CHAPTER 5

Financing New Ventures

Introduction

At its core, venture capital financing (also known as venture capital funding or VC
funding) is risk-equity investing through funds that are professionally managed
and provide an important link between finance and the development and growth
of companies. Venture capital funds focus on early-stage and start-up
companies. Venture capital funds provide risk capital in the marketplace. The
main benefit to venture capitalists (or VCs) is multiple returns on their initial
investment.

Advantages of Venture Capital Funding

Aside from the infusion of cash, the other key advantage of obtaining VC funding
includes the mentorship with the individuals at the venture capital firm. The right
firm may serve as an important partner with the entrepreneurs. A venture capital
firm may serve as a network, provide expertise and guidance at the right time,
and help instill a healthy sense of urgency and discipline in the founders. Each
year, the more established VC firms typically hear thousands of pitches from
prospectors who are trying to secure funding. However, a very small percentage
of these companies actually receive funding. Thus, securing the right kind of
venture capital funding for your business is no easy task.

How to Get Venture Capital Funding

To maximize the likelihood of success, it is highly advisable for capital-seeking

business owners to perform advance research to learn about the venture capital
process, which includes the following:

●​ Attracting the attention of the right venture capitalists​

●​ Securing initial and follow-up meetings​

●​ Surviving a rigorous due diligence examination​

 ●​ Achieving a fair and appropriate valuation​

●​ Negotiating the terms and conditions of the transaction​

●​ Closing on the funding that is sought​

What is Venture Capital?

It is a private or institutional investment made into early-stage / start-up

companies (new ventures). As defined, venture capital involves risk (having
uncertain outcome) in the expectation of a sizeable gain. Venture capital is
money invested in businesses that are small, or exist only as an initiative, but
have potential to grow. The people who invest this money are called venture
capitalists (VCs). The venture capital investment is made when a venture
capitalist buys shares of capital stock in a new venture and becomes a financial
partner in the business.

Venture capital investment is also referred to as risk capital or patient risk capital,
as it includes the risk of losing the money if the venture doesn’t succeed and
takes medium to long term period for the investments to fructify.
Features of Venture Capital investments
●​ High Risk
●​ Lack of Liquidity
●​ Long term horizon
●​ Equity participation and capital gains
●​ Venture capital investments are made in innovative projects
Suppliers of venture capital participate in the management of the company

Methods of Venture capital financing

●​ Equity
●​ participating debentures
●​ For conditional loan

THE FUNDING PROCESS: Approaching a Venture Capital for funding as a

Company

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The venture capital funding process typically involves four phases in the
company’s development:

●​ Idea generation​

●​ Start-up​

●​ Ramp up​

●​ Exit​

Types of Venture Capital Funding

The various types of venture capital are classified as per their applications at
various stages of a business. The three principal types of venture capital are
early stage financing, expansion financing and acquisition/buyout
financing.

The venture capital funding procedure gets complete in six stages of financing
corresponding to the periods of a company’s development.

Seed money: Early stage financing for proving and fructifying a new idea

Start-up: New firms needing funds for expenses related with marketing and
product development

First-Round: Manufacturing and early sales funding

Second-Round: Operational capital given for early stage companies which are
selling products, but not yet profitable
Third-Round: Also known as Mezzanine financing, this is the money for
expanding a newly beneficial company

Fourth-Round: Also called bridge financing, 4th round is proposed for financing
the “going public” process

A) Early Stage Financing

Early stage financing has three sub divisions: seed financing, start-up financing
and first stage financing.

Seed financing is defined as a small amount that an entrepreneur receives for

the purpose of being feed finance for start up loan.

Start up financing is given to companies for the purpose of finishing the

development of products and services.

First stage financing: Companies that have spent all their starting capital and
need finance for beginning business activities at the full-scale are the major
beneficiaries of the first stage financing.

B) Expansion Financing

Expansion financing may be categorized into second-stage financing, bridge

financing and third stage financing or mezzanine financing.

