Business plans for new or small businesses

Management DecisionBusiness plans for new or small businesses: paving the path to success
Amir M. Hormozi Gail S. Sutton Robert D. McMinn Wendy Lucio
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Amir M. Hormozi Gail S. Sutton Robert D. McMinn Wendy Lucio, (2002),"Business plans for new or small businesses: paving
the path to success", Management Decision, Vol. 40 Iss 8 pp. 755 - 763
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Business plans for new or small businesses: paving
the path to success
Amir M. Hormozi
College of Business, Texas A&M University-Corpus Christi, Texas, USA
Gail S. Sutton
Center for Coastal Studies, Texas A&M University-Corpus Christi, Texas, USA
Robert D. McMinn
College of Business, Texas A&M University-Corpus Christi, Texas, USA
Wendy Lucio
Halt, Thrasher & Buzas, LLP, Alexandria, Virginia, USA
Introduction
``If you don't know where you are going, any
path will get you there''. This quotation
illustrates the important role planning plays
in determining the degree of success realized
by a business. Essential elements to business
success are identification of goals, followed
by development of strategies to meet those
goals. Abusiness plan is an effective tool
used by businesses to organize these goals
and objectives into a coherent format
especially for new or small businesses. It can
be defined as operating a company on paper.
No matter the size or stage of development,
companies use business plans to improve
internal operations and to describe and
market the business to potential outside
financiers. This paper seeks to address that
utilizing business planning as a tool will
allow new or small businesses to achieve and
even surpass their goals.
Purpose of a business plan
Who should write a business plan?
. new business owners;
. new business owner seeking outside
financing for start-up;
. existing business owner seeking outside
financing for expansion; and
. any business owner who wants to increase
the success of their business.
The purpose of a business plan is to define
the business and explain in as much detail as
possible how the venture will operate in the
current market. Most business owners are
apprehensive about writing a business plan,
but a well-developed plan provides unlimited
benefits (Arkebauer, 1995). Operating the
company on paper first provides an
opportunity to identify potential problem
areas and work out solutions without real
world consequences (O'Connor, 1998). A
business plan also communicates goals
throughout the organization and helps the
business stay focused on its objectives. After
implementing the proposed strategies, the
owner or manager can use the plan as a
benchmark to identify both achievements of
goals and areas that need improvement.
However, a business plan should not be
limited to a start-up tool but, instead, used as
a working document to continually
re-evaluate progress and clarify goals for the
future. While a good business plan will not
guarantee success, it can go a long way
toward reducing the odds of failure
(Crawford-Lucas, 1992). The presence of a
business plan is highly correlated with the
performance of the business and contributes
to the growth of the firm (Orser et al., 2000).
Despite the internal benefits, most
entrepreneurs begin to develop a business
plan because of its external function. Such a
plan is a virtual requirement if the business
is attempting to obtain outside financing.
When approached about potential funding,
either for a start-up business or for
expansion of an existing business, the first
thing a prospective investor or lender will
ask to see is a business plan. It is the primary
tool used by financiers to evaluate the
potential of a business. Information investors
are looking to obtain include specific and
organized information about the company,
an in-depth analysis of the business
opportunity, and most importantly, the
amount of money requested and how the
money will be paid back (Hodges, 1997).
The writing of a business plan
Business plans tend to contain similar
sections and follow an accepted format, but
the length of the plan varies depending on the
enterprise. Abusiness plan should be long
enough to contain the pertinent information,
but not so long as to overwhelm the reader.
The current issue and fulltext archive of this journalis availableat
http://www.emeraldinsight.com/0025-1747.htm
[ 755 ]
Management Decision40/8 [2002] 755±763
# MCB UPLimited
[ISSN 0025-1747]
[DOI 10.1108/00251740210437725]
Keywords
Business plan, Entrepreneurship,
Marketing planning, Small firms,
New product development
Abstract
Planning plays an important role in
determining the degree of success
realized by a new or small
business. Essential elements to
business success are
identification of goals, followed by
development of strategies to meet
those goals. A business plan is an
effective tool used by businesses
to organize these goals and
objectives into a coherent format.
