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—Alan Lakein 

Good fortune is what 
happens when 
opportunity meets with 
planning. 

—Thomas Alva Edison 

Conducting a 
Feasibility Analysis 
and Crafting a 
Winning Business 
Plan 

Upon completion of this chapter, you will be able to: 

LearningObjectives 

1 Describe the steps involved in conducting a feasibility analysis. 
2 Explain the benefits of an effective business plan. 
3 Describe the elements of a solid business plan. 
4 Explain the three tests every business plan must pass. 
5 Explain the “five Cs of credit” and why they are important to potential 


lenders and investors reviewing business plans. 
6 Understand the keys to making an effective business plan presentation. 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


174 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
O 

174 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
O 
ne of the most important activities an entrepreneur should undertake before 
launching a company is to conduct a feasibility analysis, and based on a successful 
result, build a business plan. A feasibility analysis is the process of 
determining whether an idea is a viable foundation for creating a successful 

1. Describe the steps involved in 
conducting a feasibility analysis. 
business. The business plan functions as a planning tool, taking a viable idea 
from the feasibility analysis and describing how to turn it into a successful business. 

A feasibility analysis answers the question, “Should we proceed with this business 
idea?” It is primarily an investigative tool. The feasibility analysis gives an entrepreneur a 
picture of the market, sales, and profit potential of a particular business idea. Feasibility 
studies are particularly useful when an entrepreneur generates multiple ideas for business 
concepts and must make a “best choice.” This analysis enables an entrepreneur to efficiently 
explore the viability of alternative business concepts and to assess the likelihood of 
transforming an idea into a successful business venture. The role of the feasibility analysis 
is to serve as a filter, screening out ideas that lack the potential for building a successful 
business, before an entrepreneur commits additional resources. When the result is the realization 
that an idea simply will not result in a viable business, the entrepreneur moves on 
to the next opportunity and avoids wasting valuable time, money, energy and other resources 
creating a full-blown business plan. More importantly, he or she avoids launching 
a business that is likely to fail because it is based on a flawed concept. In other cases, a feasibility 
study shows an entrepreneur that the business idea is sound, but it must be organized 
in a different fashion to be profitable. 

If the idea proves feasible, the entrepreneur’s next step is to leverage the findings of 
the feasibility analysis to build a business plan. The primary goal of the business plan is to 
guide the entrepreneur as he or she launches and operates a business venture. The business 
plan also helps the entrepreneur acquire the necessary financing to launch the venture. A 
well-constructed business plan may be the best possible insurance against failure. Research 
suggests that, whatever their size, companies that engage in business planning outperform 
those that do not. A business plan offers: 

. 
A systematic, realistic evaluation of a venture’s chances for success in the market. 
. 
A way to determine the principal risks facing the venture. 
. 
A “game plan” for managing the business successfully. 
. 
A tool for comparing actual results against targeted performance. 
. 
An important tool for attracting capital in the challenging hunt for money. 
The feasibility study and the business plan play important, but separate, roles in the 
start-up process. This chapter describes how to build and use these vital business documents. 
It will help entrepreneurs create business plans that will guide them on their entrepreneurial 
journey and help them attract the capital they need to launch and grow their 
businesses. 

Conducting a Feasibility Analysis 

A feasibility analysis consists of three interrelated components: an industry and market 
feasibility analysis, a product or service feasibility analysis, and a financial feasibility 
analysis as shown in Figure 6.1. “Making a critical evaluation of your business concept at 
an early stage will allow you to discover, address, and correct any fatal flaws before investing 
time in preparing your business plan,” says Timothy Faley, managing director of 
the Samuel Zell & Robert H. Lurie Institute for Entrepreneurial Studies at the University 
of Michigan.1 

Industry and Market Feasibility Analysis 

When evaluating the feasibility of a business idea, an entrepreneur finds a basic analysis of 
the industry and targeted market segments essential. The focus in this phase is twofold: 

1. To determine how attractive an industry is overall as a “home” for a new business. 
2. To identify possible niches a small business can occupy profitably. 
ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 175 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 175 


Financial 
Feasibility 
Industry and 
Market Feasibility 
Product or 
Service Feasibility 
ISBN: 0-536-77917-1 

The first step in assessing industry attractiveness is to paint a picture of the industry 

with broad strokes, assessing it from a “macro” level. Answering the following questions 

will help establish this perspective: 

. 
How large is the industry? 
. 
How fast is it growing? 
. 
Is the industry as a whole profitable? 
. 
Is the industry characterized by high profit margins or razor-thin margins? 
. 
How essential are its products or services to customers? 
. 
What trends are shaping the industry’s future? 
. 
What threats does the industry face? 
. 
What opportunities does the industry face? 
. 
How crowded is the industry? 
. 
How intense is the level of competition in the industry? 
. 
Is the industry young, mature, or somewhere in between? 
Addressing these questions helps entrepreneurs determine whether the potential for 
sufficient demand for their products and services exist. 

A useful tool for analyzing an industry’s attractiveness is the five forces model developed 
by Michael Porter of the Harvard Business School, shown in Figure 6.2. This model 
recognizes the influence of five industry forces: 

1. 
Rivalry among the companies competing in the industry 
2. 
Bargaining power of suppliers to the industry 
3. 
Bargaining power of customers 
4. 
Threat of new entrants to the industry 
5. 
Threat of substitute products or services 
These five forces interact with one another to determine the setting in which companies 
compete and the attractiveness of the industry.2 

Rivalry among companies competing in the industry. The strongest of the five 
forces in most industries is the rivalry that exists among the businesses competing in a 
particular market. Much like the horses running in the Kentucky Derby, businesses in 
a market are jockeying for position in an attempt to gain a competitive advantage. 
When a company creates an innovation or develops a unique strategy that transforms 
the market, competing companies must adapt or run the risk of being forced out of 
business. This force makes markets a dynamic and highly competitive place. 
Generally, an industry is more attractive when: 

. 
The number of competitors is large, or, at the other extreme, quite small (fewer than 
five). 
. 
Competitors are not similar in size or capability. 
Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




























176 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

FIGURE 6.2 The Five 
Forces Model of 
Competition 

Potential Entrants 
Threat of New Entrants 

Bargaining Power 

Bargaining Power 

of Suppliers 

of Buyers 

Rivalry Among 
Existing Firms 
Industry 
Competitors 












Source: Adapted from Michael E. Porter, 
“How Competitive Forces 
Shape Strategy,” Harvard Business 
Review, March–April 1979, 
pp. 137–145.












































































































































. 
The industry is growing at a fast pace. 
. 
The opportunity to sell a differentiated product or service is present. 
Bargaining power of suppliers to the industry. The greater the leverage suppliers of 
key raw materials or components have, the less attractive is the industry. For instance, 
Intel and Advanced Micro Devices (AMD) exert a great deal of power over computer 
manufacturers such as Dell, Hewlett-Packard, and Gateway, which makes the industry 
less attractive for new entrants. These companies supply the chips that serve as the 
“brains” of PCs, and those chips make up a sizable portion of the cost of a computer. 
Generally, an industry is more attractive when: 

. 
Many suppliers sell a commodity product to the companies in it. 
. 
Substitute products are available for the items suppliers provide. 
. 
Companies in the industry find it easy to switch from one supplier to another or to 
substitute products (i.e., “switching costs” are low). 
. 
The items suppliers provide the industry account for a relatively small portion of 
the cost of the industry’s finished products. 
Bargaining power of buyers. Just as suppliers to an industry can be a source of 
pressure, buyers also have the potential to exert significant power over a business, making 
it less attractive. When the number of customers is small and the cost of switching to 
competitors’ products is low, buyers’ influence on companies is high. Famous for offering 
its customers low prices, Wal-Mart, the largest company in the world, is also well known 
for applying relentless pressure to its 21,000 suppliers to offer price concessions.3 
Generally, an industry is more attractive when: 

