A Short Guide to Writing a Practical Business Plan

A Short Guide to Writing a Practical Business Plan
ow can it be that here are thousands of
guides (like this one) to help hopeful
entrepreneurs write business plans…, and
yet there is an overabundance of awful business
plans.
H
The problem is often that the entrepreneur
misunderstands the purpose of writing the plan.
They seem to believe that they are simply supposed
to describe the business and let others judge
whether the idea is sound or not…, but a
description is usually not enough to get a banker or
investor compelled to help you. While describing
the business is clearly a part of a business plan…,
the actual objective is to justify the business…, to
show that there is substantial reason to believe the
business can both survive and be profitable.
This guide will help you understand what is required
to develop a business plan that accomplishes the
two critical functions that every good business plan
must:

justify your business concept – i.e., provide
evidence that there is sufficient demand in the
market place to allow success

develop a set of strategies and tactics that
seem capable of propelling you business from
where it is now (a concept, hobby or perhaps
even part-time business) into a functional,
profitable business.
Do You Really Need a Business Plan?
That’s a reasonable question. You might not need a
business plan if most of the following fit your
situation:

You don’t really care too much for the job you
have, and you can readily get another one you
think you’ll like better;

you can start the business on a part time basis;

you aren’t reliant on your current job to provide
food, shelter or benefits for your family;

the amount of money needed for launch is
fairly small and you have what you need, or
better yet two times what you think you need;
and,

you feel the potential pain of losing your job
and money is less than the work of writing a
business plan…,
… then perhaps the best thing to do is just launch
your business. But obviously, most people are not in
that situation, and a business plan is needed to create
the financial support to launch the startup.
What’s the Benefit of Writing a Plan
A business plan has two key benefits:

It helps you get your “ducks in a row”

It helps you communicate the alignment of
those ducks to other important parties, like
bankers, investors, state government,
licensors, and sometimes key vendors and
employees.
Some people are able to create a useful plan in their
mind, causing some entrepreneurs to question why
they can’t just verbally explain their business plan to
a banker or investor.
See Your Proposal
from the Banker’s Viewpoint
Written documents are always preferred and often
required because to a banker or investor your
business plan is more than just a document.
First – it’s a potential time-saver. Sometimes within a
couple minutes of reading the business plan a banker
realizes there is no scenario in which they are going
to provide funding. If the first step is a face-to-face
presentation the meeting is probably going to last an
hour, costing the banker time they might not have
needed to waste.
3. You have enough collateral that lenders don’t
need to be too concerned about whether your
business succeeds or not.
Second – and more importantly, the banker doesn’t
know you, your intelligence, or your work ethic.
When people apply for jobs they often face a barrage
of interviews, and references are sought. A banker
doesn’t have the luxury of that kind of interaction.
Therefore, it makes sense that a business plan
becomes a banker’s best tool to judge the
intelligence and aptitude of the entrepreneur, and
it’s why a banker is very interested that the
entrepreneur is the one who actually wrote the
business plan. In general, a banker or investor tends
to believe that if you are unable to write a competent
business plan which is articulate and concise, you are
likely to be unable to manage a business.
Writing a traditional business plan for options #2 or
#3 is difficult because the business plan comes down
to your abilities, personality, and the trust you can
conger in the banker. Although #3 may seem like a
“no-brainer”, from the banker’s perspective there is
still significant pain in dragging a business through
foreclosure. For #2, keep in mind that it is really
difficult for your banker, after meeting with you for
only thirty minutes, to come to the conclusion that
you have the right mix of aptitude, skills, intelligence
and work ethic.
Finally – for you the primary benefit is that if your
business plan successfully lowers the banker’s
perception of risk, that means that either

you will be offered a loan you otherwise might
not have been offered, or

you will be able to negotiate better equity
(down payment) or collateral requirements.
When a banker or investor begins looking at your
plan they want to understand what’s “clever” about
it. Is it an invention that solves a problem; are you
the first one to bring a proven concept to your
location; do you have superior talent for a skill based
business like plumbing or graphic design; are you
combining multiple businesses into a single location
to create convenience; or are you bringing your
industry new concepts for sales or distribution?
Funding requests that entrepreneurs make to
bankers and investors fall into three categories.
1. You have sound strategies (the clever part) to
attract customers and create profits, and
evidence exists to support the assumptions you
are making about potential customers.
2. Your “plan” basically boils down to making a
banker believe that although your business won’t
externally look much different than those of your
competitors (imagine a car wash or graphic
design business), but you will outhustle, outthink
and deliver better quality or service than your
competition.
Therefore, your best odds of success in both creating
a successful business as well as getting it financed, is
to find an opportunity in the market where customer
needs are not being met, and explain how your new
business can simultaneously solve that need and
operate profitably. These types of formal plans are
the focus of this guide.
Startup
Scenario #1
Startup
Scenario #2
You want to start a
business
You see a gap
between customer
needs and competitor
offerings
Business lacks features
that would reasonably
differentiate it from
competitors already in
the market place
Competitive advantage
is logical and validated
by feedback from
potential customers who
confirm that a gap
exists in the market
Higher risk
Lower risk
Perceived risk is high,
causing bank funding to
be limited to “normal”
equity and collateral
requirements - or not
available at all.
Investors are not
available due to the
perception of high risk
or low growth.
Collateral and equity
still create limits on
borrowing, but better
terms may be available
due to lower perceived
risk. If business has
high growth potential
investors are a
possibility.
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A business plan should deliver two key components:

A strategy involving a unique combination of
benefits(s) which will be the basis for how your
business will steal customers from competitors,
and,

Evidence, or strong enough logic, to convince a
reader that the unique combination of elements
you will deliver is in demand by enough
customers to make the business profitable.
Key Elements
The viability of your business is primarily based on its
ability to attract customers. This doesn’t happen by
accident. From time to time customers certainly
make logic defying purchases, but for the most part
customers choose where to buy based on the
combination of benefits which most closely meets
their needs. We often call this VALUE. The challenge
is that all customers see value in a different way,
often driven by income, education, location, etc., and
how they see value can vary depending on a
particular situation they are in (e.g., normally I like
the quality and design services of ACME Printers, but
I need business cards and my plane leaves in three
hours, so I’m going to use Timely Printers).
Those benefits which differentiate your business
from competitors are referred to as competitive
advantage.
For example, a grocery store may not have the most
convenient location, but its meat counter may be so
good that some customers are willing to suffer the
inconvenience of driving out of their way to shop
there.