Second-stage financing is provided to companies for the purpose of beginning

their expansion. It is also known as mezzanine financing. It is provided for the
purpose of assisting a particular company to expand in a major way. Bridge
financing may be provided as a short-term interim finance option as well as a
form of monetary assistance to companies that employ the initial public offers as
a major business strategy.
C) Acquisition or Buyout Financing

Acquisition or buyout financing is categorized into acquisition finance and

management or leveraged buyout financing. Acquisition financing assists a
company to acquire certain parts of an entire company. Management or
leveraged buyout financing helps a particular management group to obtain
control of another company.

Advantages of Venture Capital

✓ They bring skills and expertise to the company

✓ Large sum of equity finance can be provided

✓ The business does not stand the obligation to repay the money

✓ In addition to capital, it provides valuable information, resources, technical

assistance and help in making the business successful

Disadvantages of Venture Capital

✓ As the investors become part owners, the autonomy and control of the founder
is lost

✓ It is a lengthy and complex process

✓ It is an uncertain form of financing

✓ Benefit from such financing can be realized in long run only

D. Exit Route

There are various exit options for Venture Capital to cash out their investment:

✓ IPO – Initial Public Offering

✓ Promoters buyback

✓ Mergers and Acquisitions

✓ Sale to another strategic investor

What is wealth creation?

[Link]

Wealth creation is the process of investing in different asset classes where the
investments will help in fulfilling key needs. These investments will also be
self-contained that can generate wealth over a period of time.

The wealth creation process will be most effective if started early. Starting
investments during the early stages of life will give a head start for achieving
goals. It also helps in generating higher growth in the long term. This is due to
the power of compounding. Power of compounding is a concept that will help in
reinvesting the returns back into the fund to earn higher growth. Compounding
returns is also known as “interest on interest”. Therefore, the longer one stays
invested, the higher will be the gain in wealth.

Wealth creation process always starts with setting financial goals. Then these
goals have to be classified based on the time horizon in which one wants to
achieve them. The next few years will be short term goals. Similarly, there can be
medium term goals and long term goals. Short term goals are the ones that one
wants to achieve in the next 1–3 years. Medium term goals are the goals that
one wants to achieve in the next 3-5 years. And any goal beyond five years is
considered as long-term goals.

Why is it important?

Wealth creation is a process of investing in multiple asset classes that eventually

help in meeting one's livelihood needs. Therefore, wealth creation as an
investment strategy plays a significant role. No one really knows what the future
holds for them. Hence, it is better to start planning for the future from the
beginning. Starting investments early will help in creating wealth in the long term.
Short term investments will not always create wealth.
Each one of us will reach a point where we are unable to work any longer or earn
an income. Planning for a safe and secure livelihood in the future is what wealth
creation is all about. Who doesn't like to enjoy a relaxed retirement, in a beautiful
beach house, or in a peaceful home in the countryside? Who doesn't want
financial independence at this age? But how many of us can really afford it?
What if there is a possibility to retire just the way we dreamt of?

The solution to all these questions is investing early to create wealth.

Here are some reasons why wealth creation is important:

Regular income

Investments into good assets will help in generating alternate sources of income.
For example, investments in equities, mutual funds or debt instruments will help
in generating income through interest or dividends. Therefore, during retirement,
these investments will be an additional source of income that will help one in
retiring peacefully and have financial independence. Also, in times of
emergencies or health crisis, these investments will help in addressing the
contingencies.

Retirement planning

The benefits of investments are realized to a greater extent during post

retirement years. Having a separate retirement fund will help investors in leading
a stress free and healthy retirement. Retirement is the time where one's savings
or investments do the work for them. To create one such fund, it is important to
start early and invest regularly.

Goal based investing

Goal based investing is the best way to measure one's financial success. All of
us have goals and dreams about the future. Prioritizing and achieving one goal at
a time will give the utmost satisfaction. To do so, one should list down all the
goals along with timelines and start investing towards them. Starting small and
early will help in wealth creation. Having a separate investment fund for each
goal will help in achieving them sooner. Therefore, aligning investments to
financial goals will help individuals to create wealth.