. 
Industry customers’ “switching costs” to competitors’ products or to substitute 
products are relatively high. 
. 
The number of customers in the industry is large. 
. 
Customers demand products that are differentiated rather than purchase commodity 
products that they can obtain from any supplier (and subsequently can pit one 
company against another to drive down price). 
. 
Customers find it difficult to gather information on suppliers’ costs, prices, and 
product features—something that is becoming much easier for customers in many 
industries to do by using the Internet. 
. 
The items companies sell to the industry account for a relatively small portion of 
the cost of their customers’ finished products. 
Threat of new entrants to the industry. The larger the pool of potential new entrants 
to an industry, the greater is the threat to existing companies in it. This is particularly 
true in industries in which the barriers to entry—such as capital requirements, 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 177 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 177 
specialized knowledge, access to distribution channels, and others—are low. 
Generally, an industry is more attractive to new entrants when: 


. 
The advantages of economies of scale are absent. Economies of scale exist when 
companies in an industry achieve low average costs by producing huge volumes of 
items (e.g., computer chips). 
. 
Capital requirements to enter the industry are low. 
. 
Cost advantages are not related to company size. 
. 
Customers are not extremely brand-loyal, making it easier for new entrants to the 
industry to draw them away from existing businesses. 
. 
Governments, through their regulatory and international trade policies, do not 
restrict new companies from entering the industry. 
Threat of substitute products or services. Substitute products or services can turn an 
entire industry on its head. For instance, many makers of glass bottles have closed 
their doors in recent years as their customers—from soft drink bottlers to ketchup 
makers—have switched to plastic containers, which are lighter, less expensive to ship, 
and less subject to breakage. Printed newspapers have seen their readership rates 
decline as new generations of potential readers turn to online sources of news that are 
constantly updated. Generally, an industry is more attractive when: 

. 
Quality substitute products are not readily available. 
. 
The prices of substitute products are not significantly lower than those of the 
industry’s products. 
. 
Customers’ cost of switching to substitute products is high. 
After surveying the power these five forces exert on an industry, entrepreneurs can 
evaluate the potential for their companies to generate reasonable sales and profits in a particular 
industry. In other words, they can answer the question, “Is this industry a good home 
for my business?” Table 6.1 provides a sample matrix that allows entrepreneurs to assign 
quantitative scores to the five forces influencing industry attractiveness. Note that the lower 
the score for an industry, the more attractive it is. 

TABLE 6.1 Five Forces Matrix 

Assign a value to rate the importance of each of the five forces to the industry on a 1 (not important) 
to 5 (very important) scale. Then assign a value to reflect the threat that each force 
poses to the industry. Multiply the importance rating in column 2 by the threat rating in 
column 3 to produce a weighted score. Add the weighted scores in column 3 to get a total 
weighted score. This score measures the industry’s attractiveness. The matrix is a useful tool 
for comparing the attractiveness of different industries. 

Minimum Score = 5 (Very attractive) 
Maximum Score = 125 (Very unattractive) 

Threat to 
Importance Industry Weighted Score 
Force (1 to 5)* (1 to 5)** Col 2 . 
Col 3 
Rivalry among companies competing in 5 5 25 
the industry 
Bargaining power of suppliers in the 2 2 4 
industry 
Bargaining power of buyers 2 4 8 
Threat of new entrants to the industry 3 4 12 
Threat of substitute products or services 4 3 12 
Total 61

ISBN: 0-536-77917-1

*Scale of importance from 1 = not important to 5 = very important. **Scale of threat to the industry 
from 1 = low, 3 = medium, to 5 = high. 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


178 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 

178 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 
The next step in assessing an industry is to identify potentially attractive niches that exist 
in the industry. Many small businesses prosper by sticking to niches in a market that are 
too small to attract the attention of large competitors. Occupying an industry niche enables 
a business to shield itself, to some extent, from the power of the five forces. The key question 
for entrepreneurs is, “Can we identify a niche that is large enough to produce a profit, 
or can we position our company uniquely in the market to differentiate it from the competition 
in a meaningful way?” Entrepreneurs who have designed successful focus or differentiation 
strategies for their companies can exploit these niches to their advantage. 

Questions entrepreneurs should address in this portion of the feasibility analysis include: 

. 
Which niche in the market will we occupy? 
. 
How large is this market segment, and how fast is it growing? 
. 
What is the basis for differentiating our product or service from competitors? 
. 
Do we have a superior business model that will be difficult for competitors to reproduce? 
Fighting for The End 
Thanks to iTunes, YouTube, MySpace.com, satellite radio, 
Internet radio, and the vast underworld of illegal file 
sharing, never before has there been so much music 
floating around that is so accessible and in some cases, 
free. Music lovers, like Andreas Katsambas, appreciate 
that phenomena. 

Katsambas remembers what a struggle it was to get 
his fill of his favorite artists—Pink Floyd, AC/DC, and 
Slayer—when he was growing up on the Mediterranean 
island of Cyprus. Today as CEO of The End Records 
(www.theendrecords.com), a nine-year-old heavy-metal 
label in Brooklyn, New York, he holds a different view of 
the industry. Katsambas, now in his mid-thirties, fears 
for the life of his company. 

Katsambas started this business within a business because 
he was unhappy with the mail-order distribution 
his label was getting from third parties. Today it is the 
biggest heavy-metal music mail-order site on the Web, 
handling dozens of labels that account for two-thirds of 
company sales and all its profits. “If it wasn’t for mail order,” 
Katsambas admits, “the label wouldn’t work.” 

The story of The End began in Katsambas’ bedroom 
in San Diego. The record label grew and three years later, 
he shifted operations to Salt Lake City. The next move 
came when Katsambas relocated to a new headquarters 
in the trendy East Williamsburg neighborhood in Brooklyn. 
Thirteen of The End’s 14 loyal employees followed. 

Annual sales were $3.5 million, up 25 percent over 
the year before, and the company was profitable. Kat


sambas signed a North America licensing agreement 
with celebrated Finnish monster-rocker group Lordi, 
whose members dress as mummies and vampires. Lordi’s 
“Hard Rock Hallelujah” snatched first prize at the Eurovision 
Song Contest, an annual pan-European jamboree 
that launched the careers of ABBA and Celine Dion. On 
the surface, you might think that The End was healthy, 
but a closer look at industry changes and corporate expenses 
paints a different picture. 

When Tower Records folded, The End lost a major 
distributor that was friendlier to independent labels than 
the mainstream giants such as Best Buy and Wal-Mart. 
The fallout was immediate. “Suddenly all the big chains 
got very tight with their budgets,” Katsambas says. Unfortunately, 
he cannot count on small record stores to 
pick up the slack. Hundreds of the neighborhood stores 
closed “and you don’t see any new ones opening up,” 
laments Katsambas. 

Expenses are going through the roof in Brooklyn. 
The move from Salt Lake cost $30,000, and the $6,000 
monthly office rent in New York is twice what he used to 
pay. Expenses for Internet access, taxes, and even trash 
pickup are significantly higher in Brooklyn as well. Katsambas 
says, “Every month I sit down with my accountant, 
and she says, ‘Things are tight. How do we make it 
work?’” 

However, Katsambas isn’t panicking—yet. “In times 
of crisis, I make the best decisions,” he says. But, he also 
realizes that he needs a road map. Katsambas is looking 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 179 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 179 
for answers to basic questions. “How do we maintain a 
steady cash flow?” Other questions center on the need 
for higher profit margins and allocating the available 
budget. If the traditional record-label business model of 
investing in studio sessions and concert tours and making 
the money back on CD and record sales is dead— 
and practically everyone agrees that it is—then what is 
next for The End? 

