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Any company whether starting a new business or expanding an existing firm within an established organization- all requires a business plan so that it can meet the expected and unexpected opportunities, the obstacles which the future holds and also the most important to raise funds so that it can navigate successfully through its own unique competitive environment.(Brown et al, 2001)
This assignment focusses on the role of the business plan in acquiring capital from the investors for its start-ups or expansion and also the limitations when securing those funds.
Business plan is a blueprint of any business giving a detailed outline of business concept, business opportunity, competitive landscape, key to success and people who are or will be involved. Therefore it acts as an important sales tool which can be used to borrow money or gather support to launch a new product or service. Kuratko and Hodgetts (2001: 289) suggest that ‘the business plan is the minimum document required by any financial source.'
Role Of Business Plan:
An entrepreneur, when having any idea of a business ,are afraid of writing the business plan fearing for the future. But a well documented plan provides unlimited benefits.(Arkebauer,1995) It helps to define the in-depth analysis of the business and the strategies of how to venture with that business in the current market. A plan written on paper not only helps in identifying the potential problem areas but also helps in working out the solutions without interfacing the real world consequences.( O'Connor,1998). It also helps in communicating goals throughout the organization. If proper strategies are implemented then owners or the managers can use it as benchmark to assess the goals they have achieved and also to improve the areas of weakness. Hence it should not be limited to a start up tool but should be used continually to re-evaluate the progress of the business. Business plan does not guarantee success but helps in reducing probability of failure.(Crawford-Lucas,1992)
Apart from the above benefits, the most important role of business plan is to accomplish the vision of an entrepreneur by persuading the investors to fund them. The financiers could be either the lenders or investors. All require a business plan to evaluate the potential of business. Lenders looks at the riskiness of the loan by seeing the payback periods and cash flow data whereas the investors are interested on the longer term potential of the business and hence they want to know what the break even points are and what will be the return of investment. Thus the decision of the prospective funder to consider the proposal would depend on the quality of the plan supported with the funding proposal. As stated by Brown et all(2001:11) “the business plan is the ticket of admission giving the entrepreneur his first and often the only chance to impress prospective sources of finance with the quality of the proposal.''
To accomplish this an entrepreneur needs to formulate the plan in such a manner that it satisfies all the aspects which the investors look into. The important aspects are listed below:
Executive Summary:This section plays a critical role as its the first document which an investor looks and makes a quick decision on the proposals. It should be as concise as possible detailing all the important aspects of the business fulfilling the investors expectation.
Product, history and competitors:The investor also looks into the following factors such as what is the product or service ,what pain is being eased through this product or service, history of the product, uniqueness of the product so that the customers are induced to purchase and who are the direct and potential competitors.
Marketing analysis and plan: This is the critical part of the business plan as this not only helps the investors but also an entrepreneur to understand the market. The market analysis helps them to analyze what the market size is and what the future it holds for them and how they are going to target the market, what is the value proposition they are having and what strategies they are going to pursue to target those market.
Management: Management summary is an important summary which an investors wants to look into it as they are the ones to whom investors invest their money. The investor knows that without the right people no unique opportunity can be turned into reality. Hence they give more emphasis on the quality of the management team.
Financial plan:The financial aspects plays a critical role in the plan as it converts the other parts of the business such as the operations, marketing, management etc. into the expected financial aspect. Hence when providing financial projections one must highlight and explain the importance of the significant figures from the pro forma income statements such as revenue, operating profit, operating margin, net income and net margin over the period of 3 to 5 years. In addition to these statements it also shows the break even analysis, NPV and the cash flow statements.
