C H A P T E R

23
How to make a business plan
Barbara Masciocchi*
NextChem, L’Aquila, AQ, Italy
* Corresponding author. e-mail address: b.masciocchi@nextchem.it

1. Introduction to review progress toward goals and to compare

actuals against financial projections.
1.1 What is a business plan? Typically, a business plan refers to a new busi-
ness; sometimes, it can be prepared for an estab-
A business plan is a written strategic document
lished business that is moving in a new direction
that describes how a business is going to achieve
or is changing strategy.
its goals. It provides detailed information about
Business plans usually cover the near future
each major component of the business (type of
(up to 5 years maximum).
business, products or services, operational
plan, marketing and sales strategy, financials,
projected profit and loss statement, and other el- 1.2 Who needs a business plan?
ements that are essential to both operation and A business plan is required by start-ups trying
success) and describes how all these will be to raise funds (from banks or investors); anyway,
executed and will work together. it is also useful for any existing, well-established
It can be considered the document that sum- business that is trying to grow.
marizes and communicates the main results of In case of start-ups, the business plan is
the analyses and evaluations carried out before focused on explaining what the new company
launching a new business: traditional strategy, is going to do, how it is going to accomplish its
marketing, and accounting analyses are all put goals, and also details the amount of money
together in the business planning process. needed to bring the business from the initial
Depending on the final objective, it can be a growth phase to profitability. Moreover, the
formal document prepared to be shared with po- business plan writing process can also help to
tential investors, or in other cases, it can be uncover concept weakness, market mispercep-
developed for internal company use: in both cases, tions, and serve as the business roadmap.
it should be a dynamic document, continually In case of existing businesses, a business plan
modified and updated as conditions change can be a critical driver of growth, to help focus
and new opportunities and/or threats emerge, strategy, manage milestones, manage metrics,

Catalysis, Green Chemistry and Sustainable Energy

https://doi.org/10.1016/B978-0-444-64337-7.00023-9 465 Copyright © 2019 Elsevier B.V. All rights reserved.
466 23. How to make a business plan

assign and track responsibilities and perfor-

mance, and manage money using projections
for sales, costs, expenses, and cash. According
to a study by Professor Andrew Burke, the
founding Director of the Bettany Center for
Entrepreneurial Performance and Economics at
Cranfield School of Management, businesses
that write plans and use them to manage their
business grow 30% faster than businesses that
take a “seat of the pants” approach.
In general, a business plan can be prepared to
do the following:
• start a new business
• support a loan application
• raise equity funding
• define objectives and describe programs to
achieve those objectives FIGURE 23.1 A business plan is a part of the business
• evaluate new products line, promotion, or planning process.
expansion
• create a regular business review and 2. How to write a business plan
correction process
• define agreements between partners A business plan can be prepared starting from
• set a value on a business for sale or legal a very simple template, then adding information
purposes. and therefore complexity. It can be also written
following the six “W”s strategy (who, what,
why, where, when, how).
The simplest business plan is the three senten-
1.3 What makes a good business plan?
ces business plan focusing on the core of any
A business plan is a part of the whole business business:
planning process (Fig. 23.1) that includes 1. plan,
• product or service (what is the product or
2. undertake actions, 3. achieve results, and 4. follow-
service? what benefits does it provide and to
up.
whom?)
From this point of view a good business plan
• marketing (what marketing, advertising or
should be simple (easy to understand and to act
direct sales strategies fit the product or
on), specific (concrete and measurable objectives),
service?)
realistic (in terms of sales goals, expenses budget,
• finances (what are the major sources of
and milestone dates), and complete (including all
revenue? when will the business get to
necessary elements).
financial sustainability?)
In case of first-time business planning, it
might be helpful to seek mentorship or get help In the one-page business plan, secondary sec-
from someone more experienced within the com- tions are added to the three core components of
pany. This could prevent mistakes, waste of a business plan (team, costs, previous funding,
money and time, and can add value to the enter- target customers, size of opportunity, competi-
prise and steer in the right direction. tive business landscape, etc.).