competitive advantages are why existing
businesses are able to hang on to customers
and why startup businesses are able to steal
customers from existing business.
Competitive advantages can usually be described in
very simple terms such as: convenience, faster
delivery, better selection, better performance, lower
prices, better customer service, quality, status, style,
and so on. In the context of a specific product, such
as a lawn mower dealer, these can be expressed
more specifically, such as, includes free delivery
(customer service), or five year unlimited guarantee
(quality).
Competitive advantages are the magnets that
allow you to steal customers from entrenched
competitors; but just like magnets, competitive
advantages attract some customers and repel
others based on the tradeoffs those customers
are forced to make.
The importance of competitive advantage cannot be
overemphasized.
A business usually has some competitive advantages
that are created by accident if not by purpose. For
example, your new gas station will be more
convenient for at least some people. But the key
question is if that advantage can attract enough
customers to make your business successful.
The ability to create and deliver competitive
advantage ripples throughout the business. For
example, providing better customer service requires
either hiring smarter employees or hiring more
employees. Either way, hiring those employees will
lead to higher wages. One way to be profitable in the
face of higher wages is to pay lower rent, leading to a
loss of convenience. As a result, the choosing of
customer service as a competitive advantage could
cause a tradeoff in convenience.
Every consumer purchase (or choosing not to
purchase) involves managing tradeoffs. The mix of
benefits, and the tradeoffs involved, results in a
particular business occupying a market position in
the mind of the customer. These are often expressed
verbally as…
It’s a great place to take the
family for a good meal
… which represents a combination of reasonable
pricing, casual environment, coloring books, and
good kids menu. The tradeoff of such a market
position might be the lack of valet parking, nutrition,
food quality, convenience, noise level, service or
status.
Some businesses work very hard through their
marketing efforts to suggest a certain market
position to customers…, but too many make the
mistake of trying to be in every market position –
they try to deliver excellent customer service (higher
wages), convenient location (higher rent), broad
selection (higher rent from bigger store and higher
interest payments due to larger inventory carrying
costs), while at the same time trying to be very cost
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competitive. This isn’t so much a business strategy as
a bankruptcy strategy because obviously the cost of
delivering the product or service is higher, but
combined with the lower prices it squeezes the profit
per sale. As a result the business has to achieve
tremendous volume in order to make this strategy
work…, something that is not in the favor of a
startup because your business is beginning with no
customers.
The cliché that…
You can’t be all things to all people…
… is rooted in the concept of competitive advantage.
A more likely formula for success is to recognize the
importance of competitive advantage, tradeoffs and
market position and realize that people who are
similar in some way will often perceive their needs in
similar ways, and therefore be naturally drawn to
those suppliers with a market position that matches
their expectations (groups of buyers with similar
buying preferences are referred to as a market
segment).
For example, if you perceive that can open a meat
counter and compete for meat sales with the local
grocery via a competitive advantage of higher quality
and better customer service (knowledge and fast
service), you will very likely have higher meat costs
(quality) and higher wages (knowledgeable and
customer service oriented employees). This requires
you to make one or more of the following decisions:
1.
When a business chooses a market position, it is
trying to appeal to a certain set of buying
preferences that the entrepreneur believes exists.
In your business plan you will need to break the
market down into logical customer segments and
convince the reader for which segments your
business will be the logical choice. For example, for a
pavement marking business, a logical way to
segment the market would be on parking lot size:
small parking lots holding ten cars or less, mediumsized parking lots of eleven to one hundred parking
spots, and large lots of greater than one hundred
spots. Your business might be the logical choice of
the medium sized lots because the small lot owners
generally are capable of managing it themselves, and
the large lot owners generally want their entire lots
painted overnight which is a service that your small
business cannot yet provide with only one employee.
Summary: The success of your business will be
accidental, and failure much more likely, if you don’t
understand the flow of concepts from how
competitive advantage creates tradeoffs; puts your
business into a market position in the customers’
mind; driving the attraction of some customer
segments, while repelling others; and resulting in a
segmentation of buyers based on their buying
preferences…, which are usually aligned with
demographic similarities such as age, income,
education, children, career, size of parking lot, etc.
Sell at similar prices to competitors and make
up for the higher cost by lowering expense in
some other area, such as having a location
where the rent is lower (value strategy for
those willing to suffer some inconvenience).
Many new entrepreneurs base their opinion of
feasibility on market segments which are already
quite satisfied with existing choices, or which will be
repelled by the new business’s market position.
Market Position: It’s a little out of the way but
worth the effort.
You business plan must show that your competitive
advantages serves a unique market position and that
therefore your business will become the logical
selection of one or more market segments that are
large enough to allow your business to be profitable.
2. Have a convenient location and increase the
price of items in the meat counter compared to
competitors (premium pricing strategy).
Market Position: Their prices are a little higher
but your guests will really appreciate the
difference.
3. Have a convenient location and match the price
of competitors (volume strategy).
Market Position: Best value in the market.
How to Get Started
You best chance at business success is not to get
started by first sitting down to write your business
plan, but rather by getting out into the market and
testing your assumptions about the unmet needs of
prospective customers and honestly assessing
competitor capabilities. This market assessment
phase is critical for convincing bankers (and yourself)
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that latent demand exists for the competitive
advantage you plan to bring to the market.
Why is Writing a Business Plan so Hard for
So Many Entrepreneurs?
There are three common reasons. First, most
entrepreneurs haven’t done their homework. They
have not gotten honest feedback from prospective
customers but rather reply on opinions of friends and
family who are reluctant to share their true feelings,
and instead tend to play the role of cheerleader.
Second, many entrepreneurs see a fifty page sample
business plan and they think that they need to create
something similar. You don’t. Most plans should be
less than twenty pages, and the vast majority would
be better received if they were less than ten.
Finally, many entrepreneurs fear that they do not
have the writing skills. It is true that poor grammar,
poor spelling, or illogical or incoherent arguments
will become surrogates for what a banker or investor
thinks about your intelligence, but there are plenty of
resources which can help you transform your draft
into a more readable and comprehensible document.
Too many entrepreneurs follow an outline blindly
without thinking about what the reader really needs
to know. A business plan in most cases is a sales
brochure and needs to be written for the customer –
the banker or investor. For example, the point of the
management section isn’t to simply plop biographical
material for the founder, but rather to convince the
reader that the founder(s) have the necessary skills,
aptitudes and resourcefulness to operate the new
business. In some cases the standard biography may
clearly show the entrepreneur is a good fit, but in
many cases some clarification may be necessary. For
example…,
In Fred Smith’s position as manager at XYZ
grocery he was trained in both budgeting and
accounting functions, and interacted with
bankers regarding line of credit planning.
Here are some key issues to keep in mind as you are
preparing to write your plan.
Keep the Big Picture in Mind - Experienced business
plan readers quickly categorize a business plan as
having one or more critical risks, including:
1) The market isn’t large enough,
2) The market is too competitive,
3) Customer buying habits can’t be switched
before cash reserves are exhausted (market
inertia), or that the competitive advantage is not
sustainable because competitors can easily copy
the startup’s clever features.
4) The founders don’t have the necessary
aptitudes, skills or experience to make sales,
marshal resources or manage employees.
5) Product ideas or prototypes can’t be
commercialized within budget, or in a timely
fashion,
6) Intellectual property problems (patents)
Holding the revelation of competitive advantage until
page seven does no good if your banker, after
reading two pages, puts your plan in the garbage
because they don’t believe you understand the
importance of competitive advantage and market
segmentation. Some writers want to wait on the
explanation because they want to lay out the entire
argument before getting to what is clever. This is a
mistake. It is rather simple to make the reader know
you are aware without interrupting the flow of your
business plan. For example, you might write:
Many potential customers are currently
traveling over sixty miles round trip to purchase
soccer equipment because they value the larger
selection they can find in (a neighboring city).
Our market analysis shows that Pleasantville
has a significant population of avid soccer
players which are eager to become customers
of ABC sports.
This brief paragraph provides insight that the
entrepreneur has a competitive advantage
(convenience and selection), and gives the banker
hope that at some point in the business plan the
entrepreneur will provide some evidence to refute
the banker’s concern that Pleasantville isn’t large
enough to support the business.
Brevity and Focus - The goal of a good business plan
is straightforward writing and brevity. Focus on the
reader. The fact that you’ve always wanted to be an
entrepreneur is meaningless to them. This kind of
irrelevant information hides the important elements
of your plan and makes you look naïve, as if your
lifelong dream makes the business any more likely to
succeed.
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Newspaper editors have an old saying, “Don’t bury
the lead”, meaning you shouldn’t hide the story that
will make a person want to buy a paper on page 6.
Societal trends may provide some useful context for
your business plan, but they are rarely the lead story.
You should understand that most plans are not read
thoroughly but rather skimmed in a haphazard
manner. You need to put compelling information up
front to convince of what is clever about your
business and confront what they will logically see as
critical risks.
What readers want to know is if you have discovered
unmet customer needs; have evidence of demand
and that the market is large enough to be profitable;
and that management has the skills to manage
employees, customers and the operation of the
business. Also, a good plan needs to avoid
redundancy of the all but the most important
information, and shouldn’t include the minutia like
what color you plan to paint the walls.
Storyline - Some business plans are written like a
novel… building and building this drama about
technology changes and societal trends, and finally
on page six the business concept is finally revealed.
Writers who rely on this drama style of writing
probably believe that it will result in greater
appreciation of the cleverness of the idea once it is
finally revealed. What they don’t understand is that
the vast majority of readers won’t be curious enough
to make it to page six. A banker or investor will
believe that the communication style of your
business plan is an indication of the way you will
communicate with customers.
While a business plan isn’t literature, it should be a
story. Like every good story there are bad guys – the
competition that is under serving market – and there
are good guys – your new business that will rescue
the customers in distress. But business plan readers
don’t have the patience for prose. You need to cut to
the chase and anticipate the questions as they come
into the reader’s mind (the issues described in the
Keep the Big Picture in Mind section of the previous
page).
This requires some skill. You don’t want to get the
reader off-tract from your “If this…,then that” string
of logic…, but at the same time you need to let them
know that you realize competitor strength is a
concern, but you have sustainable competitive
advantages that will attract customers. Here’s an
example of briefly telling the reader you understand
their concerns, but have a plan, in a way that isn’t too
interruptive to your story line:
We will provide the superior customer service
demanded by our customers, but yet contain
payroll expense by hiring students from [the local
university’s] fashion department because of their
appearance, enthusiasm, knowledge, need for
practical experience, and reasonable payroll
expectations.
Summarize, Clarify and Connect the Dots – As
previously mentioned readers are usually skimming a
business plan rather than reading it carefully. You
need to make sure your key points of logic stand out.
Keep in mind that bankers and investors are very
experienced and have read hundreds of business
plans. Telling them that customer service is critically
important to your high-end clothing store… doesn’t
impress the reader of your business savvy but rather
is borderline insulting to their intelligence. It is like
telling a mechanic a car need good gas to run well.
What bankers want to know is how you are going to
provide that superior services – by having more
employees, or having better quality (higher wage)
employees.
Your plan will likely include three or four points that,
if not understood, will become deal-killers. These are
points that should be clear, stand-out and be
repeated in both the executive summary and in the
body of the business plan.
Credibility and Validation – Bankers and investors
have seen a cornucopia of sneaky tricks and outright
lies told by unethical entrepreneurs. As a result,
bankers and investor have become professional
skeptics. This makes your perspective and your
opinions not very meaningful because you are
automatically suspected of being willing to stretch
the truth in any way necessary to get the money.
Statements such as,
“There is a lack of wellness services for corporations
located in the Westport area of [city]...“
… will be seen as a likely exaggeration, obfuscation
or outright lie unless you include expert perspective
or better yet, feedback from prospective customers
to validate your opinion. For example,
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Our ability to shrink waiting times from two
weeks to two hours is of significant interest to
the twenty-five prospective customers shown in
appendix A. Our analysis shows that in roughly
16% of their purchases fast turnaround is a critical
need.
Process v. Document – Bankers and investors are
more interested that you’ve gone through the
process of writing a business plan than in the
document itself. The process of writing a good
business plan requires contact with prospective
customers, deep investigation of direct competitors,
the development of a marketing plan and budget,
the investigation of expenses, and so on. The plan
also becomes a tool to see if co-founders can work
together and whether they have a shared vision for
product attributes and competitive advantages.
Without a business plan outsiders will wonder how
much homework has really been undertaken and how
much the founders are the victim of wishful thinking.
Too many business plans make it painfully obvious
that the plan was written without the necessary
homework being performed:


