas in which things could go wrong and a planned change of the execution takes place if such adverse events did indeed occur, a new company will rarely succeed. All of this should be clearly illustrated in the risk analysis section. Others looking at your plan will also have a feel for the type of risks your business will potentially face. It is useful to align your risk expectations with that of the investors.
The financial plan measures the lifeline of your project or company. Your ability to prepare a financial plan that can communicate how you will be utilising the incoming funds is important.
This is one part of your plan in which investors will spend quite a substantial time on. The financial plan basically reflects how successfully you will be when you put the rest of your business plan into operation. It measures the outcome of your plan and therefore gives the investors a feel for how rewarding their investment is going to be. With the financial plan, the investors will do all their rate-of-return analysis and decide how viable an investment in your company will be for them. Remember, they are not putting in their money because they like you or because they are doing charity work – they are in it to make money, and the more they can make, the more excited they will be to invest in your company.
This is one of the most important parts of your financial plan. Many businesses fail because they failed to plan and execute their cash flows well. The investor will therefore be very interested to assess your ability in controlling your cash flow.
How well will you be utilising your cash and how well you can generate a positive cash flow when your business starts to run will determine the difference between success and failure.
Investors worry a lot about how cash is utilised in the company. It is therefore very important to pay special attention to the cash flow plan.’ – The Art and Science of Entrepreneurship by Mr Inderjit Singh
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