Process of Wealth Creation in 4 simple steps

1. Fixing goals

The first step in successful financial planning is setting clear goals. Goals differ
individually but can be classified as short-term, mid-term, and long-term.
Generally speaking,goals can include paying bills on time, funding a child’s
education, securing health, saving for retirement, etc. it is important to prioritize
your goals and advice a wealth accumulation strategy around them.

2. Planning strategically

Once you assess your goals and bifurcate your needs and wants, you can
develop a strategic plan that keeps a tab on your spending. Wealth growing
strategies include making a buaget for all your monthly expenses. Sticking to a
steady budget decreases the chances of frivolous spending and leads you to
accumulate and save your wealth for your future needs. As of your savings.

3. Evaluating risks

Wealth accumulation comes easily only with a steady stream of income. This
income can be increased with extra hours of work or getting side jobs. The best
way to create an additional source of income is by investing. However, you must
consider your risk appetite before choosing your investments so that you don't
end up taking more than you can handle. It is advisable to take the help of a
financial advisor to thoroughly study different investments and their risk
component in your monthly wealth cycle.

4. Allocating assets

Asset allocation is perhaps one of the most important key factors in multiplying
your wealth. But you must structure it carefully. There is a range of areas where
you can allocate your money, for example, equities, real estate, bonds, etc. This
can be done only when you have a clear idea of the risk and returns involved in
each security. You must research well to understand the nuances of asset
allocation.

What is Wealth Preservation?

Simply defined, wealth preservation is the maintenance of your income and

assets. This can be challenging as most people tend to get passive about wealth
preservation.
4 Simple steps to Wealth Preservation

1. Re-evaluating risks

It is difficult to preserve your wealth with volatile markets and changing trends.
That is why it is necessary to re-evaluate the risks associated with every
investment you make. With clever marketing gimmicks, investors are sometimes
deceived into believing that certain investments are 'risk-free'. Keep in mind that
while no investment is completely risk-free, nevertheless, with regular
re-evaluations and adequate wealth distribution amongsi different tools, you can
secure good returns on your investments.

2. Diversifying investment

As you grow older, your goals might change. our portfolio and financial standing
might also change. This is why you must diversify your potfolio or check the
market for better investment options. Diversification is crucial for growing wealth.

3. Getting insurance

Insurance is a must-have in today's unprecedented times. It is also a good wealth

preservation strategy. Insurance plans work as a monetary cushion during
financially difficult times. Insurance policies provide cover against, death, medical
injuries, etc. at a monthly premium. Ditferent companies offer different policies.
You can find out the one that suits you and your family and use it as a medium to
preserve your wealth.

4. Having an emergency fund

Remember the savings account you put a few dollars into every now and then?
You can use this savings account as your emergency fund. Investments can be
tricky and insurance policies can expire, but an emergency fund is the surest way
of wealth accumulation. An emergency fund will provide you cover during
unpredictable times of crises and losses and act as a buffer until you secure
additional funds. Generally, it is advisable to have an emergency fund that can
cover up to 3 to 6 months of your living expenses.

What are the major differences between wealth preservation and wealth
creation?
Growing wealth is limited to buying more shares, investing in stocks, etc.
However, keeping these earnings safe and secure is what wealth preservation is
all about. When you put your money in stocks, you earn profits as returns. These
profits help you create your corpus of wealth. However, when you put these
earnings in a bond as savings for future contingencies, you preserve your wealth.

Wealth creation and preservation can mean different things to different investors.
For example, if you buy real estate with an intention of selling it in the future, you
increase your chances of creating more wealth. However, if you occupy the
premises yourself, your investment acts as a wealth preservation strategy.

In retrospect you will realize that wealth preservation is nothing but a form of
wealth grow over time, acting as an ideal wealth accumulation strategy.