V. Making business with new technologies

 2. How to write a business plan 467

FIGURE 23.2 Prospective market segmentation and size of identified target market groups.

The full-length business plan is a formal docu- 2.1 Cover page

ment including the following main elements:
The first page of the business plan should
- cover page have a professional aspect including the business
- executive summary or project name, the authors’ name, and the com-
- general company description or project team pany’s (or companies’) logo (Box 23.1).
members overview
- idea (product or service) description
- business stage
- market analysis 2.2 The executive summary
- marketing and sales plan The executive summary is a short introduction
- business management structure to the business plan (normally written as the final
- operational plan step of the business plan writing process),
- business model and revenue model providing a concise summary of the entire busi-
- financial plan ness plan and a general overview of the problem
- appendix that the proposed business is going to solve. It de-
In the following paragraphs a detailed scribes briefly the business (product or service),
description of the different sections of a business the target market, the business plan purpose,
plan is provided; examples based on the real and the financial highlights, and it is very useful
business planning experience of the author are if the business plan is made for external use (to
also included (for confidentiality issues, technol- seek potential investors, for bank loan, etc.): usu-
ogy names, product names, and partners’ names ally investors screen opportunities using sum-
have been changed). maries, not full business plans (Box 23.2).

V. Making business with new technologies

468 23. How to make a business plan

BOX 23.1

Example of ‘Cover page’

Example: Prepared by ..
[Project/idea name] Business Plan Date
Presented to ..

BOX 23.2

Example of ‘Executive summary’

Example: Partner A has strong competences in process
The proposed project will investigate a new engineering and project management for the
technology (NEWT) based on the use of an inno- development of the NEWT.
vative solvent (GREENSOLVENTX) to: Partner B is one of the very few international
players with the required chemical expertise in
• break down microalgae cell wall
development and production of the innovative
• enhance the extraction of high-added value
solvent (GREENSOLVENTX).
products
The proposed joint project is set to bridge these
• reduce both capital and operating costs.
issues and allow for the best possible outcome.
The potential impact of this NEWT is The proposed market entry strategy is there-
disruptive. fore based on the following steps:
Our assessment of the competitive landscape
1. strategic alliance with partner B to develop a
shows that the greatest barrier to a full-scale
patented system for NEWT
adoption of the NEWT based on the use of
2. lab-scale research developed by partner B at
innovative solvents (GREENSOLVENTX) is the
their facilities
lack of a very innovative solution capable to
3. proof of concept: strategic partnership with
significantly reduce both capital and operating
partner C to demonstrate on site the
costs.
developed technology.
Players in the field appear to be still in the
small to medium size range and therefore appear Although the future market share of the tech-
to be more liable to funding constraints to scale- nology and of our projection in this field is impos-
up and protect their technology. sible to assess at present (the sector is in constant
The same size issue may also explain the lack fermentation, and there is always the possibility
of suitable management and engineering exper- of new and different technologies reaching the
tise among such players, for a successful market market), we think the proposed project possesses
commercialization. a risk/reward ratio tilted firmly in its favor.

V. Making business with new technologies

 2. How to write a business plan 469

2.3 General company description or than other similar products. Main sections of
project team members overview: who this part of the business plan are as follows:

The general company description or project • product/service description

team members overview is an essential part of • product/service costs
the business plan. It includes the most important • customers’ needs/benefits
information about the company presenting the • sourcing and fulfillment of product/service
business plan or the project team members pre- • differentiators: what makes the targeted
senting it, mainly in terms of company history, product or service different from similar
management team, location and facilities, legal businesses
structure and ownership, mission statement, Supporting documents should be included in
company goals and objectives (in a clear and the appendix section at the end of the business
quantitative way), business philosophy, and plan (press releases, news articles, scientific
role in the project (in case of partnership). research, statistical analysis, market research).
This section may also include the owned intellec-
tual properties (background IPs) and the plans for
2.4 Idea (product or service) description: potential foreground IPs. Properly identified and
what, why protected IPs increase the financial value of a busi-
This is the core section of the business plan ness idea. IP rights give businesses a competitive
describing in detail the offered products/ser- advantage: excluding competitors from a market,
vices, the competitive landscape, and the creating a revenue stream from licensing or cross-
competitive edge of the proposed business solu- licensing, and improving the market’s perception
tion: what is offered and what makes it better of a product or brand (Box 23.3).