Only 1 percent of the company’s total sales are digital. 
In the digital, download environment, metal and 
hard-core fans still prefer to buy a full CD. They want to 
be able to read the lyrics and listen to the whole album. 
That is a mixed blessing. On the one hand, it means The 
End is less vulnerable to digital piracy than the major labels 
are. On the other, the company is losing out in profits 
that digital sales bring to major labels. For instance, 
digital sales account for 10 percent of total annual sales 
at a typical major label. 

To give him insight, Katsambas brings in a consulting 
team. “I think you should continue to investigate 
digital sales,” suggests one consultant. “The fact that 
digital hasn’t taken off among this audience doesn’t 
mean that it’s not still going to be meaningful.” They 
recommend that Katsambas experiment on The End’s 
Web site, rather than waiting for iTunes to figure it out. 
Maybe the solution is digital content not available on 
CD, or digital prereleases available one month before a 
new CD hits the streets—but only to preferred customers. 
They all realize the best customer is somebody 
who already likes the band. They would rather market 
to somebody who already has records from The End and 
knows the label. 

Another lesson from the majors is that the record label 
should think about forming a partnership with its 

artists, in which it can participate in touring income as 
well as merchandise such as hats, T-shirts, and collectibles. 
“That’s something we want to establish,” says 
Katsambas. He also realizes that licensing songs owned 
by the label for TV, film, and video games is a potential 
source of revenue. 

The consultants agree that the Lordi signing is a key 
development, one that could make or break The End. 
The final conclusion is that The End is in a good position 
with its infrastructure and contacts—it has the ingredients 
to bring a large act into the company and amplify 
the base of success. 

Following the session, Katsambas decides to implement 
a cash-generating idea of publishing a $40 limited-
edition book/CD combo tied to the release of The 
Novella Reservoir, the latest album from the dark-metal 
band, Novembers Doom. Katsambas also plans to expand 
international distribution of the label’s mail-order 
catalog. With the turbulence in the industry, the cash 
flow pressures of New York, and the need to identify 
new revenue streams, Katsambas also saw the need to 
update his business plan. He wants to be prepared for 
anything—except the end. 

1. How are the dynamics of the industry affecting 
The End Records? What insights might Porter’s five 
forces model offer Katsambas? Use the matrix in 
Table 6.1 to score and then comment on this 
industry’s attractiveness. 
2. What value might updating his business plan offer 
Katsambas? 
Source: Adapted from David Whitford, “Heavy Metal Makeover,” FSB, 
March 21, 2007, http://money.cnn.com/magazines/fsb/fsb_archive/ 
2007/03/01/8402016/index.htm. 

ISBN: 0-536-77917-1 

One technique for gauging the quality of a company’s business model involves 
business prototyping, in which entrepreneurs test their business models on a small scale 
before committing serious resources to launch a business that might not work. Business 
prototyping recognizes that every business idea is a hypothesis that needs to be tested before 
an entrepreneur takes it to full scale. If the test supports the hypothesis and its accompanying 
assumptions, it is time to launch a company. If the prototype flops, the entrepreneur 
scraps the business idea with only minimal losses and turns to the next idea. 

The Internet is a valuable prototyping resource. Entrepreneurs can test their ideas by 
selling their products on established sites, such as eBay or by setting up their own Web sites 
to gauge customers’ response. Frank Ross, a home-based entrepreneur who dropped out of 
corporate America, operates three successful online businesses. Before launching them, 
however, he tested his business concept on eBay. Ross explains: 

If you’re considering selling a product line online as your home-based business, 
there is really no better place to test a market than eBay. It’s considerable trouble to 
set up a Web site, and it can be expensive if your product fails. (I’ve made that 


Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




mistake.) If you want to be sure you have a viable, salable product line prior to 
going to the trouble and expense of setting up a Web site, try selling on eBay. For 
the price of a few listings, you will be able to tell very quickly what kind of market 
you have for your potential Web store, and it may also help you weed out any 
problems you had not thought of.4 

Product or Service Feasibility Analysis 

Once entrepreneurs discover that sufficient market potential for their product or service idea 
actually exists, they sometimes rush in too quickly. With exuberant enthusiasm, they launch 
their businesses without actually considering whether they can actually produce the product 
or provide the service at a reasonable cost. A product or service feasibility analysis 
determines the degree to which a product or service idea appeals to potential customers. It 
also identifies the resources necessary to produce the product or provide the service. This 
portion of the feasibility analysis addresses two questions: 

. 
Are customers willing to purchase our goods and services? 
. 
Can we provide the product or service to customers at a profit? 
Entrepreneurs need feedback from potential customers to successfully answer these 
questions. Acquiring that feedback might involve engaging in primary research such as customer 
surveys and focus groups, gathering secondary customer research, building prototypes, 
and conducting in-home trials. 

Primary research involves collecting data firsthand and analyzing it; secondary research 
involves gathering data that has already been compiled and is available, often at a 
very reasonable cost or sometimes for free. Both types of research gather quantitative and 
qualitative information the entrepreneur can use to draw accurate conclusions about a product’s 
or service’s market potential. Primary research techniques include: 

Customer surveys and questionnaires. Keep surveys and questionnaires short. Word 
questions carefully to avoid biasing the results and use a simple ranking system. For 
example, a 1-to-5 scale, with 1 representing “definitely would not buy” and 5 representing 
“definitely would buy.” Test the survey for problems on a small number of people before 
putting it to use. Many Web surveys are inexpensive, easy to conduct, and provide fast 
feedback from a large quantity of respondents. Monster.com, the online job search 
company, recently conducted an online survey of 30,000 customers and integrated the 
results from the survey into every aspect of the company’s operation. “The survey 
results impact policy, process, product development and marketing efforts,” says Chip 
Henry, Monster.com’s vice president, voice of the customer. (Note the unique job 
title!) “There’s nothing in the company that isn’t touched as a result of the surveys.”5 

Focus groups. A focus group involves enlisting a small number of potential 
customers (usually eight to twelve) to give you feedback on specific issues about your 
product or service (or the business idea itself). Listen carefully for what focus group 
members like and don’t like about your product or service as they tell you what is on 
their minds. The founders of one small snack food company that produced apple chips 
conducted several focus groups to gauge customers’ acceptance of the product and to 
guide many key business decisions, ranging from the product’s name to its packaging. 

The Web may also be a resource for focus groups by creating virtual focus groups 
on the Web. One small bicycle retailer conducts 10 online focus groups each year at 
virtually no cost, and gains valuable marketing information from them. Feedback from 
online customers is fast, convenient, and timely. 

Secondary research, which usually is less expensive to conduct than primary research, 
includes the following sources: 

Trade associations and business directories. To locate a trade association, use 
Business Information Sources (University of California Press) or the Encyclopedia of 
Associations (Thomson Gale). To find suppliers, use The Thomas Register of 
American Manufacturers (Thomas Publishing Company) or Standard & Poor’s 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 

ISBN: 0-536-77917-1 




CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 181 

Register of Corporations, Executives, and Industries (Standard & Poor Corporation). 
The American Wholesalers and Distributors Directory (Thomson Gale) includes 
details on more than 18,000 wholesalers and distributors. 

Direct mail lists. You can buy mailing lists for practically any type of business. The 
Standard Rates and Data Service (SRDS) Directory of Mailing Lists (Standard Rates 
and Data) is a good place to start looking. 

Demographic data. To learn more about the demographic characteristics of 
customers in general, use The Statistical Abstract of the United States (Government 
Printing Office and www.census.gov). Profiles of more specific regions are available in 
The State and Metropolitan Data Book (Government Printing Office). The Sourcebook 
of Zip Code Demographics (CACI Inc.) provides detailed breakdowns of the population 
in every zip code in the country. Sales and Marketing Management’s Survey of Buying 
Power (Bill Communications) has statistics on consumer, retail, and industrial buying. 