To sum it up

Both, wealth creation and wealth preservation, are equally crucial. Striking a
balance between the two is tricky and many people falter along the way. So, you
must review your portfolio from time to time and see it your wealth is truly
growing. to attain financial security, use the resources at your disposal cautiously
and make well-informed decisions after considerable consultation and evaluation.

Chapter 6

Introduction Developing the Business Plan

Essentials of A Good Business Plan

A business plan is essential for the inception, growth and overall success of a
[Link] plans provide a business with a vision for the future and a clear
strategy for how to expand. There are several essential components of an e.
fective business plan, and understanding each of these components can help
you create a plan that leads your company to success.

Why are business plans important?

Business plans are important for several reasons, with one of the most prominent
reasons being that they provide a clear outline of action for companies to take to
reach their goals. These plas can give an organization clarity about how viable
their company is and what is needed to grow and prosper. Business plans help
establish specific steps that companies must take to start their business and
promote their success.

Business plans are also important because they:

●​ Provide insight as to what resources are needed to reach goals.

●​ Establish a clear timeline of when a company can expect to achieve goals
●​ Can help a company determine the steps to take to expand into a new
market
●​ Offer a clear way to track progress as a company grows
●​ Enable business owners to predict and plan for potential risks /
●​ Allow investors to see the viability of a company

10 essential components of a business plan

Effective business plans must contain several key components that cover various
aspects of a company's goals. The most important parts of a business plan
include:

●​ Executive summary
●​ Business description
●​ Market analysis and strategy
●​ Marketing and sales plan
●​ Competitive analysis
●​ Management and organization description
●​ Products and services description
●​ Operating plan
●​ Financial projection and needs o Exhibits and appendices

PRACTICAL EXAMPLE OF A BUSINESS PLAN OUTLINE

1. Executive Summary

1. Business Overview

2 Market Overview
 3. Financial Highlights

4. Our Ask

2. Company /

1. Structure & Ownership

2. History

3. Location

4. Management Team

3. Products and Services

4. Market Analysis

1. Demographics and Segmentation

2. Target Market

3. Market Need

4. Competition

5. Barriers to Entry

6. Regulation

5. Strategy

1. Competitive Edge

2. Pricing

3. Marketing Plan

4. Milestones

5. Risks and Mittigants

6. Operations

1. Personnel Plan

2. Key Assets and IP

3. Suppliers

7. Financial Plan

1. Start-up Funding
2. Important Assumptions
3. Sales Forecast
4. Cost Structure

8. Appendix
1. Executive Summary
The first section, the executive summary, is the most important one. It is only if
they find this section attractive enough that potential investors will dive into the
other sections of your plan to get more details.
Because this section is a summary of the rest of the plan this is the one you will
write last.
The executive summary is all about getting your investor excited in 5 minutes. Do
not try
to tell everything about your business. Keep it short and to the point.

There are four things that you must cover:

●​ who you are
●​ what you sell
●​ how big and profitable it can get
●​ how much you need

The executive summary is the first and one of the most critical parts of a
business plan.
This summary provides an overview of the business plan as a whole and
highlights what the business plan will cover. It's often best to write the executive
summary last so that you have a complete understanding of your plan and can
effectively summarize it.

Your executive summary should include your organization's mission statement

and the products and services you plan to offer or currently offer. You may also
want to include why you are starting the company if the business plan is for a
new organization.

2. Company
The objective of this section is to introduce the company and its management.
The content of this section will vary slightly depending on if you already have a
business or if you are starting
a new venture.

Business description
The next part ot a business pian is the business descripuon. this component
provides a comprehensive description of your business and its goals, products,
services and target customer base. You should also include details regarding the
industry your company will serve, and any trends and major competitors within
the industry. You should also include you and your team's experence in the
industry and what sets your company apart from the competition in your business
description.