BOX 23.3

EXAMPLE OF ‘IDEA DESCRIPTION’

Example: more sustainable process for the following main
characteristics:
1. Project description • ..
.. • ..

1.1 Overview of competitive technologies 1.3 Technology NEWT: progress beyond

1.1.1 State of the art .. state of the art
1.1.2 Key issues First project objective: . .
• capital and operating costs Second project objective: . .
• scale up .
Fifth project objective: . .
l
1.1.2 Challenges .. 1.4 Patents and trademark
The NEWT is patentable, and the company
1.2 Competitive positioning will have a trademark.
When compared with the best-known
mentioned technologies, the NEWT results in a

V. Making business with new technologies

470 23. How to make a business plan

2.5 Business stage section company’s growth potential and opportunities

in the target market should be included.
It should clearly describe what stage the busi-
ness is in: idea stage, or prototype of the product 2.6.3 Market segmentation
available, or team and revenues already in and
the business focused on the growth. The market segmentation helps the business
owner to focus on the several types of potential
customers, and its crucial to market assessment
and market strategy. (Fig. 23.2) It can help to un-
2.6 Market analysis: how derstand the real competition, not just the specific
This is another core part of business planning. products or services, but also other products/ser-
This section describes the market in terms of mar- vices targeting the same customer needs, thus
ket analysis, data, projections, and competition. improving the marketing and sales strategies.

2.6.4 Market trends

2.6.1 Target market identification This section includes the identification of the
The identification of the target market (ideal most important changes in the target market
and potential customers) is a key element to and explanation on how these trends are going
building market campaign and sales processes to favor the offered product or service over those
that work. Target marketing is researching and offered by competitors. Trends of the market
understanding the prospective customers’ include historical and projected growth, histori-
needs, so it will be possible to focus the market- cal consumer choices, and product development.
ing budget on the specific segment of the market
that is most likely to purchase the offered prod- 2.6.5 Market growth
ucts or services. The identification of the target This section includes the explanation on how
market can be done by answering the following the target market has been growing or shrinking
questions: Who needs the offered product or service? in recent years, using data from credible sources
Where are the identified customers? Why do (i.e., market research firms).
customers make the choice they make? How do the In Table 23.1, each segment represents a cus-
customers behave? tomers’ group categorized according to the iden-
The target market identification process can tified market segments. The standard formula to
be made using social media insights, surveys, estimate the compound average growth rate
data from existing market research, etc. Narrow- (CAGR) is shown next:
ing down the target market is not limiting the (last number/first number)^(1/period)
1.
potential of the opportunity but is the process
of identifying ideal and potential customers 2.6.6 Competition in the targeted industry
and customizing a market campaign for them. This section includes a description of the
competitive advantages and disadvantages with
respect to players within the targeted industry.
2.6.2 Target market size It will be necessary to identify the following:
Historical and projected market data allow - major competitors in the target market, why
estimating how much of the market share the they are successful, and what are their
targeted business projects to harness. The shortcomings: where they fail could be an

V. Making business with new technologies

 2. How to write a business plan 471
TABLE 23.1 Classification of market segments. Each market segment is defined by the total number of potential
customers and by the estimated growth rate.

opportunity to pick up, differentiate from description of how to overcome barriers should
them, and carve out a niche for the business; be also included (Box 23.5).
- uniqueness or competitive advantages of the
offered product or service with respect to
competitive solutions; 2.7 Marketing and sales plan
- strategies for going up against competitors The marketing plan must outline how the
moving forward. target market will be reached, through viable,
Data on the specific products or services the effective, and consistent strategies, identifying a
proposed product or service is competing with market strategy that works for the targeted
and data on the companies that produce/pro- unique business. The marketing and sales strat-
vide them with their contact information have egy provide information about the following:
to be provided within this section of the business • company image (logo, brochures, defining a
plan (Box 23.4). budget for these items);
• advertising and promotions media selection,
2.6.7 Entry to market barriers defining a start-up and on-going budget for
A description of current and potential barriers advertising;
(production costs, marketing costs, brand recog- • product or service pricing, including the price
nition, patents, technology, etc.) to penetrate the list of the competitors;
market should be included. At the same time a • business location;

TABLE 23.2 Example of simple expense budget.

