Entrepreneurship Workbook (2 Ed) - Legge

Web support material to accompany Entrepreneurship: Context, Vision and Planning
© John Legge & Kevin Hindle 2004, published by Palgrave Macmillan.
Entrepreneurship: Context, vision and planning
Contents
1 Using this workbook 1
2 The product and its market 3
3 Intellectual property 26
4 SOPA 32
5 The financial feasibility model 42
6 Spreadsheet tips 54
7 The management team 62
8 Writing the plan 68
9 Presenting the plan 75
iii
1
Using this workbook
This workbook is intended to guide both entrepreneurship students and people planning
their first entrepreneurial venture towards the completion of their entrepreneurial business
plan. For a student the result may be their major class project, while the novice
entrepreneur will be guided to the completion of an advanced feasibility study and a
comprehensive accountant’s brief. If the plan is to be used within a corporation, or as a
memorandum of understanding between joint venturers with no outside equity, little
further work will be needed. If the plan is to be used as the basis of a prospectus, or as the
basis of an approach to unrelated professional investors, a full set of pro-forma accounts will
have to be prepared by a properly qualified accountant.
Planning is not the prerogative of accountants, but money is: the entrepreneurial
business plan is intended to bring the entrepreneur and a sufficient sum of money together
to start an enterprise. Entrepreneurs need not be flamboyant, but they must have
imagination and the ability to look beyond the details while good accountants never overlook
details and can still be good accountants without ever being imaginative; creativity in an
accountant is never an unmixed blessing. An entrepreneurial venture must blend these two
opposites, and one of the rules to successful mixing is to avoid ‘turf wars’. This workbook
assumes that the planner is not a qualified accountant and the financial planning described
stops short of the point where a qualified accountant should be brought in to develop and
manage the accounts.
Chapters 2 to 6 of the workbook are intended to guide the student or entrepreneur in
the collection of essential planning data and in the completion, or at least the initiation, of
a number of essential preliminary actions. Chapters 7 and 8 discuss the writing and
presentation of an entrepreneurial business plan. The workbook has been written as a
companion to Entrepreneurship: How Innovators Create the Future and users of the
workbook who have not read Entrepreneurship will find themselves being told to do certain
things with very little explanation as to why.
Entrepreneurial business planning

Every entrepreneurial business plan shares a common emphasis on economic growth: the
entrepreneur plans to create a venture, either involving a new organisation or a new
initiative from within an established one, which will, in the first instance, represent the
most productive and socially valuable use of the resources needed by the venture, and in the
second instance create new resources that can support higher levels of consumption and
investment in the future.
The entrepreneurial business plan serves two main purposes:
Ë it shows that a proposed initiative is commercially feasible
Ë it is used to enlist the support of various people who currently control the resources
that the new enterprise will need.
1
A plan that succeeds in enlisting the support of the necessary resource controllers can then
be used as a basis for establishing the staffing and management structures at the launch
of the new enterprise, setting up an initial Chart of Accounts for the financial control of the
enterprise, and establishing initial targets for internal costs and external revenue gener-
ation. As the new enterprise develops, problems will be encountered and opportunities dis-
covered that are almost certain to lead the enterprise in directions and to achievements that
have little if any relationship to those described in the original business plan.
This tendency of the real world to rewrite plans does not reduce the value of the entre-
preneurial business planning process: without the plan the resources the enterprise needed
could not have been put under its control and the enterprise would not have got started at
all. Planners who forget that they are describing a possible outcome, which is one of many
possible outcomes, may be surprised by reality if their venture ever gets started; more often,
their excessive confidence in their ability to control the future will so diminish the conviction
of their plan that the enterprise will never be more than a paper one.
2
2
The product and its market
The tables on the succeeding pages allow the users of this workbook to capture some of the
data needed to quantify the market opportunity that they are facing.
An essential step in establishing the feasibility of a concept and then in proceeding to
develop a plan to exploit it is to estimate the size of the potential market, both in numbers
and in value. The immediate outcome of this exercise will be an estimate of the available
annual gross margin (AAGM), the absolute maximum annual yield potential of the market.
This sets a long term limit to the size of a planned enterprise, and in the short term sets a
limit on the amount a rational investor or entrepreneur should be willing to spend in
pursuing the opportunity.
If the AAGM is sufficient to justify the necessary investment, the entrepreneur must
prepare an entrepreneurial business plan, and one of the first steps in the preparation of
such a plan is the preparation of phased sales and revenue forecasts. The marketing data
captured while completing this part of the workbook is fundamental to the preparation of
such forecasts.
Product Details
Table 2.1 (see page 5) will look far too small if you are a committed innovator: the essence
of your new product can’t be captured on a single page! This page is designed to let you
capture the what, how and why of new product marketing: what are our customers going to
receive; how are they going to receive it, and why will they want it.
Basic product description

Getting the basic product description into a box the size that we provide here will seem
almost impossible. You must make the effort: although the ultimate entrepreneurial
business plan will have rather more description, and the full product documentation may
run into books rather than pages, there must be a concise way of describing the product that
captures its most important unique attributes. If you can’t find a concise way of at least
introducing the product it will prove impossible to sell it in the real world: people just won’t
sit still for an hour or so waiting to find out what it is that they are listening to.
Basic method of distribution

Just having a product that people want generates no sales: there must be a practical way
for them to obtain it. Distribution covers both the way an order will be placed by the final
customer or user and the way in which the actual product will be delivered. If the product
is a packaged good to be sold through supermarkets then the acts of ordering and delivery
are combined into the action of picking the goods off the shelf and putting them into a
3
trolley. By contrast a sophisticated industrial service might be sold in one place by one
group of people and delivered in another by a completely different group.
Frequencies
We suggest that you put some effort into deciding how often the new product will be used
and how often it will be purchased. This information will affect many of your subsequent
planning and operating decisions. Products that are purchased regularly can be marketed
in different ways from products that are purchased unpredictably; similarly, the expected
income variance and therefore the appropriate investment hurdle rates are affected by the
frequency and regularity of purchase.
The frequency of use can be used to develop an estimate of the demand for consumables
and associated services. There are many products, including the famous example of the
Gillette Safety Razor, where the initial sale of the product cannot sustain a business case
but the consumable items and related services can.
Value to user
The value to the user is close to the price at which a typical user would be indifferent
between owning this product (or any reasonably close substitute) and doing without. Taken
with some of the other data collected in subsequent tables, this sets an absolute limit on the
price that can be charged and the potential revenue that the new enterprise can earn.
Cost of acquisition and ownership

Nothing is entirely costless to own, but often the specific ownership costs are slight enough
to be ignored. Other products can involve their owners in considerable ongoing expense, in
the form of taxes, licence fees, upgrade charges, maintenance contracts, site preparation,
essential training and other costs associated with putting the new product to use. It is naive
to think that buyers are unaware of these costs, and even if they were, it could well be an
offence under the Trade Practices Act in Australia and similar laws in other jurisdictions
to take advantage of them.
The costs of purchase and ownership reduce the limit price that a supplier can charge.
4
Table 2.1 Product details
Basic product
description
Basic method of
distribution
Frequency Of use Of purchase

G Regular G Regular Expected
G Stochastic G Stochastic annual
purchases
G Often/month G Often/month per user
G Often/year G Often/year
G Annually G Annually
.......
G . . . ./. . . . G . . . ./. . . .
Significance G Consumer product G Intermediate product
G Sustains life G Sustains production
G Sustains prestige G Enhances throughput
G Enhances prestige G Enhances product
G Preserves property value
G Enhances property G Sustains asset value
G Preserves quality of G Enhances asset value
life G Preserves reputation
G Enhances quality of G Enhances reputation
life
G Other . . . . . . . . . . . . . .
G Other . . . . . . . . . . . . .
Estimate of value
(not price) to user
Estimate of costs of
acquisition and
ownership (other
than price)
5
Consumables
Many products need auxiliary or ancillary products if the user is to gain the full benefits of
ownership. Motor cars need petrol and oil, safety razors need blades, photocopiers need
blank paper. Heavy industrial equipment may need spare parts. Often, particularly for a
new product line, the supply of these products can be a useful source of profit in their own
right as well as a source of steady cash flow: economic cycles will affect the readiness of
buyers to make large purchases, but they won’t, in general, change their readiness to keep
their existing equipment operating. Tables 2.2 and 2.4 are provided to capture the
anticipated revenue for the sale of the consumable supplies required by a durable product.
The cash flow from consumables and spares is not absolutely guaranteed, particularly
for successful products: competitors are likely to be attracted to any substantial after-
market and there may be no legal way to stop them entering it.
General nature of consumables

A few words in this section of the workbook should be sufficient to summarise the
consumables; a full description can be saved for the written plan or even a supporting
document. Don’t waste space and effort listing consumables that you have no intention of
supplying because they are already widely available from many competing suppliers; do give
some thought to essential consumables that no one else currently supplies.
Basic method of distribution

Consumables can’t, in general, be made to order: there must be stocks, a physical
distribution system, a way of placing orders and settling accounts. Spare parts may be
ordered from a price list or supplied under an inclusive warranty or ongoing maintenance
agreement. There will be associated costs and revenue opportunities.
Frequencies
Frequency data should be estimated for those consumables that the venture intends to
supply. This information will be needed to establish both the size and the stability of the
associated cash flows.
6
Table 2.2 Ancillary consumables
General nature of
associated consumable
products
Basic method of
distribution
Frequency Of use Of purchase Expected

G Regular G Regular annual
G Stochastic G Stochastic purchases
per user
G Often/month G Often/month
.......
G . . . ./. . . . G . . . ./. . . .
Table 2.3 Ancillary services

General nature of
associated services
Basic method of
distribution
Frequency Of use Of purchase Expected annual

G Regular G Regular purchases
G Stochastic G Stochastic per user
G Annually G Annually .......
G . . . ./. . . . G . . . ./. . . .
7
Services
Services provide a further way of generating stable cash flows after the sale of a product to
a user. Some services, such as emergency repairs and routine maintenance, preserve the
buyer’s investment. Others, such as training and the fitting of enhancements, increase the
value of the investment, improving the supplier’s reputation and making repurchases and
recommendations more likely. Tables 2.3 and 2.5 are provided to capture service data.
Nature of services
Services can be value-preserving, as with maintenance and repair, or value-adding, such as
training and upgrading. It may be difficult to record all the service options on one sheet: we
provide two in this workbook but more may be needed. In a full operating plan for a
business, every separately priced service should be analysed, but during the early stages of
preparing an entrepreneurial business plan similar services can be grouped to keep the plan
concise.
Service delivery
Users generally place a high value on services that are delivered at their premises by highly
trained staff. In general, moving away from this level reduces the perceived value of the
service, but it also reduces the cost of delivery: part of the art of service design is in picking
the level of service where the gap between the perceived value and the actual cost is highest.
The contractual arrangements can be summarised here: some services will be charged
for as they are delivered, others will be provided under warranty at no cost, while others
may be offered as part of an extended warranty or maintenance service where the user pays
a standard charge irrespective of the amount of service actually delivered. Extended
warranties can be extremely profitable — if the incidence and cost of actual service delivery
has been estimated correctly.
Frequency information
Knowing the frequency and regularity of service opportunities will enable the planner to
estimate the quantity and the quality of the cash flow that each service element can
contribute. It will also be important in estimating the costs of providing warranty and
extended warranty service.
8
Table 2.4 Ancillary consumables (second box)
General nature of
associated consumable
products
Basic method of
distribution

per user
.......
G . . . ./. . . . G . . . ./. . . .
Table 2.5 Ancillary services (second box)

