An overview of the Business Plan - Introduction To Business - ثاني ثانوي

8.2 An Overview of the Business Plan Link to digital lesson www.ien.edu.sa Learning Outcomes Once you have completed this lesson, you should be able to: 8.2.1 Explain the purpose and objectives of a business plan. 8.2.2 Understand how a business plan can be used as a communication and evaluation tool. 8.2.3 Determine funding available to entrepreneurs and how to pitch to investors. Key Terms Business Plan Business Model Venture Capital Pitch Focus on REAL LIFE When Mohammed mentioned an idea for a new business to a friend who's a business owner, his friend said, "You'll need to prepare a business plan." While the business idea sounded great, spending hours writing a formal document was not exactly Mohammed's idea of fun, and he wondered if it was absolutely necessary. After all, Mohammed knew an entrepreneur who started and successfully grew a company based on an idea developed on the back of a napkin over dinner. He could also think of several well-known and successful global businesses that were started without business plans. So, should Mohammed write a business plan or not? That is the question that this lesson will help you answer. LO 8.2.1 KEY ELEMENTS OF THE BUSINESS PLAN For many small business owners like Mohammed, the time comes when it is necessary to develop a business plan that effectively tells their story in order to gain partners who will help transform their vision into reality. The business plan also communicates the competitive advantage, which differentiates the proposed business from the rest of the companies in the market place. Traditionally, a business plan has been described as a document that outlines the basic concept underlying a business-specifically, what problem will be solved-and describes how the entrepreneur will execute the plan to solve the problem. The plan should lay out the basic idea for the venture and include descriptions of where the entrepreneur is now, where she or he wants to go, and how she or he intends to get there. A business plan can also be thought of as an entrepreneur's game plan. It gives shape to the dreams and hopes that have motivated the entrepreneur to take the start-up plunge. As discussed in Chapter 7, your personal aspirations and motivations deserve careful thought. If the business does not align with your personal goals, you are not likely to succeed, and you certainly will not enjoy the journey. Overall, writing a business plan is an opportunity to assess if a good idea is also a good investment opportunity. It does so by providing evidence that your business can sell enough products or services to make an attractive profit. 244 Chapter 8 | Starting a Small Business وزارة التعليم Ministry of Education 2024-1446 GE44.PATHWAYS.G02.ITB.SB.PP1.indb 244 08/05/2024 09:14

There is no one correct formula for preparing a business plan. Opportunities are so diverse in size as well as growth potential that no single plan will work in all situations. But at a minimum, every business plan should include the following three key elements: 1. A logical statement of a problem and its solution. 2. A significant amount of hard evidence. 3. Candor about the risks, gaps, and assumptions that might be proved wrong. Figure 8-4 highlights the key elements of a business plan. ELEMENTS OF A BUSINESS PLAN Description of the Business Industry and Competitor Analysis . the business idea ⚫ major products and services • ⚫ ownership structure • strengths/weaknesses long- and short-term goals • description of customers ⚫ location, number, and resources of customers • sales forecasts Operations and organization of the company Development Plan • • description of major operations • analysis of resources needed Marketing Plan . • human resource plans description of major marketing activities • description of resources needed • schedule of marketing activities Financial Plan ⚫ start-up costs • short- and long-term financial needs ⚫ sources of financing ⚫ budgets and financial statements Why are each of these elements important when planning a new business? If you are the only person working in your small business, is there really a need for a business plan? FIGURE 8-4 Elements of a Business Plan For most entrepreneurs, the issue is not whether to plan but when and how to engage in effective planning, given the situation. Many small business owners may not prepare a plan until they are required to do so. We will examine deciding when to plan in the next section. An entrepreneur must choose the form that the planning will take. Preparing a plan requires time and money, two resources that are always in short supply. The entrepreneur has two basic choices when it comes to writing a business plan: the short plan or the comprehensive plan. The short plan: A short plan is an abbreviated form of the traditional business plan that addresses only the most important issues in a firm's success, including the following: The problem that needs to be solved for customers . The business strategy that will be used to solve the value proposition • The business model (described in the next section) . • Measures used to gauge success Milestones to be met The tasks and responsibilities of the management team A short plan can also be used when trying to attract investors to the business. Although some investors will want to read a comprehensive business plan before deciding about ⚫⚫ the investment, others will want to see an abbreviated presentation to learn whether the business idea sparks their interest. وزارة التعليم 8.2 An Overview of the Business Plan | 245 Ministry of Education 2024-1446