V. Making business with new technologies

472 23. How to make a business plan

BOX 23.4

Example of ‘Competitors analysis’

Example: - Few players prefer the design, building, and
Analysis of major competitors in high-added maintenance business model, depending on
value components extraction technologies from expertise and resources.
microalgae.
List of major competitors in development of
Distribution of players along the algae value
the GREENSOLVENTX
chain
- few players in the high-added value
components extraction technologies
development;
- nearly all players active in the high-added
value components extraction technologies
development from wet algal biomass are
focusing also on the concentration step,
developing proprietary processes. The market landscape can be graphically pre-
sented as follows:

Strengths
The most active players have the following:
- strong IP position
- integrated teams composed of biologists,
engineers, chemists, and internationally
recognized scientific advisors
- strong management teams with expertise in
the bio-energy market

Weaknesses
- Many players are start-up companies
pursuing the financing needed to scale up the
developed technologies.
- Many players need partnerships with
contractors to gain engineering and project
management expertise.

Business model
- The most common business model is the
licensing of the developed IP.

V. Making business with new technologies

 2. How to write a business plan 473

BOX 23.5

Example of ‘Entry to market barriers’ description

Example: - The first spin-offs/start-ups for
The assessment of the competitive landscape GREENSOLVENTX research and
shows that the greatest barrier to a full-scale development have been successfully created
adoption of the algal components’ extraction in Germany and the United States;
technologies is the lack of a very innovative solu- - Major international industrial and chemical
tion capable to significantly reduce both capital players are realizing the potential and
and operating costs. will invest in the deployment of the NEWT.
Players in the field appear to be still in the
small to medium size range and therefore appear
to be more liable to funding constraints to scale
Partner A/Partner B will be the first
up and protect their technology. known in Europe to focus on
The same size issue may also explain the lack GREENSOLVENTX applied to algae
of suitable management and engineering exper- processing
tise among such players, for a successful market The main barriers to the market entry are
commercialization. therefore these:
Partner A has strong competences in devel- - Partner A/Partner B would be first movers.
oping and managing research projects up to mar- We are aware of any competing research
ket stage, but it needs to join forces with a high- project boosting the same combined industrial
value-added and innovative technology partner and chemicals capabilities.
in algae processing using GREENSOLVENTX. - Barriers for new entrants are very high (þ20
The proposed joint project with Partner B is set yrs experience needed for preparation and
to bridge these issues and allow for the best characterization of GREENSOLVENTX).
possible outcome. - Know-how hedge is defensible by patenting.
The market assessment of technologies based
on the use of SOLVENTX for algae processing
shows the following:

• products or services distribution; 2.8 SWOT analysis

• forecasted sales, providing a month-by-
month projection of sales based on historical SWOT is the acronym that stands for
sales, marketing strategies, market research. strengths, weaknesses, opportunities, and threats.
A worst scenario, the lowest number of sales A SWOT analysis is an organized list of the
that could be reached in difficult situations, business’s greatest strengths, weaknesses, op-
should also be included. All data used to portunities, and threats.
reach these estimates have to be gathered and Strengths (positive factors) and weaknesses
put in the appendix section at the end of the (negative factors) are internal to the company
business plan. (location, competences, etc.).