General nature of
associated services
Basic method of
distribution

per user
.......
G . . . ./. . . . G . . . ./. . . .
9
Competition and value
The modern business planner needs to take a very broad view of the possible competition;
competitive threats are not limited to physically similar products. Table 2.6 is provided to
help the planner consider:
Ë What are the benefits users will expect from purchasing and using the new product?
Ë What alternative ways are there for users to obtain similar benefits?
The alternatives are remarkably broad for industrial products, and broader still for
consumer ones: consumers may not set out their needs in a product-oriented fashion at all.
A parent with children requiring entertainment can buy them a toy, or take them to the
movies, or the zoo, or to a fast food restaurant, or the museum, or a park, or lock the study
door and ignore the sounds of breaking glass from the kitchen.
Alternatives
We have provided four lines on Table 2.6 to list probable competitors for the new product.
Planners should take a broad view of what may constitute competition: limiting their views
to physically similar products may miss the point. Competition is anything that offers users
an alternative way of obtaining a similar benefit.
The ‘price’ column in this section of the table should be based on this value equivalence,
that is, how much the user would have to pay to receive the competing benefit, not simply
a price list entry. The right hand column should get the market share of the nominated
competitor for consumer products and the industry rank of the competitor for industrial
ones.
Superiority
For each of the four possible competitors we have provided space to list two reasons why the
new product should, at least some of the time, be preferred. Technical arguments should be
avoided: these are ‘sales messages’, not formal arguments.
Value premium
If the new product is better than all the probable alternatives, this should be worth money
to its users. There may be no practical way of the supplier capturing this value premium in
cash, particularly if part of it is indirect or inferred, but it does represent a buying incentive.
Alternatively, if the planner cannot identify a value premium at all, there have to be
questions about the likely market take-up of the new product.
Acceptable price
There is room in this box to set out the price of the primary product and some of its major
after-market and service auxiliaries. The ‘natural’ point for this price will be the average
level of the prices charged by the product’s established competitors, when there are close
competitors: any premium will require a strong justification and powerful sales arguments,
while a discount will cast doubt on the product’s quality.
10
Table 2.6 Competition and value
Alternatives Price Share
1 ......................... ..... .....
2 ......................... ..... .....
3 ......................... ..... .....
4 ......................... ..... .....
Main points of 1
superiority of (a) ...................... ..............................
new product
(b) ...................................................
2
(a) ...................................................
(b) ...................................................
3
(a) ...................................................
(b) ...................................................
4
(a) ...................................................
(b) ...................................................
Estimated
value premium
for new product
Estimate of
maximum
sustainable
price
For a genuinely novel product with no close competitors, the price, for planning
purposes, can be set at about half way between the perceived value and the variable cost.
Consumer demographics
Table 2.7 is intended to be used for products marketed to final consumers as distinct from
businesses. Business-to-business product concepts will generally use Table 2.8, following.
The consumer demographics study attempts to identify every person who could reasonably
be considered a potential customer for the new product: an absolute limit on the size and
value of the market. Most products, even very successful ones, fail to reach more than a
fraction of their potential customers before the product is replaced or withdrawn.
11
Geographic range
The starting point is a simple population count for the regions in which the product is going
to be marketed, either at launch or within one or two years of the initial launch. Many
products have wider potential than this, but so many things are likely to have changed in
two years that a new business and marketing plan should be used for these stages of market
expansion. Often the product concept will have a wide market potential, but sufficient
details will have to be changed for linguistic, cultural or regulatory reasons to make the
launch product unsuitable for the expanded market.
Sex
Some classes of product are much more likely to be sold to persons of one sex than to
persons of the other. Failure to take this into account, when appropriate, leads to an
erroneous doubling of the potential user population.
Household
Some products will be bought for household use, and so their ultimate success will be
limited by the number of households in the targeted region, while others will be bought for
personal use. Even with modern small families, getting the basis of purchasing wrong can
throw the market size estimate out by a factor of three or so.
Parenting
Some products, such as creche services, only appeal to people with children. Where these
factors are significant, failure to take them into account leads to errors in estimating the
customer population and in conducting promotional campaigns.
Age and income ranges

The appeal of a new product may be highest for people in a particular age and/or income
range. Counting or targeting people outside this range can lead to expensive mistakes.
Other distinguishing features

Many products have their main appeal to people with specific interests, disabilities, singular
physical characteristics or particular occupations. This part of Table 2.7 can be used to
record this, and then to estimate the proportion of the populations that meets the particular
requirement for interest in the product. These conditions may be additive or multiplicative:
if the appeal is to tall bricklayers, short bricklayers and tall people in other trades are
excluded from the market, while if it is to tall people and to bricklayers then tall bricklayers
may, if care is not taken, be counted twice.
12
Table 2.7 Consumer demographics
Criterion % Pop. b/f
Population in
geographic range
Sex G Male G Female G N/A

Household G Household G Personal
Parenting G N/A
G No. of ch. G Ages . . . . to . . . .
Age
G From . . . . . to . . . . . . G N/A
Income (’000s pa)
G From . . . . . to . . . . . . G N/A
Other (1)
Other (2)
Other (3)
Other (4)
Cohort size
Entry rate
Exit rate
Sources (1)
Sources (2)
Sources (3)
13
For example:
Tall people 30%
Bricklayers 20%
minus tall bricklayers –6%
Total market 44%
Cohort size, entry and exit rates

The major result of the consumer demographic analysis will be an estimate of the number
of people, living within the targeted regions, who meet the minimum criteria for being
potential customers for the product.
The entry and exit rates allow the planner to make future year estimates of the number
of new customers entering the market and the number of established ones leaving. This, in
turn, gives the planner the ability to forecast the number of ‘virgin’ customers in the market
at a future date, and therefore the likely response to sales and advertising campaigns, as
well as estimating the rate of loss of customers and their associated revenue streams and
beneficial influence.
For the Australian population as a whole, the exit rate is about 0.75 per cent (deaths
and residents departing permanently) while the entry rate is about 2 per cent (births and
inbound migration). The rate1 of passage through most markets will be substantially more
rapid than this. For many markets entry occurs at a certain age or income level; within this
level, population movements may also cause entry and exit.
Information sources
It is an excellent idea to document the sources of information relied on, and not just for
students trying to impress their lecturer. When a plan is being reviewed by a potential
investor, the sources quoted may be referred to as a check on the planner’s work; also, other
sources may be used to corroborate the planner’s forecasts.
1
These rates are determined by dividing the numbers entering or leaving by the
number left in the market. When a segment is defined by age range, the narrower the range
the faster the turnover of the members of it. The population of the ‘age 21’ cohort changes
by 100 per cent every year.
14
Business demographics
A consumer demographic study will be about counting people: while different people might
buy at different frequencies, the unit of sale will be about the same. With business sales this
is not the case. Australian businesses vary from part time hobbies turning over $10 000 or
less to firms like BHP and Telstra, with annual sales measured in the billions. The task of
the planner is not, therefore, to count firms but to count sales opportunities. Table 2.8 is
provided to assist the planner in this task.
Customer firm size

A few products will appeal equally to firms of every size, but most won’t. Even those
products that do have near universal appeal will generally have to be sold differently when
offered to firms of different sizes. These differences may be, but do not have to be, so
significant as to require a separate business plan. Planners should try to avoid glossing over
any problems in this area.
Industry type
We have provided a list of industry types, not an exhaustive one, where the business
operations are sufficiently different to make it likely that they will respond to a new product
differently.
Professional statisticians and econometricians will want to use ISIC (International
Standard Industry Classification) codes to carry out such a study, but most readers of
business plans have not memorised the significance of the many codes. A planner may have
to use the codes in order to make sense of census data, but such details may not be needed
in the finished plan.
Scaling metric
In general terms the number of units of a product a firm is likely to buy will depend on some
characteristic other than its simple turnover. The demand for payroll services will, for
example, reflect the number of employees while the number of cash registers required will
tend to reflect the number of transactions rather than their total value: Woolworths have
far more people collecting money than BHP does.
Geographic segments
Very few firms can afford the expense of launching a new product ‘everywhere’. Even those
that do launch their new products in many countries at once often find that their product
must be customised to some extent for different markets for linguistic, regulatory or other
reasons, and so multiple launch and marketing plans are required.
When a segment is not going to be addressed for two or more years from the date of the
product launch, it is better to leave it out and make it the subject of a separate plan to be
produced nearer to the time when it will be implemented. Markets and technology simply
change too fast for assumptions made two years in advance to be a reliable basis for
planning and action.
15
Two years after the first launch of a new product a great deal more will be known about
the way users respond to it than could possibly be known on the day of the initial launch.
If this response suggests that the product should be offered to new market segments, it will
be possible to produce a far more accurately targeted business plan closer to the time of the
extended launch. If the original plan went into too much detail about the extended markets,
and the initial launch was successful, an enterprise may be tempted to follow the initial
plan too uncritically.
Aggregated financial data

Bringing together some financial numbers about the targeted segments gives the reviewer
a feel for the market: profitable, rapidly growing industries are a much softer sales target
than marginally profitable and declining ones. The aggregates also serve as a broad check
on the sales and marketing forecasts. For the plan to succeed, some part of the target
industry’s added value must be diverted to the new enterprise. When this fraction starts to
get significant, reviewers are going to wonder whether firms in the target industry have the
capacity, much less the wish, to pay for the new product.
Information sources
It is an excellent idea to document the sources of information relied on, and not just for
students trying to impress their lecturer. When a plan is being reviewed by a potential
investor, the sources quoted may be referred to as a check on the planner’s work; also, other
sources may be used to corroborate the planner’s forecasts.
16
Table 2.8 Business demographics
Firm size G Small G Medium G Large
Industry type G Retail G Mfg G Mining
G W/H and dist G Transport G Agriculture
G Education G Public G Private
G Health G Public G Private
G Com. services G Cons. services G Bus. services
G Public admin.
G Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scaling metric G Revenue G Profit G Value added
G Employees G Transactions
G Assets
G Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Sales potential
segments
1 ...................... ..........
2 ...................... ..........
3 ...................... ..........
4 ...................... ..........
Financial data Gross revenue Total VA Total profit

(all segments in
plan)
Revenue growth Profit growth
% pa % pa
Entry rate Exit rate
% pa % pa
Information sources
(1)
(2)
(3)
17
Uplift calculation
Planners working within corporations should ask their controller’s department what uplift
to use and skip Table 2.9. We have put it here for new entrepreneurs as a reminder that
wages are only part of the cost of employing someone.
Leave and holidays

In less well regulated parts of the world, and possibly Australia too, unscrupulous employers
can avoid some or all of their paid leave obligations. People starting new enterprises should
be very cautious about such sharp employment practices, even when they are tempted to use
them: a high level of employee commitment is often critical to the success of the new
enterprise, and employees bearing grudges seldom make such commitments. Many slave
owners in America’s ante-bellum south believed that their ‘servants’ were loyal and adoring,
until they saw them rushing to cheer the Union’s General Sherman and help Sherman’s
soldiers pillage and fire the slave-owners’ mansions.
Incentive provision
Australian workers have a long tradition of expecting ‘the rate for the job’ and a party at
Christmas, but in many cultures much larger annual bonuses are offered to the employees
of a successful business; perhaps as much as six months pay. As the Australian labour
market becomes less comprehensively regulated such arrangements will become more
common in Australia too.
Overtime provision
Very few businesses have a perfectly even flow of work, and there will be times when
employees will be asked to work longer than normal hours so as to handle peaks or to
eliminate backlogs. Workers in most countries expect to be paid at a higher rate for
overtime: in some countries such rate supplements are legally obligatory; in others they are
a matter of discretion, but employers who want a committed work force will make provision
for rewarding exceptional effort.
Idle time provision

Most businesses will experience some slack time, and in many businesses employees will
inevitably be involved in non-income-generating activity for part of the time. Service
employees may have to travel between customer premises, for example, and customers will
be unwilling to pay for the travelling time, although the employees expect to be paid while
travelling. Service businesses with a ‘single server’2 must be prepared for at least 30 per cent
idle time if they are to deliver a quality response to 95 per cent of their customers;
businesses with multiple servers can plan on a higher peak period utilisation.
2
For example, a single cash register operator in a shop, or a single skilled service
employee at a given location.
18
Table 2.9 Uplift calculations
Days Subtotal % Total %
Annual leave
Sick leave
Special leave
Long service leave
Public holidays
Incentive provision
Overtime provision
Idle time provision
Payroll tax
Insurance
Superannuation
Amenities
Supervision
Training
Other
Other
Other
Total
Table 2.10 Primary product cost and margin

Hours Rate Uplift Subtotal Total
Price
Labour
Materials
Distribution
Total costs
Contribution
19
Be careful with percentages: a 30 per cent idle time provision needs a 43 per cent
( ) uplift on wage rates.
Payroll tax and superannuation