It can be defined as operating a
company on paper. No matter the
size or stage of development,
companies use business plans to
improve internal operations and to
describe and market the business
to potentialoutside financiers. A
business plan should not only
reflect the individuality of the new
business but should also follow a
standard format. This format is
comprised of four major sections:
introductory elements, business
section, financial statements, and
the appendix. This paper seeks to
address that utilizing business
planning as a tool will allow new or
smallbusinesses to achieve and
even surpass their goals.
The authors thank their
research assistant,Stacy McGee, for hervaluable assistance ingathering information for
this paper.
Downloaded by Duquesne University At 08:40 30 January 2016 (PT)

While Arkebauer (1995) suggests that the
average recommended length is 40 pages and
can often take six months to a year to
complete, the Small Business Administration
(SBA) (1993) points out that there is no set
length to a business plan. However, the SBA
indicates that the average length seems to be
30 to 40 pages, including the supporting
documents section.
When determining who will do the writing
of the business plan, either writing the plan
oneself or having a consultant do the writing,
the benefits and drawbacks of each option
must be considered. The American Woman's
Economic Development Corporation advises
that although it is beneficial to have an
expert review your completed business plan,
it is wise to write the plan yourself. By
becoming an expert in your own business,
you will know all of the industry trends, all
about your customers, and all about your
business as a whole (SBA, 1997). The
opportunity for learning that writing your
own business plan provides is worth the time
spent on its development.
While the benefits of writing your own
business plan are numerous, it is definitely
wise to have a consultant examine the
business plan. An expert will be able to
identify areas in the business plan that may
need improvement before attempting to
obtain outside financing. Acommon
drawback of having a consultant write the
business plan is the expense, since many new
or small businesses do not have the funds
necessary to cover such expenditures.
Sections of a business plan
Introductory elements
The introductory elements of a business plan
include the cover page, table of contents, and
executive summary. These sections provide
the reader with important preliminary
information about the company and where to
locate relevant data within the plan (see the
Appendix for an overview of a business plan
format).
Cover page
The purpose of a cover page is to inform the
reader what they are about to read and
provide information about how to contact the
business. The cover page is the first contact a
potential financier will have with the
business, so it is important to include all the
necessary elements. The cover page should
say the words ``business plan'' and should list
the name of the person submitting the plan,
name of the business, company logo, address,
telephone number, fax number, and
e-mail address.
Table of contents
The table of contents provides the reader
with a convenient way to find specific
sections of the plan. All business plan pages
should be numbered, and the table of
contents needs to include page numbers for
major sections and important subsections.
While the cover page and table of contents
may seem inconsequential relative to other
portions of the plan, their significance should
not be underestimated. Lenders and
investors are inundated with business plans
and if important sections cannot be found
easily, or if there is contact information
missing, the venture may not receive the
attention it deserves.
Executive summary
The executive summary is the first main
section of the business plan. It is designed to
provide a summary for the reader of what
they are about to read. It should first identify
the amount and type of funding sought
(either debt or equity) and then summarize
company objectives, history, and financial
information. The executive summary is
typically between two and three pages long
and should aggressively sell the business
(Arkebauer, 1995). The executive summary is
where many investors start reading. If their
interest is not peaked, they may not read any
further. The goal of the executive summary is
to have the reader, ``read on'' (Brown, 1996).
This section is also the place to note that
back-up information is included in an
appendix. Subsequent sections of the
business plan provide more details on areas
hi-lighted in the executive summary.
The business section
Three main sections remain in the plan
following the introductory elements:
business information, financial statements,
and the appendix. The business section
should provide the reader with information
about the industry, including status and
trends, detailed product and development
information, a description of the
management team, and overall marketing
strategy. This section describes in as much
detail as possible how the business will
actually operate.