V. Making business with new technologies

474 23. How to make a business plan

Opportunities (positive factors) and threats chart to show the management flow of the tar-
(negative factors) are external (competitors, geted business has to be created, providing a
price, etc.) (Box 23.6). list of management and key employees that
already work for the company, stating what
2.9 Business management structure experience or education each person brings to
the company, including a contingency plan if a
It is important to state what legal entity the key position were to be vacant.
business will utilize and if a board of directors
is required, and also define each person’s role,
including personal contact information and re-
2.10 Operational plan: how, where
sumes or CVs of all owners, partners, advisory
board members, attorneys, accountants, insur- This section of the business plan should pro-
ance agents, and bankers. An organizational vide information about the following:

BOX 23.6

B O X 2 3 . 6 Example of ‘SWOT analysis ’

Example:

V. Making business with new technologies

 2. How to write a business plan 475
• product manufacturing: how the products will streams. In this section a description of the strat-
be made, including information about egy to maximize the potential of any chosen rev-
manufacturing techniques, quality and enue stream has to be provided (e.g., by
inventory control, customer services; increasing the duration of the relationship with
• product location, including a layout of the customers, trying to figure out how to charge
proposed facility, estimated costs of rent (if more for the provided product or service by
applicable), utilities maintenance, and improving the quality of the product or service,
insurance; by targeting a more affluent market, by adding
• business hours: normal business hours or shifts; new features to the product or service that raise
• legal environment: permits, bonds, licenses, the value of them).
related trademarks, patents copyrights
(providing copy of mentioned documents in
the appendix section); 2.12 Financial plan: when
• staff: number of employees required by the It is important to have, and provide in the
type of labor, mentioning existing staff and business plan, a clear view of the overall finan-
qualifications, including plans on how to cial picture.
recruit skilled, unskilled, and professional The financial plan enables making financial
employees; projections, understanding how much money is
• inventory procedures; needed to start and run the business until reach-
• key suppliers. ing the desired milestones. At the same time, it
enables knowing perfectly how much money to
ask from investors to get the business to a spec-
2.11 Business model and revenue model ified milestone or to get the business off the
ground.
The business model is the description of how For large businesses, this part is normally
the different parts of the business (marketing, completed by accountants.
product improvement, finances, employees,
etc.) work on their own and together to create
and capture value for stakeholders in a compet- 2.12.1 Expense budget
itive landscape. This is an ever-changing process An expense budget sums month-by-month
that needs to be monitored by the management expenses incurred in the relevant year. It can
team. A business model consists of a set of be simple or complex, depending on the level
choices made by the management team and the of detail, allowing more control over how money
consequences of those choices (policy choices, as- is being spent (Table 23.2).
sets choices, governance choices); in this sense, it Tip: Each budget item must be assigned to an
is a reflection of the company strategy over the owner, who is responsible for it and authorized
entire range of possibilities comprising several for spending. At the same time, budget items
products/services, several target customers, and owners must be tracked and followed up
several kinds of financing, and several levels of (a simple way can be organizing a peer group
growth. While every organization has a business manager sharing results). A useful tool can be
model, not every organization has a strategy: a the creation of a milestone table (Table 23.3) that
plan of action for contingencies that may arise. summarizes the main activities envisaged in
The revenue model is part of the business the business plan, assigns them to dedicated
model and describes how and when revenue managers, specifies dates for completion and
will be generated: by one or more revenue budgets, tracks completion of the milestones,