The comprehensive plan: When entrepreneurs and investors speak of a business plan, they are usually referring to a comprehensive plan, a complete business plan that provides an in-depth analysis of the critical factors that will determine a firm's success or failure, along with the underlying assumptions. Such a plan is especially beneficial when you are facing significant change in the business or the external environment (such as changing demographics, new legislation, or developing industry trends). It can also be helpful in explaining a complex business situation to investors. As we discuss business plans, it is also useful to understand what a business model is. The term business model has become a popular phrase in business, especially among entrepreneurs and their investors. Simply stated, a business model explains in a systematic and clear way how a business will generate profits and cash flows. As such, it measures the anticipated financial outcomes of management's strategic decisions and activities that determine a company's profits and cash flows. An entrepreneur must continually be anticipating what can go wrong with the firm's business model and what can be done if it does. Once you have an idea of your business model, you can proceed to look at whether you should also be providing a business plan. CHECKPOINT What are the key elements of a business plan? LO 8.2.2 THE BUSINESS PLAN AS A TOOL Using a business plan as a communication and evaluation tool A business plan can be a helpful tool to use with two important groups: company insiders, who can use it for direction, and outsiders, who may help the company achieve its goals. Figure 8-5 provides an overview of those who might have an interest in a business plan for a proposed venture. Company insiders are the internal users of the plan: the entrepreneur, the new company's management, and its employees. The business plan provides a framework that helps the entrepreneur and the management team focus on important issues and activities for the new venture. And it helps the entrepreneur communicate his or her vision to current and prospective employees of the company. The business plan can also be helpful with outsiders. To make the company successful, the entrepreneur must convince outsiders—potential customers, suppliers, lenders, and investors—to partner with the company. Why should they do business with your start-up, rather than with an established company? They need evidence that you will be around in the future. Consider that a lender or other investor might demand to see a business plan before investing in your venture. Wouldn't you require the same before investing your personal savings or, even more important, your family's savings? pul 246 Chapter 8 | Starting a Small Business Ministry of Education 2024-1446

Insiders • Entrepeneur and management team • Employees Who else might benefit from a business plan? Outsiders Potential customers Suppliers Lenders ⚫ Investors Family and friends Private investors Venture capitalists FIGURE 8-5 Potential Users of a Business Plan Using a business plan as an assessment and evaluation tool An entrepreneur must find the right balance between planning and becoming operational. No matter how well your plan has been thought out, unexpected events will happen. One of the key attributes of a successful entrepreneurial team is adaptability, regardless of what the business plan says to do. The benefits of having a business plan can depend on the circumstances surrounding the start-up. For some start-ups, the environment is too turbulent for extensive planning to be beneficial. Entrepreneurs in new fields may find that there is too much uncertainty and too little good information to allow them to write a comprehensive plan. In this case, an entrepreneur's ability to adapt may be more important than a careful plan. ● Planning may pose a problem when the timing of the opportunity is a critical factor. Becoming operational as quickly as possible may have to take priority over in-depth planning. Do not, however, use timing as an easy excuse not to write a business plan! A business may be so constrained by a shortage of capital that planning is not an option. Planning may not make sense for some companies. وزارة التعليم Ministry of Education 2024-1446 8.2 An Overview of the Business Plan | 247

Clearly, there are times when writing a carefully documented business plan is not needed, especially if you are the only person working in the business. More often, however, entrepreneurs resist writing a business plan because they lack the discipline to do so. If you want to capture the full potential of an opportunity and make a difference in lives, planning is the rule, not the exception. But building an exceptional company requires thoughtful planning and then execution. Deciding what you want the business to be and to accomplish is vital and deserves considerable thought. Above all, plan with intention, which comes from having to justify your beliefs and assumptions about your start-up. FYI Bankers and other lenders want to see a written business plan before considering making a loan. Looking at the business. plan can help a potential lender determine if the owner really understands the business and is committed to its success. CHECKPOINT How is the business plan an effective tool for small businesses? Why would investors want to see a written business plan? LO 8.2.3 FINANCING A START-UP AND PITCHING TO INVESTORS A new business with a good product or service may run out of money before it can become profitable. Several years of operation are required before most new businesses earn a profit. Finding adequate financing is a key step in starting and running a new business. p248 Chapter 8 | Starting a Small Business Ministry of Education 2024-1446