Industry
The first portion of the business section
should provide an overview of the industry
the firm is entering. According to Sahlman
(1997), the information investors want from
this section is whether or not the total
market for the venture's product or service is
large or rapidly growing and whether the
industry is structurally attractive. Investors
look for large or rapidly growing markets
[ 756 ]
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn andWendy Lucio
Business plans for new or
small businesses: paving thepath to success
Management Decision40/8 [2002] 755±763
Downloaded by Duquesne University At 08:40 30 January 2016 (PT)

because it is easier to break into a growing
market than it is to struggle against
competitors in a stationary market. Ideally,
financiers would like to invest early in a
market that has high growth potential. If the
industry has high potential, the business
plan should state explicitly how and why this
is the case. Negative information about the
industry should not be excluded. Discussing
possible future challenges indicates a
realistic view of the market. However, if the
market is not growing, the business plan
needs to convince the reader that the venture
will still be able to make sufficient profit,
making it beneficial for investors to
participate (Sahlman, 1997).
The company
Specific information about the company
follows industry information. This section
should begin with the overall company vision
or mission statement. Amission statement is
a one to two sentence description of the type
and purpose of the business (O'Hara, 1995). A
precise mission statement should show a
clear purpose, because a business that is
focused has a higher probability of success in
the marketplace. Also included in this
section is the overall business objective:
either to purchase an existing business, start
a new company, or expand existing
operations. Aperiod for completion of the
objective is included, as well as the planned
legal structure. Legal structure options
include a sole proprietorship, partnership,
corporation, and other hybrid combinations.
The product or service
The next aspect to address in-depth is the
actual product or service to be marketed. To
succeed in obtaining capital the
entrepreneur must be able to clearly and
succinctly describe the product or service
with the prospective audience in mind
(Crawford-Lucas, 1992). This is especially
necessary if the product is highly technical,
and the reader needs a background to
understand industry jargon. Also in the
product/service section, investors look for
identification of a core competency, which is
the characteristic that sets the business apart
from the competition. For example, IBM is
not known by their users for technical
superiority or low prices. Their core
competency is ``customer service''
(Arkebauer, 1995). Because the business
environment is constantly changing, the
business plan should address how the
business will retain its unique advantage if
competitors begin offering products with the
same features. The essential question for
financiers in this section is: ``Why will the
product or service be successful in the
marketplace?''.
Pricing
Pricing is another subject addressed in the
business section: how much will be charged
for a product or service and how that price
was derived (American Express Website for
Small Businesses, 1998). Investors will
naturally look for opportunities in markets
with value pricing; i.e. markets where the
costs of production are low and consumers
will still pay a lot for it (Sahlman, 1997).
However, if value pricing is not evident in
the product or service described in the
business plan, this does not mean financing
is unattainable. Value pricing is rare and
profits are still attainable in low margin
industries. The most important
characteristic of the pricing section is where
the pricing strategy realistically places the
business in comparison to the competition.
Business owners should not determine
pricing to impress investors. For example,
plans that describe a product or service as
higher in quality than the competition but
lower in price are unrealistic and damage
credibility. Making it clear to investors that
pricing has been well thought through can be
more important than actual figures.
The market
The section on market description expands
on the points mentioned in the industry
portion and includes an evaluation of target
customers and competition. The central
question in customer evaluation is: ``Who is
the market?'' (Arkebauer, 1995). Investors are
looking for businesses that know their
customers and the problems they are solving
for them (Elkins, 1996). Important customer
data includes, target market, economic
make-up of customers, where they live or
work, and why and where they purchase.
Regardless of industry, all businesses will
have competitors. The competitor section
indicates where the product or service fits in
the current environment. An analysis of this
environment indicates to investors that the
entrepreneur has a solid understanding of
the industry and is realistic about the
obstacles the business will face in the
marketplace. Competitor information
includes annual sales, market share, and how
the competitors are or are not meeting
customer needs (American Express Website
for Small Businesses, 1998).
Marketing plan
After defining the product, pricing,
competition, and customers it is necessary to
incorporate aspects of each category into a
marketing plan. Marketing is, ``the process of
planning and executing the conception,
[ 757 ]
Amir M. Hormozi,
Gail S. Sutton,
Robert D. McMinn andWendy Lucio
Business plans for new or
small businesses: paving thepath to success
Management Decision40/8 [2002] 755±763
Downloaded by Duquesne University At 08:40 30 January 2016 (PT)