Census data. The Bureau of the Census publishes a wide variety of reports that 
summarize the wealth of data found in its census database, which is available at most 
libraries and at the Census Bureau’s Web site at www.census.gov. 

Forecasts. The U.S. Global Outlook traces the growth of 200 industries and gives a 
five-year forecast for each one. Many government agencies including the Department 
of Commerce offer forecasts on everything from interest rates to the number of 
housing starts. A government librarian can help you find what you need. 

Market research. Someone may already have compiled the market research you need. 

The FINDex Worldwide Directory of Market Research Reports, Studies, and Surveys 

(Cambridge University Press) lists more than 10,600 studies available for purchase. 
Other directories of business research include Simmons Study of Media and Markets 
(Simmons Market Research Bureau Inc.) and the ACNielsen Retail Index (ACNielsen). 

Articles. Magazine and journal articles pertinent to your business are a great source 
of information. Use the Reader’s Guide to Periodical Literature, the Business 
Periodicals Index (similar to the Reader’s Guide but focuses on business periodicals), 
and Ulrich’s Guide to International Periodicals to locate the ones you need. 

Local data. The state Department of Commerce and the local Chamber of 
Commerce probably have useful data on the local market of interest to you. Call to 
find out what is available. 

The Internet. Entrepreneurs can benefit from the vast amount of marketing 
information available on the Web. This is an efficient resource with up-to-date 
information, and much of it is free. 

PRODUCT PROTOTYPES. An effective way to gauge the viability of a product is to build 
a prototype. A prototype is an original, functional model of a new product that entrepreneurs 
can put into the hands of potential customers so that they can see it, test it, use it, and 
provide feedback. Prototypes usually point out potential problems in a product’s design, 
giving entrepreneurs the opportunity to address them in the product development process. 
The feedback customers give entrepreneurs based on prototypes often leads to design improvements 
and the identification of new features, some of which the entrepreneurs might 
never have discovered on their own. Makers of computer software frequently put prototypes 
of new products into customers’ hands as they develop new products or improve existing 
ones. Known as beta tests, these trials result in an iterative design process in which 
software designers collect feedback from users and then incorporate their ideas into the 
product for the next round of tests. Existing companies can benefit from creating prototypes 
as well. 

IN-HOME TRIALS. One technique that reveals some of the most insightful information 
into how customers actually use a product or service is also the most challenging to coordinate: 
in-home trials. An in-home trial involves sending researchers into customers’ 
homes to observe them as they use the company’s product or service. 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 183 
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Not only did the entrepreneurs’ idea work, but their 2. What were the costs of the feasibility research and 
company introduced the world to a new term: eco-what might have the costs been without it? 
fashion. Little Earth is now a multi-building design and 

manufacturing complex in the SoHo district of Pitts-Sources: Carla Goodman, “Can You Get There from Here?” Entrepreneur, 
December 1996, “Conveniently Green: Local Business Turns Trash to 

burgh with distributors in Australia, Germany, Japan, 

Cash,” www.thepittsburghchannel.com/green-pages/13707818/detail. 
Mexico, New Zealand, and the United Kingdom. And it html; “About Little Earth,” Little Earth Productions Inc., www. 
all started with an idea, a feasibility study, and a busi-entrepreneur.com/article/0,4621,226677,00.html; “About Little Earth,” 

Little Earth Productions Inc., www.littlearth.com/pages05/about. 

ness plan. 

shtml; Jennifer McGuiggan, “When Duality Equals Balance,”

1. What benefits did the feasibility analysis that 
Seaton Hall University, e-Magnify, www.e-magnify.com/entrepreneurs_ 

DeMarco and Brandegee conducted give them? view.asp?ID=36. 

Financial Feasibility Analysis 

The final component of a feasibility analysis involves assessing the financial feasibility of 
a proposed business venture. At this stage of the process, a broad financial analysis is sufficient. 
If the business concept passes the overall feasibility analysis, an entrepreneur 
should conduct a more thorough financial analysis when creating a full-blown business 
plan. The major elements in a financial feasibility analysis include the initial capital requirement, 
estimated earnings, and the resulting return on investment. 

CAPITAL REQUIREMENTS. Just as a boy scout needs fuel to start a fire, an entrepreneur 
needs capital to start a business. Some businesses, such as manufacturing and retail businesses, 
require large amounts of capital. Other businesses, such as service businesses, require 
less capital to launch. Start-up companies often need capital to purchase equipment, 
buildings, technology, and other tangible assets as well as to hire and train employees, promote 
their products and services, and establish a presence in the market. A thorough feasibility 
analysis will provide an estimate of the amount of start-up capital an entrepreneur will 
need to get the business up and running. 

Shawn Donegan and 
Mike Puczkowski and 
Trac Tool Inc. 

ISBN: 0-536-77917-1 

For instance, Shawn Donegan and Mike Puczkowski needed $150,000 to launch Trac Tool 
Inc. and bring the Speed Rollers paint system to market. They spent most of that start-up 
capital to develop and test the prototype and to introduce the product at the Painting and 
Decorating Contractors of America trade show.6 

You will learn more about finding sources of business funding, both debt and equity, 
in Chapters 14, “Sources of Equity Financing,” and 15, “Sources of Debt Financing.” 

ESTIMATED EARNINGS. In addition to producing an estimate of the start-up company’s 
capital requirements, an entrepreneur should forecast the earning potential of the proposed 
business. Industry trade associations and publications such as the RMA Annual Statement 
Studies offer guidelines on preparing sales and earnings estimates. From these, entrepreneurs 
can estimate the financial results they and their investors can expect to see from the 
business venture. 

RETURN ON INVESTMENT. The final aspect of the financial feasibility analysis combines 
the estimated earnings and the capital requirements to determine the rate of return the venture 
is expected to produce. One simple measure is the rate of return on the capital invested, 
which is calculated by dividing the estimated earnings the business yields by the amount of 
capital invested in the business. Although financial estimates at the feasibility analysis stage 
typically are rough, they are an important part of the entrepreneur’s ultimate “go” or “no 
go” decision about the business venture. A venture must produce an attractive rate of return 
relative to the level of risk it requires. This risk-return trade-off means that the higher the 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


184 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

184 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

2. Explain the benefits of an effective 
business plan. 
level of risk a prospective business involves, the higher the rate of return it must provide to 
the entrepreneur and investors. Why should an entrepreneur take on the risk of starting and 
running a business that produces a mere 3 percent or 4 percent rate of return when he or she 
could earn that much in a risk-free investment at a bank or other financial institution? You 
will learn more about developing detailed financial forecasts for a business start-up in 
Chapter 7, “Creating a Solid Financial Plan.” 

Wise entrepreneurs take the time to subject their ideas to a feasibility analysis like the one 
described here, whatever outcome it produces. If the analysis suggests that transforming the 
idea into a viable business is not feasible, the entrepreneur can move on to the next idea, confident 
that he or she has not wasted valuable resources launching a business destined to fail. 