In Australia and many other countries employers are liable to various taxes and contri-
butions. Failure to collect these may be a criminal offense: they must certainly be allowed
for in any plan.
Amenities
At the very least, employers must provide towels, soap and toilet paper; in many countries,
and even in some Australian industries, they are expected to provide considerably more
than that: subsidised canteens, subsidised housing, schools, scholarships, medical and
hospital insurance or clinics, or other necessities and comforts. As a very general rule, the
lower the nominal wages, the higher may be the relative and even the absolute cost of the
amenities an employer is expected to provide.
Supervision
Military-style span of control calculations are very unfashionable, but even self directed
work teams take a certain amount of time away from revenue-generating activities to direct
themselves. Broadly speaking, the lower the wages and the less skilled the work force the
higher the level, and quite possibly the cost, of the supervision that will be required.
Do not confuse this entry with allocated overheads (overhead allocation is an obsol-
escent accounting technique used to handle fixed costs as if they were variable ones). This
covers direct costs of supervision: if one person, paid 50 per cent more than the average
worker, can supervise ten of them the direct supervision cost is 15 per cent uplifted. (If the
total uplift is 60 per cent and the basic supervision overhead is 15 per cent, the uplifted
overhead is 160 per cent of 15 per cent or 24 per cent. This raises the total uplift from 60 per
cent to 69 per cent and the supervision overhead to 25 per cent. It is pedantry to go around
the loop a second time.)
Training
Enlightened employers set aside 2 per cent or more of their payroll for employee training.
Unenlightened ones spend even more in extra supervision of poorly trained employees and
in sorting out the problems that they cause. Industries where there are rapid product line
changes and a high skill level is expected of employees may spend 10 per cent or more of the
payroll on education and training of various kinds.
Other
The rows in Table 2.9 should not be regarded as a complete list of oncosts: three rows are
provided to encourage planners and entrepreneurs to make an appropriate allowance for
other direct costs of employment, such as tools, transport, cleaning of uniforms and work
clothes and, in general terms, any cost which is directly incurred when an additional worker
is employed.
20
Table 2.11 Spares and consumables
Group 1
Price
Labour
Materials
Distribution
Total costs
Contribution
Group 2
Price
Labour
Materials
Distribution
Total costs
Contribution
Group 3
Price
Labour
Materials
Distribution
Total costs
Contribution
21
Primary product cost and margin
Table 2.10 on page 19 is intended to help the planner capture the direct costs and contri-
bution margin from each sale of the main product.
Price
This can be the recommended retail price, in which case retailer and/or distributor margins
should be included in the distribution cost, or the shipping price, in which case only those
transport costs included in the price should be treated as distribution costs. We recommend
using the former method, as by exposing the cost of the distribution channel the
entrepreneur is in a position to evaluate alternative distribution strategies.
Labour
This line should record:
Ë the direct labour hours required to produce one unit of the product (if it is a good) or
deliver one unit (if it is a service)
Ë the average hourly pay rate for employees directly engaged in product manufacture
and delivery
Ë the uplift as calculated in Table 2.9.
The result is the direct labour cost.
Materials
This is the cost of materials (including average scrap and cutting allowances) required for
each unit of product manufactured and/or delivered.
Distribution
The treatment of this entry will depend on how the price is treated (see above). If the price
quoted is the final purchaser price, this line should include all the normal costs of physical
delivery, the reseller margins, and any ‘routine’ incentives and reseller allowances. If the
quoted price is the wholesale or ex-factory price this should only include uncharged delivery
costs.
Spares and consumables

The detail lines in Table 2.11 on page 21 are as for the main product.
We have provided space for three separate categories. Many real products will require
a large number of different spares and types of consumable item. For planning purposes,
the different spares and consumable items can be allocated to a manageable number of
groups. One group could be warranty service, one for rarely used spares, and one for
regularly used spares and consumables.
22
Table 2.12 Ancillary services
Group 1
Price
Labour
Materials
Distribution
Total costs
Contribution
Group 2
Price
Labour
Materials
Distribution
Total costs
Contribution
Group 3
Price
Labour
Materials
Distribution
Total costs
Contribution
23
Ancillary services
Table 2.12 on page 23 also allows for three entries, and the services might be grouped in a
similar way to that suggested for Table 2.11. One set of services might be offered once per
customer, one on a regular basis, and the third infrequently or on a warranty basis.
Computing the AAGM

Table 2.13 has places for data on the main product, three ancillary services, three sets of
spares and consumables, and two rows for ‘other’. The frequencies are the annual frequency
of purchase, and so the total in the bottom row should be the absolute maximum amount
of revenue and gross margin that the market could produce in a year.
Most real markets do not delivery this much money, and almost never in the first year.
Table 5.1 from Entrepreneurship3, reproduced below, shows the maximum amount a prudent
entrepreneur or firm will spend on an opportunity once the AAGM is known.
Product security Launch day value (fraction

of AAGM)
The product is an unbreakable, unavoidable and indefinite monopoly 14%
Competitive entry will not occur for at least four years from the full 7%
launch (that is, after market testing completed)
Otherwise 4%
This is the total amount of money that should be committed from the time the number is
calculated until the product has been on the market long enough for the user response to
be estimated with some confidence, including the manufacture and/or purchase of initial
trading stocks but excluding the variable costs of forecast sales and the forecast promotional
expenditure. It is possible to estimate user response after the expected repurchase interval
has elapsed by observing whether trial users are, in fact, repurchasing it, or after six to
twelve months by surveying users and asking whether they intend to repurchase and/or
recommend the new product, or by waiting two years and deducing the value of Bass’s q, the
recommendation rate, from the sales data.
Example
A new product is expected to appeal to an ultimate population of 10 000 users, each of whom
will spend $200, of which 50 per cent will be contribution, on it per year. The AAGM is 50%
× $200 × 10 000 = $1 million. The budget for completing the business plan, starting the
business, purchasing initial trading stock, and paying fixed costs for a year should not
exceed $40 000.
3
Entrepreneurship: How Innovators Create the Future by John M. Legge and Kevin
Hindle, Melbourne: Macmillan, 1997. Reproduced by permission.
24
Table 2.13 The AAGM
Frequency Price Margin Revenue Contrib.
Main product
Spares and
consumables (1)
Spares and
consumables (2)
Spares and
consumables (3)
Ancillary
services (1)
Ancillary
services (2)
Ancillary
services (3)
Other (1)
Other (2)
TOTAL
A note on interpretation
The AAGM concept was developed relatively recently by John Legge and Kevin Hindle, and
so planners should not assume that everyone that they meet will be familiar with it, or that
those who are familiar with it will agree with its use or with the suggested values in Table
5.1 from Entrepreneurship. Two aspects of the AAGM have already caused some confusion
and the following points are an attempt to clarify these:
Ë the AAGM is the total amount of gross profit that a complete monopolist with an
unlimited marketing resource could possibly extract from the fully developed market.
It is not the maximum profit a particular enterprise could generate
Ë Table 5.1 from Entrepreneurship was developed under the assumption of a novel
product entering an untapped market, and therefore facing the maximum possible
marketing risk. When the product is a line extension or leverages an established
brand in some other way the marketing risk may be much less and the day one value
correspondingly higher.
25
3
Intellectual property
One of the major threats to most new ventures comes from imitators: if a well-funded ‘fast
follower’ can enter a new market or match an innovative product within two or so years of
its launch the returns to the innovator may fall dramatically. When the innovation is
launched by a well funded corporation that commits adequate resources to the launch and
early marketing, it may create an early mover advantage that is sufficient to safeguard its
investment. Many innovations come from cash-strapped new ventures, carrying out what
is little more than a market trial while they try to demonstrate the viability of their
enterprise to venture and development capitalists.
For such struggling entrepreneurs intellectual property protection is critical.
Patents and designs

Table 3.1 opposite may be used to record information about patents and designs, either held,
applied for or licensed. We have provided room for three entries: many enterprises will have
more.
Patent/design number
Record the actual number of the patent or registered design and note whether it is a
pending application, a patent or design registration already granted, or a patent or regis-
tered design licenced from someone else.
Description
Try, in this part of the table, to indicate what is protected. Do not simply transcribe part of
the official patent documentation. When this information eventually turns up in an
entrepreneurial business plan, the reviewer will not, in general, be an expert at interpreting
patent specifications. Be careful not to over-state the protection actually granted: a success-
ful business plan may lead to investors placing money with the entrepreneur, and care
should be taken not to deceive them, even inadvertently.
Countries
Patents are granted by countries and are not respected in countries where no patent has
been granted. Similarly, licensors of patents often limit the licensee’s rights to a specific list
of countries. Record any such limitations here.
26
Table 3.1 Patents and designs
Patent/design number 9 Held 9 Licensed 9 Applied for
exp: exp:
Brief description
Countries
Budget

exp: exp:
Brief description
Countries
Budget

exp: exp:
Brief description
Countries
Budget
Budget
Patents are not cheap. Unless they have already been granted and paid for there will need
to be a provision for them. Design registrations cost less than patents, but there is still a
continuing need to monitor the market for potential infringers and to persuade them to
desist.
27
Copyright
Copyright exists in instruction manuals, software, drawings and the like. Entrepreneurs
who rely on subcontractors to produce any essential material of this nature need to make
sure that they have secured the right to copy it for their own purposes and have some
security against the producer selling additional copying licences to third parties.
When material subject to copyright is produced by employees in the course of their
duties, copyright normally passes to the employer, but this leaves open the possibility that
disputes could arise about the nature of the employees’ duties. Explicit steps to set out the
duties of creative employees and to secure copyright over their work may be advisable.
Table 3.2 lists some of the common materials potentially subject to copyright. The
author is implicitly the copyright owner: if the author is not the entrepreneur or someone
employed by the entrepreneur specifically to write the designated material there will have
to be an explicit licence or assignment executed. Where the ‘authority’ column shows
assigned or licenced, the status column should indicate whether the assignment is complete,
has been agreed, or is yet to be negotiated.
Trade marks and business names

There is no point in marketing an excellent product if users can’t remember who you are
when the time comes to buy more of it or to recommend it to a potential new user. The link
between the firm and its users is often a trade mark or trade name. Once a business is well
established, people who use similar names or marks may be committing an offence under
the Trade Practices Act and it may also be possible to sue them under the common law; in
both cases a successful action relies on the possibility of deception. When a business is new
and has very few customers there is no one to have been deceived, and such legal actions
may fail.
The new business can protect itself by registering its business name(s) and trade marks.
Note that the definition of a registrable trade mark is broad: the Coca Cola bottle is a trade
mark, as is the McDonald’s ‘golden arches’ symbol and the exhaust note of the Harley-
Davidson motor bike. Table 3.3 has space to record some of the trade names and trade
marks that the business will use together with their registration dates.
28
Table 3.2 Copyright
Material Author Authority Status
Staff instruction manuals
User manuals
Sales brochures
Training courses for staff
Training courses for users
Computer systems – operational
Computer systems – user
Other
Table 3.3 Business names and trade marks

Name or mark Date registered
29
Other formal IP
Plant breeders and designers of integrated circuits and printed circuit boards have
specialised intellectual property regimes. From time to time and from country to country
new forms of statutory intellectual property may be created. Table 3.4 should be used to
make notes of any formal intellectual property, not recorded earlier, that can be used to
assist the new enterprise.
Trade and other secrets

Informal intellectual property includes development plans and status reports, market
survey reports and market intelligence summaries, customer lists, details of proposals to
key prospects and special contractual arrangements with key customers, summaries of
customer problems and their resolution, and many other items of information routinely
generated and circulated within businesses. All of this would be useful to a rival who made
the effort to understand its significance; some of it could be critical in tight sales or
contractual situations.
People often exaggerate the benefits of good intelligence and the risks from espionage.
During the Second World War the British General Crewel commanded a tank division
defending the Egyptian frontier against the German Afrika Corps commanded by General
Rommel. The British decrypted a command from Hitler to Rommel ordering him to abandon
his advance on Egypt: this intelligence was passed to Crewel, who stood his men down.
Rommel, however, ignored Hitler’s order, continued to advance, and destroyed Crewel’s
unprepared division.
Trying to keep everything secret often means that nothing is: the most successful firms
are often very open with information in general, and the status of the few matters which
must be kept secret is known to the firm’s staff and information about these is kept secure
by them. The law provides strong remedies against departing staff or defaulting contractors
who publish or distribute secret information causing damage to a firm. These legal remedies
won’t protect information that wasn’t secret, and staff and other people who are not told
that certain information is highly sensitive may have no legal obligation to protect it.
A successful information security policy protects secrets whose release could be
genuinely damaging without disrupting normal communication inside the firm and between
the firm and its customers, suppliers and even rivals. Table 3.5 provides space to set out the
key details of the new enterprise’s information security policy.
30
Table 3.4 Other formal intellectual property
Other intellectual property
Table 3.5 Information security

Key features of information security policy
31
4
SOPA
The strategy a new venture or new product marketer adopts determines the organisation
that must be built to implement it. The product, defined in Chapter 2 of this workbook, and
the organisation lead to the definition of a process. The three together imply the control of
some assets and the creation of more.
Strategy
Strategic directions (or goals)
Firms need a strategy, or at least some agreed strategic goals, to give direction to the rest
of their planning. Table 4.1 is intended to help the entrepreneur capture the key elements
of the entrepreneur’s strategic objectives. A number of possibilities, not all mutually
exclusive, are included in the table. There is also space for others.
Reasonably or otherwise, some people will find it hard to publicly acknowledge some of
their objectives, but it is very important for entrepreneurs to be honest with themselves
when considering these issues. A plan to establish a new lobby group or entertainment
venue for plutocrats will differ significantly from a plan to help the underprivileged. In
every case confusing the actual strategic directions of an enterprise with such more socially
acceptable ones as may need to be displayed in public will lead to a poorly functioning
organisation, even when calamitous failure is avoided.
Strategic targets
In Table 4.2 we set out some common business metrics and invite the entrepreneur to put
numbers in the appropriate squares. As with the previous table there is space for different
metrics to be added.
We have put columns for the launch year, the third trading year, and the tenth trading
year to let the entrepreneur paint a ‘number picture’ of his or her ambitions for the firm or
the product. Once the business is operating this chart should be revisited once a year or so,
progress against ambition noted, and a new set of projections drawn up.
The strategic ambitions are recorded here as a guide to planning, not as a set of
immovable goal posts. They serve to remind the growing business that it has ambitions, and
that at every stage there is a necessary tension between resolving current problems and
laying the foundations for future growth.
32
Table 4.1 Strategic directions
Improve the entrepreneur’s lifestyle
Add excitement to the entrepreneur’s life
Prove a point about the entrepreneur
Create a new growth venture
Support the continued growth of an existing venture
Prevent or halt the decline of an existing venture
Commercialise a new technology
Commercialise a new service concept
Popularise a new idea
Improve the situation of an underprivileged group within society
Maintain the privileges of an entrenched group within society
Other
Table 4.2 Strategic targets