V. Making business with new technologies

476 23. How to make a business plan

and compares actual results with the planned 1. the income statement, also called the profit and
ones. loss statement
2. the cash flow statement
2.12.2 Budgeting process 3. the balance sheet
The budgeting process may include the The income statement (or the profit and loss state-
following: ment) is a quite standard document, showing
• budget preliminary meeting: with main sales in the first part and then cost of sales. Gross
managers to discuss strategy and priorities, margin is obtained from subcontracting costs
sharing a template to facilitate each manager from sales. Operating expenses are also shown;
to prepare a simple proposed budget for the EBIT (earnings before interest and taxes) is calcu-
relevant area; lated by subtracting operating expenses from
• budget development and discussion: gross margin and profits (the so called “bottom
consolidation of the different budgets into a line”) by subtracting interest and taxes.
single total budget and sharing with all Sales e Costs of sales ¼ Gross Margin
managers, showing difference between Gross Margin e Expenses ¼ Profits
proposed budget and actual spending limits. The gross margin (also called gross profit) is an
important ratio for comparison and analysis;
This process will result in an accurate, real- acceptable gross margin levels depend on the
istic, and useful budget and also in a high level industry. A few service businesses have no spe-
of commitment from involved managers. cific cost of sales, which creates a gross margin
of 100% (e.g., a business consultant, attorney,
2.12.3 Forecasting for future months/years tax consultant have no specific cost of sales
“Statement” means data in the document for an engagement because the deliverable is
(coming from the past), “forecast” or “pro-forma” expertise).
means data estimated/projected future data. In the budgeting process, the described
A timeline for projections has to be estab- expense budget will become part of the profit
lished; fixed and variable costs and fixed and and loss table.
variable revenue sources have to be added, giv- Description of the financial terms used in
ing a range for uncertainty, looking at the trends Table 23.4:
of the industry and economy in general. In the • sales: exchanging goods/services for money;
case of an existing business launching a new • cost of sales (also called costs of goods sold, direct
product, a forecast can be made looking at the costs, and unit costs): raw materials and
existing product growth rates in previous assembly costs, costs of finished goods that
months and adjusting them to anticipate chang- are then resold, direct cost of delivering the
ing market conditions or business strategy service;
implementation. In case of new businesses, it is • expenses (also called operating expenses): office
much harder to make projections and forecasts rent, administrative, marketing, telephone
due to the lack of previous data on which to bills, taxes, and interest. All things that a
base any projections. business pays for but does not resell.
Expenses are deductible against income, so
they reduce taxable income but cannot be
2.12.4 Financial statement depreciated;
A financial statement contains three main • profit (also called income): sales minus cost of
sections: sales minus expenses.

V. Making business with new technologies

 2. How to write a business plan 477
TABLE 23.3 The milestone table.

All the expenses incurred during the first year A detailed profit and loss statement divides
will be shown in the profit and loss statement of operating expenses into categories, including
the first year; all expenses incurred before the “sales and marketing expenses” and “general
first year of operation are classified as start-up and administrative expenses” (Table 23.5).
expenses. A cash (liquidity) flow statement can be made
monthly or on a quarterly basis, using an ac-
counting system or an Excel spreadsheet. It can
TABLE 23.4 Example of standard income statement be useful to create two such statements, the first
or profit and loss statement. This is a one for the time period before the business start
partial graphic showing only 3 months (examples of before cash flow out are costs for
of a 12-month table. renting space, legal and business registration
fees, etc.), the second one after (examples of after
cash flow out are monthly rent, employee salaries,
utilities, liability insurance, marketing costs; after
cash flow into are represented by the different rev-
enue streams).
Ending Cash ¼ Starting Cash þ Money
Received e Money Spent
The cash flow is the change in the balance
from one period to another (usually month by
month). Cash balance is calculated by taking
the ending balance from the previous period
and adding (or subtracting) cash flow.
A standard cash flow can be divided into
different sections, cash received and expenditures.
An example of pro-forma (projected) cash flow
is provided in Table 23.6.
Some explanations of items in Table 23.6:
In the “cash received” section:
• “New other liabilities” is for items like
accrued taxes and accrued salaries and wages,

V. Making business with new technologies

478 23. How to make a business plan

TABLE 23.5 Example of detailed profit and loss statement with expenses split into categories. Only 3 months of a
12-month table is shown with additional 2 years data.

V. Making business with new technologies

 2. How to write a business plan 479
TABLE 23.6 Example of cash flow and cash balance.

money owed that will have to be paid, but is The cash flow “works” when all numbers in
not formally borrowed. the bottom row are positive. In case one or
• “New long-term liabilities” is for new money more numbers are negative, the cash has to be
borrowed on longer terms. adjusted to make them positive (investing more
• “New investment received” is for new money money, borrowing money, etc.).
coming into the company as an investment. The balance sheet (Table 23.7) shows a busi-
ness’ financial position reporting in detail; assets,
In the “expenditures” section:
liabilities, and net worth as defined here:
• “Cash spending” is money spent immediately
• Assets: cash, accounts receivable, inventories,
to pay expenses that are not invoiced (due at a
and properties (land, buildings, vehicles,
later date), e.g., wages and salaries.
furniture) owned by a business. Assets can be
• “Repayment of current (short-term)
“current” (anything paid in advance, stocks,
borrowing” and “long-term liabilities
etc.) and “fixed” (intangible assets like
repayment” are repayments of debt (regular
intellectual property). Assets can be defined
payoff of long-term debt or single payoff of
as anything with monetary value that a
the current debt).
business owns and can be usually sold to