Types of Financing Three types of financing must be considered: Start-up financing is the amount of money needed to open the business. It includes the cost of buildings, equipment, inventory (products or raw materials on hand), supplies, licenses, and the like. • Short-term financing is the money needed to pay for the current operating activities of a business. Short-term financing is obtained for a period of less than a year and often for one or two months. • Long-term financing is money needed for the main resources of a business (such as land, buildings, and equipment) that will last for many years. These resources usually require large amounts of money and will be paid over many years. Sources of Financing Most new businesses start on relatively little funds. Finding the needed money may be the most difficult part of starting a business. The money required to start and operate a new business usually comes from a mixture of owner-supplied and borrowed funds, each with its own benefits and drawbacks. Some of the main sources of finance available to businesses are illustrated in Figure 8-6 and outlined below: FIGURE 8-6 Venture capital Personal savings Crowdfunding Sources of Finance Available to Businesses Supplier credit Sources of Finance Angel investors Banks and loans Friends and family Can you think of other types of finance available to businesses? Personal savings: Many small businesses, particularly those established by a single individual, are started using personal savings. However, the source of owner-supplied money depends on the ownership structure. In a proprietorship, one person will supply the money. In most partnerships, each partner will be expected to contribute. A corporation is owned and financed by the shareholders. • Friends and family: A traditional source of funding for many small businesses is the owner's network of friends and family. When accepting money from your own personal connections and relations, it is important to ensure the terms are clear to both parties. For example, understanding whether the money is a gift or a loan, and if so, when it is expected to be repaid, and what will happen if the business fails. • Banks and loans: Borrowed funds are obtained through loans from banks and other financial institutions. Banks and other lenders may offer less favorable terms than friends and family. However, benefits include the banking infrastructure and support services, and potentially larger loan values for successful applicants. Crowdfunding: An increasingly popular choice of funding for new ventures is crowdfunding, in which the general public are invited to donate or invest in the business, in exchange for exclusive perks or early access to the products or services. Crowdfunding can be a great way to generate publicity and build a community of future customers. Equally, the company must ⚫show a commitment toward meeting the expectations of the public supporters. وزارة التعليم Ministry of Education 2024-1446 8.2 An Overview of the Business Plan | 249

• Angel investors: Traditionally, high-tech firms have been more likely to obtain funding from outside sources such as angel investors. Angel Investors are business people, often existing entrepreneurs, who have already been successful and are willing to make a cash injection into a fledgling business in exchange for a stake in the company. Oqal is a non-profit group established in 2011 as the first group of individual investors (Angel Investors) in the Kingdom of Saudi Arabia (https://oqal.org/). The Angel Investor Network (Sirb) provides another financial channel for SMEs (http://sirb.sa/). Venture capital: Venture capital is money provided by investors to finance new products and businesses that have a good chance of being very profitable. Today, a thriving Saudi venture capital market indicates the importance being placed on new businesses as good investment opportunities. The government established Saudi Venture Capital (SVC) with the aim of stimulating the financing of start-ups, through a SAR 2.8 billion investment in 2021. Regardless of sector, eligible new businesses could receive a contribution of up to 65% of the total fund via SVC. • Supplier credit. Often companies that sell equipment, materials, or inventory to a business will offer credit if the business does not have financial problems. While this can be a very useful option to have, a new business owner should be careful about accepting credit. The owner must take into account the cost of the credit and when payments are due. Other Financial Resources and Support There are many additional financing resources for Saudi entrepreneurs. Monsha'at (discussed in Chapter 7) provides a range of financing solutions for small businesses, including the venture investment initiative, the finance guarantee program (Kafala), and a funding awareness program. The Tamweel funding gate platform had facilitated loans of SAR 12.3 billion by Q1 2022, while the Indirect Lending Initiative had enable low-cost loans of SAR 2.5 billion (Monsha'at Quarterly Report Q1 2022). Many incubations provide funding opportunities. Pitching to Investors In addition to having a written business plan, an entrepreneur seeking capital from investors may be asked to give an oral presentation to the investors, or what is called a pitch. This is not the time to present the entire business plan but rather to spark the investors' interest in the business. Frequently, the entrepreneur is given 15 to 20 minutes to present, followed by about the same amount of time for questions and answers. For an entrepreneur to successfully secure investment, they must think like an investor. This means making the proposition attractive to those who will be giving up funds. Most entrepreneurs have difficulty putting their story together from an investor's perspective. They can speak elegantly about the product, the customer, and possibly the market. However, they lack the intuition and experience to present the opportunity in a way that lets the investor know if it's a good investment. What investors want to know is relatively straightforward, as is the order in which they want to see the topics in the pitch. The essential topics that need to be covered are the same for most businesses. Figure 8-7 highlights key slides or points that should be included in a presentation. P250 Chapter 8 | Starting a Small Business Ministry of Education 2024-1446

