Chapter 16 Developing a sustainable business plan Objectives 1. To define a sustainable business plan and demonstrate its value 2. To describe the benefits of a business plan 3. To set forth the viewpoints of those who read a business plan 4. To understand the mind-set of your fiveminute reader 5. To see a complete outline of an effective business plan Objectives 6. To present some helpful hints for writing an effective business plan 7. To highlight points to remember in the presentation of a business plan 8. To underline some of the contrarian viewpoints on the importance of a business plan But first ? What is a 'business plan'? And what could it be used for? A sustainable business plan Dramatic increase in the number of companies for which sustainability is a 'key driver of business growth and innovation'. A fundable business plan must cover: - - - - greenhouse gases energy use clean power other emissions-reducing strategies. A sustainable business plan Industrial systems (e.g. a business, an ecoregion or the economy) are not separate from the biosphere. An entrepreneurial company is a particular case of an ecosystem. A business has both infrastructural capital and natural capital. A sustainable business plan The business plan The major tool for determining the essential operation of a venture The primary document for managing the venture and raising funds for it The business plan A written document that describes: - current status - expected needs - projected results of the new business. And includes: - - - - - - - sustainability marketing, research and development manufacturing management critical risks financing milestones. The business plan Gives both the potential funder and the entrepreneurial team a clear picture of: What the venture is Where it is projected to go How it will get there The business plan Can also be called: - - - - A venture plan A loan proposal A business case An investment prospectus The business plan The document required by any financial source - giving the entrepreneur entrance into the investment process. Getting started Set a 'north star goal' that: - - - - - - - - is optimistic and aspirational can be achieved in a reasonable timeframe can be acted on by new employees connects to the core of the business drives excitement and passion serves a higher purpose than business profitability solves a great human challenge leverages your organisation's strengths. Tips for creating a winning business plan Get into the mind-set of the investor who generally only spends five minutes reading your business plan. Imagine an angel investor or a bank manager with a stack of plans on his or her desk. Keep the plan respectably short. Put effort into the two-page executive summary. Create an air of excitement in the plan. Tips for creating a winning business plan Don't exaggerate. Identify your target market. Highlight critical-risks and show problems and solutions. Show how an effective team already works well together. Don't over-shoot. Tips for creating a winning business plan Package your plan well with a logical arrangement and overall neatness. Reasonably support your projected share of the market. Identify your competitive advantage. Be sure the plan has a favourable cost structure. Keep the plan in the third person. Structure ? What content might you expect to see included in a business plan? How to structure a business plan How to structure a business plan How to structure a business plan Business plan segments Business plan segments Business plan segments Business plan segments Updating the business plan Update in the event: - - - - - - of financial changes of additional financing of changes in the market of launch of a new product or service of new management team to reflect the new reality. A practical example See Appendix 1 for an example business plan - 'Red River Optical: Affordable reading glasses for Vietnam' The pitch ? Now it is written, how can you (verbally) present your plan to an audience? The pitch Presenting the plan to stakeholders - especially funding providers - Either individually or in groups Also known as 'the elevator pitch' Be organised, well-prepared, interesting and flexible Preparing the pitch Know the outline thoroughly Use keywords in the outline that help recall examples, visual aids or other details Rehearse the presentation Be familiar with any equipment (use your own laptop) The day before, practise it in full Presenting the pitch Focus on the consumer pain Demonstrate a reachable market Explain the business model Tout the management team Explain your metrics used to calculate revenue projections Motivate the audience Answer: 'Why you?' and 'why now?' What to expect The potential funder may not listen, and may only glance at the plan. They are more likely to criticise and question than to praise the plan. Be prepared to handle questions. Key concepts ? (close your books) 1. What is a business plan and what does it describe? 2. What are the main segments in a business plan? Key concepts A business plan is a written document that describes: - current status - expected needs - projected results of the new business. Key concepts The business plan outline: I. II. III. IV. V. VI. Executive summary Business description Sustainability Marketing Operations Sustainable development measures of performance VII. Management VIII. Financial IX. Critical risks X. Harvest strategy XI. Milestone schedule XII. Appendix and/or bibliography Chapter 15 Measuring performance for entrepreneurial ventures Objectives 1. To distinguish between the two kinds of performance measurement and their importance/relevance to entrepreneurs 2. To explain the principal financial statements needed for any entrepreneurial venture - the balance sheet, income statement and cash-flow statement 3. To outline the process of preparing an operating budget 4. To discuss the nature of cash flow and to explain how to draw up such a document 5. To explain how capital budgeting can be used in the decision-making process Objectives 6. To illustrate how to use break-even analysis 7. To describe ratio analysis and illustrate the use of some of the important measures and their meanings 8. To understand the importance of triple bottom line accounting 9. To appreciate the diversity of environmental accounting But first ? How can the success of an entrepreneurial venture be measured? Dimensions of performance measurement Entrepreneurs operate in an environment characterised by strong competitors and decreasing resources. Five kinds of resources Tangible resources - Financial - Physical Intangible resources - Organisational - Relational - Human This chapter is about tangible resources (including considerations of the environment) Measuring financial performance Financial information quantifies: - - - - marketing distribution manufacturing management. It is built on a foundation of assumptions. Common terms The key financial statements The