Structure & Ownership

This is a purely descriptive part, the key question you need to answer here are:

●​ who are the shareholders:

-​ as part of the anti-money laundering regulation, investors have the legal
obligation to check the identity of the shareholders of any business they
invest in or lend money to. Giving them the full list enables them to do a
quick sanity check and gives them ine opportunity to raise any concern
trou might have. It your reader is an equity investor it also gives him a
 grasp of who the other shareholders are. It is also important that you
mention if any of your co-shareholders brings more than just money to the
company (for example if one of your shareholders is an expert in your
industry and also brings advice and credibility to the company.

●​ where is the company registered and what is the legal structure:

-​ this is also one of the anti-money laundering requirements. But it also
gives the reader an indication of the size of the business and the
applicable tax system. Some investors also have geographical restrictions
on investments, hence this is also where they will check if you are eligible.

History
-​ If you are writing a business plan for an existing company this is where you
would present the key highlights to date. The idea here is to build your
credibility and show to your reader that you have a viable business.
-​
The main points you want to touch on are:

●​ how long you have been in business: this is a real reassuring factor for
any investor as it proves that your business is a viable one.

●​ company milestones: you want to show what has been achieved so far in
terms of growth, product launches, internationalisation. If you are seeking
growth capital this will build your credibility and show that you have the
ability to execute your plan.

●​ past difficulties: if there have been periods when the company was in
danger (for example because of a new entrant in the market, or a sudden
drop in demand) and you managed to turn things around and stay in
business.

Location
-​ If you are writing a plan for a business for which location is important for
example a shop or a restaurant) or if you are managing large business with
multiple stores or factories this is where you would describe ideally using a
map) the main locations) of your business.
Management Team
This is one of the most important section of your business plan. You must
demonstrate
that your team has strong experience in your sector and the skills to run this
business.

If there are any important skill gaps in your team, you need to address them and
mitigate them here. It could be that you are looking for someone with these skills
or that you have a board member or a non-executive director that can fill the gap.

Try to put some pictures if you can. It is always better when one can put a face
on a name!
And it helps if you are due to meet your investors at some point.

Market analysis and strategy

The purpose of the market analysis and strategy component of a business plan is
to research and identify a company's primary target audience and where to find
this audience.

Factors to cover in this section include:

●​ Where your target market is geographically located

●​ The primary pain points experienced by your target customers
●​ The most prominent needs of your target market and how your products or
services can meet these needs
●​ The demographics of your target audience

●​ Where your target market spends most of their time, such as particular
social media platforms and physical locations

●​ The goal of this section is to clearly define your target audience so that you
can make strategic estimations as to how your product or service will
perform with this audience.
Now that you have introduced the company it is time to dive into what it does.

3. Products and Services

 -​ The key to writing a good product and services section is to be precise
about the product or service you sell, the client you are targeting, and the
channel you are targeting him through.

-​ After this section, your reader will start thinking about how big, how
crowded and how profitable your market is and try to guess what the
overall strategy is going to be. You want to send him in the right direction!
So be ultra-precise, don't say for example "I sell shoes" but "I sell leather
boots targeted at women aged 16-25 who buy online".

-​ If you can try to include pictures of your products. By now your reader
knows who you are and what business you are in. It is time you show him
why this is a good opportunity.

3. Market Analysis

Marketing and sales plan

-​ This part of your business plan should cover the specifics of how you plan
to market and sell your products and services. This section should include:

●​ Your anticipated marketing and promotion strategies

●​ Pricing plans for your company's products and services

●​ Your strategies for making sales competition

●​ Why your target audience should purchase from your company versus
your

●​ Your organization's unique selling proposal

●​ How you ill get your products and services in front of your target audience

The objectives of the market analysis section are to show the investors that:
the market is large enough to build a sustainable business
●​ you know who your customers are and why they buy
 ●​ despite the competition, it exists a gap in the market where your business
will fit
●​ The first step of the analysis consists of assessing the size of the market.

Demographics and Segmentation

-​ The way you look at the market will depend on your type of business. If it is
a small business, such as a coffee shop for example, then you need to
look at the market on a local basis (your town, your street). If you are
targeting a wider audience, then you need to evaluate the market at a
national or an international level.