V. Making business with new technologies

480 23. How to make a business plan

TABLE 23.7 Example of pro-forma balance sheet.

somebody else. Assets are not deductible

against income but can be depreciated
(usually long-term assets whose value declines
TABLE 23.8 Simplified example of break-even over time).
analysis. • Liabilities: money coming out of the business,
debts, notes payables, accounts payable.
Liabilities can be also “current” (payroll, bills,
etc.) and “fixed” (debt, bonds, etc.). One
definition is amounts of money owned to be
paid back.
• Net worth, also called equity: represented by
total (current and fixed) assets minus total
liabilities (current and fixed), ownership,
stock, investment, retained earnings.

V. Making business with new technologies

 2. How to write a business plan 481
Total Assets e Total Liabilities ¼ Net Worth revenue of 200 V per-unit, and average variable
The “cash” row is the balance calculated in the costs of 100 V per-unit, the line on the break-
cash flow table. even chart shows profits increasing and crossing
The “accounts receivable” is the money owed the break-even line at 1000 units/month (Table
by customers for sales already made. 23.8).
The “inventory” balance is calculated as the The units break-even point is:
previous balance minus direct cost of sales Fixed Cost/(Unit Price e Unit Variable Costs)
minus new inventory purchases. The sales break-even point is:
The “other current assets” is calculated as the Fixed Cost/(1 e (Unit variable Costs/Unit
previous balance plus new assets purchased (in Price)
the cash spent section of the cash flow table) If bank support is needed, it may be helpful
minus sales of assets (in the cash received section). include a statement of intent about how much
“Long-terms assets” are the depreciable assets money is being requested from the bank, requested
(plants, equipment, vehicles, etc.), where the bal- repayment and interest rates, and collateral
ance is calculated as last month’s balance plus offered.
new assets purchase, minus sale of assets. If investors support is needed, it may be use-
The “accumulated depreciation” decreases ful to include potential exit strategies, how much
the value of the capital assets. ownership interest is offered, and if there is a po-
The “accounts payable” balance is calculated sition on the board included.
as the last month’s balance plus additions (e.g., A standard business plan should explain the
operating expenses not paid as incurred, etc.) general state of the industry and the nature of
minus payment of payables. the business, also comparing projected numbers
The “paid-in capital” is money invested. to standard classified industry profiles in terms
“Retained Earnings" are the accumulated of average sales growth over 5 years, average
earnings reinvested in the company, not taken profitability, and balance sheet numbers. This in-
out as dividends. formation can be very valuable (Table 23.9).
“Earnings” are the accumulated earnings There are standard business ratios used to
since the end of the last year. At the end of the evaluate a business performance or business
year, earnings still left in the business become health. They can be easily generated after having
retained earnings. developed projections for sales, profits, cash, as-
The financial statement may include also a sets, liabilities, and capital: profitability ratios, ac-
break-even calculation, which represents the vol- tivity ratios, debt ratios, liquidity ratios, other
ume of product or service that needs to be sold additional ratios.
at a specific price point to recover the total oper-
ating costs. If this volume is met or exceeded, the 2.12.5 Main profitability ratios
company will break even. It may even operate at • gross margin: sales minus cost of sales,
a profit. If this volume is not met, the company expressed as percentage of sales
will have operated at a loss. • net profit margin: net profit divided by sales, as
The break-even analysis depends on assump- a percentage
tions for fixed costs, unit price, and unit variable • return on assets: net profit divided by the total
costs (Fig. 23.3). assets
In the following simplified example, • return on equity: also return on investment
assuming fixed costs of 50,000 V, average (ROI), net profit divided net worth

V. Making business with new technologies

482 23. How to make a business plan

FIGURE 23.3 Break-even chart based on assumptions in Table 23.8.