financial statements are the 'books of record' of an organisation. The basic financial statements are: - balance sheet - income statement - cash-flow statement. Balance sheet Reports the financial position at a specific time Two parts: - - Financial resources (assets) owned by the firm Claims against the financial resources (current and long-term liabilities and owners' equity) The balance sheet (pt 1) THE FIRST HALF OF TABLE 15.2 The balance sheet (pt 2) Important terms Current assets - - - - Cash Accounts receivable Inventory Prepaid expenses Fixed assets - Land and building (value) - Depreciation Current liabilities - - - - Accounts payable Notes payable Taxes payable Bank loan (payable and long-term) Contributed capital - Common and preferred shares Retained earnings The balance sheet always balances The business calls a supplier for delivery of $11 000 of materials used in manufacturing. The materials arrive and the business takes possession. The bill is to be paid within 30 days. Assets = Liabilities + Shareholders' Equity The balance sheet always balances On the balance sheet - Inventory goes up by $11 000 - Accounts payable rise by $11 000 When the bill is paid - The business issues a cheque for $11 000 - Cash declines by this amount - Accounts payable decreases by $11 000 Assets = Liabilities + Shareholders' Equity The balance sheet ? What can the balance sheet tell you about a business? The income statement Shows change in the firm's financial position over a specified period - Shows whether sales revenues were greater than or less than expenses Also known as the 'profit and loss statement' The income statement Often examined more frequently than the balance sheet Read together with the balance sheet Primary categories: - Revenues - Expenses - Net income The income statement Important terms (Gross or sales) revenue Cost of goods sold - Inventory - Goods available for sale - Gross margin Operating expenses - Selling expenses - Administrative expenses Financial expenses - Income - Estimated income taxes The balance sheet ? What can the income statement tell you about a business? The cash-flow statement Provides information about cash receipts and cash payments during a specific period Used because accrual accounting records 'obligations' rather than 'transactions' Includes: - Operating activities - Investing activities - Financing activities The cash-flow statement The cash-flow statement ? What are some things a firm can do to maintain a positive cash-flow? (Some suggestions are provided in Entrepreneurship in Practice, p. 532-3) Types of financial budget Operating budget Sales forecasts - Project future sales from historical sales Expense (purchase) forecasts - Project purchases (and desired beginning and ending inventories) Operating expenses - Fixed costs - Variable costs - Mixed costs Sales forecasts Two techniques: - Simple linear regression - assuming a linear relationship between specific elements, such as product sales and advertising expenditures - Trend line analysis - estimating that current sales will increase by a certain percentage over the prior period's sales Cash-flow budget Often prepared with the assistance of an accountant An overview of the cash inflows and outflows during a period Management can make financing arrangements by pinpointing cash problems in advance Pro forma statements Projections of future financial statements Usually a pro forma income statement is prepared first and then a pro forma balance sheet Capital budget Used to estimate future amounts and timing of cash flows from a capital investment Helps answer the question: Which of several investment projects should be selected? Methods of capital budgeting Payback method - How long to 'pay back' the original investment Net present value (NPV) - Determine future value in present terms (a dollar today is worth more than a dollar in the future) Internal rate of return (IRR) - Like NPV, but future cash flows discounted to make the net present value equal to zero Break-even analysis Used to price products and services competitively and earn a fair profit Find out how many units must be sold to 'break even' at a particular selling price Contribution margin approach: - Percentage of each sale that remains after subtracting variable costs Financial ratio analysis Financial statements report on a firm's position at a point in time and on its operations over a past period. However, the real value is in helping predict the firm's earnings and dividends. Financial ratio analysis Ratios are generally considered to be for owners, managers or creditors. Vertical analysis - Look 'up and down' a single statement to see strengths and weaknesses Horizontal analysis - Look at financial statements and ratios over time Examples of ratios for owners Performance tools for sustainable entrepreneurs Life cycle assessment (LCA) - Track and evaluate costs from initial idea to the decline and eventual conclusion of a product's life Design for the environment (DFE) - Designing products so 'wastes' are 'designed out' Factor X - Factor 4 is doubling the output while halving the impact; quadrupling the output at the same impact; or producing the same amount for 25% impact Performance tools for sustainable entrepreneurs Environmental management system (EMS), ISO 14000 and clean production - Tools to improve environmental performance and provide a systematic way of managing environmental affairs through continuous improvement Environmental impact assessment (EIS) - Assessment of the possible positive and negative impacts of a proposed project on the natural environment Performance tools for sustainable entrepreneurs Material flow analysis (MFA) - To produce a better understanding of the flow of materials through an industry and connected ecosystems; to calculate indicators; and to develop strategies to improve the material flow systems MET (materials, energy and toxicity) Matrix - A matrix used to present the analysis of various environmental impacts of a product over its life cycle Triple bottom line John Elkington, 1994 - for sustainable development, examines: Triple bottom line ? We have examined financial (profit) measures. What could you measure to determine a firm's performance in terms of 'people' and 'planet'? Triple bottom line Key concepts ? (close your books) 1. What are the three basic financial statements? 2. What kind of 'picture' of performance does each statement provide? 3. How can organisations use the concept of triple bottom line to improve their sustainability? Key concepts Basic financial statements: - Balance sheet - Reports the financial position at a specific time - Income statement - Shows change in the firm's financial position over a specified period - Cash-flow statement - Provides information about cash receipts and cash payments during a specific period Key concepts Triple bottom line: - People (social) - Planet (environment) - Profits (economic)