BUSINESS PLAN EXERCISE

DEMOKRITOS SEMINAR NOVEMBER 21, 2008 ning Essentials Dr. Elias G. Carayannis Professor of Science,Technology, Innovation and Entrepreneurship Director of Research, European Union Research Center Co-Founder and Co-Director, Global and Entrepreneurial Finance Research Institute School of Business, George Washington University Washington, DC, USA caraye@gwu.edu BUSINESS PLAN EXERCISE Break into teams or 4-5 persons each and outline the business plan for a concept or idea the team chooses to develop This business plan should be prepared per the presentation made by Prof. Carayannis at the Demokritos Seminar on November 21, 2008 and included in the slides below. Each team should prepare an outline of the business plan in about ten slides covering the key aspects of the business plan. Designate team spokesperson and share thoughts with group. Email in advance business plan presentation to: caraye@gwu.edu and innovation2008@edu.demokritos.gr by December 4, 2008. B.C. Επιχειρηματίας : Κάποιος που κάνει ότι μπορεί για να μην δουλέψει. ΛΕΞΙΚΟ 1

Why Prepare a? Makes the entrepreneur think about all the players, parts, and forces that will determine the success or failure of the venture Documents the basis for investment requirements, sales goals, operational logistics, financial management, and growth strategy Benchmarks the timeline and quantifies the entrepreneur s ambitions 2003-2004 E.G. Carayannis & M.R. Stewart 4 The Serves Three Purposes: Communication Explain your entire vision External and Internal Co-optation Proselytize and gain buy-in Assure yourself and others of feasibility Coordination Chemistry Skills Vision Congruence Complementarity Compatibility 2003-2004 E.G. Carayannis & M.R. Stewart 5 5 A Outline OUTLINE 1) Executive Summary 2) Background 3) Objective 4) Market Analysis 5) Operational Configuration 6) Implementation Plan 7) Financial Plan 8) Qualifications & Commitments Prof. CARAYANNIS, ISTM 234 NEW VENTURES FINANCING, 9/07 2

Executive Summary Section 1 A two-page encapsulation of the whole plan from concept to return on investment Terse Confident Addressed to potential stakeholders: Partners Investors Lenders Regulators Write it first, then revise it after all the ensuing details are fleshed out 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 7 EXECUTIVE SUMMARY Περιγραφή επιχείρησης Στόχοι Παρόν στάδιο ανάπτυξης Προϊόντα/ Υπηρεσίες Αγορά που στοχεύετε Στρατηγική Μάρκετινγκ Πωλήσεων Ανταγωνιστές, διάρθρωση αγοράς Ανταγωνιστικά Πλεονεκτήματα Ομάδα Διοίκησης Λειτουργικό μοντέλο Οικονομική στρατηγική Μακροπρόθεσμοι Στόχοι EXECUTIVE SUMMARY (Πέντε λεπτά για για να να πειστεί) 1. Ποιοι είμαστε και τι κάνουμε 2. Προϊόντα Υπηρεσίες..και γιατί οι πελάτες θα τα αγοράσουν 3. Αγορά μέγεθος και ρυθμός ανάπτυξης 4. Γατί τώρα? Τι είναι νέο ή διαφορετικό? 5. Άνθρωποι Ομάδα - Διοίκηση 6. Ιστορικά στοιχεία Επιτυχίες ως τώρα ή προβλεπόμενες επιτυχίες 3

ΕΡΩΤΗΣΕΙΣ Ποια είναι η δουλειά μας? Πού πάμε? Πώς θα φτάσουμε εκεί? Ποιος είναι ο τομέας μας? Τι μοναδικό προσφέρουμε? Ποια είναι η δεξιότητά μας και ο στόχος μας? ΕΠΙΧΕΙΡΗΜΑΤΙΚΑ ΓΝΩΡΙΣΜΑΤΑ ΓΙΑ ΕΠΙΤΥΧΙΑ Πάθος Ενθουσιασμός Άξιος Εμπιστοσύνης Δημιουργικότητα Εμμονή Υπευθυνότητα Ευελιξία Αυτοπεποίθηση Αισθητότητα Επικοινωνιακός Πωλητής Ταπεινόφρων Background Section 2 Where is the venture coming from? Overview of market, industry, niche, and competitive environment relevant to new venture Brief explanation and identification of customers, suppliers, complementors and competitors Introduction of key players within new venture Who s on board, and so what? Who else is needed and why? 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 12 4