Targeted metric 1 year 3 years 10 years
Gross revenue from sales
Gross revenue from other activities
Gross value of assets controlled
Value of net assets (shareholders’ equity)
Cash flow
Profit
Return on assets
Number of customers/users/clients/adopters
Annual units sold
Number of countries firm/product available in
Market share
Other
33
Organisation
We distinguish the organisation from the process as another example of separating present
from future considerations. There are organised people involved in the process of delivering
goods and/or services for the firm, but if this was all the firm consisted of there would be no
way for it to change and adapt as its customers changed on the one hand and the tech-
nologies, services and components available to it changed on the other.
The organisation also has a current man-
agement role, in that it has the ability to
correct minor perturbations before they
degrade current operations. Both kinds of
management should be present in any
organisation that intends to be around for a
significant time. Both kinds are ‘overheads’
paid for out of fixed expenses, and the cost
only varies slowly as the revenue of the busi-
ness changes. Cutting back on both the stra-
tegic and operating parts of an organisation is
a quick way to improve its current profit,
although this is often at the expense of its
future growth potential.
Table 4.3 is intended to capture some broad indications of the size, scope and cost of
the fixed part of the proposed organisation.
Three points in time are suggested: at the moment the project starts and the current plan
is put into operation; at the time the new product is first placed on the market; and after the
product has been on the market for three years. It is quite acceptable to use fractions when
a function is being carried out by a part-time appointee, or when one person is covering two
or more areas, but it is not, in general, satisfactory to assume that any of the key
organisational elements in Table 4.3 can be omitted entirely.
34
Table 4.3 Planning and supervision
Organisational function Project start Product launch Launch plus 3 years
Heads Salary Heads Salary Heads Salary
Exec. Staff budget Exec. Staff budget Exec. Staff budget
Chief executive and company
secretariat
Chief financial officer and major

accounting functions
Information systems management
New product development and

market planning
Production and delivery
35
supervision
Sales management and reporting
Service management and

reporting
Human resource management

(central functions)
Other
Process
‘The process’ refers to the value-adding and revenue-generating activities undertaken by a
venture. The process needs to be analysed in two dimensions at least: there is the definition
of the functions that must be carried out, and there is the definition of a scaling metric and
ratio for each of these functions. The number of sales staff, for example, may be related to
the number of new customers expected to be gained per period, while the number of service
staff may be related to the total number of customers or the aggregate value of equipment
installed or to some other measurable factor.
Table 4.4 allows the planner to define three scaling metrics which will then be used to
qualify the entries in the subsequent process design table.
Table 4.5 can be used for manufacturing or service businesses: in some cases of either
class the scaling factor on some lines will be zero. The intention is to capture the number
of heads that must be recruited for a given level of business, and to give some indication as
to how this number will vary as the business expands or contracts. The line ‘Supervision
and management’ is intended to capture the direct overhead costs, such as works payroll,
HR and amenities as well as foremen and supervisors.
36
Table 4.4 Process scaling metrics
No Description Unit
1
Table 4.5 Process decomposition

Function Metric Factor Unit
budget
Transforming operations
Goods inwards and stores
Operations
Warehousing and dispatch
Supervision and management
Customer service operations

Equipment, vehicles and stores
Service to customers
Staff education and training
Sales operations
Sales personnel
Product management and merchandising
Sales training
37
Tangible assets
A firm consists of people and things and cannot operate unless both are present. The ‘things’
dealt with in this subsection are those necessary to the operation of the business, such as
premises, equipment, work in progress, finished goods inventory, customer goodwill and
brand equity and the various core competencies implicit in a successful business. Purely
financial assets, such as the debtors ledger, are dealt with in the financial section of the
plan. The scaling metrics are those defined in Table 4.4, above.
Many of the assets listed will be leased rather than owned, but this is, again, a financial
issue to be dealt with in the financial section of the plan: who the legal owners are is less
important to practical business operations than the fact that the firm has the use of the
asset. Occasionally a firm is able to share a critical but lightly used asset: sophisticated test
equipment often falls into this category. Where guaranteed part-time access to an asset
would be as useful as full control, this should be noted.
38
Table 4.6 Tangible assets
Asset description Metric Unit Factor Deprcn Acquire
(yrs) cost
Premises: administration
Premises: manufacturing
Premises: warehousing
Premises: service and repair
Premises: sales
Vehicles: benefit
Vehicles: goods transport
Vehicles: sales and service reps
Equipment: office
Equipment: manufacturing
Equipment: service and repair
Equipment: sales
Materials and components
Work in progress
Finished goods
Information technology (central)
Information technology (user)
Other
39
Intangible assets
Successful companies are worth more as a ‘going concern’ than the value of their physical
assets: for listed companies, the share price is usually higher than the net assets per share.
(If the share price falls below the value of the assets, the shareholders would be better off
winding up the company and selling the assets, or accepting a takeover offer from an asset
stripper, which amounts to much the same thing.)
Intangible assets should not be confused with undervalued assets: land and buildings,
and sometimes patents and other elements of intellectual property, may be recorded in a
company’s accounts at their acquisition value, which may be far lower than their market
value. Asset strippers are always on the lookout for companies where the gap between the
value of the shares and the recorded value of the assets is caused by such undervaluations.
Broadly, intangible assets consist of the firm’s human capital, its customer goodwill
and/or brand equity, and the market value of any of its protected intellectual property such
as patents, registered designs and copyrights.
Human capital
Human capital has been used in a fairly amorphous way: obviously money that is invested
in employee training must have some lasting effect, or no one would do it. One way of
estimating it is:
Ë capitalise training expenditure using a fairly sharp depreciation rate (such as 25 per
cent or even 33 per cent: training is forgotten, staff leave or change tasks, technology
advances)
Ë add an amount representing the cumulative value of the staff’s experience: take the
log to the base 10 (log, not ln when using a spreadsheet or calculator) of the total
number of years all current employees have been with the organisation and multiply
it by half the average annual salary.1
Goodwill and brand equity

A firm’s goodwill is the capital value of the future income stream that is reasonably expected
to be generated by the firm’s current customer base, over and above the cost of providing the
product including the ‘rent’ of all the assets used in the delivery process. It should be
approximately equal to the accumulated sales and promotional expense depreciated at a
rate consistent with customer turnover.
These ways of estimating goodwill and the value of a firm’s core competence are
extremely tentative at the time of writing, but their relative magnitudes may serve as a
check on the realism of the planner’s assumptions.
1
This is a quick way of valuing a 15 per cent experience curve.
40
Table 4.7 Human capital
After
1 year 3 years 10 years
Number of employees
Average period of service
Total employee years
Log of total employee years
Average employee salary
Experience value
(= (salary) × (log cum years) × 0.5)
Cumulative employee-years of training
Depreciated value of training
Table 4.8 Goodwill and brand equity

After
1 year 3 years 10 years
Cumulative sales and promotional expense
Estimated annual rate of customer loss
Depreciated value of sales and promotional expense
41
5
The financial feasibility model
This chapter does not include tables for the entrepreneur or planner to fill out, since we
assume from the start that no serious planner would fail to take advantage of a modern
personal computer with a spreadsheet program. This chapter will describe how to construct
a model, which can then be used to generate pro-forma income and cash flow statements
and balance sheets.
Entrepreneurs and planners who follow these guidelines should produce a set of printed
pro-forma accounts that will be sufficient to demonstrate the financial feasibility of a
proposal. Such accounts will generally be adequate when accompanying a business case
seeking support for an internal project from the senior managers of a corporation. They
should also be sufficient, in general, for an entrepreneurial business plan prepared as an
exercise by students in entrepreneurship programs.
A limited model such as this one will not provide an adequate set of pro-forma accounts
for an entrepreneur seeking finance from an unrelated party such as a bank, a venture
capitalist or a business angel. While a conscientious lecturer might spend up to an hour
evaluating a student’s business plan, a venture capitalist could take two days. Chapter 14
of Entrepreneurship: How Innovators Create the Future gives an overview of the depth of
accounting detail needed to survive such a detailed examination. Entrepreneurs who wish
to use their plan to raise capital may choose to develop this planning model into a full set
of accounts, or they may ask their accountant to do it for them. Accountants should not be
asked to develop the planning model, although their help can be very useful: the planning
model is an essential part, some say the heart, of the business plan.
Students working in teams, or students with an accounting qualification undertaking
an entrepreneurship program, should also go beyond this relatively simple financial model
and prepare a more complete one.
In general terms, the difference between a feasibility model and a full set of accounts
is the way figures are sourced, whether actual or pro-forma. A proper business accounting
system can be audited to the point that named workers and suppliers are shown to have
received money in return for specific activities, with a similar level of detail on the income
side. A feasibility model relies on ratios to generate appropriate cost and income figures,
driven off a limited number of key assumptions. There should be two principal results
obtained from a feasibility model: it should be possible to show that the project is viable and
prospectively reasonable, and it should be capable of developing an investment offer which
can be used to answer the questions a potential investor might reasonably ask.
General spreadsheet structure

Modern spreadsheet packages have a multi-sheet capability, with formulae linked across
sheets but the formatting of each sheet independent from the rest. An entrepreneur or
42
planner should take advantage of these facilities and make the financial feasibility model
as easy to examine and understand as possible.
The first sheet should normally be used to set out the principal assumptions and
results. Since this sheet will not normally need to be printed, full use should be made of the
spreadsheet package’s colour and font facilities. The spreadsheet’s cell protection facilities
can be used to stop users accidentally modifying cells containing text or formulae, and
annotation on this sheet should encourage prospective investors to experiment with the user
parameters. The second sheet could reasonably be used to present income statements, cash
flow projections and balance sheets. Columns near the left edge of the sheet can be used for
annual figures, with the same projections but in monthly form further to the right and the
notes to the accounts further over still. The third sheet can be used for monthly or annual
schedules projecting key financial numbers, such as investment timing and employment
levels. In a full set of working accounts, such schedules would lie behind practically every
row on the main accounts: often there will be schedules contributing to schedules, but this
level of detail is seldom appropriate for a financial feasibility forecast.
We suggest that the projections be carried forward for five years (or for the balance of
the current financial year plus five further years) except where there is a clear reason for
using a different period. A plan for a show or a major event does not need to continue past
the completion of the event or run of performances and the settling of accounts; on the other
hand, a major corporate initiative might not even start generating cash inside five years and
a longer timescale will be essential. Five years seems to be a reasonable limit for detailed
forecasts, and so even when a plan is part of a strategy that will run for a much longer
period, dealing with the problems and opportunities in five-year chunks will often prove a
satisfactory approach.
The spreadsheet calculations should be carried out on a monthly basis and summed (or
replicated, in the case of the balance sheets) to make up the annual reports. Modern
personal computers have adequate power to complete such calculations without causing
performance to suffer visibly, and an annual sweep can miss periods of strained liquidity
which monthly budgeting would have revealed. Our preference is for the marketing model
described in the previous chapter to be added after the financial projections, since it
generates the sales figures that the financial projections require. The promotional budget
projection might even be displayed on the very front sheet to allow users to experiment with
the effect of modifying it.
The last few sheets can be used for formatting reports and graphs for printing. This
allows the planner to make the screen presentation of the reports as attractive as possible
without compromises inflicted by the limitations of the available printing technology.
General spreadsheet rules

Balancing
Accountants invented the concept of balance to give warning of any arithmetic errors in a
set of accounts. A modern computer is very unlikely to make any arithmetic errors, but
human programmers, including spreadsheet users, are very prone to logical ones. Testing
for balance, by arriving at each main result by two different routes, remains extremely
important and under no circumstances should spreadsheet formulae simply assume it in
order to generate a result.
43
Figure 5.1 Spreadsheet structure
Rounding and conditioning

Digital computers are ‘finite automata’ (amaze your friends with that one) and under certain
circumstances will, while working correctly, produce results that do not seem to be those
prescribed by the laws of arithmetic. In financial applications this can become apparent by
a failure to achieve balance or when columns of numbers which appear to sum to a different
number than the computer-generated total.
The correct way to make sure that this does not happen is for the spreadsheet writer
to take positive control of rounding and truncation. ROUND and TRUNC functions or their
equivalents are provided in spreadsheet packages to facilitate this. All spreadsheet
expressions involving division, or multiplication by a number with a fractional component
(like a percentage) should be protected by a ROUND or TRUNC function, ensuring that the
answer is an exact number of dollars.
Figure 5.2 shows the use of the ROUND function, both to define the precision of the
monthly percentage rate and to ensure that the ‘interest due’ is always an exact number of
dollars.
Zeros
By accounting convention, zero quantities are presented as a blank field in the accounts of
a business. An option (in Microsoft Excel®, for example, Tools, Options, View, zero values)
allows users to select this option and make the screen and printed output from the model
more accountant-friendly. If blanked zeros are selected and a zero appears in a money field
this generally means that the rounding and conditioning controls have failed and the cell
contains a small value other than zero.
44
Interest rate 9.70% (Annual) Interest rate 0.097 (Annual)
0.81% (Monthly) =ROUND(B1/12,5) (Monthly)
Principal $105,131 Principal 105131