-​ When assessing the size of your market, you need to come up with two
variables: the
number of potential customers and the value of the market.

The idea here is to get a sense of how atomised your market is. If you are in a
market
where there is a small set of high-value customers then it might be complicated
to compete against more established players and your business is likely to be
dependent on a handful of customers meaning that losing one would potentially
threaten your business. Now if you are in a market with lots of low-value
customers it might be complicated and costly to reach enough of them to get to
the minimum volume for your business to be profitable. Ideally, you want to be in
a market with a high number of medium value customers meaning that there are
enough customers to leave room for a few players and that each customer brings
a decent amount of revenues.

Once you have estimated the market size you need to explain to your reader
which
segments) of the market you view as your target market.

Target Market
-​ The target market is the type of customers you target within the market.
You need to identify the different segments in your market and explain
Who you are going after and why. One way to identify the segments is to
group customers by buying pattern or demographics. For example in the
fashion market you could have:
 ●​ men vs. women
●​ low price vs. premium clothing
●​ online vs. in-store
●​ shoes, accessories, and outfit

[Link] Need
-​ This section is where you demonstrate that you have insight into your
market. You know

-​ You need to describe the buying patter of your target customers. What
triggers a purchase? Is it something they need such as food? Is it a value
associated with the product or a brand perception? Etc.
-​
Later in your plan, you will use this analysis to justify your market positioning.

Competition
Here you have to explain who your competitors are, how they are positioned on
the market, and what their strength and weaknesses are. Some of the items you
need to cover are

●​ who are they? (name, brand, independent vs. part of a larger group,
location)

●​ how big are they? (turnover, number of staff, etc.)

●​ which customer do they target? (segments)

●​ what are the key characteristics of their offerings? (price, associated

services, etc.)

You should write this part in parallel with the Competitive Edge part of the
Strategy section, as the idea here is to find a weakness in your competitors'
positioning that your company will be able to use in its own market positioning.

Barriers to Entry
 -​ Here, the objective is to show to investors that the risk of having new
competitors entering the market is fairly remote. Hence if you are writing
your business plan for a start-up then this section is a bit tricky as you
need to show that you will succeed where others will fail!

-​ Once again, you can find more details on this section in our market
analysis article.

Regulation
-​ In this section, you need to details which regulation is applicable to your
sector and how you are going to comply with it.

Strategy
-​ Until now all the sections of the business plan ouline we covered were very
descriptive, this is where things get a bit more interesting.

-​ Strategy is a big word for what is really just explaining your view of the
market, how you want to attack it, and why it should work.

-​ The first part of the strategy section is the Competitive Edge sub-section
which is where you explain your market positioning.

Competitive Edge
-​ The competitive edge part is where you answer investors' favourite
question: "what makes you different from the competition?"

-​ Hopefully, you will have laid the groundwork for this section in the previous
ones and orientated your analysis of the market in a way that prepares the
reader to embrace your positioning.

Pricing
In order to explain and justify your pricing strategy you must touch on the
following points:

●​ Compare it to your competitor's pricing

●​ Show that you are profitable at that level
●​ Explain the rationale behind your price
The first thing to do is to assess if you have control over your prices. It could very
well be
that you have limited control over your prices. If you are in a price a driven
market where all your competitor's price at £9.90 it can be complicated to justify a
higher price to your customers.

Now if you have control over your prices you then need to come up with a figure.
Here
are the two main strategies that you can use to do so:

Cost-plus pricing:
-​ this consist of adding a percentage margin to the cost of the good or
service you are selling. The advantage of this strategy is that you are
guaranteed to earn your margin on every sale. The disadvantage is that
your price could be below or above what customers are willing to pay for a
product or service.