Objective Section 3 What is the venture all about? Vision statement What does the venture see for itself? Mission statement What is the overarching philosophy of how it will get there? Marketing strategy and goals Share? Niche? Lead? Follow? Financial goals Growth? Margin? Returns? KEEP IT BRIEF, CONFIDENT, AND CREDIBLE 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 13 ΣΤΡΑΤΗΓΙΚΟΣ ΣΧΕΔΙΑΣΜΟΣ ΦΑΣΗ ΑΝΑΛΥΣΗΣ ΑΝΑΛΥΣΗ ΠΕΡΙΒΑΛΛΟΝΤΟΣ ΕΣΩΤΕΡΙΚΗ ΑΝΑΛΥΣΗ ΙΔΙΑΙΤΕΡΕΣ ΔΕΞΙΟΤΗΤΕΣ Ή ΑΝΤΑΓΩΝΙΣΤΙΚΕΣ ΑΔΥΝΑΜΙΕΣ ΦΑΣΗ ΔΡΑΣΗΣ ΟΡΙΣΜΟΣ ΣΤΟΧΩΝ ΣΤΡΑΤΗΓΙΚΗ ΘΕΣΗ ΣΤΟΧΟ- ΘΕΤΗΣΗ ΣΤΡΑΤΗΓΙΚΗ ΤΜΗΜΑΤΩΝ Market Analysis What is the venture s environment, and what will it do there? Comprehensive and in-depth examination Start with the big picture Porter s Five Forces Brandenburger & Nalebuff s Value Net Zero-in on salient issues SWOT Analysis IE or CPM Matrix Formulate a specific sales prospectus Strategy Qualify How are you going to get there? Forecast Quantify Where are you going to go? Section 4 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 15 5

Market Analysis, cont. Answer these questions: Section 4 Strategy Forecast Exactly where and from whom is the sales revenue coming from? How will it be captured? How much will it be? When will it come in? Monthly Quarterly Annually What will growth look like? KEEP IT CONSERVATIVE, PLAUSIBLE, AND FEASIBLE 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 16 Market Analysis, cont. Section 4 Summarize the Marketing Mix the 4 Ps Product What are you selling? Could be a service or an experience also Pricing How much are you charging? And how and when will you collect it? Place Where and how will you deliver? Promotion How will the market learn about you? 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 17 ΔΙΑΔΙΚΑΣΙΑ ΠΡΟΣΔΙΟΡΙΣΜΟΥ ΑΝΤΑΓΩΝΙΣΤΙΚΩΝ ΠΛΕΟΝΕΚΤΗΜΑΤΩΝ Ανάλυση Περιβάλλοντος Εσωτερική Ανάλυση Ευκαιρίες Πλεονεκτήματα & Αδυναμίες Σχετικές Ευκαιρίες Ανάπτυξης Ανταγωνιστική Ανάλυση Προσδιορισμός Κυρίων Πλεονεκτημάτων Ιδιαίτερες Δεξιότητες Στρατηγική Εστίαση 6

ΣΥΝΟΛΙΚΗ ΥΠΟΣΤΗΡΙΞΗ ΤΟΥ ΠΕΛΑΤΗ Σημαντικά Θέματα Αντιληφθείτε ότι ο πελάτης είναι πρώτος ( δείτε την ανάποδη πυραμίδα) ΠΕΛΑΤΕΣ ΥΠΑΛΛΗΛΟΙ ΔΙΕΥΘΥΝΤΗ(Ε)Σ ΙΔΙΟΚΤΗΤΗ(Ε)Σ Porter s Five Forces Section 4 Diagram 1985 M. Porter, presented in advance of permission 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 20 Brandenburger & Nalebuff s Value Net Section 4 Diagram 1996 A. Brandenburger & B. Nalebuff, presented in advance of permission 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 21 7

