Entrepreneurship and new venture creation
Last year, Entrepreneur Magazine list several brilliant entrepreneurs in the world that are able to generate revenue accounting for million of dollars in relatively short period. The successful of their business mostly due to the adoption of information technology that undoubtedly help their ventures to generate revenue, minimize costs, and retain customers effectively and efficiently.
In other publications, Fortune lists 500 companies annually that generate extensive revenue worldwide. The annual events, named Fortune 500, the magazine shows that there is always a change in the list every year. Some companies are out of the lists and some of them become newcomers in the list.
The annual events suggest that companies that are able to maintain and improve their position are those that have strategic plan that empower them to alter their business strategy if the market changes. In entrepreneurship and management study, the situation refers to the creation of winning business plans in which it composes of several factors that are important to perform business in the long term.
Concerning the entrepreneurship, this paper will discuss the use of two sources when corporations develop a business plan. The two sources are primary and secondary sources. Since creating business plan requires thorough research, therefore it is somewhat similar to conducting a research. In order to provide insight on how to create a business plan, in each element there will be at least one example (Entrepreneur.com, 2007a).
Creating Business Plan
- Finding Source of Information for Business Plan
In general, an organization who creates a business plan may take benefits of using primary and secondary sources. The use of both sources is somewhat similar in nature to conducting a research in which both sources provide the company with several benefits and drawbacks as following:
- Primary Sources
This becomes the most important sources for creating a business plan since the data is undoubtedly valid. The characteristics of primary sources include management’s remarks, annual reports, company official documents about strategic plan, and historical data of sales achievement. For example, the company’s primary sources compose important issues as following:
- Preface/Management Remarks: This source is a very important source since the creation of a business plan is the result of managements’ direction. Therefore, the creation of a business plan should take into account things that managements suggest and directs. Managements’ remarks include the company’s achievement in the previous year and the next year’s target.
- History of product development. This source elaborates the nature of product or service that the business plan informs. Therefore, within the section there will be explanation regarding the product/service and the target market, and the underlying reasons explaining the factors why a business can obtain and retain a competitive advantage.
In order to develop products that are saleable in a particular market, the company should take a look at the historical data about the company’s products. The concept that helps a company to track the product development is product life cycle (PLC), which developed by Vernon in 1966 and has different four stages as following (see Appendix 4):
- Introduction Stages. The stage represents an era where a product experiences a slow growth since it is in an introductory stage. When a business plan is developed for a product in this stage, the company should provide acquisition strategy including massive promotion plan.
- Growth Stage represents an era where a product experiences increasing market acceptance that result in the increased revenue and enhanced profits.
- Maturity Stage is a time of slow down in sales growth because the product has achieved acceptance by most potential buyers.
- Decline Stage is the phase when the company experience the failing sales and thus revenue.
(Internet Center for Management and Business Administration, 2004)
- Financial performances. This source simply describes some important financial figures including three accounting policies: cash flow statement, income statement (profit and loss statement), and balance sheets. The use of financial data will provide the projected financial figure that the business plan wants to achieve at a give period.
Concerning the issue, there are four types of investment evaluation tool that the company must base their analysis so that their business plan will make sense. The four elements are as following”
- Payback Period. This element is considered to be a conventional tool in analyzing the feasibility of a project although some corporations still use it due to it provides simplicity. By using this tool, anyone with sufficient computing skills can calculate it.
According to Corporate Finance Live, payback period represents the period or the number of time that a company takes when performing capital budgeting to obtain the initial costs (Mathis 2000). It means that the use of payback period will give investors illustration about the time that they will earn the money they spend on a project (Mathis 2000).
If we assume that the cash inflows occur regularly over the course of the year, we can compute the payback period using the following equation (Mathis 2000):
When choosing project based on payback period method, investors simply choose projects with shorter payback periods since shorter payback period means the projects are more liquid and less risky than ones that give longer paybacks (Mathis 2000).
However, the method also posses some drawbacks since it disregards any benefits that occur after the payback period since the concern of payback period method is to look for any projects that have shorter return in term of the number of year.