Competitors are often easily dismissed as
incompetent even though they have been
around for thirty years,
the new business assumes it can compete on
price because of a competitor’s bloated
overhead, even though the competitor in
question may have its building paid for while
your new business will have an $8,000 per
month rent payment,

the voice of the customer is missing in
validating latent demand

expenses are underestimated as if no
conversations have occurred with landlords,
utility companies, suppliers or insurance
agents.
Expectations – It is true that there are some
entrepreneurs that can get funded from rough
scribbling on the back of a napkin. Are you an
experienced entrepreneur or is this your first time?
Did you invent nuclear fusion or are you selling Tshirts on the beach? Experience, the compelling
nature of your business, equity, collateral and the
personality of your banker are going to affect the
diligence and thoroughness expectations for your
plan. Putting you best foot forward is always
recommended.
Keep in mind that a very good business plan can
rarely salvage deals with characteristics that banks
want to avoid, such as poor credit histories, or the
lack of equity or collateral. However, a quality
business plan will reduce the perceived risk of the
business and as a result lower these hurdles, from
perhaps a 40% equity requirement to a 25% equity
requirement.
Pro Forma Financials
Pro Forma simply means projected. Financial
projections are studied carefully for two key
issues: how quickly is revenue expected to be
created, and are expenses adequately accounted
for. There are three key pieces to pro forma
financials:

One-time start-up costs. These typically
include equipment, original inventor,
fixtures, equipment, signage, startup legal
and accounting expenses, original website
design, deposits and so on.

Operational expenses projected in a cash
flow format on a monthly basis. It is
typically that the one-time startup costs
show up in operational expenses as a loan
payment.

Break-even analysis. Here, operational
expenses are categorized as:

Direct expenses – those expenses that
are directly linked to sales, such as
inventory replacement, commissions,
the use of supplies such as glue for
installation, and so on.

Indirect or “overhead” expenses, such
as management salaries, rent,
insurance, advertising, etc.
Financial projections are covered in more depth in
a document titled Making Financial Projections &
Calculating the Break-Even Point.
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Mistakes to Avoid in Writing your Plan
1. Writing to Impress Rather than Inform: – Clearly
there are advantages in making the reader
conclude, upon reading the business plan, that
you are talented and intelligent. However, using
complicated language and jargon to try to make
this point can create confusion and cause readers
to lose patience. For example, consider what
business this entrepreneur plans to go into:
ABC, LLC is dedicated to developing cuttingedge software and online application for both
public and private use. Leveraging existing
Internet applications and technologies, ABC
enhances the user experience by satisfying
unfulfilled user needs in high-demand
products and services.
want to believe the market analysis has been
performed objectively. Consider:
“Owners often have great emotional
attachment to their equine friends-something which is priceless.”
The use of the world priceless is an obvious
exaggeration which allows a reader to question
the entrepreneur’s objectivity and credibility.
Many business plans suffer Death by a Thousand
Cuts, meaning that while there may be no
egregious errors, the small losses of credibility
add up in the mind of the reader to become a
deal-killer.
4. Naïve Statements:
In this particular circumstance the reader would
be perhaps a little surprised to finally discover on
page five of the plan, if they made it that far, that
the business is primarily a web-site developer.
2. Confirming Unfamiliarity – Trying to sound
impressive can easily backfire when the writing
reveals the entrepreneur does not actually have
the knowledge they are trying to portray. For
example, an entrepreneur wrote:
“The [startup’s] proprietary formulation was
derived from ABC University’s research program.
[Startup] has all patent rights to manufacture
and market [the invention] across North
America, in perpetuity.
This section was fine right up to the words in
perpetuity. These words were likely added to
sound impressive, but they suggest that the
reader may not really understand patents. That’s
because in twenty years or less the patent rights
will die so no rights can be granted or are needed
into perpetuity. More importantly, however, is
the omission of describing whether the license is
exclusive or non-exclusive – a critical difference.
A reader will assume that if the license is
exclusive, it would have been mentioned, and if it
wasn’t mentioned, the license is either not
exclusive, or the entrepreneur is too
inexperienced to recognize the value of the
difference – both of which can be deal-killers.

We have no competition

First to market wins

Our patent is bulletproof

Our projections are conservative

Economies of scale will lower our expenses
and therefore no additional funding will be
required to scale our business to $20 million
in revenue.
These kinds of statements expose an entrepreneur’s
inexperience and create a loss of confidence in their
experience and management capability.
A business plan outline follows on the next page. This
outline is only a suggestion. Determine what is
compelling about your story. What is the likely
reason your business will survive startup? Those are
the items that need to stand out in your business
plan. Focus on the critical risks, write a first draft,
and get an experienced person to review it. There
are at least two, resources that can help you:
1.
SBDC – Small Business Development Centers.
SBDCs operate nation-wide and provide
workshops and one on one counseling. You
can find the office nearest you by visiting
www.asbdc-us.org/.
2. SCORE – The Service Corp of Retired
Executives. SCORE is a program of the SBA
which recruits retired business owners to
provide mentoring to new business startups.
Find the nearest office, or get online
assistance, by visiting www.score.org.
3. Projecting Personal Values onto the Market:
While readers want to see passion, they also
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BUSINESS PLAN OUTLINE
Executive Summary – The executive summary is the
most important part of the plan and in many cases
the only part that gets read in a linear fashion. Try to
keep the executive summary to one page.
 Start with a one sentence description of the
business.
 In one or two sentences describe the problem