KEY SLIDES TO BE INCLUDED IN A PITCH PRESENTATION 1 Identify the problem to be solved. 2 Introduce your solution to the problem. 3 Discuss your beginning traction for getting sales. 4 Identify the target market. 5 Explain the costs of collecting information in your target market. 6 Communicate the value proposition relative to competitors. 7 Describe the basics of the revenue model. 8 Provide financial projections, along with the assumptions. 9 Sell the team. 10 Identify your funding needs, and explain the use of the funds. 11 Describe possible exit strategies-how the investors may be able to cash out. 12 End on a high note-remind investors why your product/service/team is so great. (Source: Caroline Cummings at Palo Alto Software) Is it better to include too much or too little information in a pitch to investors? FIGURE 8-7 Key Slides to be Included in a Pitch Presentation Increasingly, many new start-ups choose to present their introductory pitches in the form of a short video. With the costs of video production decreasing, this has become a relatively inexpensive option for many small businesses, with the benefit of being able to share a professional presentation via an email link. Moving beyond static presentation slides, there is a growing range of innovative ways to present information to investors, including interactive 3D models and immersive virtual reality demonstrations. Remember, the purpose of the pitch is not to close the deal with the investors. Instead, the objective is to get to the next stage of due diligence. The pitch is not the end; it is only the beginning. How can you use technology to enhance your pitch presentation? وزارة التعـا ist of Education CHECKPOINT How should you prepare a pitch to investors? 58 8 60720 8.2 An Overview of the Business Plan | 251

8.2 ASSESSMENT Key Concepts Determine the best answer. 1. Every business begins with a(n) a. customer b. profit c. idea d. invention 2. True or False. Most small business owners enjoy being part of a team. 3. True or False. A business plan does not have to be written because the business owner is well aware of the information in the plan. 4. Money needed for the important resources of a business (such as land, buildings, and equipment) that will last for many years is called a. start-up financing b. short-term financing c. long-term financing d. credit 5. Money provided by investors to finance new products and new businesses that have a good chance to be very profitable is known as a. shares b. private equity c. venture capital d. a small business loan 6. An oral or video presentation of the business idea to investors is known as a Make Academic Connections 7. Technology Locate an outline for a business plan on the Internet. Compare the sections of the plan you found with those in Figure 8-4. Develop a final outline using both resources. Write a two-sentence statement for each section of the outline describing why that section is important to a successful small business. 252 Chapter 8 | Starting a Small Business Ministry of Education 2024-1446

8. Math Majid and Reham have formed a partnership to open a traditional Arabic coffee shop in Riyadh. Majid invests SAR 46,000 and Reham invests SAR 62,000. They get a micro start-up loan for SAR 37,000. They have SAR 18,000 of credit from the coffee bean machine supplier that sold them some of their equipment. Calculate the total amount of start-up financing available to the partnership. Make a pie chart that shows the percentage of total financing that is provided from each source. How much of the financing is owner supplied and how much is borrowed? وزارة التعليم Ministry of Education 2024-1446 8.2 An Overview of the Business Plan | 253