Benefit driven pricing:

-​ this consist of estimating the gain procured by your good or service to the
customer and set the price as a fraction of this gain. It is easier to do when
your product or service procure a hard benefit (i.e. when you can quantify
the money your customer will save than when your product procures a soft
benefit (i.e. when you cannot easily quantify the value of the benefit as for
example if it makes your customer save time). The advantage of this
technique is that it allows you to maximise the price of your goods and
services. The disadvantage is that it usually requires trying different price
points in order to find the right market price.
It is always a good thing to test different prices. Do one week with price A and
one week
with price B and compare the results in terms of sales and volume.

Marketing Plan
-​ The best way to show that your business plan is realistic is to get into the
specifics of the implementation. Your reader needs to feel that you are
ready to go and that he just has to push on a button (write you a check) to
make it happen. to use to target your customers.
 -​ In the marketing plan section, you need to show that you have identified
the best channels
-​ By channel, I mean both the distribution network (online, owned stores,
third party network, door to door, etc.) and the means of communication
(flyers, print advertising, online marketing, etc.).

You want to start by listing all the different options and then start diving into the
ones you
picked and explain why you think they are the most relevant in terms of:
●​ reach: why do you think you will be able to touch most of your potential
customers through that channel?
●​ cost: why do you think this will be cost-effective? What is the budget
allocated in your plan?
●​ competition: why do you think you stand a better chance against your
competitors by using this channel?
●​ implementation: who is going to. be responsible for that? What makes
him relevant? Which partners/suppliers have you approached so far?

Milestones
-​ This section is where you set the goals for your company. This is a
commitment you are making to your investors and you will be judged on
your ability to achieve these goals. It is therefore important that you take
time to identify goals that are:

relevant:
-​ i.e. objectives that will make a real difference to the business

achievable:
-​ you don't want to get labelled as a dreamer but rather want to be perceived
as an entrepreneur who delivers his business plan

measurable:
-​ you want to be able to get back to your investors and say "we said we'll
get 1,000 customers by year-end and we delivered 1,200!".
Here you will be judged on your ability to identify and focus on the key objectives
to bring your business to the next level. This will help build your credibility
towards your investor and ultimately play a part in his investment decision.
From a relationship perspective, being able to over-achieve these objectives will
be key if
you are to raise more money in the future.

Risks and Mitigants

-​ The risks and mitigants section has one key objective: enable you to
anticipate any an opportunity to show that:

●​ you know this is a key risk,

●​ you thought about it,
●​ you have a contingency measure in place.

It is very important to be transparent in this section. If an investor spots a key risk

in your plan that you haven't disclosed he is going to think "well I am not sure he
knows this market as well as he claims", and that looks bad. You want to do
everything to build credibility and trust with your investors because the moment
they start doubting you they will start doubting the investment.

6. Operations
-​ This section is where you get into the details of how your company will
operate. It usually starts with the personnel plan.
Personnel Plan
-​ In the personnel plan section, you must explain how many people you will
employ and what will be their roles. If your staff is planned to increase over
the duration of your business plan, it is recommended to explain what will
be the driver. It could be that you plan a new shop opening or that you will
increase support staff with sales.

If you have a shop or a restaurant it is also recommended to put the staff plan in
perspective with the opening hours.

Key Assets and IP

-​ The idea behind this section is to identify or dismiss any operational risks
that could ariseon the asset side.
 -​ You need to explain which are the assets and intellectual property without
which the company could not operate (for example a delivery truck or a
licence) and the steps you took to protect them.

Suppliers
-​ In this section, your investor will want to check that you intend to do
business with respectable counterparties and that you are not dependent
on a single supplier. Therefore you need to explain who will be your main
suppliers, the relationship you have with them (it any) and what is your
backup plan if one was to be replaced. days of credit, delivery schedule,
etc.). Yon also need to mention the main terms you have negotiated with
your suppliers (price, numbers. Now that you have explained how your
company will be operated it is time to dive into the

7. Financial Plan
-​ This is te most crucial part of your business plan. The tone of this section
will depend on If the recipient of your business plan is a lender you need to
show that your business is going to be stable, profitable and cash
generative and that you are not going to take too many risks. If it is an
equity investor you need to show that your business can become big and
cash generative enough to make it easy to sell and enable him to reach his
target return.
-​
-​ As a minimum, you will need to show a full set of financial statements
(P&L, cash flow statement and balance sheet) over three years and a
monthly cash flow statement. It is also good practice to show a monthly
P&L and balance sheet for the first year.