Will Anderson teamed up with Rory McDonald and Jared Archibald, two other Stanford 
business school students, and Stanford electrical engineering PhD candidate Paul Cuff to 
enter the Business Association of Stanford Engineering Students business plan contest. 
Their idea: to adapt a speech and noise separating filter technology being developed in 
Stanford’s electrical engineering school to dramatically improve hearing aids. The team 
won the $25,000 grand prize and began to build a company around the idea. With 
$500,000 in venture capital, the Adaptive Hearing Solutions’ team focused on its first 
task—to prove the quality of the new product to potential buyers. After a series of clinical 
trials, the new technology made only a small improvement in hearing aids, and the entrepreneurs 
decided to focus their energy on building other more viable businesses. “We 
were faced with whether we wanted a small business that might capture some value in 
the process, or whether we wanted to fold up while we were still ahead and move on to 
other pursuits. We chose the latter,” says Anderson.7 

If the analysis shows that the idea has potential as a profitable business, the entrepreneur 
can pursue it, using the information gathered during the feasibility analysis as the 
foundation for building a sound business plan. “As you work through this phase, you will 
identify factors that are essential to your venture’s success while compiling the detailed, in-
depth information you need to write your business plan, thereby immensely shortening the 
next phase in the process,” says Timothy Faley, director of the first student-run venture capital 
fund in the United States.8 We now turn our attention to the process of developing a 
business plan. 

The Benefits of a Business Plan 

A business plan is a written summary of an entrepreneur’s proposed business venture that 
describes its operational and financial details, its marketing opportunities and strategy, and 
its managers’ skills and abilities. There is no substitute for a well-prepared business plan, 
and there are no shortcuts to creating one. The plan serves as an entrepreneur’s road map 
on the journey toward building a successful business. One writer says “a business plan 
should be the place where the map is drawn, for, as every traveler knows, a journey is a lot 
less risky when you have directions.”9 In essence, a business plan describes the direction 
the company is taking, what its goals are, where it wants to be, and how it’s going to get 
there. The plan documents the entrepreneur’s thorough research of the business opportunity. 
A business plan is an entrepreneur’s best insurance against launching a business destined 
to fail or mismanaging a potentially successful company. In the words of business 
plan consultant and author David H. Bangs, Jr., “Your business plan can help you avoid going 
into a business venture that is doomed to failure.”10 

The business plan serves two essential functions. First, it guides the company’s operations 
by charting its future course and devising a strategy for direction. The plan provides 
a battery of tools—a mission statement, goals, objectives, budgets, financial 
forecasts, target markets, and strategies—to help managers successfully lead the company. 
In an ideal situation, the entrepreneur enlists the help of all involved in the venture 
to write and update the business plan, providing managers and employees a sense of 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




direction. As more team members commit to making the plan work, it takes on special 
meaning. The business plan gives everyone targets to shoot for, and it provides metrics 
for measuring actual performance against those targets, especially in the crucial and 
chaotic start-up phase of the business. In addition, writing a business plan requires entrepreneurs 
to acquire an in-depth understanding of the industries in which they plan to 
compete and how their companies fit into them. The key to an effective business plan is 
to use it as a tool to guide everyone involved in the venture—making it a true planning 
document—as the business grows.11 

The greatest waste of a business plan is to let it sit unused. When properly done, a plan 

becomes an integral and natural part of a company’s planning process. In other words, suc


cessful entrepreneurs actually use their business plans to help them build strong companies. 


Craig Knouf and 
Associated Business 
Systems 

ISBN: 0-536-77917-1 

Every month, Craig Knouf, CEO of Associated Business Systems (ABS), an office-equipment 
supplier in Portland, Oregon, distributes the company’s business plan to his seven vice presidents. 
They compare their divisions’ and the overall company’s actual results to those established 
in the plan. When the plan and the actual results don’t match, the managers try 
to determine why and then rewrite the business plan accordingly. Knouf and his top managers 
also devote two full days each year to a planning retreat where they discuss, evaluate, 
and revise ABS’s mission and long-term goals. Knouf says this consistent approach to 
actually using the business plan plays a vital role to support more than $21.5 million in annual 
sales. With the help of the revised business plan, ABS scanning software sales doubled 
to $3.1 million in just one year.12 

The second function of the business plan is to attract lenders and investors. Unfortunately, 
many small business owners approach potential lenders and investors without having 
prepared to sell themselves and their business concept. “Lenders [and investors] want 
to see solid, incisive business plans that clearly demonstrate an entrepreneur’s creditworthiness 
and his ability to build and manage a profitable company,” says a partner in a venture 
capital firm.13 Scribbling some rough estimates on a note pad to support a loan 
application is not enough. Applying for loans or attempting to attract investors without a 
solid business plan rarely attracts needed capital. The best way to secure the necessary capital 
is to prepare a sound business plan. The quality of an entrepreneur’s business plan 
weighs heavily in the final decision to lend or invest funds. It is also potential lenders’ and 
investors’ first impression of the company and its managers. Therefore, the finished product 
should be highly polished and professional in both form and content. 

A business plan is a reflection of its creator or the team behind it. The plan should 
demonstrate that an entrepreneur has thought seriously about the venture and what will make 
it succeed. Preparing a solid plan demonstrates that an entrepreneur has taken the time to conduct 
the necessary research and to commit the idea to paper. Building a plan also forces an 
entrepreneur to consider both the positive and the negative aspects of the business.A detailed 
and thoughtfully developed business plan makes a positive first impression on those who 
read it. In most cases, potential lenders and investors read a business plan before they ever 
meet with the entrepreneur behind it. Sophisticated investors will not take the time to meet 
with an entrepreneur whose business plan fails to reflect a serious investment of time and energy 
in defining a promising business opportunity. They know that an entrepreneur who lacks 
the discipline to develop a good business plan likely lacks the discipline to run a business. 

Although feedback from others may be valuable, entrepreneurs should not allow 
someone else to prepare their business plans. Outsiders cannot understand the business 
nor envision the proposed company as well. The entrepreneur is the driving force behind 
the business idea and is the one who can best convey the vision and the enthusiasm he or 
she has for transforming that idea into a successful business. Answering the often difficult 
questions potential lenders and investors ask requires entrepreneurs to understand all 
of the details of the business plan. Investors want to feel confident that an entrepreneur 
appreciates the risk of the new venture and has a strategy for addressing it. They also want 
to see proof that a business will become profitable and produce a reasonable return on 
their investment. 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


186 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 

186 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 
Byron Myers, Ali Perry, 
and Brenton Taylor and 
Inogen 

One way to understand the need for a business plan is to recognize the validity of the 
“two-thirds rule.” This rule says that only two-thirds of the entrepreneurs with a sound and 
viable new business idea will find financial backing. Those who do find financial backing 
will only get two-thirds of what they initially requested, and it will take them two-thirds 
longer to get the financing than they anticipated.14 An effective strategy for avoiding the 
two-thirds rule is to build a business plan! 

Even after completing a feasibility analysis, sometimes it is the more detailed business 
plan that provides an entrepreneur with the realization that “it just won’t work.” The time 
to find out that a business idea will not succeed is in the planning stages before committing 
significant money, time, and effort. It is much less expensive to make mistakes on paper 
than in reality. In other cases, a business plan reveals important problems to overcome before 
launching a company. Exposing these flaws and then addressing them enhances the 
chances of a venture’s success. Business plans can help nascent entrepreneurs nail down 
important aspects of their concept and sometimes prevent costly mistakes. Bill Evans, a 
counselor for SCORE, a group of retired business executives who counsel entrepreneurs, 
says one client wanted to start a business designing customer scrapbooks. It was not until 
she started formally planning that it became clear she would only average $3 an hour for 
her labor.15 

The value in preparing a plan is not just in the document itself; it is in the process the 
entrepreneur goes through to create the plan. Although the final product is useful, the 
process of building the plan requires entrepreneurs to explore all areas of a business and 
subject their ideas to an objective, critical evaluation from many different angles. What entrepreneurs 
learn about their industries, target markets, financial requirements, competition, 
and other factors is essential to making their ventures successful. Building a business plan 
reduces the risk and uncertainty of launching a company by teaching an entrepreneur to do 
it the right way. 