Interest due $849
Interest due =ROUND(B4*B2,0)
Figure 5.2 The ROUND function

The same spreadsheet fragment is shown in normal and in ‘formula’ view.
Annotation
Modern spreadsheet packages allow their users a rich variety of annotation devices. In
Microsoft Excel®, for example, each cell can have a note stored in it; in addition, drawings,
arrows, and text boxes can be added to the spreadsheet. These facilities should be used
freely, both to help subsequent users who may inherit the model and to help the initial user
if it becomes necessary to amend or review it after it has been set aside for a period.
Cells can be named and the name used in formulae instead of the simple reference: this
can also make a spreadsheet easier to follow.
The printed presentation of the accounts should normally have a note for practically
every line, explaining how the figures were derived and including, or referencing, any
relevant auxiliary tables.
The income statement

The Income Statement (or ‘P&L’ in American-speak) should be the primary reference point
for someone examining a plan. We strongly urge planners to keep the number of lines in the
statement low enough to fit on a printed page in a reasonable font size; where (as will
usually be the case) more information is required it can be developed in an auxiliary
schedule and the fact noted by a note in ‘Notes to the accounts’ for the printed version and
drawn on the spreadsheet for the screen version. The ‘value-adding’ format outlined here
works, but it is not intrinsically superior to the various alternative layouts. Planners
working for a corporation with an established standard for the presentation of accounts
should follow their employer’s instructions wherever they differ from the suggestions below.
Guides to planners preparing accounts (including this one) will suggest rows that, in
some cases, will not be needed. It is usually better to omit them altogether rather than
waste a precious line on a row of blanks.
Revenue
This may be a single line, but often a few more add clarity. Even when only a single product
is covered by a plan, as with a new line of packaged consumer goods, it is often useful to
have a second line for co-promotion allowances and incentives, distinguishing revenue
booked from amounts actually received.
When there is a manufactured product with associated spare parts and service sales,
it is a good idea to show primary sales revenue separately from service and spare parts
revenue, since the former is much more volatile than the latter. An ‘other’ revenue line can
45
be helpful as a place to put income such as grants and licence and franchising fees which
may significantly improve the viability of a proposal.
By convention, sales taxes are recorded as negative amounts under the revenue heading
rather than an expense. The firm receives the money, but only as trustee for the tax
authorities, and the sales tax is not treated as an operating expense but rather as a
correction to the nominal revenue.
Direct costs
Direct costs are costs that vary directly with the level of business. They always include
purchased materials and components and transport contractors’ charges. By convention,
they include the wage costs of the staff directly involved in producing and delivering the
goods and services which make up the product offering. This is reasonable for casual staff,
outworkers and employees on piece rates, but it is a very dubious assumption when salaried
professionals or highly skilled blue collar workers are involved.
Compass Airlines (mk I) performed a competitive evaluation of Australian and Ansett
airlines, assuming that flight and cabin crew were direct costs, and that Compass’s
competitors would not be able to lower their prices below these levels: on this basis,
Compass forecast fabulous profits for its operation. Ansett and Australian, on the other
hand, observed that their pilots and cabin crew drew the same salary on the ground and in
the air, and aircraft leases had to be paid whether the aircraft was flying or not, and their
direct costs, and therefore their minimum prices, were much lower than Compass had
assumed. Compass went broke in approximately a year.
In general, staff whose wages are not closely related to the level of output, and who have
skills, knowledge or experience that would be difficult or costly to replace, should be
accounted below the gross margin line under general expenses and not treated as a direct
cost, no matter how directly they are involved in the value-adding activities of the business.
Sales commissions, but not sales salaries, can be included as a direct cost if they are
likely to be a significant amount.
Gross margin
The difference between the revenue after allowances and the direct costs is the gross
margin: this should always be reported as a percentage as well as a dollar figure. The
reciprocal of the gross margin is, implicitly, the price elasticity of demand which in turn is
an indication of the expected sensitivity of the market to price cutting.
General expenses
General expenses should be broken down into at least the following elements:
Ë sales and marketing staff and related costs
Ë manufacturing staff and related costs (where relevant)
Ë promotion
Ë administration
Ë new product development
Ë depreciation.
46
Each of these lines will normally need to be supported by an auxiliary schedule. Additional
lines may be needed if there are major expenses expected that are not easily assigned to one
of these headings.
Earnings before interest and tax (EBIT)

The EBIT is the difference between the gross margin and the total of the general expenses.
It should be presented both as a dollar figure and as a percentage of sales: prospective
buyers of an established business are keenly interested in the EBIT, and so a strong value
will be an indication that the entrepreneur and/or the venture investors will find it
relatively easy to make a profitable exit by way of a trade sale in due course.
Interest
Interest income and expense should be shown below the EBIT line. Separate lines for
interest earned, and short and long term interest obligations are generally considered
desirable.
Taxable income and tax

Taxable income should be stated after deducting the net interest expense from the EBIT.
Tax should be shown at the appropriate rate, remembering that the Tax Office does not pay
money to companies that have trading losses, and that profits are sheltered from tax until
all past losses have been exhausted. A little care is needed in programming the appropriate
calculations. Novices sometimes show negative tax being received while a firm is making
losses: such errors rob a plan of any credibility.
Tax is an annual matter, and so while most of the calculations should be done on a
monthly basis and aggregated to form the annual data, company tax should be calculated
from the annual data and shown as being due in the last month of each financial year. In
Australia, companies over a certain size are required to make progressive company income
tax payments during each year based on the previous year’s tax assessment. Unless these
payments are properly planned for, they may place stress on a growing company’s cash
reserves.
Profit and distributions

Profit, like company tax, is an annual matter: earnings before tax can be calculated
monthly, or even more frequently, but since a firm’s income tax liability is based on its
whole-year business, so is its after tax profit. It is often convenient to describe the
disposition of the profit, basically the split between dividends and retained profits, on the
Income Statement.
Cash flow statement

There are many possible formats for a cash flow statement: the ‘functional area’ format
presented here is adequate; but an alternative format may be used if necessary.
47
Trading (or operations)
Three lines can show trading receipts, operating expenses, and net cash flow from
operations.
Sales for cash may be booked in the month that they are incurred, but sales on credit
should be booked after ninety days. Cash purchases should be booked as they are incurred,
while payment to creditors should not be delayed more than thirty days. Wages and taxes
should be shown in the month that they fall due.
Capital transactions
Three lines, backed up as necessary by auxiliary schedules, suffice to show the purchase and
disposal of assets and the net cash flow from asset sales and purchases.
Finance
Separate lines can be used to show loans raised, loans repaid, net interest, equity capital
subscribed, company income tax paid, dividends paid, and net cash flow from financing.
A line should be provided for capital returns if the plan envisages making them.
Extraordinary items
Extraordinary receipts and disbursements should usually appear, even when no such items
are forecast in the plan, as an indication that the planner is aware of their possibility.
Non-operating
There should be provision to show non-operating receipts and disbursements.
Cash flow summary

Net cash flow from operating, capital, financing and extraordinary activities can be summed
to produce a forecast of operating cash flows; these, adjusted for non-operating receipts and
disbursements, show a net cash flow. This in turn should represent the difference between
the opening and closing cash balance.
Balance sheets
While the income and the cash flow statements reflect activities that take place over a
period, the balance sheet reports an instant in time. The first function of a balance sheet is
to demonstrate balance, both vertically and horizontally. Vertical balance requires that the
total of all liabilities, plus the value of the shareholders’ equity, are exactly matched by the
value of the firm’s assets. Horizontal balance requires that the changes from the previous
balance sheet correspond exactly to the transactions recorded in the income and cash flow
statements. It is important, when programming a balance sheet, to make these checks and
to demonstrate balance.
48
The second role of the balance sheet is to give a reviewer an idea of the value and
stability of the business. The nominal value is, of course, shown as shareholders’ equity, but
an analysis of the asset statement will give an idea of what the value might be if the
business was wound up and the assets put on the market. The balance sheet also gives an
indication of the ability of the business to meet its obligations, the degree to which current
assets are adequate to discharge short term liabilities.
There are a number of ways in which a balance sheet may be laid out: our preference
is for shareholders’ equity at the top, followed by assets, followed by liabilities, followed by
a statement of net assets which should exactly match shareholders’ equity. Entrepreneurs
working in a corporation should, of course, use their employer’s standard form of
presentation, and entrepreneurs who engage an accountant to prepare their pro-forma
accounts should accept the layout that the accountant is happiest with.
Shareholders’ equity
Shareholders’ equity consists of the capital shareholders have subscribed plus retained
profits: a complicated capital structure may involve multiple equity classes and several
reserve accounts. During the entrepreneurial planning phase, a simple statement of equity
and retained profits should suffice; although once capital is raised and a venture commences
a more complex structure may be needed to satisfy the various stakeholders.
The equity should be calculated by taking the equity from the previous balance sheet,
adding capital subscribed (from the cash flow statement) and profits earned (from the
income statement) during the intervening period, and subtracting dividends paid and
capital returned. When accounts are provided on disk this is easily checked (in Excel® use
Tools, Auditing, Trace…) and will be when accounts are provided on disk to a conscientious
examiner or venture capitalist.
Assets
The most important division in the asset statement is that between current and non-
current, or fixed, assets. Current assets include cash at bank and short term deposits,
accounts payable, and marketable inventory. One or two additional lines may be needed,
depending on the nature of the proposed business. Non-current assets are not available for
the settlement of current liabilities, and in general will represent property, plant and
equipment needed if the business is to operate normally. Goodwill, and other forms of
intellectual property can be put onto balance sheets, but professional venture investors will
usually reverse these during their evaluation and mutter curses about the trouble to which
they are being put. If a business is expected to derive actual cash income, such as license
or franchise fees from its intellectual property, a modest valuation supported by a clear
explanation is likely to be acceptable.
The entries under assets can also be derived from the previous balance sheet and the
income and cash flow statements: accounts receivable, for example, is the entry from the
previous balance sheet plus the value of sales from the income statement less amounts
received as shown on the cash flow statement.
49
Liabilities
Liabilities must also be divided clearly between current and short term liabilities, such as
amounts owing to creditors and overdrafts at the bank, and long term liabilities such as
secured loans. Provisions are a special form of liability: there will usually be a provision for
company income tax and other taxes; and there may need to be provisions for interest due
and for dividends voted but not yet paid.
Provisions serve to reconcile the income and the cash flow statements and to keep the
spreadsheet programming ‘clean’. Interest affects taxable income, while tax payments affect
the current cash balance and therefore the tax and interest due. Careful creation of
provisions will prevent the spreadsheet program complaining about circular references.
As with the previous two sections of the balance sheet, the entries should be calculated
from the previous balance sheet via the income and cash flow statements.
Financing requirement
For a business to be solvent, the current assets must exceed the current liabilities (meaning
that the business has the means to pay its debts as they fall due) and the total assets must
exceed the total liabilities (meaning that the value of the shareholder’s equity is positive).
The second condition can be fudged (for a time) by putting intangible assets on the balance
sheet; but the first is a legal requirement of continuing trading. If a firm’s current assets fall
below its current liabilities and it continues to trade the directors are committing an offence
and may be prosecuted as well as being sued personally by creditors the company can no
longer pay.
During the development of the financial feasibility model, it is quite likely that the net
assets will be predicted to be negative and the current assets will be predicted to be
inadequate to cover current liabilities. The planner must project appropriate equity sub-
scriptions and long term debt financing arrangements to bring net assets back to positive
and raise current assets to a prudent level.
In a reasonable plan, the total value of long term loans must always be less than the
value of tradeable non-current assets. In practice this will be made a condition of any loan
that the eventual venture may receive, and since the lender will wish to examine the
financial forecasts they should always show that the security available exceeds the loan
requested. The short term balance of current assets less current liabilities must always be
greater than zero, to show that the business has a measure of stability against the random
events, such as a default by a significant debtor or a demand for cash payment by a major
creditor.
At this, the financial feasibility stage, it is important not to be excessively clever in
structuring the proposed financing arrangements. This is particularly so if finance, whether
equity or debt, is to be sought from an unrelated party. Such parties will have their own
ideas about how capital should be raised and how the capital of a venture should be
structured, and since ‘them as has the gold makes the rules’ the wise entrepreneur does not
set up a conflict in advance.
The end result of this process will be a timed schedule of equity subscriptions and loan
draw-downs which ensure that the proposed venture can operate legally while achieving its
forecasts for sales and profits.
50
Venture valuation
There are two measures of the value of a venture. One simply takes the cash flows that the
venture will absorb and generate, puts a notional disposal value (or cost) in the month after
the end of the plan projections, and uses the spreadsheet function IRR to compute the
internal rate of return, and the function NPV to calculate the current value at the venture
start date using an appropriate risk-weighted rate of return. The risk weighted rate of
return can be calculated using the formula developed by Dixit and Pindyck, and the venture
only represents a rational use of the capital it will require when the risk-weighted net
present value is positive and the venture’s internal rate of return exceeds the appropriate
risk-weighted rate.
Timing of proposed investment cash flow Annual

