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In today's environment, the business plan is the entrepreneur's most important document when setting up a new business. No company can express its business goals or secure financing without the help of a well-conceived and well-presented business plan. Without a business plan, it is almost impossible for someone to take your business idea seriously or even consider investing in it.
Because this thesis is about setting up a business plan for the start-up of a new kind of social network, we will first start with an overview about the concept business plan throughout the literature. In this literature study the term business plan is defined as well as the main functions of the business plan followed by an overview of the typical structure of the business plan. Furthermore, a problem discussion on the topic business plan in the literature is displayed.
In the next part the main focus will lay on the composition of the financial plan.
Subsequently, in the section Location Based Social Network a brief explanation is given about LBSN to give the reader an idea about what the business idea is all about.
An entrepreneur willing to start his own enterprise stands before a lot of obstacles. Building up a company does not happen over one night.
Theoretical framework Introduction
There was a time that entrepreneurs only had to write a letter to propose their business idea and send it to some investors to secure funding. Nowadays, investors are far more demanding and expect a higher level of expertise and preparation from the entrepreneurs they choose to fund. Kleiner (2007), a legendary venture capitalist states that when examining a proposal, investors want to see much more than just a good idea and a bright young man or woman: they want to see a business plan showing that the concept has been thoroughly assessed and that the entrepreneur has carefully thought through the issues for taking the necessary steps of taking the idea and transform it into a successful company.
The emergence of the business plan
The term business plan is a word that found its origin during the Second World War period. Back then it was mostly used to define the long term strategies of big firms. The Business Plan was a highly confidential document and was only exposed to a very limited audience. During the 80's the term business plan became more popular and it was then that the first articles appeared discussing the issues behind the business plan. From that decade on, the term business plan was mainly used to indicate the start-up of new and emerging companies. (Karlsson, 2005). This may be the reason that when the term business plan is mentioned the first image that crosses people's minds is the start-up business, which has not to be especially so because The Ernst and Young Business Guide (1987) points out that even established firms can have formal written business plans to determine or evaluate the accomplishment of business goals.
Definition of a Business Plan
The literature on the topic business plans is awash with information and offers a lot of definitions.. Essentially these definitions have all the same meanings. Abrams & Barrow (2005) define the business plan as a roadmap to the company's targeted destination. Ideally, it enables the entrepreneur to get from the basic business concepts to a healthy, successful business.
Barringer (2009) describe it as a "written document that carefully explains every internal and external aspects of a new venture" (Barringer, 2009, p. 1)
The format of the business plan
We can distinct three main factors throughout literature from which the BP structure will manly depend. To begin with, the format of the business plan will mainly depend on the purpose for which the BP is elaborated. For instance Barringer (2008) states that a BP established for a start-up company to investigate the feasibility of the venture may somewhat differ from that of a business in expansion that wants to evaluate the accomplishment of the business goals. For example, a start-up firm will not be able to dwell much about the company's history or past successes.
Further, Mason and Stark (2004) argue that whether the entrepreneur is pursuing capital from a bank, a business angel or even a venture capitalist, the format of the business plan should be adapted accordingly.
So we can conclude that depending on the firm's level of development or on what purpose the business plan serves, i.e. to raise capital or for internal purposes, the emphasis on the topics will be different and the format of BP will vary accordingly.
Functions of the BP
The academic literature provides an abundance of information on the topic: functions of the BP. A single search with GoogleTM Scholar found 2.3 million hits for terms 'function*' AND 'business plan*'. After going through books and relevant literature we can differentiate internal as well external uses for the business plan.
Most of the time when people think about the reason why a business plan is written, the first thing that pops up in their head is to raise money. It is a fact that most lenders or investors will not put money into a business without seeing a business plan first. If the purpose of the bp is indeed to raise finance, its test will be how much interest it can generate from reviewers in as little time as possible and ultimately how much money it can attract from investors.
Attracting Human Capital
Zetterberg (2004) assigns another interesting external function to the business plan: it can also be used as a tool for attracting human capital. It is not uncommon that a potential employee wants to see the company's business plan before making a decision whether joining or not.
It seems very unlikely that the sole purpose of a business plan is only that of a fund raising device. Instead, Abrams and Barrow (2005) argue that the business plan has a lot of intrinsic value. The authors of the Business Plan Guide Plan for start-up companies also support this theorem that while developing the business plan has chance to take advantage of two big opportunities:
First of all, it gives the entrepreneur the opportunity to learn about the industry and the market. When writing a business plan the entrepreneur will have to go to the process of writing a marketing plan. This should give the entrepreneur some valuable insights in who the most important competitors are, who will be his main customer, and also facts about the industry like for example, the market restrictions, market size, and so on.
Internal planning doc.
Secondly it can be used as an internal planning document. Developing a business plan enables the entrepreneur to make the crucial business decisions that focus the entrepreneur's activities and maximize his resources. Immers, while developing the business plan, one will increase the understanding of the many forces that have an impact on your business's success, which in turn will give a stronger sense of control. Like for example understanding the financial aspects of the business, including cash flow and break-even requirements.