Ali Perry’s grandmother did not like to deal with her bulky, inconvenient oxygen tank. 
Working with friends Byron Myers and Brenton Taylor, Perry developed a solution—a 
portable oxygen concentrator that filters out nitrogen from room air to replace the oxygen 
tank. The team drew up a business plan, entered it in a business plan competition at the 
University of California at Santa Barbara—and they won! With this validation, the company 
Inogen was born. Inogen’s machine plugs in anywhere and is portable, using a 
rechargeable lithium ion battery for power.16 

ISBN: 0-536-77917-1 
Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 187 
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joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 187 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 
Using and Updating 
the Business Plan 

A business plan can help spot future success or failure, 
attract suppliers and employees, and more. The 
process of writing a business plan forces you to take a 
thorough, careful, and comprehensive look at the 
most important facets of your business, including the 
contexts in which it operates. Merely raising questions 
can sometimes lead to a solution, or at least ensure 
that if conditions change, you will be better prepared 
to make an informed decision. The ongoing “what if 
this or that happens?” inherent in the planning 
process can be stimulating. In other words, the planning 
process itself can make the entrepreneur a more 
capable manager. Writing a business plan teaches you 
about aspects of the business that you may not learn 
through any other process—spotting future trouble areas, 
identifying opportunities, and recognizing organizational 
issues. 

A business plan helps to: 

. 
Evaluate a new venture—The plan can be used to 
develop strategy and create projections. 
. 
Attract good people—Select portions of the plan 
can be a valuable communication tool for potential 
employees or potential business partners. 
. 
Inform suppliers and customers—You can use your 
plan as a tool to develop deeper, stronger relationships 
with key suppliers and customers. 
. 
Monitor your business’s performance—Using a 
business plan to monitor your performance produces 
many benefits relating to cash flow, and 
“plan-to-actual” analysis enables you to spot trou


ble early and develop action plans. 

. 
Develop new strategies—The acts of reviewing 
and editing a plan can lead to strategic insights 
about the business and the changing environment 
in which it operates. 
Therefore, updating a business plan can have numerous 
benefits. Here are eight reasons for updating 
your plan: 

1. A new financial period is about to begin. 
2. You need financing, or additional financing. 
3. Significant market changes—shifting client tastes, 
consolidation trends among customers, and altered 
regulatory climates can trigger a need for 
plan updates. 
4. New or stronger competitors are looking to take 
your customers for their growth. 
5. The firm develops or is about to develop a new 
product, technology, service, or skill. 
6. You have had a change in management, and new 
managers need fresh information. 
7. Your company has crossed a threshold, such as 
moving out of your home office, reaching 
$1 million in sales, or employing 100 people. 
8. Your old plan no longer reflects reality. 
Using a business plan as an active, insightful tool can 
provide excellent returns for the entrepreneur and those 
involved in and around the business. 

Source: David H. Bangs, “9 Ways to Use Your Business Plan,” 
Entrepreneur.com, September 27, 2005, www.entrepreneur.com/ 
startingabusiness/businessplans/article80098.html. 

3. Describe the elements of a 
solid business plan. 
ISBN: 0-536-77917-1 

The Elements of a Business Plan 

Wise entrepreneurs recognize that every business plan is unique and must be tailor-made. 
The elements of a business plan may be standard, but the way entrepreneurs tell their stories 
should be unique and reflect their enthusiasm for the new venture. For those making a 
first attempt at writing a business plan, it may be very helpful to seek the advice of individuals 
with experience in this process. Accountants, business professors, attorneys, and 
consultants with Small Business Development Centers can be excellent sources of advice 
to create and refine a business plan. (A list of SBDCs is on the Small Business Administration’s 
SBDC Web page at www.sba.gov/SBDC.) Remember, however, that the entrepreneur 
should be the one to author his or her business plan, not someone else. 

Initially, the prospect of writing a business plan may appear to be overwhelming. Some 
entrepreneurs would rather launch their companies and “see what happens” than invest the 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


188 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

188 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
quires 
time, effort, and thought. However, this investment pays dividends, and not all of 
them are immediately apparent. Entrepreneurs who invest their time and energy toward 
building a comprehensive business plan have an advantage when they compete in a hostile 
environment. 

Entrepreneurs can benefit from business planning software available from several 
companies to create their plans. Some of the most popular programs include Business Plan 
Pro* (Palo Alto Software), PlanMaker (Power Solutions for Business), and Plan Write 
(Business Resources Software). Business Plan Pro, for example, covers every aspect of a 
business plan from the executive summary to the cash flow forecasts. The software helps 
entrepreneurs organize information, and provides helpful tips on plan writing with templates 
for creating financial statements. These planning packages can help to produce 
professional-looking business plans, but there is a potential drawback: The plans they produce 
may look as if they came from the same mold. That can be a turn-off for professional 
investors who review hundreds of business plans each year. 

A business plan typically ranges from 25 to 50 pages in length. Shorter plans may be 
too brief to be of value, and longer plans run the risk of never getting used or read! This 
section explains the most common elements of a business plan. However, entrepreneurs 
must recognize that, like every business venture, every business plan is unique. An entrepreneur 
should view the following elements as a starting point for building a plan and modify 
the content to better tell the story of his or her new venture. 

Title Page and Table of Contents 

A business plan should contain a title page with the company’s name, logo, and address 
with the names and contact information of the company founders. Many entrepreneurs also 
include the copy number of the plan and the date on which it was issued on the title page. 
Business plan readers appreciate a table of contents that includes page numbers so that they 
can locate the sections of the plan in which they are most interested. 

The Executive Summary 

An executive summary highlights the critical aspects of the plan. This section should be 
concise—a maximum of two pages—and should summarize all of the relevant points of the 
proposed deal. The executive summary is a synopsis of the entire plan, capturing its essence 
in a condensed form. It should explain the basic business model and the problem the business 
will solve for customers. It should briefly describe the owners and key employees, target 
market(s), and the company’s competitive advantage. It should also include financial 
highlights including sales and earnings projections, the amount of funding needed, how the 
funds will be used, and how and when any loans will be repaid or investments cashed out. 
After reading the executive summary, the reader should be able to understand the entire 
business concept and what differentiates the company from the competition. 

The executive summary is a written version of what is known as “the elevator pitch.” 
Imagine an entrepreneur on an elevator with a potential lender or investor. The entrepreneur 
has that person’s undivided attention for the duration of the ride, but the building is 
not very tall! To convince the investor that the business idea is a great investment, he or she 
must condense the message down to its essential elements: communicating key points in a 
matter of one or two minutes. The Babcock Elevator Competition at Wake Forest University 
has students actually ride an elevator with a venture capitalist with the opportunity to 
pitch their business ideas in just two minutes. “The competition was designed to simulate 
reality,” says Stan Mandel, creator of the event and director of the Angell Center for Entrepreneurship. 
The object of the competition is to hone a two-minute “elevator pitch” and 
deliver it to a venture capitalist during the elevator ride. The winner receives the chance to 


*Business Plan Pro is available at a nominal cost with this textbook 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 189 

spend 30 minutes in face-to-face conversations with the venture capitalists who judge the 
competition.17 

The executive summary is designed to capture the reader’s attention. If it misses, the 
chances of the remainder of the plan being read are minimal. Acoherent, well-developed summary 
introducing the rest of the plan establishes a favorable first impression of the business 
and the entrepreneur behind it, and can go a long way toward obtaining financing. A good executive 
summary should allow the reader to understand the business concept and how it will 
make money as well as answer the ultimate question from investors or lenders: “What’s in it 
for me?” Although the executive summary is the first part of the business plan, it should be 
the last section written. 