that some customers feel exists in the
marketplace.
In one or two sentences describe the solution.
Make sure that the description of the solution
makes clear, in concise terms, the magnitude of
the competitive advantage, such as three times
faster, or, saves or target customers forty minutes.
Consider if you need to solve curiosity about how
the competitive advantage is created in very brief
terms.
Showcase what’s compelling about your market
validation. Maybe it’s your background, customer
or expert feedback, or the fact that you just
landed Microsoft as a customer.
Management experience
Present information, in brief, that shows that you
understand your critical risks and why they
shouldn’t be considered deal killers.
Describe the market potential, key customer
segments, and distribution methods
Funds needed to launch the business and
summary financial projections.
Try to keep the executive summary to one page, and
certainly no more than two.
The Business Plan – use a page break and a new
major heading to indicate that the body of the plan is
now beginning.
1. Context – Sometimes it’s necessary to start with
some background information to give a reader
the appropriate context to appreciate the
competitive advantage that the new business has
created. Keep this kind of discussion to a half
page or less.
2. Management Team — Describe the people
involved. Show that they have the necessary
expertise or experience to understand the
business and its customers, or, if you don’t have
those people on board yet, make an argument of
when they should be and why they are critical at
the current time. If using detailed biographies or
resumes put them in an appendix.
3. Description of Business / Product Idea
The Problem /Solution and Competitive
Advantage
Examples of describing a problem and solution
follow
Example 1- Anywhere, Iowa lacks a provider of
laser-engraving services. Our business will be
able to provide these services at rates that are
comparable to traditional engraving services,
but provide improved style, allow additional
materials such as wood, glass and plastic to be
easily engraved in an infinite variety of both
text and graphics.
Critical risk: is the market big enough.
Example 2 - Over the past six months the backlog
for interior painting has not been less than five
weeks. This backlog, combined with Sunshine
Painting’s ownership of high capacity spray
equipment, will provide efficiency to give
Sunshine significant price advantage.
Critical risk: sustainability of competitive
advantage.
Example 3 – HPLC instruments require significant
labor and have run times that average 1.75
hours per sample. Our [invention]
simultaneously processes multiple samples
reducing the average sample time to five
minutes and eliminates handling of hazardous
waste.
Critical risks: market inertia, management and
intellectual property.
4. Competition — Divide the market into direct and
indirect competitors. Indirect competitors can
usually be handled in aggregate while direct
competitors must be analyzed individually. Explain
tradeoffs from the customer perspective.
Consider using a matrix (grid table with features
that differentiate businesses across the top, such
as hours of operation, location, equipment,
delivery, expertise, etc., and competitors down
the side).
5. What Segments (customer types) will be most
attracted to the new choices —Segments can be
defined demographically, such as: men, women,
older, younger, teenagers, cars owners, horse
owners, smokers, chronic pain suffers, household
9
incomes above $60,000, dog owners, exercise
freaks, businesses with more than 25 employees,
businesses that machine certain grades of steel or
aluminum, that print a catalog, those with
international customers, etc.
Example #1 -- Sometimes segmenting seems difficult.
For example, suppose you plan to open the only
grocery store in town. It may seem like the entire
town is your market. However, at the very least
you can segment the market by those who work
out of town and therefore are near your
competitors on a daily basis.
Example #2 -- Suppose your grocery will take orders
via the internet and deliver the groceries. Three
clear segments of customers who might value
delivery services: elderly people who can’t make it
to the store, dual income families who are willing
and can afford to pay for the convenience, and
affluent people who simply want and can afford
the service. Census data can be used to determine
how many people are in each group. Go to
http://ia.profiles.iastate.edu/places/
Example #3 -- In some cases a specific circumstance
can make a particular kind of business the logical
choice, rather than where a customer typically
purchases. For example, suppose your business is
differentiated from competitors by printing
technology that allows 4-hour turnaround, but
costs 25% more. You might find statistics or do
some surveying that shows that a fast turnaround
is needed for 10% of print jobs, allowing you to
credibly project a 10% market share.
6. Market Overview – Include information on:
Market Size -- How many dollars are spent on
your category annually? Calculate the per
capita expenditure – e.g. $5.775 billion in
industry wide sales divided by 300 million US
residents = $19.25 per capita. 100,000 market
population times $19.25 = $1,925,000 market
capacity. Also provide information on trends.
Market Share -- This is typically based on the
strength of your competitive advantage and
the size of key buyer segments. For example,
statistics might show that for the kind of
products you’ll sell that discounters like WalMart and Home Depot typically get 60% of
sales, mail order gets 15%, and specialty stores
get 25%. 25% of $1,925,000 = $481,250.
Distribution Channels – for some the distribution
strategy is obvious - direct sales to the
consumer via a retail store. In other cases
partners will be recruited, such as clothing
stores or software implementers, to help sell
the product.
Other information relevant to your industry.
Examples & Sources of market research include:
associations for your industry, magazines that serve
your market (ask for their media kit), franchisers
(request a franchise kit), library databases (ABI
Inform, Predicasts, Lexis Nexis, etc.), Internet sites
(www.findarticles.com), similar businesses, and your
efforts for pre-selling and surveying.
Example #1 If your research shows that the
average number of lanes of bowling in cities similar
to the one in which you want to start a new
bowling alley is 50 lanes per 50,000 people, and
your city of 50,000 people only has 30 lanes of
bowling, your market research suggests that a new
alley of twenty lanes is feasible as long as you can
show that your market participates in bowling at an
average rate.
Example #2 For new business that will sell to other
businesses, pre-selling is a powerful form of market
validation. For your foreign language translation
business, you should get appointments to speak
with ten or twenty businesses that need translation
services. Those that express interest should be
asked to sign letters of support.
Example #3 If your new business will sell dog
training services, simply placing an ad in the paper
before you’ve formally formed the business, may
be a great way for you to gauge demand.
Example #4 Primary market research (surveys and
focus groups) may be needed in some situations.
Example #5 Articles in magazines, trade journals or
general Internet searches can be useful. For
example, you believe that your new day care will be
successful because its competitive advantage of
being located next door to a large employer. If you
find an article that reports that the most successful
strategy for new daycares to steal market share is
by locating next to large employers, you’ve got
some good evidence to validate the demand for
your competitive advantage. However, it would
still be a good idea to request that management let
you do a survey of employees to determine their
needs.
10
Example #6 Similar businesses in similar sized cities
with similar competition can be great sources of
information – e.g., “if it works there, why wouldn’t
it work here”, as long as you don’t compete with
them. Suppliers that will sell you your inventory or
equipment can help you find and introduce you to
businesses like yours.
Example #8 Focus groups - get ten potential
customers in a room, buy them lunch, and ask them
what they think of your idea.
6. Marketing Plan — Your business needs to create
a system that continually reminds customers that
your business can solve their needs. What will
make people walk in the front door (retail)?
What will make the telephone ring (service)?
How will leads be generated (industrial)? What
allies will be involved? In general you need to
help the reader understand how your business
will communicate (newspaper, radio, direct mail,
referral, distributors, etc.), what it will cost to do
so, and what you anticipate the results will be.

sales line. See the handout titled “Financial
Projections and Break-Even Point Calculation”
for more detail.
Break-Even point Calculation — See above
On the following pages you will find
1.
2.
3.
A first draft of a business plan
A review of that first draft
A second draft of the business plan
7. Operations Plan — The content of this section
will vary dramatically. In computer businesses,
this section might be used to show what
protocols will be used to providing information
security. In some businesses it is necessary to
provide detail on insurance because for example,
in some situations coverage may not be available
or is especially important (e.g., businesses
involving kids, horses, weather, etc.) Detail in the
section will vary depending on the complexity of
operations
8. Financial Projections and Finance Plan —