It is also interesting to note that a business plan can be used within different timeframes.
First of all it can be used to determine the Viability of a Future Business
Allen et al. (2006) describe the BP as "a plan which can be used to develop ideas about how the business should be conducted." According to the authors, the entrepreneurs get by writing a BP the chance to "make mistakes on paper" by examining the company from all perspectives, such as marketing and finance and refine their strategies accordingly, rather than failing in the real world."
Determine/Evaluate the Accomplishment of the Business Goals
Secondly, Schultz et al. (1987) point out that a business plan can be a retrospective tool, against which a businessperson can assess a company's actual performance over time. For example, the financial part of a business plan can be used as the basis for an operating budget, and can be monitored carefully to see how closely the business is sticking to that budget.
In this point of view, the plan should be used as the basis for a new plan. After some time has elapsed, the business plan should be re-examined to see if the company has accomplished its business goals and if necessary needs redirection.
To write or not to write a business plan / The relationship between Pre-start-up Formal Business Plans and Post-start-up Performance
The opinions on the topic whether a business plan is a useful document or whether it is more a waste of time are not unanimous throughout the literature. Despite a lot of researches that have been conducted within this field, the findings from studies that examined whether there is a relationship between the pre-start-up formal business plan and the post-start-up efficiency of the company are not consistent throughout the literature. The word efficiency in this particular circumstance means that it has not been proved that the Business Plan will help a new venture in succeeding.
Some studies claim that they found no relationship between a formal written BP and performance. For example: "Does formal business planning enhance the performance of new ventures?" (Lumpkin et al. 1998) This study examined the planning-performance link among 54 new entrant and 40 established firms. Results suggest that new startup companies who use formal written business plans fail to outperform those who don't.
Of course there are a lot more factors outside writing a business plan playing a role in the future success of the firm. Initially raised capital, experience of the entrepreneurs, used business model, the age of the venture, are just a few to be named. Recent studies conducted by Lange et al. (2007) took all these factors into account and examined whether writing a business plan before launching a new venture affects the subsequent performance of the venture.
Their dataset contained 116 Babson College alums graduated between 1985 and 2003 that started a new business since graduating. From the results of the study it appeared that there is no difference in performance between new ventures that started with a written business plan and those who did not.
Of course one could argue that the studied dataset has a few limitations. First of all the dataset only comprises ventures started by Babson College which is somewhat limited and will compromise the external validity. It will be difficult to generalize the findings of this study to the rest of the start-up ventures in business world. However, there are benefits at this bounded dataset: the respondents have similar educations. This will limit and take into account the influence from the independent variable, education. On the other hand the taken sample frame is randomized and longitudinal which will benefit the internal validity. This means that the research design allows to formulate a correct answer to the proposed hypothesis.
From their findings Lange et al.(2007) suggest that "unless a would-be entrepreneur needs to raise substantial start-up capital from institutional investors or business angels, there is no compelling reason to write a detailed business plan before opening a new business." Instead, the authors suggest that "entrepreneurs should make financial projections, especially cash flow."
In contrast, some studies have shown that planning goes well together with the overall growth and success of new firms. Ford et al. (2003) conducted a study of 800 randomly selected American nascent companies and found a significant positive correlation between the degree of business planning formality and financial results in year 1 and 2.
Liang and Gartner (2005) found, using data from the U.S. Panel Study of Entrepreneurial Dynamics (PSED), a strong main effect for business planning: Nascent entrepreneurs who completed a business plan were 2.6 times more likely to persist in the process of business emergence than those who did not complete a plan. In addition, they found that the chances for survival of ventures in an uncertain financial and competitive environment was more likely when they engaged in planning in the early stage of the start-up activities. And that ventures were more likely to continue their activities if they started to plan late in the stage of start-up activities in a certain financial and competitive environment.
For now, we will leave the discussion aside whether causality exists between writing a BP and the success of the venture and move on to asking ourselves why so many entrepreneurs bother to write the business plan.
Many business people or entrepreneurs defend that the time that is needed to produce a formal written BP, would be better spent on pushing the new venture forward instead of writing a plan that no one will read. (Allen 2006)
This might be true if we take into consideration that the venture capitalist or the firms that provide finance to businesses receive piles and piles of business plans and have no time to read them all. In fact, very few entrepreneurs have access to formal venture capital at the moment they start their ventures. Bygrave and Hunt (2004), for example, estimate that in the US, fewer than one in ten thousand new ventures has the privilege to receive their financial funds of a venture capitalist. This is very rare, especially for the USA which has more than two-thirds of the total venture capital in the entire world. This means that receiving capital from VC's is by far the rarest form of funding.