Mission and Vision Statement 

As discussed in Chapter 2, “Strategic Management: Gaining a Competitive Edge,” a mission 
statement expresses in words an entrepreneur’s purpose and direction for a company. 
The mission statement anchors a company in reality and serves as the thesis statement for 
the entire business plan. Every good plan captures an entrepreneur’s passion and vision for 
the business, and the mission statement is the ideal place to express them. The mission statement 
answers the questions, “Why are we here?” and “Where are we going?” A vision statement 
complements this by addressing the questions, “What do we stand for?” and “What 
kind of company do we want to become?” A vision statement captures the entrepreneur’s 
dream of something to come from the business 

Company History 

The owner of an existing small business should prepare a brief history of the operation, 
highlighting the significant financial and operational events in the company’s life. This 
section should describe when and why the company was formed, how it has evolved 
over time, and what the owner envisions for the future. It should highlight the successful 
accomplishment of past objectives and should convey the company’s image in the 
marketplace. 

Business and Industry Profile 

To acquaint lenders and investors with the industry in which a company competes, an entrepreneur 
should describe the industry in the business plan. This section should provide the 
reader with an overview of the industry or market segment in which the new venture will 
operate. Industry data such as market size, growth trends, and the relative economic and 
competitive strength of the major firms in the industry set the stage for understanding the 
viability of the new product or service. Strategic issues such as ease of market entry and 
exit, the ability to achieve economies of scale or scope, and the existence of cyclical or seasonal 
economic trends help readers further evaluate the new venture. This part of the plan 
also should describe significant industry trends and key success factors as well as an overall 
outlook for its future. Information about the evolution of the industry helps the reader 
comprehend its competitive dynamics. 

The U.S. Industrial Outlook Handbook is an excellent reference that profiles a variety 
of industries and offers projections for future trends. Another useful resource of industry 
and economic information is the Summary of Commentary on Current Economic Conditions, 
more commonly known as The Beige Book. Published eight times a year by the Federal 
Reserve, The Beige Book provides detailed statistics and trends in key business sectors 
and in the overall economy. It offers valuable information on topics ranging from tourism 
and housing starts to consumer spending and wage rates. Entrepreneurs can find this 
wealth of information at their fingertips on the Web at www.federalreserve.gov/FOMC/ 
BeigeBook/2007. 

This portion of the plan also should describe the existing and anticipated profitability 
of the industry. Any significant entry or exit of firms or consolidations and mergers should 
be discussed in terms of their impact on the competitive behavior of the market. In addition, 
the entrepreneur should mention any events that have significantly affected the industry 
in the past 10 years. 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




This section should contain a statement of the company’s general business goals and 
then provide a narrower definition of its immediate objectives. Together, they should spell 
out what the business plans to accomplish, and how, when, and who will do it. Goals are 
broad, long-range statements of what a company plans to achieve in the future that guide 
its overall direction. In other words, they address the question, “What do I want my company 
to look like in three to five years?” 

Objectives are short-term, specific performance targets that are attainable, measurable, 
and controllable. Every objective should reflect at least one business goal and include 
a technique for measuring progress toward its accomplishment. To be meaningful, an objective 
must have a time frame for achievement. Both goals and objectives should relate 
to the company’s basic mission. In other words, accomplishing each objective should 
move a business closer to achieving its goals, which, in turn, should move it closer to its 
mission. 

Business Strategy 

An even more important part of the business plan is the owner’s view of the strategy 
needed to meet—and beat—the competition. The previous section discussed how entrepreneurs 
define where they want to take their businesses by establishing goals and objectives. 
This section addresses the question of how to get there—business strategy. Here, an 
entrepreneur must explain how he or she plans to gain a competitive edge in the market 
and what sets his or her business apart from the competition. Entrepreneurs should comment 
on how they plan to achieve business goals and objectives in the face of competition. 
A business strategy also addresses government regulation and identifies the image the 
business will project. An important theme in this section is what makes the company 
unique in the eyes of its customers. One of the quickest routes to business failure is trying 
to sell “me-too” products or services that offer customers nothing newer, better, bigger, 
faster, or different. The foundation for this part of the business plan comes from the material 
in Chapter 2. 

This section of the business plan should outline the methods the company can use to 
meet the key success factors cited earlier. If, for example, making sales to repeat customers 
is critical to success, an entrepreneur must devise a plan of action for achieving a customer 
retention rate that exceeds that of existing companies in the market. 

Description of Firm’s Product/Service 

An entrepreneur should describe the company’s overall product line, giving an overview of 
how customers use its goods or services. Drawings, diagrams, and illustrations may be valuable, 
particularly if the product is highly technical or original. It is best to write product and 
service descriptions so that laypeople can understand them. A statement of a product’s position 
in the product life cycle might also be helpful. An entrepreneur should include a summary 
of any patents, trademarks, or copyrights protecting the product or service from infringement 
by competitors. Finally, the plan should include an honest comparison of the company’s product 
or service with those of competitors. A plan should cite specific advantages or improvements 
that make the company’s goods or services unique and describe plans for creating the 
next generation of goods and services that may evolve from the present product line. What 
competitive advantage does the venture’s product or service offer? Ideally, a product or service 
offers high-value benefits to customers and is difficult for competitors to duplicate. 

One danger entrepreneurs must avoid in this part of the plan is the tendency to dwell 
on the features of their products or services. This problem—the “fall-in-love-with-yourproduct” 
syndrome—often afflicts inventors. Customers, lenders, and investors do not care 
how much work, genius, and creativity went into a product or service; they care about what 
it will do for customers. This section should define the benefits customers receive by purchasing 
the company’s products or services, rather than provide a “nuts and bolts” description 
of the features of those products or services. A feature is a descriptive fact about a 
product or service (e.g., “an ergonomically designed, more comfortable handle”). A benefit 
is what the customer gains from the product or service feature (e.g., “fewer problems with 
carpal tunnel syndrome and increased productivity”). Advertising legend Leo Burnett once 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 

ISBN: 0-536-77917-1 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 191 
TABLE 6.2 Transforming Features into Meaningful Benefits 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 191 
TABLE 6.2 Transforming Features into Meaningful Benefits 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 
For many entrepreneurs, there’s a big gap between what a business is selling and what its cus


tomers are buying. The following worksheet is designed to eliminate that gap. 
First, develop a list of the features your company’s product or service offers. List as many as you 
can think of, which may be 25 or more. Consider features that relate to price, performance, convenience, 
location, customer service, delivery, reputation, reliability, quality, features, and other aspects. 


Next, group features with similar themes together by circling them with the same color ink. 
Then translate those groups of features into specific benefits to your customers by addressing 
the question “What’s in it for me?” from the customer’s perspective. (Note: It usually is a good 
idea to ask actual customers why they buy from you. They usually give reasons that you never 
thought of.) As many as six or eight product or service (or even company) features may translate 
into a single customer benefit, such as saving money or time or making life safer. Don’t ignore 
intangible benefits such as increased status; they can be more important than tangible benefits. 


Finally, combine all of the benefits you identify into a single sentence or paragraph. Use this 
statement as a key point in your business plan and to guide your company’s marketing strategy. 


Benefits 

Features 

Benefit Statement: 

Source: Adapted from Kim T. Gordon, “Position for Profits,” Business Start-Ups, February 1998, pp. 18–20. 


Håkan and Annika 
Olsson and First 
Penthouse 

ISBN: 0-536-77917-1 

said, “Don’t tell the people how good you make the goods; tell them how good your goods 
make them.”18 This part of the plan must describe how a business will transform tangible 
product or service features into important but often intangible customer benefits—for example, 
lower energy bills, faster access to the Internet, less time writing checks to pay 
monthly bills, greater flexibility in building floating structures, shorter time required to 
learn a foreign language, or others. Remember: Customers buy benefits, not product or service 
features. Table 6.2 offers an easy exercise designed to help entrepreneurs translate their 
products’ or services’ features into meaningful customer benefits. 