Unfortunately, when company compare two projects that has different returns by using payback period scheme, the company will take the project that have zero return but the payback period is five year than a project that provide $1 million in return but the payback period is sixth year. Another drawback is the fact that payback period is lack of considering time value of money in the calculation.
- Average Rate of Return (ARR)
This method refers the profits occurs as the result of a project as a percentage of the original capital cost (“Investment Appraisal” 2005). This evaluation method has beneficial since it provides simplicity and easy to calculate. However, this method is not practical in today’s business practice since it lack of considering time value for money and thee concept of profits is very subjective. Average rate of return (ARR) can be calculated by using following equation (“Investment Appraisal” 2005):
ARR = x 100%
X = average annual revenue within the depreciation period
Y = initial investment during the period
- Net Present Value (NPV)
The first method of discounted cash flow is net present value (NPV). NPV is beneficial in evaluating an investment since it takes into account the value of future cash flows and the cost of raising the capital required for the investment. NPC is calculated by using following equation where CFIn is net cash flow at the nth year after a company makes an investment, r means the discount rate, n is total year of depreciation, and I0 is total investment. When choosing a project, the decision is made for a project that has positive NPV.
NPV = CFI 1 + CFI 2 + . . .+ CFI 3 – I0
(1 + r) 1 (1 + r) 2 (1 + r) n
- Internal Rate of Return (IRR)
The second method in DCF is internal rate of return (IRR). This method simply calculates the discount rate at which the Net Present Value (NPV) of a project equals zero (Mathis).
- Existing business position. This item highlights where the company position in the market, the legal aspect of the company’s operation, the birth of the company, and key personnel (including owners).
- Key achievements. This item elaborates major achievement that the business has obtained that becomes significant part of the company’s success. It includes patents, awards, won contracts, product development, and many others (com, 2007b)
- Using suitable statistical and research methods including the use of sampling, the company will gather precise information about how company should responds to particular market needs
- Secondary Sources
In addition to primary sources, these sources become additional data that company may obtain in order to give an insight about external forces that may influence the company’s operation. This sources present the company a description about things happened in a market (AllBusiness, 2005). The characteristics of secondary sources are as following:
- Secondary sources may come from several sources such as data published by chambers of commerce, government agencies, a country’s Census Bureau and Nielsen ratings. For example, a company that intends to open new internet café in Brighton may open an official site of Brighton city that lists existing internet café in Brighton (http://www.brighton.co.uk/cybercafes/). Appendix 1 shows several internet café providers in Brighton.
- Business description describes any things relate to the environment of the business. Therefore, in a business plan should describe the existing competition in the industry and also the outlook of the industry. This information is important for readers (managements, fund raisers, or investors) so that they can assess whether the business has potential advantages or not (com, 2007b)
- Many companies do not consider strategic planning as the most important decision, while in fact; it can be used to align employees’ actions with the strategic plan (McKinsey & Company, 2007a)
- Data from Bureau of Statistics. For example, information from Australian Bureau of Statistics (2007a) describes data of internet users in Australia as shown in the Appendix 2.
- Industry information describes competitive position of a company in a particular market. As mentioned in the previous section, managements and investors as the main readers /of business plan have a great interest in knowing the competitive nature of a business. Therefore, it is essential that a business plan also provides some business analysis tools to give them an insight about the nature of competition the product/service exists (com, 2007b).
In order to do so, there are many kinds of business analysis tools such as PEST, Porter’s Five Forces, Boston Consulting Group (BCG) Matrix, Ansoff Matrix, and SWOT analysis. Appendix 3 shows an example of competitive analysis by using SWOT analysis for Apple’s famous product, iPod.
This paper has discussed several sources when a company creates a business plan. The two sources are primary and secondary sources. The development a business plan is not a paper work but more practical work since a business must consider the real-case scenario. In this manner, a business plan acts as a guideline for a company in achieving their objectives.
In order to create a good business plan, there are several tips that a business may consider as following:
- Focus on competences when selecting a business
- Pore over the potential financial advantages to deliver a service or manufacture a product
- Develop real-case scenario to obtain reasonable performances
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