Schedule of Startup Costs — Provide a listing
of the one-time startup costs, including
equipment, inventory, improvements (paint,
carpet), working capital, deposits, etc.
Sources of Capital – Identify the source of the
required capital which you calculated in the
point above. How much with founders
contribute, how much will be borrowed from
the bank, etc.
Revenue and Expense Projections — You
need to provide revenue and expenses
projections for 3 years on a monthly basis. If
your business sells a number of different
items, such as shipping services and mailbox
rental, you should make projections for each
11
Digital Beans
Sample Business Plan
(this plan will be critiqued on the pages following it – don’t read this with the belief that it is a quality plan)
Executive Summary - Digital Beans will be a café serving the traditional coffee and sophisticated coffee blends
accompanied by an array of bakery items, ice cream delights and a small kitchen to serve snacks, cold items
and perhaps pizza. Unlike a typical café, the major draw or attraction will be the availability of computers and
the Internet. Digital Beans will be the answer to the coffee house for the young generation. Digital Beans will
also provide a computer repair service as a commercial business. Digital Beans goal is to provide the
community with a social atmosphere for communication and gaming.
This business plan is prepared to obtain financing in the amount of $150,000. This financing is required to begin
work on site preparation and modifications, equipment purchases, and to cover expenses.
Mission: As the popularity of the Internet continues to grow at an exponential rate, easy and affordable
access is quickly becoming a necessity of life. Digital Beans provides communities with the ability to access the
Internet, enjoy a cup of coffee, and share Internet experiences in a comfortable environment. Digital Beans will
provide computers for those who do not have one and will provide a wireless environment for those who seek
to play games with other people. Digital beans will also generate exposure through its computer repair
services – which will be drop off as well as in home services.
The risks involved with starting Digital Beans are:
-People may already have a computer and Internet service
-Other coffee houses could easily duplicate this offering
-Will the various groups of people who will frequent the Internet Café feel socially compatible.
Marketing
Marketing will be done in many ways. One of these will be in the form of a website which will have the basic
details of where, who, why and how. There will also be advertisements in the local college paper, the ISU daily
as well as the local town newspaper called the Ames Tribune. We will use radio to reach high schoolers and
advertising in the Ames High School newspaper. Adults would be more difficult. You could also expect that
other towns such as Huxley, Boone, Slater, Gilbert might also come to the Internet café for gaming nights.
12
Monthly Expenses
Communications
$10,000 (guess)
Management Salary
25,000
Part timers 7.50 per hour
40,000
Computer Technician (PT)
17,000
Utilities
8,000
Insurance
700
Rent
1,500
Legal
500
In store Promotion
500
Advertising
Total
5,000
108,200
Services Offered:
Digital Beans will provide full access to email, WWW, FTP, Usenet and other Internet applications such as
Telnet and Gopher. Printing, scanning, and introductory courses to the Internet will also be available to the
customer. Various games such as Warcraft III: Frozen Throne, and WarCraft III: Reign Of Chaos, Digital Beans
will also provide customers with a unique and innovative environment for enjoying great coffee, specialty
beverages, and bakery items.
Digital Beans will also provide its customers with access to introductory Internet and email classes. These
classes will be held in the afternoon and late in the evening..
Digital Beans will obtain computer support and Internet access from ISU NET located in Ames. ISU NET will
provide the Internet connections, network consulting, and the hardware required to run the Digital Beans. We
are still investigating a supplier to provide Digital Beans with coffee equipment, bulk coffee, and paper
supplies.
Market Segmentation
Number of People in Ames by age
Under 5 years
4,136
5.2
5 to 9 years
4,089
5.1
10 to 14 years
4,302
5.4
15 to 19 years
9,090
11.4
20 to 24 years
16,288
20.4
25 to 34 years
10,739
13.4
35 to 44 years
9,623
12.0
45 to 54 years
8,743
10.9
55 to 59 years
2,795
3.5
60 to 64 years
2,306
2.9
65 to 74 years
3,766
4.7
13
75 to 84 years
2,845
3.6
85 years and over
1,259
1.
Key customers are likely in the 15 to 44 age brackets.
Market Trends
Due to intense competition, cafe owners must look for ways to differentiate their place of business from
others in order to achieve and maintain a competitive advantage. The founder of Digital Beans realizes the
need for differentiation and strongly believes that combining a cafe with complete Internet service is the key
to success.
Competition:
The dual product/service nature of Digital Bean's business faces competition on two levels – traditional coffee
cafés and internet service providers.
The number of online service providers around Ames is approximately eighteen and counting. These small,
regional service providers use a number of different pricing strategies. Some charge a monthly fee, while
others charge hourly and/or phone fees. Regardless of the pricing method used, obtaining Internet access
through one of these firms can be expensive. Larger Internet servers such as America Online (AOL), Prodigy,
and CompuServe, are also fighting for market share in this rapidly growing industry. These service providers
are waging price wars and are becoming more accessible to the local consumer. It may be the speed for many
consumers who do not wish to pay for DSL or a faster internet. Consumers who are not convinced they would
frequently and consistently travel the Internet, will not be willing to pay these prices.
Digital Beans does not currently face any direct competition from other cyber-cafes in the Ames market.
Coffee Cafés
o
Robert Bros Cafe N Grand Mall, Ames, 50010 - (515) 232-8894
o
Cafe Diem - - 323 Main Str, Ames, 50010 - (515) 956-3556
o
Taraccino Coffee - - 539 Lincoln Way, Ames, 50010 - (515) 232-7606
o
Gregory’s 421 S. Duff Avenue
o
Burgies – Duff and Airport Road
o
ISU Memorial Union – ISU Campus
o
Stomping Grounds - 303 Welch Ave - (515) 292-5258
o
HyVee – Starbucks – two different locations.
o
Sante Fee Expresso – 116 Welch Avenue
Product Differentiation
Digital Beans will follow a differentiation strategy to achieve a competitive advantage in the cafe market. By
providing Internet service along with hardware/software and other services, Digital Beans separates itself from
14
all other cafes in Ames. In addition, Digital Beans provides a comfortable environment with coffee and bakery
items, distinguishing itself from other Internet providers in Ames.
Promotion
Digital Beans will implement a pull strategy in order to build consumer awareness and demand. Initially, Digital
Beans has budgeted $5,000 for promotional efforts which will include advertising with coupons for a free hour
of Internet time in local publications and in-house promotions such as offering customers free Internet time if
they pay for an introduction to the Internet workshop taught by Digital Beans's computer technician.
Sales
First year sales are estimated at 30,000 per month, creating an annual profit of close to $200,000.
15
Business Plan Review
Digital Beans
Your business plan is off to a good start, but there are a
number of issues that need to be addressed. The
following points outline the main issues.
1.
2.
3.
4.
5.
From place to place the plan uses words like
“perhaps”, “hope”, “likely”, “might” and so on.
You should do the necessary homework to be able
to change those statements to such phrases as,
“based on our research”, “according to …”,
“statistics show”, “based on [something] we
believe [something else]”.
These changes will give the plan the necessary
tone of experience and expertise.
At the end of the mission statement you mention
in-home computer repair services. This is the only
mention of this service in the plan. In-home repair
creates many issues, such as automobiles and
automobile insurance, bonding insurance,
additional labor and so on. In addition, it takes the
business away from its core expertise. I believe
you should consider whether this in home repair is
important to the business at its inception, or
something that should be added at a later time. If
your decision is to keep the service in play from the
beginning, you will need to provide more details of
the logistics (will you hire a second technician to
cover the store), or sacrifice in-store customer
repair service when the technician is out making a
house call.
The paragraph that outlines the risks of the
business is, in my opinion, a very negative way of
commenting on these issues. I believe you could
instead deal with the issue more positively. For
example, talk about the difficulties other coffee
houses will have duplicating your services rather
than mention the risk of them duplicating them. In
effect you are talking about the same thing, but
the positive way makes the point you want while
still making the reader understand the risk.
The marketing paragraph seems misplaced. I
would suggest moving this section to after the
services offered section so that the marketing
information flows together. That will also give the
reader the chance to read about what products
and services need to be marketed, before they are
reading about how marketing will occur.
Website marketing is mentioned. The website can
be a tool, but how will potential customers even
know that the website exists. You need to provide
more detail of how people will become aware. A
budget also needs to be created.
6. The marketing budget mentions that “Adults
would be more difficult [to market to]. The plan
needs to show how these challenges will be
overcome.
7. $700 for insurance expense seems low, especially if
the in-home repair service is offered. $5,000 in
advertising expense seems low. You’ll need to put
together a budget that shows how advertising
money will be spent.
8. The word “intense” in the Market Trends section
seems to set the wrong mindset. I would instead
focus on the issues that differentiate your business
and shows that your business will be outside of the
traditional competitive issues, regardless of
whether they are intense or not.
9. The market segmentation section is the right idea
but I think it needs some work. The idea of
identifying key segments and the number of
people in each is a good idea. But the plan doesn’t
have the data to then show what percentage of
each of those groups will likely become customers.
As a result you can’t draw a straight line between
the number of people in each segment and the
likely hood that they will show up at the door. I
think that a better argument to validate that latent
demand should exists would be to look at other
similar cities that can support a cyber café, and
make the argument that if those similar cities (with
similar people in each age category) can support a
cyber café, then Ames should be able to as well.
You might look at Manhattan KS, Corvallis Oregon,
and so on. I believe that this issue - the lack of
validation of demand - is the most important
deficiency in the plan.
10. The competition section includes internet service
providers. I don’t believe that these need to be
considered as competitors. A matrix should be
used to compare the coffee café competitors.
11. For the sales and expense section you need to
provide logic for how the monthly sales projection
was calculated. Also, in the first months sales will
be lower and require extra working capital to
cover expenses. You should prepare a 12-month
cash flow projection that show how sales grow
from month to month, and the related monthly
expenses.
16
Digital Beans Internet Café
Executive Summary
The city of Ames lacks a coffee house or Café where patrons are provided internet access. These kinds of
businesses are common at other University towns across the country, including such similar cities as Columbia
Missouri, Manhattan Kansas, and Corvallis Oregon, many of which although larger in population, support more
than one of these types of “cyber” establishments.
Digital Beans will provide patrons a social gathering place where they can drink high quality coffee and other
beverages, as well as order bakery and other higher quality snack and light lunch items, while at the same time
have access to the internet using either their own wireless equipped computers or rent time on house
machines. In addition, Digital Beans will provide computer maintenance and repair services, and sell a narrow
range of computer accessories.
Depending on the time of day, Digital Beans expects to draw patrons for work, social and entertainment
purposes. Many students and younger professionals enjoy group and online “Gaming” and Digital Beans will
market its evening culture to this group.
This business plan requires $110,500 of financing, which will be used for equipment purchases and working
capital. Owners’ investment of $37,500 is available and committed, and the founders are seeking bank
financing of 86,450.
17
Business Plan
Digital Beans Internet Café
Management Team – Digital Beans will be founded by two individuals and operate as a Limited Liability
Company. Founders’ resumes are attached in Appendix A.
Jim Smith – Bachelors degree in Hotel and Restaurant Management, and four years of management
experience with Applebee’s of Ames and Paul’s House of Steaks in Edina, MN.
John Doe – Degree in MIS and minor in computer science. Three years of MIS related work experience
with Principal Financial Group in Des Moines.
Business Description
Computers have become an integral part of business activities, and for the younger generation, they are an
important component of social interaction. Digital beans will exist to provide a coffee house environment that
provides internet access for business and personal use, as well as provide a computer centric environment for
socialization.
Products
Digital Beans will provide full access to email, WWW, FTP, Usenet and other Internet applications such as
Telnet and Gopher. Printing, scanning, and introductory courses to the Internet will also be available.
Professional software titles such as Microsoft Word, PowerPoint, and Photoshop will be available to patrons at
no charge. Various games will also be available that customers will want to play either simply for the
experience, or to “test-drive” before they make their own purchase.
The following list of items will produce revenue for the store. Percentage of sales and estimated gross margins
are based on conversations with proprietors of other internet cafes or suppliers.
Coffee – The Roasterie of Kansas City will provide high quality coffee beans for local grinding and retail bulk
sale, as well as to make premium coffee drinks such lattes and cappuccinos. Coffee sales are expected to be
20% of overall sales and carry a COGS margin of 10% on served coffee and 40% on retail sales of whole bagged
beans.
Other Beverages –- Including non-alcoholic bottle fruit drinks such as Nantucket Nectars, soda, premium
bottled beer and wine. These beverages are expected to provide 20% of total sales and average a COGS
margin of 25%.
Food – Snack and light lunch items will be sold in a prepackaged manner when available. Items will include
desserts, fruit, salads, soups and bread items. Food sales are expected to account for 15% of total sales and
average a COGS margin of 30%.
Computer Rental
The majority of customers are expected to bring their own wireless equipped computer laptop machines to
the store. However, ten computers will be purchased for rental to patrons. Software will allow customers to
log in with a credit card and automatically bill the customer for connect time when they log off. Computer
rental is expected to account for 20% of total sales.
Computer Printing, Accessory and Product Sales – Color laser printing, specialized “gadgets” and software
will be offered to patrons. These sales are anticipated to provide 5% of total sales and average a COGS
margin of 40%.
Computer Maintenance & Repair – On site staff will be able to handle a wide range of computer repair and
upgrades for such items as memory. Repair and maintenance is expected to contribute 20% of overall sales
and have a 40% COGS margin.
18
Competitive Advantage
Digital Beans will be the first internet café in Ames. Being first will allow the store to achieve visibility and
loyalty. Although other coffee shops and cafes may offer internet access at some point in the future, Digital
Beans will maintain competitive advantage through