So why then go so many entrepreneurs through the process of writing business plans if the main objective of their plan is to secure funding from a venture capitalist and they know that they will almost always come up empty handed? Part of the explanation may be that other sources of financial funding such as banks, business angels, equity investors require written business plans too.
Another explanation could be that they write the plan for internal reasons. Although writing a business plan is a very laborious task and it takes typically several weeks to finish it could avoid costly, perhaps disastrous, mistakes later thanks to the planning process that helps the entrepreneur think through things thoroughly. (business plan guide 4 start ups)
Patel (2009) could be right when he states that " Most investors don't want to invest in a plan, they want to invest in a business that is up and running. You don't have to be making money, but they want to see something more than just a piece of paper."
Furthermore, it is a fact that if you want your BP to be noticed by investors, the chance is greater if you get a personal introduction, instead of approaching them on your own (Barringer, 2008).
This is definitely the case for all businesses in China. If you want to look for capital, or even if you just want to do business, you will need 'Guanxi'. Guanxi literally means "relationships". Since Confucius set-out the basic relationship rules 2000 years ago this has become the basis for conducting succesfull business in China. The reality is that the majority of Chinese people won't trust and will not do business with people that are not part of their Guanxi. If you win the confidence of a chinese business relation, he will be part of your Guaxi network and will be happy to do business or introduce you to other acquintances or information sources, thus expanding your Guanxi network. Seligman (2005) points out that it has been generally known for centuries that businesses in China with a widely developed Guanxi network are more succesful than those with a limited or no network.
We conclude that is not about having a good or a bad business plan per se to secure finance but more about knowing the right people. This is why startup businesses have the disadvantage over established firms because they may not have such contacts.
Anyway, a lot of authors recommend to do write the business plan because for the internal and external value that lies within the plan. Abrams and Barrow (2005) state that a good business plan for a sound business concept not only helps achieving the business goals, it also lets you save time and money by focusing on your business activities, giving you more control over your finances, marketing, and daily operations, and helps you raise the capital you need. Or as Kleiner (2004), a legendary venture capitalist states: "Even if you have all the money you need, you still need a business plan. A plan shows how you'll run a business. Without a plan, you don't know where you're going, and you can't measure your progress."
Business Plan Structure
The Executive Summary
The most important section of the business plan, the executive summary, is the first part of the plan that is going to be read by a potential investor or lender. Time is money for businessman and businesswomen and although you can have spent three months at preparing the plan, the cold, hard fact is that an investor or lender can dismiss it in less than five minutes. Therefore it is crucial that this part is very clear and gives a compelling distillation of the business so that the reader will be persuaded to wade through the rest of the plan. A typical venture capitalist can expect to read more than 1000 business plans in a year. Andrew Anker, partner of August Capital - one of America's most respected venture capital firms- explains: "The first thing I read are the first two paragraph of the executive summary. If I can't be dragged in, there is no way the next five million people can be dragged in. It doesn't take me more than one minute to decide whether a business is interesting or not."
The Summary reflects the results of the entire planning and should be crafted after having considerated all the other aspects of the business, so it has to be written last. The topics that have to be included in the executive summary are everything that would be covered in a five-minute interview. The following fundamentals of the proposed business have to be explained and formulated in a positive and confident tone: What will your product be? Who will be your customers? Who are the owners? What do you think the future holds for your business and your industry?
If applying for a loan or pursuing investor's capital, there has to be clearly stated how much money is needed, how it is going to be used, and how the money will make the business more profitable, thereby ensuring repayment.
For example, an investor interested to fund a start-up company will be interested in seeing the potentiality of the business in terms of return of the capital and how the risk will be minimized.
To be completed
"Strategic planning is part of the ongoing management job. The plan itself is only a snapshot; planning should be going on all the time." George James Former Sr. CFO Levi Strauss & Co.
Location Based Social Networks
3.0 The Financial plan:
"Nobody plans to fail but many fail to plan" This expression is to be interpreted in many ways but according to the authors of "Corporate Finance" it means that the failure is often attributable to a lack of systematic management. The problem with a lot of entrepreneurs is that they are most often does rather than writers. They prefer the action - doing business - than behind their desk drafting up business and financial plans.
Financial reports display the financial status of the company. When will the company be profitable, how much cash will the company be generating, what is the value of the company? The financial plan gives answers to these questions. This information is also valuable the relations outside the company like banks, investors, customers, the government.
Parts of the financial plan:
Profit and loss account
The profit and loss account is one of the four basic statements that a company has to make. It keeps track of the financial result for a certain period in time. It answers the basic questions about the financial performances of a company such as: How much money did the company make? The profit and loss account comprises, as the name suggests two category's in the profit and loss account, namely revenues and expenses. There are a lot of terms for revenue: sales, turnover, return, income,â€¦ Costs arise from using the production resources. Costs can be booked referring to the costs they rely with, like the costs of goods sold. (COGS) Or they can be booked in the period the costs are incurred. And finally costs can be booked so that a attribution to the period is displayed.
According to Cornwall et al. (2005)