ΑΝΑΛΥΣΗ ΠΕΡΙΒΑΛΛΟΝΤΟΣ ΓΕΝΙΚΟ ΠΕΡΙΒΑΛΛΟΝ Τεχνικές Συνθήκες Πολιτικές Συνθήκες Κοινωνικές Συνθήκες Οικονομικές Συνθήκες ΠΕΡΙΒΑΛΛΟΝ ΑΓΟΡΑΣ Είδος Αγοράς Ρυθμός Ανάπτυξης Αγοράς Δυναμική Ανταγωνισμού ΠΕΡΙΒΑΛΛΟΝ ΕΡΓΑΣΙΑΣ Προμηθευτές Ανταγωνιστές Κόστος Κεφαλαίων Εργατικό Δυναμικό SWOT Matrix Diagram External Factors Internal Factors Opportunities (O) Threats (T) Strengths (S) SO Strategies ST Strategies Section 4 Weaknesses (W) WO Strategies WT Strategies Table 1997 F.R. David, adapted in advance of permission 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 23 Operational Configuration Section 5 What will the venture be made of? Asset requirements Physical plant and equipment Intellectual property rights / licenses Materials and supplies Human resources Entrepreneur(s) Management Production Sales Administration This section may also be called Business Operations Production Operations or just Operations 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 24 8

Operational Configuration, cont. Section 5 Make a complete shopping list of every economic input (factors of production) Land, labor, capital, technology, entrepreneur(s) Quantify each item based on the sales forecast developed in the preceding Market Analysis section Identify and assign all costs associated with the revenue goals How much of what will it take to do it? 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 25 Implementation Plan When and how will the venture be built? Prepare a step-by-step procedure for putting all the pieces in place Plot the timetable for each step of the implementation, based on the Operational Configuration developed in the preceding section Work Breakdown Structure (WBS) PERT charts GANTT charts Integrate the sales development, asset acquisitions, and staff assignments Time is money Timing is financial performance Section 6 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 26 ΔΙΑΧΕΙΡΙΣΗ ΧΡΗΜΑΤΟ- ΟΙΚΟΝΟΜΙΚΗΣ ΡΟΗΣ Το ακόλουθο σχήμα δείχνει την ροή των χρημάτων μέσα σε μια μικρή επιχείρηση Αύξηση Ταμείου Εισπρακτέοι Λογαριασμοί Ταμείο Μείωση Ταμείου Πληρωτέοι Λογαριασμοί Πώλήσεις Αποθήκη Παραγωγή 9

Financial Plan How will the venture s money move? Apply dollar figures to each part of the plan Market Analysis yields income figures Operational Configuration yields expense figures Implementation Plan yields cash flow analysis for startup While income/expense ratios determine profitability, cash flow is far more critical. The cash flow shortfall at startup indicates the investment requirements Additional investment injections may be needed at critical growth stages, as well 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 28 Financial Plan, cont. Draw graphs from the spreadsheets A picture is worth a thousand words Learn to think in terms of the curve dynamics Most startups fail because of cash flow deficiencies Cash flow bankruptcy can occur even if accrual accounting calculates a profit Which can create a tax liability even when the venture is really broke Cash is King 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 29 Financial Plan, cont. Financial forecasts should present: Monthly for 1 st year Quarterly for 2 nd and 3 rd years Annually for 4 th and 5 th years (and beyond, if warranted by particularly ambitious risks) A concluding table should offer investment milestones, in terms of goals stated early in the business plan Ample return on investment must be demonstrated by the financial forecast curves Equity investors look for multiple times earnings A low-risk investment doubles in value in 7-12 years Can your venture make it worth their while? 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 30 10

Financial Plan, cont. Risk Assessment Build a set of what-if scenarios to the spreadsheets Best case Mediocre case Disappointing case Nightmare case Conduct a sensitivity analysis What if I m off in my what-if scenarios? Identifies which factors are most critical Expected values based on probabilities 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 31 Financial Forecasting Cash flow is the most critical factor The area between the receipts and expense curves equals the cash investment requirement (see slides 20-24) Most startups fail because of cash shortfalls, even with accrued profitability Accurate cash forecasts and competent cash management are therefore imperative Cash is King, Cash is King, Cash is King!!! 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 32 Financial Forecasting Pro forma financial statements Type of The Perspective it Measures Statement Cash Flows Balance Sheet Income / P&L Dynamic (checkbook transactions and balance) Static (asset values vs. debt and equity claims) Performance (profitability, breakeven analysis & sensitivity analysis) 2003-2004 E.G. Carayannis & M.R. Stewart 33 33 11