Location: Digital Beans will be locating on Main Street
next door to Olde Main Brewing Company. This location
will be convenient to professionals during the day, and
also create a stream of traffic between the two
businesses as Olde Main customers may desire web
access. Management of Olde Main are interested in a
discussion of opening up access between the two
businesses which would allow a common music venue.
Targeting of gaming community for evening
entertainment
Computer maintenance and repair service, which most
cafés lack the expertise to provide.
Competition
There are several coffee houses in
Ames. None provide internet access to
patrons1. A summary of each
competitor is provided in the table
(right). Digital Beans will be the only
internet coffee house/ café offering
internet access and computer
maintenance and repair. In addition,
Digital Beans will have a valuable
location alongside a popular restaurant
that is targeted at the same
demographic groups as Digital Beans.
Market Analysis
Name
Robert Bros
Café Diem
Taraccino
Gregory’s
Burgies
ISU Union
Stomping
Grounds
HyVee
StarBucks
Sante Fee
Digital Beans
Location
Mall
Main
539 Lnclnwy
421 S. Duff
S. Duff
ISU Campus
Campus town
Internet
No
No
No
No
No
No
No
Repair
No
No
No
No
No
No
No
Food
Desserts
Lunch
Desserts
Desserts
Soup&Sand
Coffee
Lunch
East and
West Lnclnwy
Welch
Main
No
No
Coffee
No
Yes
No
Yes
Lunch
Light Lunch
Digital Beans will target two distinct
demographic groups, which will vary depending on the time of day. During business hours Digital Beans will
appeal to professionals who need internet access for work or personal issues or, for casual business meetings
where internet access is necessary. In the evenings and on weekends, Digital Beans will attract a more social
group and be of special appeal to groups that want to partake in online or network gaming in a social
environment.
General Market Statistics 2
The coffee business has boomed in recent years, especially with regards to specialty coffees. According to a
National Coffee Association Annual Drinking Trends Survey, specialty coffee consumption has risen from 9 percent
in 2000 to 16 percent in 2004. While fast food chains are growing at a rate of 2 percent each year, coffee chains
grow more than 10 percent annually. In addition, 66 percent of Americans buy their coffee outside of their homes.
The Specialty Coffee Association of America reported at the end of 2003 that the total number of retail coffee
shops in the country had reached 17,400 or 4% more than 2002, with annual sales reaching $ 6.12 billion or $21.10
per capita, giving Ames a market capacity of approximately $1,160,690.
Demographics: Seventy-seven percent of U.S. adults drink coffee daily and gourmet coffee consumption has risen
1
www.netcafeguide.com states that there are no Internet Cafes in Ames.
Following italicized text and statistics are from Coffee Shop, a research publication by SBDCNet in San
Antonio, Texas.
2
19
in the past five years. According to Scarborough Research, a market research firm that studies media, lifestyle, and
shopping patterns in the United States, in October 2004, 12 percent of adults have been to a coffee shop in the
past month. Although popularity of coffee shops has recently spread across the nation, the West coast has the
most coffee shop patrons. The ideal ratio of coffee shops to residents in a particular area is 1:10,000. Although
Ames has a ratio with Digital Beans of 1:5,500, the Ames Des Moines Area has a high percentage of coffee
drinkers as noted in the following ranking taken from a national survey shown at right.
Client Profile: Coffee bar patrons are younger, more affluent, and educated and are 22 percent more likely to be
aged 18-24. Coffee shop patrons are 28 percent more likely than the average American adult to be single and 70
percent more likely to have a post graduate degree. These demographic are well aligned with the Ames market.
Wireless Technology: Coffee shops have become establishments where people are not only drinking coffee but
also surfing the Internet, working from their laptops, or communicating with friends, family, and colleagues.
Wireless technology is changing the way people live. Hotspots (Internet access areas that deploy wireless
technology) can be found in airports, hotels, and coffee shops. Some offer free access while others require paid
subscriptions. Offering free wireless Internet in coffee shops is a sure way to boost success.
Break Even Point Calculation:
One Time Equipment Purchases
Espresso Machine
$4,000
Bean Grinder
500
Computer Systems (10) 20,000
Games
500
Printers
500
Furniture & Equipment 11,500
Repair Equip & Software 1,500
Working Capital
55,000
Total
$93,500
Direct Expenses
Average COGS
Supplies
Repairs & Maintenance
Miscellaneous
Contribution Margin
19.5%
2.0%
1.0%
2.0%
75.5%
Indirect Expenses - Annually
Management Salary 35,000
Part timers (100 hrs/wk)40,000
Computer Technician 17,000
Employee Benefits
4,800
Payroll Taxes
9,200
Utilities
8,000
Insurance
4,500
Rent
18,000
Legal
500
Advertising
18,600
Accounting/Tax
1,200
Supplies
3,969
Repairs & Maintenance 1,985
Miscellaneous
3,969
Outside Services
1,800
Communications
18,000
Loan Payment
16,114
Total
$194,114
Break-Even Point Calculation = 202,673 / .755 = $268,393 annually or $22,366 per month, or $745 per day. An
average expenditure of $7.50 per person equates to daily patronage of 99 customers. Average patronage of
the establishments interviewed in Columbia MO and Corvallis OR are estimated by those owners to be greater
than 125 to 200 per day.
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Similar Market Success
The founders of digital beans interviewed cyber café owners in Manhattan Kansas, and Corvallis Oregon.
These highly comparable communities to Ames, in both population and demographic makeup, both support
two cyber cafés each and suggest significant latent demand in the Ames market.
City
Ames IA
Corvallis OR
Manhattan KS
Columbia MO
Population
53,000
50,100
44,700
88,500
Traditional
Coffee
10
17
8
21
Ratio
1:5,300
1:2,950
1:5,588
1:4,200
Cyber
Coffee
1
9
2
5
Ratio
1 : 53,000
1 : 5,566
1 : 22,350
1 : 7,700
Market Summary: We believe the similarity of Ames to other markets where internet cafés have been
successful, Ames’s above average coffee consumption, the trends in coffee consumption, and Digital Beans
unique market position will allow the business to achieve its breakeven point within a reasonable time frame.
Marketing
Digital Beans will utilize radio, Tribune and ISU Daily advertising, in additional to a “door hanger” campaign.
These same strategies will likely be used in the longer term as well, but in a more moderate amount.
Month 1
Month 2
Ongoing
Radio
2,500
1,500
500
ISU Daily
800
400
150
Ames Tribune
2,800
2,000
800
Area Newspapers
400
100
100
Door Hanger
1,000
0
0
7,500
4,000
1,550
Operational Issues
Digital Beans will obtain computer support and Internet access from ISU NET located in Ames. ISU NET will
provide the Internet connections, network consulting, and hardware. ISU NET has estimated high speed
Internet access costs to be from $15,000 to $20,000 annually. $30,000 has been used in the financial
projections. Wireless networking vendors have been identified and equipment costs are included in the
equipment purchases below.
The business will open at 7 am and close at midnight during the week and stay open until 2 am on the
weekends. Computer literacy is a requirement for Digital Beans employees.
One-Time Startup Costs:
Loan Payment:
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3 Year Summary of Projected Cashflow and Income
22
Cash Flow Projection – Year 1
23
Cash Flow Projection – Year 2
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SmartStart Follow-Up Questions for Building a Business Plan
Answers to the questions below should be in business plan format, not question and answer format. See Business
Plan Outline.
1.
What is your new business’s break-even point?
To calculate your break-even point you need to separate direct and indirect expenses. Direct expenses are those
expenses that are caused by actually making a sale, and typically include: inventory, supplies, fuel, commissions,
and credit card processing fees. Calculate these as a per unit cost, add them up, and subtract them from the price
customers will pay. This is your per unit gross profit. Indirect expenses are those expenses that you will incur
regardless of whether or not you make any sales. These typically include wages, rent, insurance, utilities,
telephone, accounting, owner’s “salary”, etc. Calculate these costs on an annual basis. Dividing the total indirect
expenses by the gross profit per unit will give you your break-even point in units.
2.
How big is your market area? What is the population of the market area?
Typically the geography of your market is thought of as a circle around your store, but this is not true in every case.
There is an important tradeoff that normally exists. The more specialized your competitive advantage is, the more
likely you can pull customers from farther away. However, even though your market area is bigger, because what
you do is so specialized, you are likely dealing with smaller groups of customers who value your specialization.
Once you have defined the geography of your market area, go to
http://www.census.gov/prod/cen2010/briefs/c2010br-01.pdf for Midwest population information, or
http://www.icip.iastate.edu/census/cities-2010 for Iowa specific information. Another source is
http://www.icip.iastate.edu/about/recap.
Example #1 Your barber shop may have some prized customers that drive 90 miles for a haircut, but the vast majority of customers will likely
come from the 10 or 15 mile, or 10 or 15 block area surrounding your business. Rather than simply relying on your opinion abou t
how big this area should be, call several barbers in other similar communities that you don’t compete with, or, perhaps the
National Barber’s Association will have some research on the issue.
Example #2 An analysis may show that your lawn mowing business should not travel more than 30 minutes to a customer’s site. Traveling any
farther may increase travel costs too much, and decrease work time too much, to make the job profitable.
3.
What problem are you trying to solve for the customer?
What advantage(s) will your business offer to customers versus the choices they already have? How will their lives
be improved because your business is available to them? Your focus should be on the benefit from the customers’
perspective.