Return on equity or return on investment is • net working capital: short-term assets minus
probably the most important business ratio: if short-term liabilities;
ROI is low, this means that the business is not • interest coverage: profit before interest and
producing enough profits comparable to alterna- taxes divided by total interest payments.
tive investments.
Liquidity ratios are very important for
The return on assets and the net profit margin
bankers and for loan applications.
are useful to show the company performance
Activity ratios focus on financial performance
over time and can be used to compare the com-
and are generally used to compare a company’s
pany with the rest of the industry.
performance to the average for its industry.
Liquidity ratios focus on cash position and abil-
ity to meet obligations: • inventory turnover: cost of sales divided by the
average balance of inventory
• current ratio: short-term assets divided by
• total assets turnover: sales divided by total
short-term liabilities, gives an overview of a
assets
business’ cash position and ability to meet
short-term commitments; 2.12.6 Debt ratios
• quick ratio: inventories are first subtracted
from short-term assets before they are divided • debt to net worth: total liabilities divided by
by short-terms liabilities; total net worth

V. Making business with new technologies

 2. How to write a business plan 483
TABLE 23.9 Comparison of the business numbers with standard industry profile.

• short-term debt to liabilities: short-term debt and losses have impacts on the cash. The cash
divided by total liabilities, as measure of and balance sheet are linked together (Fig. 23.4).
depth and term of debt.
2.12.9 Previous investors and funding
2.12.7 Additional ratios It is also important to give an overview on
how the business has been funded so far and
• assets to sales
what the business owners are looking for.
• debts/assets
• current debt/total assets
• the number that comes from the short-term
assets divided by the short-term liabilities is 2.13 Appendix
called acid test Appendix at the end of the business plan
• total sales/net worth could include the following:
• resumes and CVs of key people
• sensitive information: private financial data,
2.12.8 Linking the numbers
business secrets, investor information
The assumptions and the forecasts made • industry research
about sales and personnel have an impact on • currents assets and liabilities
the profits and losses (income statement). Profits • copies of leases and contracts

V. Making business with new technologies

484 23. How to make a business plan

FIGURE 23.4 Logic of business statements.

• maps and photos of business location List of abbreviations and acronyms

• industry articles of relevance
• letters of intent from future customers CAGR Compound average growth rate
• any other supporting material CV Curriculum vitae
EBIT Earnings before interest and taxes
IP Intellectual property
ROI Return on investment
SWOT Strengths, weaknesses, opportunities, threats

3. Conclusions and future trends

Further reading
A business plan is made by both words and
numbers, text and tables: it is quite impossible [1] A. Werner, How to Make a Business Plan, A Step by
Step Guide to Creating a Business Plan That’s Compre-
to provide a useful and effective description of hensive, Effective and Geared for Success, Miafn LLC,
a business only by using words, and on the other 2015.
hand, numbers cannot explain alone the busi- [2] A. Genadinik, Business Plan Template and Example:
ness without words. Section by section the busi- How to Write a Business Plan, Semantic Valley LLC,
ness plan becomes a set of tables and charts 2015.
[3] J.E. Ricart, How to Design a Winning Business Model;
along with the text. There are many resources Ramon CasadeusMasanell, HBR, January, February
on the internet that can help to calculate and pre- 2011.
pare all the spreadsheets and forms listed in the [4] T. Berry, Hurdle: the Book on Business Planning, A Step-
chapter, also offering free downloadable sample by-Step Guide to Create a Thorough, Concrete and
plans, tips, outlines, and discussions on topics Concise Business Plan, 2006. Palo Alto Software.
[5] Bplans e Starting a Business Made Easy, 2018. https://
related to developing a business plan. articles.bplans.com/how-to-write-a-business-plan/.

V. Making business with new technologies