Financial Forecasting (cont.) Cash flow is the most critical factor The area between the receipts and expense curves equals the cash investment requirement Cash breakeven doesn t occur until the positive area equals the initial deficit area The amount by which the positive area eventually exceeds the initial deficit is Return on Investment (ROI) Most startups fail because of cash shortfalls, even with accrued profitability Accurate cash forecasts and competent cash management are therefore imperative Sales growth follows an S-curve Cash receipts from sales typically follow the same curve, but delayed by time 2003-2004 E.G. Carayannis & M.R. Stewart 34 34 Basic Accounting Review Sales Expenses = Income This is the formula for the income statement Cash is king, but without sales, all a business has is expenses Assets Liabilities = Owners Equity This is the formula for the balance sheet What the business owns, minus what it owes, is what the owners own 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 35 Basic Accounting, cont. Learn to read financial statements The items on the balance sheet are listed in order of immediacy The left side is listed by liquidity Cash tops the left side as the most liquid asset Then money accounts, trade receivables, inventories, equipment, real estate, and intellectual property The right side is listed by priority order of claims against the business assets Trade payables are the first debts paid, then credit lines, notes, mortgages, and bonds Stockholders equity is a claim that only exists if all the liabilities are satisfied 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 36 12

Basic Financial Management Equity is the highest-risk claim against a venture s assets Highest risk means last in line after creditors Once invested, the asset value of the venture is a function of financial performance High risk seeks high reward Financial performance must be monitored and managed beginning with the business plan, through every investment and operational transaction 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 37 Qualifications & Commitments What do we know about the venture s key players, and what s their commitment? Résumés for all key personnel Entrepreneurs Managers Technical specialists Sales hotshots Commitment letters from critical players and stakeholders Investors (including entrepreneurs own ante) Lenders Prospective customers Suppliers Subcontractors Section 8 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 38 Summary A business plan is a carefully conceived formula for risk management Plan the work and work the plan SUMMARY But build in flexibility Keep it a living document You may need different versions of varying emphasis for different audiences It will need to be revised and refined as events unfold A business plan is a pro forma contract With yourself and with all your stakeholders A contract is a promise It is harder to keep a promise than to make one The only thing harder than achieving excellence is sustaining it 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 39 13

Budgeting New Venture Launch Monitoring actual costs against forecasts Requires accurate, current accounting data Permits standardized costing and variance analysis Variances point to management problems Internal control is best practice More than one person must be responsible for each area of cost monitoring Independent auditors 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 40 Budgeting, cont. New Venture Launch Actual financial performance needs to feed back to business plan The business plan financials establish the baseline budget The business plan is a living document, subject to revision and refinement The budget starts out based on imperfect information Things that are learned are also subject to change Financial management, like all management, is a fluid and dynamic arena 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 41 Business planning is Project Management New Venture Launch A Three-Dimensional Challenge Technical performance Quality standards Schedule performance Timeliness standards Financial performance Profitability standards 2002-2004 E.G. Carayannis & M.R. Stewart Ver. 3 Rev. 29-Feb-04 42 14

Business planning is Project Management A Three-Dimensional Challenge New Venture Launch Cheap and fast compromises quality Cheap and high-quality takes forever Fast and high-quality costs a fortune Prof. CARAYANNIS, ISTM 234 NEW VENTURES FINANCING, 9/07 Business planning is Project Management The Relationship of Cost, Schedule, and Quality New Venture Launch High Quality Cost 300 200 100 0 Days Weeks Months Low Quality Med Quality Prof. CARAYANNIS, ISTM 234 NEW VENTURES FINANCING, 9/07 New Venture Launch Business planning is Project Management A dollar of cost reduction is worth more than a dollar of sales growth Sales Fixed costs Variable costs (@ 50% of sales) Net income The Sales Whiz $101.00 $ 25.00 $ 50.50 $ 25.50 The Penny-Pincher $100.00 $ 24.00 $ 50.00 $ 26.00 Prof. CARAYANNIS, ISTM 234 NEW VENTURES FINANCING, 9/07 15