If customers can get the same or similar products from another business, how will they be better off buying
from you?
If customers can’t get the same or similar products or services from another business (even via a long drive or
mail order), how will their lives be better if they buy your products or services?
Example #1 Do customers currently have to drive to Des Moines or use mail order to get the products your new business will sell? If so, your
new business is solving the problem of lack of convenience.
Example #2 Will your new business provide a product that allows a house to be painted in 20% less time? If so, then your new business s olves
the problem of inefficient painting methods.
Example #3 Will your new business provide a new ice drink that they can’t get without driving for thirty minutes or three hours? If so, then
your new business provides a unique way to cool off with a cold drink experience.
Try to keep your answer to one or two sentences. Refer to this concept as Competitive Advantage.
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4. What prices will your new business sell at compared to the competition?
Competitive advantages are created by either offering your customers more features (longer hours, better quality,
more convenience, specific brands, delivery, atmosphere, customer service, longer life, free advice, etc.), or a
lower price. Both have impact on your break-even point.
Offering more features, in almost every case, increases the cost of doing business.
Example #1 Creating a competitive advantage of convenience by locating in the mall will increase the cost of doing business because of higher
rent.
Example #2 Creating a competitive advantage of customer service by hiring bright employees with great personalities will increase the cost of
doing business because quality employees will be able to demand higher wages.
In these situations the business must use one or more of the following strategies to make up for the higher costs:
 Plus Pricing Strategy If customers are getting more features, they might be willing to pay a higher price.
 Volume Strategy
Price like the competition and plan that the attractiveness of the extra features will attract a large enough