New market or first entry by supplier rate
More than one year before product launched 100%
Product launch day 70%
Market acceptance proved 30%
Two years’ profitable trading 20%
Line extension or replacement of successful product
More than one year before product launched 35%
Product launch day 25%
Market acceptance proved 20%
Two years’ profitable trading 18%
Figure 5.3 Minimum rates of return
Figure 5.3 lists typical rates of return (or hurdle rates) that a venture should be able to
exceed at various stages. These values are based on particular assumptions and should be
regarded as approximations only in any real proposal. The exact values can be calculated
when necessary. The value of the venture in the month after the plan period ends should
be taken as the greater of the net assets and the net current assets plus a multiple of the
cash flow in the preceding year. The multiple can be as high as six if there have been two
years of profitable trading running into the end of the plan and three otherwise.
The equity part of the financing schedule described above can be used to construct a
spreadsheet row showing the flow of capital and dividends, and a separate calculation of the
IRR offered to the investors at each financing stage should be made, showing, in each case,
that the offer exceeds the rate of return from Figure 5.3 or as calculated specifically for the
current plan.
Figure 5.4 shows one way of displaying the stages of equity finance and showing the
return to the investors at each financing stage. In this table it is assumed that there are no
dividends paid during the currency of the plan, and the investors’ return is calculated on the
basis of an assumed sale of the business as a going concern for $12 million immediately
following the end of the fourth year in the market. This assumption allows the rather simple
rate of return formula as shown in Figure 5.4 to be used.
51
If the plan envisaged paying a dividend a slightly more complex calculation would be
needed and an IRR or equivalent function would have to replace the simple calculation
shown in Figure 5.4.
Spreadsheet prepared for printing

Month -12 0 18 30
Stage 1 2 3 4
Subscription $100 000 $500 000 $1 000 000 $2 000 000
Shares 500 000 500 000 500 000 500 000
Final value $12 000 000

Return to investors
Stage 1 97.44%
Stage 2 56.51%
Stage 3 34.04%
Stage 4 31.04%
Spreadsheet with formulae exposed

A B C D E
1 Month -12 0 18 30
2 Stage 1 2 3 4
3 Subscription 100000 500000 1000000 2000000
4 Shares 500000 500000 500000 500000
5
6 Final value =12000000
7 Return to investors
8 Stage 1 =($B$7/(4*B3))^(1/(4-B1/12))-1
9 Stage 2 =($B$7/(4*C3))^(1/(4-C1/12))-1
10 Stage 3 =($B$7/(4*D3))^(1/(4-D2/12))-1
11 Stage 4 =($B$7/(4*E3))^(1/(4-E1/12))-1
Figure 5.4 Investor returns
The deal
An entrepreneurial business plan is a proposal, not a set of commands, and the people to
whom the proposal is being made may decline it or accept it subject to modification or under
special conditions.
Plans may be prepared for one or more of a number of reasons — some of the more
common include:
Ë the plan may have been prepared in order to convince a bank or other lending
institution that the proposed venture will generate an adequate cash flow to service
the lender’s desired schedule of interest payments and principle repayments without
jeopardising the lender’s access to the agreed security
Ë the plan may have been prepared with a view to securing equity investment from an
unrelated party, either a ‘business angel’ or an investment fund: in either case they
52
will want to be assured that their returns are likely to be commensurate with the
risk that their investment is being exposed to, that there is a reasonable probability
that they will be able to withdraw their investment and their share of the profits at
or after an agreed date, and that they will be kept properly informed of the progress
of the enterprise and be able to take steps to protect their investment should this
become necessary
Ë the plan may be intended to be presented as a business case to the senior
management of a major corporation, in which case they will wish to know that the
rate of return that they will get meets or exceeds the relevant hurdle rate, that the
plan conforms to the agreed corporate strategy, and that the other strategic
objectives of the corporation will not be put at risk
Ë the plan may be intended to be presented to a prospective colleague whose unique
skills and experience make him or her vital to the venture’s success: such people
generally wish to be assured that the rewards they may expect, in terms of money
and experience, are commensurate with the career and other risks that they may be
asked to run, as well as the assurance that they will receive a proper degree of
respect and authority within the venture.
Sometimes the same planning effort will lead to more than one target audience being
addressed. A moment’s consideration suggests that a proposal which would be suitable for
one audience might fail to interest another one. It is very dangerous to prepare versions of
the same plan incorporating different assumptions to different audiences; at the least, when
the audiences compare notes their discovery of the trickery will totally destroy the plan
authors’ credibility, while it is possible that a criminal fraud may have been committed. It
is, on the other hand, almost mandatory to tailor the presentation of the plan to each
audience that it will be offered to.
In general the entrepreneur will be in no position to command cooperation, and the deal
offered must be a suggestion put up for consideration, not a take it or leave it proposition.
It is, in general terms, unwise to put the entrepreneur’s negotiating limits into the plan, but
the deal as described should be one that the entrepreneur would be prepared to live with
and one which the entrepreneur would accept if the roles of plan receiver and sender were
reversed.
53
6
Spreadsheet tips
It is vitally important that any set of accounts a prospective entrepreneur shows to any
financier or accountant balances, but this is not easily achieved by relying on trial and error
during the construction of the underlying financial model. Often, the attempt to link the
different reports and schedules provokes the spreadsheet program into complaining that
some references are circular and that calculation is impossible.
The diagrams that follow represent an attempt to explain the way a spreadsheet should
be linked to give a reasonable chance of balance while retaining the very important
capability to change a parameter and see the effect ripple through to the various tables and
charts. The convention used here is based on the Excel® auditing function: a blob at the end
of a line indicates that the cell that it is located in is referenced by the cell where the
arrowhead is located. It says nothing about how the references are used by the formula in
the target cell.
Ordinary expenses
The first diagram shows the general handling of an ordinary expense (direct or
indirect).
The general principle is that expenses must be divided into salary-related, which must
be paid in the current period, and ‘other’, part of which may be parked in a balance sheet
cell for payment in a later period or periods. Cells in the ‘Accounts payable’ line, along with
most lines on a balance sheet, take a carried forward amount, add or subtract the
appropriate transactions, and report a brought forward amount in the next period. The
amount is then withdrawn from the balance sheet when it appears as a paid item on the
cash flow statement.
54
Integrating the marketing and financial model
The following diagram shows how the marketing model and the financial model may be
integrated:
Marketing expenditure drives the marketing model; as before, this must be divided into
salary related expenses, to be paid in the current period, and other expenses, part of which
may be parked on the balance sheet as a liability until they are paid in a later period or
periods. When linking the marketing model back to the income statement, the generated
numbers must be divided two ways. Some sales will be for cash, and are therefore taken
into cash flow in the period in which they are completed; while other sales will be on credit,
and may have to be parked as an asset on the balance sheet until the cash is received.
The second division of the revenue projections recognises that the marketing
communication process is not instantaneous. Externally influenced packaged consumer
goods sales track the advertising expenditure pretty closely: most consumers either respond
to an advertisement that they have seen on their next visit to a supermarket or they never
do. Some durable consumer goods sales may occur in the same period as the advertising
that triggered them, but many will occur later, while significant industrial purchase orders
may not be signed until weeks, months or even years after an in-principle decision has been
secured, while payment can be delayed still further.
Taxation and interest cause several problems for spreadsheet builders; they are complex
subjects in themselves, and they can be a source of circular references. Interest is paid on
the balance in the bank, and if the constructor is not careful, the interest will affect the
balance and the spreadsheet program will complain about a circular reference. Taxation
can also trigger this effect: tax depends on profits; some profits are retained and add to cash
55
balances; and an increased cash balance earns additional interest creating an additional tax
liability.
Company income tax

The following diagram describes how company income tax can be handled safely; strictly
speaking, this method is correct for a monthly or quarterly set of accounts, but if the planner
decides not to prepare monthly accounts for a particular proposal, this method is accurate
enough at the pro forma stage to be used on annual projections:
The taxation authorities, at least in Australia, but as a fairly general rule in many
countries, take a ‘lifetime’ approach to corporate taxation, with the proviso that they never
give anything back without a monstrous fight. Accumulating income from day zero, and
accumulating tax from the first payment, makes it easy to calculate the additional tax due
in any single year. Note that if the accumulated income is negative, no tax is payable;
similarly, if the accumulated income at the end of one year is less than that at the start of
it, no extra tax will apply. This model can cope with different tax rates; the tax calculation
used should avoid negative amounts. Some firms treat the notional negative tax on a loss
as a future tax benefit on their balance sheet: this is the sort of shonky accounting that
makes potential investors in a venture suspicious. Even when this trick is deemed
acceptable, there is no actual cash returned from the Tax Office and so the negative income
tax should have no effect on the firm’s cash position.
Interest and debt

Interest and cash balance projections cause a lot of grief. Real corporations, and even
medium sized companies, have many different debt instruments and accounts, each of which
has its own interest rate and repayment schedule. The official accounts of such companies
56
report these debts under two headings: ‘Short term’, meaning that the company is obliged
to have the resources to repay or refinance them during the next accounting period, and
‘Long term’, meaning that, assuming no breach of the loan conditions, the debts need not
be repaid in the next accounting period.
At the pro forma level it is generally sufficient to divide debt into current, or ‘Overdraft
at bank’, and long term. Net cash flows go to the bank, where they may move the account
from positive, and reported as ‘Cash at bank’ to negative and reported as ‘Overdraft at
bank’, or vice versa. The solvency condition is then that current liabilities, including any
bank overdraft, must be less than current assets, so that the enterprise will be able ‘to meet
its debts as they fall due’. This can leave net assets, and equity, negative with the firm
trading on hope and its long term debt. If the long term creditor is not a family friend or
statutory investor, however, the conditions of any general purpose loan are likely to include
a requirement that net assets remain positive, ensuring that the loan is not exposed to the
57
same risks as equity. Creditors whose debt is secured on a specific asset may not be quite
as concerned about the general condition of the firm.
The interest/debt diagram is one of the most complex; two points to notice are:
Ë interest should be calculated in the way that is most favourable to the creditors, so
that the minimum balance should determine interest earned and the maximum
balance should determine interest payable. In the diagram, this is shown by taking
the current and previous balance sheet figures into the calculation
Ë because interest payments affect balances which affect interest payments, interest
calculated for one period and shown on the income statement for that period must be
parked on the balance sheet until the next period before appearing in the cash flow
and from there affecting the current account at the bank.
On the interest/debt diagram the principle of accumulating rows on the balance sheet and
showing current period values elsewhere is maintained.
Materials
Materials usage is fairly straightforward:
A sale (or possibly a shipment) triggers a draw-down of materials creating an inventory

movement; a related, but notionally independent, purchasing decision replenishes the
inventory and generates a payment, part of which may occur in the current period and part
of which may be deferred to a subsequent period or periods. In this diagram the running
value of the inventory is maintained in the balance sheet and slaved elsewhere if needed.
It would be bad programming to maintain such a balance in two different parts of the
spreadsheet.
58
The inventory model outlined here and described in Entrepreneurship1 is suitable for
a set of pro forma accounts, but is very simple compared to the inventory control and
management systems needed by an operating business.
Fixed assets
Firms will generally need a number of ‘fixed’ assets, and for an operating firm the
maintenance of an asset register is a major task, never performed perfectly and often
performed perfunctorily. The clerical effort needed to record the acquisition, movement and
disposal of fixed assets is often a prime candidate for downsizing as it is easily seen as an
activity with no direct link to a firm’s value adding operations. An extreme case of this
occurred at the Budget Rent-a-Car company before its reorganisation under an
administrator in 1989, with some 600 vehicles known to have been purchased but whose
whereabouts was a mystery. The managers of the company were even prosecuted for selling
vehicles that were still under lease, but successfully defended themselves by showing that
it was impossible to determine which vehicles were under lease and which were not, given
the state of the firm’s information systems, and the incident was an honest mistake.
At the level of pro forma accounts it is permissible to simplify the asset register quite
drastically, sometimes merely running a single heading for ‘fixed assets’ or possibly three
headings, one for plant and equipment used in the production of goods and the delivery of
1
Legge & Hindle (1997) op. cit.
59
value-adding services, a second heading for ‘Equipment, other’, and a third heading for land
and buildings.
In Australia, depreciation can be calculated by the diminishing balance method, where
each period’s depreciation is a simple fraction of the previous period’s WDV, or by fixed
amounts based on the item’s original cost. The first is easiest to calculate; the choice for an
actually operating company will be made by its CFO after some agonising, since the Tax
Office frowns on companies that choose one method and subsequently start using the other.
Continuing to depreciate an asset after the WDV reaches zero is a common error on pro
forma accounts.
If a projected enterprise plans to dispose of some assets during the life of its plan, any
difference between the WDV at the date of disposal and the amount realised becomes an
extraordinary profit or loss. In the diagram above, the costs of buying assets are split
between the current period and future periods, since many such purchases are on 30 day
credit or even more generous terms. Disposals are taken into cash flow in the period that
the disposal occurs, since, in general terms, the asset is not disposed of until the cheque is
successfully banked.
The capital account

