UNIT 2 NEW VENTURE AND BUSINESS PLAN

In the entrepreneurial journey, the first step or the ice-breaker is search for business idea. Mr. Suketu Vyas launched a project to manufacture spectacle lenses because he lost a pair of spectacles at Singapore and discovered that it was very expensive there and thought to produce the same in India and export to Singapore. There is a plethora of specific business ideas, but less literature on how to identify, methodology, sources of assistance and information. Hence, Opportunity Identification and Selection(OIS) as a process has a creative dimension. The seven step process of OIS is as below: Step 1 -> Preparation of Personal Profile (of the proposed entrepreneur) Step 2 -> Development of Opportunity Selection(decision making) Framework Step 3 -> Generation of Ideas Step 4 -> Snap Investigation Step 5 -> Evaluation in terms of OS(decision making) and short listing of Ideas
Step 6 -> Pre-feasibility studies Step 7 -> Opportunity Selection

Opportunity Identification and Selection contd. ..

Step 1 -> Personal Profile: The proposed entrepreneur draws up his personal profile describing his Education, Work experience, Other academic/ Practical Interests, Personality, Objectives for establishing an enterprise, Investment Preparedness, Attitude to Risk-taking and his personal Considerations like where he likes to set up his enterprise and whether he would like to with any of his friends as partners etc., Step 2 -> Development of Opportunity Selection (OS) Framework: Opportunities are abound in the market. However, open to the sky is no action at all. Hence, the entrepreneur shall have a list of criteria to arrive at answers to the questions like: a. Investment investment or project cost means not simply the investment in fixed assets. It includes the preliminary and pre-operative expenses, contingency and escalation and working capital margin. b. Technological Sophistication, (c) Managerial/Organizational demands, d. Market and Competition ( including exports), (e) Sector preference depending on the entrepreneur s educational and work experience background, (f) Government Intervention/Dependence like price controls (Pharmaceutical industry), raw-material allocation (like in the case of paraffin wax), (g) Implementation Time, (h) Profitability, (i) Degree of risk and its form, (j) Location, (k) Personal considerations to include Taboos/religious Sentiments, Life Style, Relative Importance of Money,

Development of Opportunity selection Framework cont

Amenability to takeover by children, Speculative Orientation like not interested in business but in the appreciation of the land prices so that you can cash on sale of the land etc. Step 3 -> Generation of Ideas: Large companies have no problem in generating ideas since they can invest money in such process. However small entrepreneurs cannot afford such an expenditure. The ability to generate ideas depend on interest in sensing opportunities over a period of time, ability to harness sources of knowledge and information and vision and creativity. The seven approaches to generation of ideas are -> 1. Natural resources, 2.Existing anticipated Industries, 3. Market-driven, 4. Service sector scanning, 5. Extension/modification of present work content, 6. Creative effort, and 7. Other Ways. After generating the ideas, under Step 4 Snap Investigation must be carried out and in the next step 5, Short listing of the ideas shall be done by proper evaluation. Pre-feasibility studies must be carried out as in Step 6.

Step 7 - > Final Selection: This is the last step in the OIS process and is very crucial . The following basic guidelines may be kept in mind: a) Imperfect Knowledge avoid proceeding with opportunities where knowledge of its crucial aspects is inadequate. b) Comprehensive Comparison meaning that for each option of an opportunity, ask and answer a series of questions (refer Annexure 1). c) Missing the tree for the Wood means getting influenced excessively by less relevant details. Project A and B have breakeven points of 35% and 40% respectively. The difference is insignificant and hence should not become a basis for a decision unless the project scores completely on other counts.

Final Selection of Opportunity Contd

      

The Key Issues to be considered in Finally selecting an OPPORTUNITY How comfortable will you be technology-wise ? How easy/difficult is the market position ? How is the profitability ? How risky is the project, as expressed through breakeven point and sensitivity analysis ? What is the future of the industry to which the project belongs ? How critical is the dependence on the government ? Do the success determinants and risk factors match your own capabilities? Will you be able to learn the business and get a grip over it ? Do you feel enthused about it ?

ERRORS IN SELECTION OF OPPORTUNITIES

The common errors are: 1. ME TOO syndrome choosing an opportunity because others have taken it up and are seen doing well. An army officer makes money from transport business while a wholesale trader miserably fail s in it. 2. Fallacy of Numbers giving much importance to financial calculations like ROI, Ratios etc. by overlooking marketfeasibility. Failure of Hand knitting machines which are lying idle in India. 3. Story of an Elephant syndrome There are some entrepreneurs who notice merely a part of the total project reality. This is the deficiency of focusing attention on the positive features of an opportunity and overlooking its negative ones or relying on unfounded optimism in relation to negative features causing serious selection errors.

4. Square peg in a round hole - entrepreneurs sometimes fail to relate the key determinants of success to their own capabilities. A well known builder diversifies into hotel, restaurant and catering business. A high order of operating, day-to-day managerial efficiency is a precondition for success in the hotel/restaurant business. Inability to organize the dayto-day efficient managerial system is the major weakness of the builder- the result, his diversified business fails. 5. Undifferentiated Enterprise A large number of small enterprises are not performing well or closing down because they are too identical. The competition is only in the price, and too low a price makes the enterprise to close down. The failure to perceive a special position as to how your enterprise will be different and to build distinctive edge into the opportunity right in the beginning is a serious error.