The reason why investors like to see monthly numbers for the first year is
that it is going
to be the most critical year as:
●​ it is the year you are the most vulnerable
●​ any delay or underperformance will have some repercussions over the
year 2 and 3
●​ If you don't have a finance background it is recommended that you use a
professional tool to help you with the financial forecast.
Start-up Funding
-​ In this section, you will list the sources and uses of funds required to start
your business.
-​ The investor will look at how much is needed and how much money is
brought to the table by the shareholders. If you are writing your plan for a
retail bank it is important that you isolate the assets, inventory and VAT on
a separate line as they often offer specific loans adapted to each of these
categories.

Important Assumptions
-​ You must identify the key assumptions underlying your financial forecasts.
These are the assumptions the investor will stress (i.e. run scenarios on to
test the viability of your plan and estimate the potential downsides and
upsides.

Sales Forecast

- The sales forecast section is probably the second most important one in your
business plan. This section relates directly to the market analysis, competitive
edge, marketing plan and pricing sections. The objective here is to build and
justify your sales estimate for the next three Building a sales forecast is a double
exercane. You first need to build the numbers using a bottom-up approach and
then sanity checks them using a top-down approach. Once you have built a
realistic top line, you need to focus on the costs.

Cost Structure
-​ This part is all about analysing the operational risk of a business. The
analysis resides in two fundamental notions: operating leverage and
breakeven point.

Breakeven
-​ Let's start with the breakeven point which is the level of sales required to
reach profitability.

-​ Every business has 2 types of costs: fixed and variable costs. The fixed
costs as their name indicates are the costs that will be incurred
 independently from the level of sales. For example the rent of a shop. The
variable costs are the costs that depend on the level of activity. For
example the cost of the goods sold in a shop.

The breakeven point is then computed by dividing the total amount of fixed costs
by the margin of varable costs.

Let's take an example. If the only fixed cost of a shop is its rent of £2,000/month
and if the shop sells goods it buys at E30/item at a price of €50/item. Then the
shops make 50 - 30 = £20
of profit over variable costs per item. This means it needs to sell 2,000 / 20 = 100
items to cover
the cost of the rent. The breakeven point of this shops is therefore 100 items.

The direct conclusion of this is that the higher the fixed costs, the more sales are
required to cover them, and therefore the higher the risk of the business is. In
plain English variable costs are great fixed costs are bad!

Operating leverage
-​ What about operating leverage then? Well, operating leverage has to do
with operating profit elasticity, which is the impact of a difference of 1% in
sales on the operating profit. This seems complex but it is in fact really
simple. There are two dimensions in the operating leverage: the level of
fixed vs. variable costs and the margin on variable costs.

-​ As we just saw above the more fixed costs a business has the more sales
it needs in order to start making a profit. But this is not the whole story.
Consider two businesses in the same industry. Business A is
manufacturing its goods in the house while business B is outsourcing the
manufacture to a supplier. As a result business A has higher fixed costs
than business B (the cost of the factory, but at the same time business A is
earning more on each sale than business B

Appendix
-​ This is where you add any detailed piece of data or backup materials you
might have. The objective of the appendix section is to serve as a reserve
 of materials that the investor can use either to investigate certain areas of
your business plan in more details or as a starting point to do his due
diligence.

Exhibits and appendices

-​ The final section of your business plan should include any extra
information to further support the details outlined in your plan. You can also
include exhibits and appendices to support he viability of your business
plan and give investors a clear understanding of the research that backs
your plan. Common information to put in this section includes:

●​ Resumes of company management and other stakeholders oMarketing

research
●​ Permits
●​ Proposed or current marketing materials
●​ Relevant legal documentation
●​ •Pictures of your product
●​ Financial documents