Risks: Risk is the uncertainty of the future and the investors wants to know the assessment of the level of risk. They want to know that if there is any risk such as operation risk, market risk, financial risk then how one plans to avoid it and also how to mitigate those risks.. Hence when formulating the plan one needs to take care of adding all the risks which are associated
Limitations Of The Business Plan:
no matter how innovative is the product but if proper business plan is not formulated with proper research then there might be some flaws which an investor will feel and would hinder him in investing in your business. The limitations could be :
the management team having no experience in the field in which they are venturing nor having any good reputation of successfully completing their projects and also the team having no proper blend of people, range of skills and depth of knowledge will lead to rejection of the plan. Hence the team should contain blend of people with proven track record and their requisite resumes should also be attached.
if the market analysis is not done properly i.e. the size of the market in which the company is penetrating its product,buying behaviour of the customer, how they are going to target their market and at what price they are going to target etc. then an investor might feel unsecured in investing the funds as they will feel that entrepreneur is not having proper analysis of their target market.
if one defines the market size too broadly for a product then it provides no value to the investor as investor would feel that proper market analysis is not done.
Certain business plan shows that there is either no or very few competition which implies that there is not enough customer to support the product or service. Hence proper marketing analysis needs to be done showing that there is a wide market for the product and it also gives an assurance to an investor that if management executes well then the firm can earn substantial profit.
They also require to know what's the the strength and weakness of the competitors,what's their market share and what are the threats of entry to that particular industry.
if its a manufacturing industry and is not located at favourable geographic location with no assess to skilled employees or inexpensive labour might also hinder an investor to invest.
if unrealistic sales are forecast i.e. expecting an unimaginable sale when there is not much demand in the market.
if proper profit projections and cash flow statements are not shown in the plan. Since profit projections is considered to be the heart and the cash flow is considered to be the blood of the plan, hence the investors are keen to see whether the peak need and the peak availability of cash are shown and what is the expected financial returns i.e. return on investment(ROI).
If proper balancing of an asset and liabilities are not done.
If proper break even analysis is not done as the investor are interested to know at what level of sales will a break even occur.
If neither any investment nor any security i.e. collateral is provided then an investor might feel unsecured in investing.
If proper fund planning, usage of the funds and the repayment of funds are not shown properly then an investor might not invest.
If no sensitivity analysis is done then investor might not approve the plan as this is the critical part of the financial plan. Since the financial data are made on assumptions and it may change in due course of time. Hence,its necessary to calculate the changes in the profitability by changing the critical parameters of the financial plan and also to evaluate that whether the firm is able to repay all its debts and obligations.
Most investors do not calculate the risk associated with the business and this might also hinder the investor to invest. They want to evaluate what the risks are associated and what are the ways to mitigate those risks.
When expanding an existing business, credit rating should be attached as the investors would like to see that how the company is performing for the last few years.
an investor always look into the sustainability of the business i.e. who will run the business in absence of an entrepreneur. This is the critical aspect as they want to know that will the business die if an entrepreneur leave the business and pursue some other work.
The business plan does not accommodate multiple individual investors
the business plan does not contain any document which sets the terms and conditions i.e. Subscription Agreement(SA) for the investment as no investor would invest without these documents. It also becomes difficult for the entrepreneur to raise funds without these documents.
Business plan does not provide any loan agreement i.e. Promissory note agreement and neither it provides Private Placement Memorandum(PPM) i.e. the document which contains all the information related to the company stating the operations, transaction structure, terms of investment, risk of the business etc. Both the PPM and SA should be included in the business plan when raising capital from the investors.
For a high technology business, it is considered to be highly risky business and since it is in development phase hence the track record of the company would not be available and also the return on investment would be slow. In the initial period the return may be negative but in long term it may have good return.
The bankers would not invest since its a risky business having no track record and also the rate of return would not be good in the initial few period, hence the company may not be able to service the interest and repayment on timely basis in the initial period.
The venture capital are basically investing the third party money in any business hence they require high return on investment and that too within a short frame of time. But since the return on investment is not known, neither the track record of the company is known and also the company may not be able to service the debts and obligations in that time frame, hence venture capital may not fund them.
Finally the probable source for the investment would be angel investors since they help the company in the development phase. They like to invest in the risky business and they neither require the track record of the company. Since they take high risk and hence they require high return on investment. Hence they take the equity investment in the company.
High technology companies sometime shave to operate for a long time without profits and sometimes even without sales. Hence bankers wont lend you.