An enterprise’s equity structure can cause novice planners some grief. One point of
potential pain is the dividend: since a dividend reduces a firm’s cash balances it will affect
its interest obligations which will eventually affect its after tax profit. Prudent planners
who include a check that the proposed dividend is legal, in that accumulated (not just
current) profits are adequate to cover it may find that their spreadsheet complains of a
60
circular reference. Good practice, as illustrated on the preceding diagram, puts the dividend
into a balance sheet provision in the period in which it is declared and draws it down from
the cash flow in the following period.
By contrast, capital subscriptions and capital returns are taken into cash flow in the
period in which they occur, because title to shares issued or surrendered changes when
payment is made, not when the transaction is agreed.
Summaries
Only potential investors carrying out a complete due diligence examination will wish to
examine the monthly pro forma accounts in any detail. Even then monthly projections more
than a year or so into the future are more in the nature of informed guesses than definite
plans. In a running company, of course, the accounts must be kept current, either in quasi-
real time with the use of an advanced accounting package or at least monthly for firms with
manual or semi-automated accounting systems.
Planners may choose to prepare pro forma accounts on an annual basis, saving the
effort of preparing monthly ones until a due diligence auditor asks for them, but there is
very little extra effort involved in making monthly projections until the end of the plan
period and summarising them into an annual presentation. As long as the construction
rules set out here are followed, entries in the income and cash flow statements will be the
sum of the entries for the months or quarters making the year up, while the balance sheet
reports will be those for the last period in each accounting year. Adding up balance sheet
rows, or reporting single months in the other statements, can make the annual summaries
look very strange.
61
7
The management team
A good team can make an ordinary proposition work, while a poor team may wreck an
outstanding one. Equity investors, in particular, will rank the quality of the management
team ahead of all other considerations when deciding whether to support a venture. Fixed
interest lenders can generally look to taking control of some security if the venture does not
prosper, but equity investors stand to lose their whole investment if the venture
management proves incompetent or untrustworthy.
When an investor is considering supporting a venture, or when corporate managers are
considering backing an internal proposal, any suspicion about the integrity of the venture’s
managers or the honesty of their proposal will usually be sufficient to prevent the venture
gaining support. In many corporate environments, even when a venture is successful, if
hindsight reveals that corporate management was deliberately deceived to gain its support,
the venturers, even if they keep their jobs, have little chance of ever being supported again.
Managerial competence is a more complex matter than managerial honesty, and the gap
between the ideal and achievable standard of proof is often going to be wide. Would-be
venturers often lack extensive experience: when a venture is pursuing a radical innovation,
there may be no living person available with directly relevant experience. Sometimes the
lead entrepreneur will have unrivalled experience in some particular aspect of the venture,
often the technical ones, but little experience or even understanding of other key areas, such
as marketing or finance. The two most acceptable surrogates for experience are appropriate
qualifications and the presence of a suitably experienced mentor.
In structuring the management team for a proposed new venture it is important to
achieve satisfactory cover for each of the key management areas. Every venture needs a
chief executive, both as a representative to the world at large and a decision maker of last
resort. If the venture plans rapid growth an experienced financial accountant will be
essential: shoe boxes to keep the receipts in between annual visits from the local accountant
won’t suffice. If the business will be involved in manufacturing an experienced production
executive will be essential while if the business has a major service component, someone
skilled and experienced in planning service delivery and training the service personnel will
be vital.
Businesses need customers, and this means marketing and sales staff, and
merchandising staff as well if the firm’s products are to be sold through mass-market
retailers. As the venture grows it may find that it needs specialist executives in charge of
each of these three areas, but at its launch the venture may have to concentrate on the most
important one: this will probably be the sales manager if the business’s customers will be
primarily other businesses, the merchandising manager if the main outlet is mass market
retailing, and the marketing manager in most other cases.
62
Table 7.1 Key executive positions and appointments
Responsibility Critical? Holder Status? Salary Shares Subscribed
Chief executive
Chief financial officer
Research
Development
Marketing
Sales
Merchandising
Production
63
Purchasing
Service delivery
Training
HR
Legal
Information systems
Other 1
Other 2
Other 3
If a business is pioneering the application of advanced technology, the quality of its
R&D management may be crucial, and there is little reason to hope that the inventor of a
new venture’s key products will also be the best person to supervise a professional team
engaged in readying it for the market. If it is politically necessary to give the inventor an
impressive title, it may be necessary to appoint a separate, suitably experienced,
development executive.
Table 7.1 lists some executive positions and invites the planner to note their
significance and any preemptive appointments. A plan can be acceptable if some of these
positions, even necessary ones, have no identified occupant, but the positions described as
critical must have a name. The status column can be used to show whether the nominated
person has accepted the position, is negotiating, or hasn’t yet been approached.
The salary information will be used to demonstrate to a reviewer the seriousness with
which the appointment is viewed and the shares held and the amount subscribed will
indicate the probable commitment of the appointee to the venture. For the sales director and
any other person with a substantial bonus scheme indicate the on-target earnings, a more
meaningful number than the salary.
Résumés
Table 7.2 (which has space to capture details of four venture executives) allows the planner
to capture the most important facts about the key executives for the venture.
The table is largely self-explanatory: the ‘mentor’ entries are not essential, particularly
when the nominated executive has highly appropriate qualifications and recent, relevant
experience. When the nominated executive is relatively young, or has relatively little
experience in positions with similar duties and responsibilities to those that participation
in the venture will involve, the ability to cite a mentor will greatly improve the credibility
of the resulting plan.
64
Table 7.2 Executive profile
Responsibility Name
Most recent appointment Salary
Relevant qualifications Age
Significant experience
Mentor
Mentor’s relevant experience
Responsibility Name
Mentor
65
[This page is intentionally blank]
66
Table 7.2 Executive profile (continued)
Responsibility Name
Mentor
Responsibility Name
Mentor
67
8
Writing the plan
To this point we have told the planner to collect data and to build a marketing and financial
model using a spreadsheet program. There has been a certain logic in the order in which we
have suggested that the data should be collected, but raw data is never very reader-friendly.
The penultimate stage in planning is to prepare a persuasive case to be presented to a
target audience: basically, a written plan plus supporting material.
The first step is to clarify four main points:
Ë Who is presenting the plan?
Ë Who is the plan being presented to?
Ë What are they being asked to do?
Ë What will they get from doing it?
The plan is a message

An entrepreneurial business plan is not a work of art or literature, produced to be valued
and admired for its intrinsic excellence. It is a working document, produced as an essential
part of an intention to create a new enterprise or to reinvigorate an established one.
Occasionally the message is self-directed, formalising the author’s intentions and not
intended to be read by any other person. Most entrepreneurial business plans are intended
to stimulate another person or group of people into taking some specific action or actions.
The first thing any reasonable person asks, when requested to do something is: Who is
asking?
Who is asking?
If a plan is a message, someone is sending it. The sender may be the author, but more
usually it is the author on behalf of a team of which the author is a member, or sometimes
the author has been engaged specifically to prepare a plan by some third person or group
of people.
When someone sets out to write a document, they seldom start with the question ‘who
am I?’ uppermost in their minds. When someone picks up a document and starts to read it,
the question ‘who wrote this?’ is, by contrast, very important. Great novelists and
storytellers know this, and so books and screenplays almost always start with a passage
that identifies the principle actors, or protagonists, and the (supposed) author as well if the
author is represented as participating in the action.
Business plan writers should not be coy or artful: the authorship and authority should
be stated on the title page and amplified, if necessary, at the start of the executive
summary. A sentence such as ‘This plan has been prepared by … and … on behalf of …’ will
generally suffice.
68
Having decided who the author is, and who the author is representing, it is then im-
portant to remember this throughout the construction of the plan. We recommend that the
plan be written in the first person plural, the editorial ‘we’, partly for readability and partly
to keep the reader (and the writer) focussed on the need to make a response to the plan.
Who is the audience?

A message needs an address: it is discourteous to waste people’s time by exposing them to
documents that they have no interest in reading; and it can be a serious waste of the
planner’s effort if the people who should read the document fail to realise that its contents
may be meaningful to them.
Many plans are written to raise money, but money comes from many sources: banks,
other lenders, private investors, professional investment funds, business angels, fellow
members of a team, public donations, government support schemes and others. If the
planner is serious, any reasonable reader will infer from the title page, and be certain by
the end of the first paragraph of the executive summary, who the target audience is and
whether the current reader is a member of it.
If an approach is being made to a bank or investment fund the title page and opening
paragraphs should be customised appropriately. The effort required is minuscule on a
modern document processing package, and the effect can only be positive.
Whoever is being addressed, the plan writer must make an effort to understand the
audience’s priorities. For serious plan evaluators these usually are, in order:
1 Is there a market for the product that the plan proposes to introduce, and if so,
how big is it?
2 Is the venture management team trustworthy, and competent to carry through
the plan?
3 Are there any major regulatory, technical or moral problems that must be
resolved before the venture can be a success?
4 Does the financial plan, as described in the pro-forma statements, describe a
reasonable use of the investor’s funds and offer the investor a reasonable return?
Many novice plan writers devote the great bulk of their written plan to a description of their
technical proposal: at best, this can impress the reviewers with the author’s technical
competence, but misses the investors’ two major concerns entirely. Other inexperienced plan
writers devote excessive space to the financial statements and show great ingenuity in
devising an investment proposal, failing to show proper concern for any of their potential
investors’ top three concerns.
Style
A good business plan is easy to read without being condescending or pompous. Not everyone
finds it easy to strike the right note: a good place to find excellent writing in the appropriate
style is the business sections of the major broadsheet newspapers, or the reporting (not
always the opinion section) in the Australian Financial Review. Indirect expression, such
as ‘…it is suggested that…’ when what is meant is ‘…we suggest…’ strikes many readers
as a way to evade personal responsibility: it may be meant to be formal, but it just makes
the text harder to read and much harder to sympathise with. ‘We’ is quite acceptable, even
69
for plans with a single notional author. It suggests the presence of an entrepreneurial team,
and avoids the clang of excessive egotism.
An excessive use of short sentences gives text a staccato effect. This is less of a problem
than text full of long sentences that ramble on interminably without ever seeming to come
to the point. The ancient Romans invented the ‘tricolon’, a sentence formed of a statement
followed by two qualifying clauses, and the same technique is the foundation of good English
writing. Edward Gibbon was one of the best exponents of the tricolon, but an unbroken
series of them, as in the eight volumes of Decline and Fall of the Roman Empire, can become
monotonous or even intimidating. A few short sentences add variety.
Structuring the plan

Many books on business planning present their readers with a table of contents. For some
projects a given table of contents will prove useful to the author and lead to a plan that
informs without insulting or distracting the reader, but the same table of contents, when
used for a different project, may produce a plan that is hard to follow and even harder to
appreciate.
There are, we believe, some essential elements in every plan, and as long as they are
present in an order that makes sense in the context of the project being described and the
audience being addressed the resulting plan is likely to prove acceptable. We present the
elements that we consider essential below. The order suits our convenience, but we do not
prescribe it.
The title page

The title page of a plan serves as an introduction to its audience. To paraphrase Groucho
Marx, the only people who must read a given plan are those who are too busy to do so. If
they are presented with a document that says, explicitly or implicitly, ‘I am unimportant’
the people who ought to read the plan are practically directed to ignore it.
Some planners may find themselves working for corporations where there is a standard
for the front covers of reports laid down. Such standards should be followed, but where the
rules permit the use of colour, fonts and layout should be such as to make the document look
authoritative and prepared with care. Where no standards exist, it is worth investing a
certain amount of effort in making the cover distinctive — and relevant. Dancing girls are
an appropriate decoration for a proposal to revive A Chorus Line but are less suitable for a
project to develop a new religious retreat.
A few things are absolutely essential on the cover:
Ë the title of the plan
Ë the name of the author(s)
Ë the sponsoring authority or entrepreneur, where this is not the author(s)
Ë the confidentiality status.
When a plan is being prepared as a student exercise, the appropriate red tape should be
placed in a box on the cover, clearly distinguished from the plan itself. The examiner will
wish to see that the title page is appropriate in view of the audience and the contents; since
the examiner will not, in general, be a prospective investor, partner or employee of the
venture, addressing the plan to the examiner should normally mean some loss of impact.
70
Executive summary
Practically every plan must include an
executive summary, and in most cases it
should be the first thing that a reviewer
sees after the title and possibly the table of
contents. The title page is intended to
catch the interest of the people whose
attention is essential if the planning docu-
ment is to succeed in initiating a project:
the executive summary persuades these
same people to read the rest of the plan.
An executive summary should not be a
précis of the plan that it accompanies. It
should contain the minimum amount of
information a reviewing executive needs in
order to decide whether to read the rest of
the plan, to pass it on to someone else to
review, or to pass it over altogether. The
following points must be covered:
Ë who has prepared the plan, and upon
whose authority and/or instructions
Ë who constitutes the primary target
audience
Ë what action members of the target
audience are being called upon to take Figure 8.1 Sample title page
Ë what the expected result of these
actions is, and (unless this is perfectly
obvious) why members of the target audience should desire these results.
Some points will only be required for specific audiences:

Ë when a plan for an initiative is to be presented to the management of an existing
business the executive summary must identify the agreed business strategy that this
plan supports
Ë when a plan is intended to raise venture funding the proposed method of harvest
must be outlined
Ë when a plan is intended to support an application for debt finance the nature and
accessibility of the security and the adequacy of the cash flow to cover the interest
and principal repayments must by stated clearly
Ë when the plan proposes a novel product or process the executive summary should
contain an indication of the technological risk implied
Ë when the plan proposes the introduction of a new product the executive summary
should contain an estimate of the potential market’s size and the confidence with
which this can be stated
Ë when a plan requires action by unrelated parties the executive summary should
include appropriate highlights of the qualifications and experience of the
entrepreneurial team.
71
There can be no absolute limits to the size of an executive summary, but any summary that
exceeds two A4 pages or 600 words is going to stretch the patience of most of its potential
readers.
The project overview

By no means all plans need a section headed ‘Project Overview’, but it is essential that the
information described in the subsections below is conveyed to any appropriate plan reviewer
who reads to the end of the formal plan and before the reviewer starts on any of the possible
supplements and appendices.
The gap
Two things are necessary before an initiative, whether a product or process, makes sense:
there must be some difference between the current state of some identifiable set of people
or existing enterprises and a possible, more desirable, state; and the initiative must enable
these individuals and enterprises to close that gap at an appropriate cost. A plan reviewer
needs to be convinced that the gap exists as well as being convinced of the technical
excellence of the proposed solution.
Experience shows that far more new enterprises have come to grief because their
initiators had dramatically overestimated the demand for their product than have failed
because their product was technically unviable. The simple assertion that a gap exists will
not convince an experienced reviewer: if it is real, why has no one else taken advantage of
it already?
The market
A gap, as described above, is an essentially technical matter. The market is defined by the
number of people and enterprises that experience that gap and the amount of money that
they are prepared to pay to have it closed. Since this is a numeric estimate it should have
both an absolute magnitude and a confidence interval. Both these numbers should be set
out clearly in the plan, together with an account of the research that supports them.
A plan for a process improvement within a corporation may have one customer only: in
such cases the reviewer must be told that the designated internal customer acknowledges
the existence of the nominated gap and the desirability, and value, of closing it.
The product
The introduction of a new product or process may involve elaborate research and
development projects followed by major production and training efforts. These projects are
properly the subject of their own project plans, relying on a business plan for their
expenditure authority. Their plans are not part of the business plan and should not be
bound with it.
The business plan should include the minimum amount of information needed to assure
the plan reviewer that the project is technically feasible and to convey an appropriate degree
of confidence in the cost estimates associated with the various stages of the project. There
may be many things that the plan authors consider it proper for the plan reviewers to know,
but unless these are matters with a direct bearing on the reviewers’ assessment of the plan,
they should not be included in it.
72
The management team
This section is crucial to any plan intended to raise funds in any form from unrelated
parties, while it may be of minor importance in a proposal for an internal initiative within
a corporation. Its absolute importance will vary in plans prepared under other
circumstances, but even for a purely self-funded expansion of an established small or
medium enterprise it offers the opportunity for a critical survey of the strengths and
weaknesses of the management team.
The section on the management team serves two purposes: it shows that the senior
executives of the proposed venture have the experience, supplemented as necessary by
qualifications, to carry out the tasks to which they are proposed to be assigned; and it shows
that the planner has designed a complete management structure.
Many student and novice entrepreneurs’ plans raise questions in their reviewers’ minds
by appearing to leave no one in charge of some vital business function, such as marketing,
finance or sales: such plans are often very strong technically but technical excellence is
seldom enough. Other students and novice entrepreneurs prepare plans with an excellent
marketing or sales focus but which neglect the product itself, or fail to acknowledge the
requirement for training service providers or merchandising a new consumer product.
Some sensitivity to the national prejudices of the probable reviewers may be helpful.
Forms of expression that might, in one culture, be seen as signs of a properly justified self-
confidence might, in others, be regarded as vainglorious boasting. In the other direction,
what reviewers in one culture may regard as proper modesty could be treated in another as
an admission of inadequacy.
The marketing overview

The world beats no paths to the door of the inventor of a better mousetrap. Except in the
particular case of process change entirely internal to an established enterprise, the
successful creation, expansion and defence of a customer base is essential to the success of
any new venture. Building an adequate customer base will require substantial expenditure,
competently administered.
The entrepreneurial team in charge of any serious new venture will prepare a complete
marketing plan which will often be much bigger than the business plan that it supports.
This will almost certainly be true of a multinational plan, where each country must be
allocated its own budget and targets and must develop its own media and sales plans.
The business plan should contain an overview of the marketing plan, setting out
aggregate phased budgets and targets, outlining the media and sales strategies, and
covering key factors such as training of sales and support staff, incentive schemes for sales
staff and distributors. It should also state clearly whether the full marketing plan has been
completed and made available for inspection, and if it hasn’t, provide a budget in money,
time and person power to prepare it before the product is actually launched.
Financial analysis
Plans developed within corporations should adopt the style and presentation rules as set out
by the corporation’s financial controller’s department; in other cases the layout described
here should be used unless there is a sound reason to do otherwise.
73
Statements
Pro-forma income (P&L), cash flow and
Serif fonts (like this) should be used for
balance sheets should, in most cases, be
body text since they are familiar and
displayed covering the first twelve months
easy to read.
of the enterprise’s existence by month and
the first five years by year. They should be Sans serif fonts (like this) are suitable for
laid out to fit in a double-page spread for numeric tables, particularly when a lot of
the twelve month figures and on a single numbers must be fitted into a small space.
page for the five year figures (note that
balance sheets need to show an opening 9 point type (like this) is easily read accurately by
people with reasonable eyesight.
balance in both the monthly and annual
presentation). Fonts smaller than 9 point
sans serif should not be needed: if the presentation threatens to spill over one page, lines
should be combined and analysed in a separate schedule presented as part of the Notes. The
statements should be supported by adequate ‘notes’: one note per line on the income
statement would not be excessive.
Charts
Charts may be used to support the financial statements when the use of such charts will
make it easier for the reviewer to understand the proposal. Two charts are essential in any
plan offered to unrelated sources of finance: the breakeven charge and the cumulative cash
flow chart.
Ë The breakeven chart shows the gross and net margins projected to be earned by the
business, either by plotting the margins directly or by showing the revenue and the
variable, fixed and total costs against the level of business expressed as a percentage
of the planned level. Separate charts may be needed to show the position at the end of
the first year on the market and after three years if the balance between fixed and
variable costs is expected to change significantly as the venture develops.
Ë The cash position, or cash balance, chart shows, for revenue at the targeted level and
at some lower level, often 75 or 80 per cent of target, the projected cash position of
the enterprise. The X-axis of this chart is time. The cash position chart should clearly
show the lowest point that the business’s cash balances will fall to and the time when
the balance will turn positive. Any negative cash balances must be secured against
equity in the form of tradeable assets or enforceable guarantees. The reviewer will
inspect the cash position chart to estimate the amount of capital that must be raised
or guaranteed and the degree of risk that this capital will be exposed to.
Spreadsheets
Reviewers are entitled to receive a copy of the marketing and financial models used to
generate the statements and charts. Apple users should note that Apple Mac computers can
read IBM format floppy disks but most PC users have trouble reading Mac disks.
Red tape
The written plan may usefully conclude with appendices, one listing the principal sources
and another listing the (separately bound) supplements that should be examined in a full
‘due diligence’ investigation.
74
9
Presenting the plan
A written business plan is necessarily a relatively formal, structured document, ‘covering
all the bases’. Any real reviewer will be comfortable with some sections of a well-prepared
plan but have concerns in other areas, and different reviewers will have different concerns,
arising out of their own previous experience. Any written plan that attempted to address
every possible concern would be so long that no one would read it, and so the written plan
needs to be supplemented by a presentation.
There is one immutable rule about such presentations: don’t simply read the written
plan to the audience. In general a presenter should only recite material from the written
plan in response to questions. It is conventional to assume that the audience at a business
plan presentation has read the written plan reasonably carefully, and impolite to make a
point of proving that anyone hasn’t. In practice, many of the audience will not have opened
their copy of the written plan until minutes before the presentation started. The presenter
should treat this as a sign of confidence in the general validity of the plan rather than
contempt for the effort that went into preparing it.
There is a near-immutable second rule, and that is to find out before the presentation
how much time has been allowed and spend no more than half of this talking and showing.
Half the time should be left for questions and the possible showing of some prepared ‘encore’
material if the audience asks for it. People who go on too long not only irritate their
audience; they may see the key decision maker leave before the presentation is completed.
By contrast, a well-structured presentation that runs to the allotted time leaves open the
possibility that the key decision maker may decide to keep the session going past the
allotted time to explore the proposal more thoroughly: in sales parlance, this is a clear ‘buy’
signal, and you wouldn’t want to miss it.
Media
The minimum standard acceptable today is a spoken presentation supported by coloured
OHP transparencies prepared by an appropriate computer package such as Corel Presen-
tations® or Microsoft Powerpoint®. These packages allow for the preparation of interactive
presentations with hot buttons tending towards complete multimedia experiences. Some,
but not all, key decision-makers will be happy to use a multimedia system to examine a
business proposal.
Careful use of video recording can be used to illustrate marketing research results or
to demonstrate the operation of a prototype. Care should be taken with the shooting and
editing of such video clips: they should aim for a ‘documentary’ appearance, avoiding looking
like a home video or a shopping channel promotion.
75
Objectives
The ultimate objective of a presentation will be to secure the participation of the audience,
or key members of it, in the project described in the business plan. Few presentations end
like a revivalist meeting, and so the ostensible aim of a presentation should be to secure the
agreement of the key decision makers present to proceed to a full due-diligence examination
of the entrepreneurial business plan and its supporting documentation.
This is not a trivial decision: professional venture funds carry out a full due-diligence
examination on less than one in fifty of the proposals put to them. There are probably
several viable projects in the forty-nine that don’t make it, but the initial scan of the plan,
or the first and only face-to-face presentation, failed to catch those plans reviewers’
imagination. People who commence a presentation with the attitude that the audience is
obliged to respond favourably to their proposal are making a serious mistake.
The universe of the possible is infinitely larger than the universe of the actual. The
people whose cooperation the entrepreneur needs will always have alternative uses for their
time and money. Even when there is no current alternative superior to the entrepreneur’s
plan, the reviewers know that tomorrow may offer them one. To endorse one plan is to reject
an infinite number of alternatives: people who seek such an endorsement should be con-
fident in the quality of their proposal, but they should also respect the serious nature of the
decision that they are asking their audience to make.
76

Entrepreneurship Workbook (2 Ed) - Legge

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Entrepreneurship Workbook (2 Ed) - Legge

Загружено:

Авторское право:

Доступные форматы

Web support material to accompany Entrepreneurship: Context, Vision and Planning

© John Legge & Kevin Hindle 2004, published by Palgrave Macmillan.

Entrepreneurship: Context, vision and planning

1 Using this workbook 1

2 The product and its market 3

5 The financial feasibility model 42

7 The management team 62

8 Writing the plan 68

9 Presenting the plan 75

Entrepreneurial business planning

Basic product description

Basic method of distribution

Cost of acquisition and ownership

Frequency Of use Of purchase

General nature of consumables

Basic method of distribution

Frequency Of use Of purchase Expected

Table 2.3 Ancillary services

Frequency Of use Of purchase Expected annual

Frequency Of use Of purchase Expected

Table 2.5 Ancillary services (second box)

Frequency Of use Of purchase Expected

1 ......................... ..... .....

2 ......................... ..... .....

3 ......................... ..... .....

4 ......................... ..... .....

Age and income ranges

Other distinguishing features

Sex G Male G Female G N/A

Cohort size, entry and exit rates

Customer firm size

Aggregated financial data

Financial data Gross revenue Total VA Total profit

Revenue growth Profit growth

Leave and holidays

Idle time provision

Long service leave

Idle time provision

Table 2.10 Primary product cost and margin

Payroll tax and superannuation

The result is the direct labour cost.

Spares and consumables

Computing the AAGM

Product security Launch day value (fraction

Patents and designs

Patent/design number 9 Held 9 Licensed 9 Applied for

Patent/design number 9 Held 9 Licensed 9 Applied for

Trade marks and business names

Training courses for staff

Training courses for users

Computer systems – operational

Computer systems – user

Table 3.3 Business names and trade marks

Trade and other secrets

Table 3.5 Information security

Table 4.2 Strategic targets

Chief financial officer and major

Information systems management

New product development and

Production and delivery

Sales management and reporting

Service management and

Human resource management