6. Failure to grasp key elements of success: There is an entrepreneur who entered spice processing business relying on his ability top mobilize technology and marketing inputs. He did not grasp that procurement or speculative instinct is a crucial deciding factor of successful performance in his business. It is this lack of ability to judge the essence of an opportunity , brings some business men to ruin. 7. Lack of Ownership: This happens mostly in partnership and family owned businesses. When one partner is exited about the given opportunity, the other only senses holes(negative points) in the idea. The business often fails. 8. Catch the first bus - some entrepreneurs are in terribly hurry to set up their enterprises and grab the first or one of the earliest ideas and jump into business. They end up in grabbing a wrong opportunity. 9. Inaccurate, unreliable or false information. 10. Unwillingness to Step back.

CHECK-LIST FOR GOING INTO BUSINESS

Owning a business is the dream of many. Careful planning can reduce the gap between the dream and reality. The check-list for Going into Business is a guide to help you prepare a comprehensive business plan and determine if your idea is feasible, to identify questions and problems you will face in converting your idea into reality and to prepare for starting your business. Operating a successful small business will depend on; > a practical plan with a solid foundation; > dedication and willingness to sacrifice to reach your goal; > technical skills; and > basic knowledge of management, finance, record keeping and market analysis. Identify Your Reasons As a first and often overlooked step, ask yourself why you want to own business. Check the reasons that apply to you. Some reasons are better than others, none are wrong; however, be aware that there are tradeoffs. For example, you can escape the 9 -5 daily routine, but you may replace it with a 6 a.m. to 8 p.m. routine.

Check-list for going into business continued..

A Self-Analysis Personal Characteristics Going into business requires certain personal characteristics. List out your personal characteristics after serious thought and objectivity. Remember, it is your future that is at stake. Personal Conditions Understand the physical, emotional and financial strains you will encounter when you start a new business. Personal Skills and Experience Certain skills and experience are critical to the success of a business. Since it is unlikely that you possess all the skills and experience needed, you will have to hire personnel to supply those you lack. There are some basic and special skills you will need for your particular business. Identify skills that you possess and those you lack.

Check-List for Going into Business continued..

Find Your Business Niche Getting into the right business at the right time is a very good advice but following that advice may be difficult. Many entrepreneurs plunge into a business venture so blinded by the dream that they fail to thoroughly evaluate its potential. Is Your idea Feasible ? You should be able to define your business, identify the product/service you plan to sell, specify what need is satisfied by this product/service, how competitive is the market and what is the demand-supply gap for your product/service.

BUSINESS PLANNING PROCESS

The first and the most crucial step for starting a business. It lays down the step-by-step procedure by which business would function It is prepared to scan all the possible opportunities and threats, understand the demands of the market and arrange for the best possible resources. What is Business Plan ? It is an outline of the business giving details of the finance, assets, staff, products or services and markets. It guides the entrepreneur. It identifies problems and it is also used in funding applications. Purpose of Business Plan: 1. Enables the entrepreneur to think through the business in a logical and structured way and to set out the stages in the achievement of the business objectives. 2. Enables the entrepreneur to plot progress against the plan.

Purpose of Business Plan continued

3. Ensures that the resources needed to carry out the strategy and the time when they are required are both identified. 4. Ensures that the entrepreneur has thought through the crucial aspects of the venture. 5. An important document for discussion with prospective investors and creditors. 6. It links into the detailed short term one year budget. 7. Assuming that the key features of business plan are communicated to the employees, employees are aware of the business s direction. 8. The business plan is an important tool to articulate the ideas of management to convince investors and other stake holders, especially during turn-around and growth phases.

Business Planning Process continued

A good business plan would document short-term and long-term goals of the business and establish specific tasks for achieving these goals. Planning should be a never ending process and is very crucial in the start-up stage. How the entrepreneur shall proceed ? 1. Review previous business plans and their out come. 2. Be very clear as to objectives. 3. Set out the key assumptions (e.g., inflation, exchange rates, market growth, competitive pressures.) 4. Take a critical look at their business - SWOT analysis. Business Planning Process: 1. Idea generation 2. Environmental scanning 3. Feasibility analysis 4. Drawing-up a Functional Plan 5. Project Report preparation 6. Evaluation, Control and Review

Business Planning Process continued .

Advantages of Business Planning: 1. Improved understanding of opportunities, problems and weakness. 2. Greater control over the Organization. 3. A valuable source of information about the business that may be required by third parties. 4. Improved use of company s resources. 5. Increased employee participation. 6. Increased profits and

BUSINESS PLAN OUTLINE

Elements of a Business Plan 1. Cover Sheet 2. Statement of Purpose 3. Table of contents I. The Business A. Description of Business B. Marketing C. Competition D. Operating Procedure E. Personnel F. Business Insurance G. Financial Data II. Financial Data A. Loan Applications B. Capital Equipment and Supply list C. Balance Sheet D. Break-even Analysis E. Pro-forma income projections (profit & Loss statements) >Three-year summary > Detail by month, first year > Detail by quarters, second and third year > Assumptions upon which projections were based F. Pro-form cash flow > Follow guidelines for letter E

Business Plan Outline Elements of a Business Plan continued

III. Supporting Documents A. Tax returns of principals for last three years B. Personal financial statement (all banks have these forms) C. in the case of franchised business, a copy of franchise contract and all supporting documents provided by the franchiser D. Copy of proposed lease or purchase agreement for building space E. Copy of licenses and other legal documents F. Copy of resumes of all principals G. Copies of letters of intent from suppliers, etc.