Eliminate Features

Any Combination
volume of customers to make up for the extra costs of providing those features.
Competitors may provide features which you think customers don’t really value. Eliminating the cost of those
unnecessary features may be enough to offset the costs created by adding your new features. For example, a
daycare may add computers and make up for the extra lease payments on the computers by not having as high
of ratio of care providers to students (lower wages). Parents who value their children being exposed to
computers may choose the daycare even though the ratio isn’t as good.
If the combination of features and price attracts enough revenue to exceed expenses, the business works. The
challenge is to convince someone that the combination you plan will attract the revenue.
When the competitive advantage is a lower price, the business must employ either a volume strategy, elimination
of features strategy, or some combination of the two.
5.
What evidence do you have that your new business’s Competitive Advantage is in demand by enough customers
to make the business profitable?
Market research is needed to show that there is sufficient demand for your new business’s competitive advantage.
Example #1 If your research shows that the average number of lanes of bowling in cities similar to the one in which you want to start a new
bowling alley is 50 lanes per 50,000 people, and your city of 50,000 people only has 30 lanes of bowling, your market research
suggests that a new alley of twenty lanes is feasible.
Example #2 If your market research shows that Americans spend $5.2 billion dollars each year on bird watching, then the average per capita
expenditure is $19.25 per person per year ($5.2 billion / 270 million Americans). Therefore, in a market of 50,000 average people,
we could expect sales of $962,500 (50,000 x $19.25). If your store breaks even at $175,000 in sales, then you’ll need a mark et share
of 18% to break even. If according to market research, specialty bird watching stores get a 25% market share (evidence that some
customers prefer to buy from specialty stores), the business looks feasible.
Example #3 For new business that will sell to other businesses, pre-selling is a powerful form of market research. For your foreign language
translation business, you should get appointments to speak with twenty or thirty businesses that need translation services. Those
businesses that like your competitive advantages may be willing to sign a letter or interest or letter of intent that you can take to
the bank to show market demand.
Example #4 In some cases, pre-selling research can be used for the general public. If your new business will sell dog training services, simply
placing an ad in the paper before you’ve formally formed the business, may be a great way for you to gauge demand, however,
you should be careful not to make any promises that you can’t delivery on even if the business doesn’t get started in the man ner
you would like (perhaps you start it part-time rather than full-time).
Example #5 Primary market research might be needed in some situations. This may mean standing on a busy sidewalk and asking people to f ill
out a survey. Be careful though. Asking people if they would like a Japanese restaurant in town will not provide as accurate of
answers as listing fifteen different types of restaurants and asking them to pick the top three they think your town needs.
Example #6 Articles in magazines, trade journals or general internet searches can be useful. For example, you believe that your new day care
will be successful because its competitive advantage of being located next door to a large employer. If you find an article that
reports that the most successful strategy for new daycares in stealing market share is by locating next to large employers, you’ve
got some good evidence to support the demand for your competitive advantage. However, it would still be a good idea to request
that management let you do a survey of employees to determine their needs, and execute the survey via the company’s employee
mail system or by stuffing surveys under windshield wipers.
Example #7 Similar businesses that don’t compete in your area can be great sources of information. Suppliers that will sell you you r inventory
and/or supplies can be useful in helping you identify other businesses like yours in similar cities. You can learn a tremend ous
amount about what you are facing by speaking with them. At first, focus on convincing them that you are from a goo d distance
away and will not be a competitor. Ask if you can visit them. They will not likely share sales information with you, but you might
ask them, “if I’m locating in a town of 12,000 people, with a major highway and one other competitor, is $120,000 in first years
sales a reasonable projection?” Phrasing your question in this manner allows them to provide feedback without giving away
details about their stores. Other information such as promotions that work well, inventory to stock, and other sales and
management information is useful.
Great sources of market research include: associations for your industry, magazines that serve your market (ask for
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6.
their media kit), franchisers (request a franchise kit), Internet (www.findarticles.com, etc), library databases (ABI
Inform, Predicasts, Lexis Nexis, etc.), similar businesses, and your efforts for pre-selling and surveying.
Will any groups be especially attracted to buy from your new business?
Businesses often try to be all things to all customers, but no matter how well your new business is run, some of
your potential customers will still prefer to buy from competitors or mail order products (convenience or can’t get
out to the store). Or they simply don’t need what you’re selling (they can get along without the riding lawn mower
or the homemade chocolates).
What type of people (or what type of businesses) will be your core customers? Who wants your new business to
exist the most? Describe them demographically, such as: men, women, older, younger, teenagers, people with cars, people who
ride horses, people who smoke, people with chronic pain, people with household incomes greater than $60,000, people with household
incomes less than $20,000, people with dogs, people who like to exercise, people who own trucks, businesses with more than 25 employees,
businesses with less than 10 employees, businesses that machine steel or aluminum, businesses that print a catalog, businesse s with
international customers.
Example #1 Sometimes segmenting a market is difficult to do. For example suppose that you want to open what will be the only auto repair
shop in town. Some people will still prefer to drive 25 miles to the dealership. And since you can’t find any demographic that will
consistently separate those who want the convenience of shopping with you, trying to segment the market may not have much
benefit.
Example #2 Suppose that you want to open a grocery business that takes orders via the internet or telephone and delivers the bagged up
groceries to peoples houses at whatever time of day they request. Three clear segments of customers exist. Identifying them will
help you gauge demand and devise market strategies. The segments are: Elderly people who can’t make it to the store, Dual
income families who are willing and can afford to pay for the convenience, Affluent people who simply want and can afford the
service.
Example #3 Suppose that your new business will paint parking lots for businesses. Your analysis may determine that a business needs to have
25 employees in order for it to be worth your time to take your equipment to their location. Likewise, you may find that businesses
with less than 25 employees are the best candidates for your new bookkeeping service because once they grow beyond 25
employees they tend to hire a full time bookkeeper. Information from the local chamber of commerce or yellow pages may be
useful for identifying businesses.
Refer to this concept as Market Segmentation.
7.
How will potential customers come to understand the advantages that your new business offers?
How will the marketing and sales process function?
Your business needs to create a system that continually reminds customers that that your new business can solve
their needs. In many cases it’s helpful to think of the communication and sales process as three steps: lead
generation, lead nurturing and harvesting (closing the sale).
Example #1 For some businesses, this may be as simple as placing newspaper ads and greeting people as they walk in the door. However,
there usually are ways to improve they’re approach.
Example #2 Suppose your business will sell payroll services. The marketing strategy may consist of the following:
Lead generation: Customer sees an ad in the newspaper or (gets direct mail ad) and responds by calling or visiting the store. A
sales rep on average spends thirty minutes with the customer on the phone or in person and gives or sends them a brochure, an d
enters the contact into the sales software program. Nurturing: 75% advance to this stage as experience shows that 25% won’t
provide personal contact information in the lead stage. A week after initial contact, the sales software program reminds the
salesperson to call the lead to answer any questions and try to set an appointment (to close the sale, or get them in the store to
further nurture the sale). Process takes approximately thirty minutes to complete including phone tag time. Closing: Experience
shows that 20% will reach this stage. Salesperson visits client or calls them again to determine interest. Depending on interest, the
salesperson determines whether any follow up is needed. Two hours per lead is budgeted at this stage. From experience and
based on the competitive advantage of the new business, it is estimated that the new business will be able to close 10% of all leads.
On average it is estimated that each lead will consume roughly two hours of sales person time, resulting in an average sale o f
$2,000 per year. Regardless of outcome, lead remains in database to receive future direct mailings.
Example #3 In addition to the situation above, suppose that an additional lead generation method is added via a partnership with three l ocal
accounting firms, and two local legal firms. These firms are provided with discounted payroll services for their employees, in
exchange for providing referrals to the new business when clients inquire payroll issues.
An estimation of the time involved and the cost should be included so as to determine the necessary budget and capacity.
The answers to the questions above should be put into business plan format. An outline is provided on page 4.
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You may need to add some sections, or rearrange sections in order to tell your “story.” Keep in mind that in
general you want the reader to reach the following conclusions as they read through your plan:







That you understand how the industry works and customer motivations (typically proven in your overview).
That there are some customers unsatisfied with their current choices in the market place.
That the competitive advantages of your business are in demand (identify segments of greatest demand when possible).
That the expense of delivering your product or service creates a reasonable break-even point (break-evens at a reasonable market share).
That you have a marketing / sales plan that will create adequate customer interest and sales.
That you and/or your management team have the skills to pull this thing off.
That the financial projections make sense – not too aggressive of sales projection and enough production and sales capacity to meet
projections.
8. Sales Projection – Logical projection of sales growth on a month-by-month basis based on market research.
How will the marketing and sales process function?
Example #1 Sales growth based on the direct sales effort. For example, from experience gained from speaking with other similar business , or
from personal experience, you’ve learned that one salesperson can call on 10 customers a day, on average 3 will decided to
purchase, resulting in an average sale of $200 each. In month 4 a second sales person will be added.
Example #2 Ads placed in the local newspaper will reach 50,000 potential customers. In the first month we expect a response rate of .5% per
week resulting in 250 inquiries. Of those inquiries, 10% (25) will buy with sales of $40 on average, or 1,000 per week, $4,0 00 for the
first month. Response will grow by .005% per month thereafter, etc.
Example #3 Based on the initial year’s sales of ABC, Inc., a similar business is a similar geographic and demographic market, we anticipate the
following monthly sales….
SBDCs are a program supported by the U.S. Small Business Administration and extended to the public on a non-discriminatory basis. SBA cannot endorse
any products, opinions or services of any external parties or activities. Any opinions, findings, conclusions or recommendations expressed are those of the
author(s) and do not necessarily reflect the views of the SBA.
Iowa State University does not discriminate on the basis of race, color, age, religion, national origin, sexual orientation, gender identity, sex, marital status,
disability, or status as a U.S. veteran. Inquiries can be directed to the Director of Equal Opportunity and Diversity, 3680 Beardshear Hall, ( 515) 294-7612.
Funded in part through a cooperative agreement with the U.S. Small Business Administration. All opinions, conclusions or reco mmendations expressed are
those of the author(s) and do not necessarily reflect the views of the SBA.
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