Manufacturers should describe their production process, strategic raw materials required, 
sources of supply they will use, and their costs. They should also summarize the 
production method and illustrate the plant layout. If the product is based on a patented or 
proprietary process, a description (including diagrams, if necessary) of its unique market 
advantages is helpful. It is also helpful to explain the company’s environmental impact and 
how the entrepreneur plans to mitigate any negative environmental consequences the 
process may produce. 

While renovating their top-floor apartment in Stockholm, Sweden, civil engineers Håkan 
and Annika Olsson came up with a unique idea for creating high-quality modular penthouses 
that they could manufacture in factories and install on top of existing flat-roof 
buildings. When the couple moved to London, they purchased aerial photographs of the 
city and marked all of the flat-roof buildings in red ink. “We knew we had a good business 
idea when the whole picture was red,” says Håkan. After conducting more research 
and building a business plan, the Olssons launched First Penthouse, a company specializing 
in rooftop development. Their business model adds value both for tenants, who get 
penthouse living quarters where none existed before, and for landlords, whose property 
values increase with the addition of the modular penthouses. First Penthouse offers the 
benefit of a convenient one-day installation and guarantees no disturbances to existing 
residents. To convince balking regulators, the Olssons use special “quiet” tools and place 
soundproof mats over the roofs as they work. As sales grow, the Olssons are planning to 
take their concept into other large urban markets around the world.19 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


192 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 

192 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 
Raymond Aranoff 
and Vektor 

Marketing Strategy 

One of the most important tasks a business plan must fulfill is proving that a viable market 
exists for a company’s goods or services. A business plan must identify and describe 
a company’s target customers and their characteristics and habits. Defining the target 
audience and its potential is one of the most important—and most challenging—parts of 
building a business plan. Narrowing its target market enables a small company to focus 
its limited resources on serving the needs of a specific group of customers rather than 
attempting to satisfy the desires of the mass market. Creating a successful business depends 
on an entrepreneur’s ability to attract real customers who are willing and able to 
spend money to buy its products or services. Perhaps the worst marketing error an entrepreneur 
can commit is failing to define the target market and trying to make the business 
“everything to everybody.” Companies are usually more successful when they 
focus on a specific market niche or niches where they can excel at meeting customers’ 
special needs or wants. 

Successful entrepreneurs know that a solid understanding of their target markets is 
the first step in building an effective marketing strategy. Indeed, every other aspect of 
marketing depends on their having a clear picture of their customers and their unique 
needs and wants. Defining a company’s target market involves using the techniques described 
in more detail in Chapter 9, “Creating a Marketing Plan.” Proving that a profitable 
market exists involves two steps: showing customer interest and documenting 
market claims. 

SHOWING CUSTOMER INTEREST. An important element of any business plan is showing 
how a company’s product or service provides a customer benefit or solves a customer problem. 
Entrepreneurs must be able to prove that their target customers actually need or want 
their goods or services and are willing to pay for them. After reviewing thousands of business 
plans, venture capitalist Kathryn Gould, says that she looks for plans that focus on “target 
customers with a compelling reason to buy. The product must be a ‘must-have.’”20 

Proving a viable market exists for a product or service is relatively straightforward for 
a company already in business, but can be quite difficult for an entrepreneur with only an 
idea or a prototype. In this case, an entrepreneur might offer the prototype to several 
potential customers in order to get written testimonials and evaluations to show to investors. 
Another option is to sell the product to several customers at a discount. This may 
prove that there are potential customers for the product and would allow demonstrations 
of the product in operation. Getting a product into customers’ hands is also an excellent 
way to get valuable feedback that can lead to significant design improvements and increased 
sales down the road. 

Raymond Aranoff’s work at NASA’s Johnson Space Center in Houston, Texas, used to include 
frustration due to the difficulties of integrating different types of engineering software 
and data management systems. “General Motors loses $1 billion [a year] because 
of the problem,” says Aranoff. He noticed that software designers tended to ignore the 
poor integration in industries such as automotive, defense and contracting, and aerospace. 
To solve the problem, Aranoff created Vektor, a business that uses a Web-based 
software system that collects and interfaces data from multiple software platforms into 
one intuitive and customizable database. Aranoff was able to get Vektor into potential 
customers’ hands and get feedback from them, which enabled him to prove that his business 
idea was valid.21 

DOCUMENTING MARKET CLAIMS. Too many business plans rely on vague generalizations 
such as, “This market is so huge that if we get just 1 percent of it, we will break even 
in eight months.” Statements such as these usually reflect nothing more than an entrepre-

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




neur’s unbridled optimism, and in most cases, these statements are unrealistic. Entrepreneurs 
must support claims of market size and growth rates with facts. Gathering those facts 
requires market research. Results of market surveys, customer questionnaires, and demographic 
studies lend credibility to an entrepreneur’s frequently optimistic sales projections. 
(Refer to the market research techniques and resources described earlier in this chapter.) 
Quantitative market data are important because they form the basis for all of the company’s 
financial projections in the business plan. Recall from the section on feasibility analysis that 
one effective documentation technique involves business prototyping, in which entrepreneurs 
test their business models on a small scale before committing serious resources to a 
business that might not work. 

One of the main purposes of the marketing section of the plan is to lay the foundation 
for the financial forecasts that follow. Sales, profit, and cash forecasts must come from 
more than wishful thinking. An effective market analysis should identify the following: 

Target market. Who are the company’s target customers? How many of them are in 
the company’s trading area? What are their characteristics (age, gender, educational 
level, income, and others)? What do they buy? Why do they buy? When do they buy? 
What expectations do they have about the product or service? How can the company 
set itself apart from the competition in its customers’ minds? 

Advertising and promotion. Only after entrepreneurs understand their companies’ 
target markets can they design a promotion and advertising campaign to reach those 
customers most effectively and efficiently. Which media are most effective in reaching 
the target market? How will they be used? How much will the promotional campaign 
cost? How will the promotional campaign position the company’s products or 
services? How can the company benefit from publicity? How large is the company’s 
promotional budget? 

Market size and trends. Assessing the size of the market is a critical step. How large 
is the potential market? Is it growing or shrinking? Why? Are customers’ needs 
changing? Are sales seasonal? Is demand tied to another product or service? 


Neil Malhotra and 
NP Solutions 

ISBN: 0-536-77917-1 

One of the largest potential markets in the world of biotechnology is treating lower back 
pain. Many people begin to suffer some form of degenerative disc disease in their late 
twenties, but the majority of sufferers are not disabled severely enough for highly invasive 
and risky treatments such as spinal fusion. This led Neil Malhotra and the team at NP 
Solutions to see the market potential for a much less invasive form of treatment. The 
treatment they developed involves a tiny injection of a hydrogel treatment into the affected 
disc. “Lower back pain is responsible for 15 million physicians’ visits a year,” Malhotra 
says. The size of the potential market validates the business potential for the 
innovation.22 

Location. For many businesses, choosing the right location is a key success factor. 
For retailers, wholesalers, and service companies, the best location usually is one that 
is most convenient to their target customers. Using census data and other market 
research, entrepreneurs can determine the sites with the greatest concentrations of their 
target customers and locate there. Which sites put the company in the path of its target 
customers? Maps showing customer concentrations (available from census reports and 
other sources), traffic counts, or the number of customers using a particular train 
station may be available. This and other types of information help provide evidence 
that a solid and sizable customer base exists. Do zoning regulations restrict the use of 
a site? For manufacturers, the location issue often centers on finding a site near their 
key raw materials or near their primary customers. Using demographic reports and 
market research to screen potential sites takes the guesswork out of choosing the 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


194 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 

194 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
joka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka jokajoka joka joka joka joka joka joka joka joka joka joka joka joka joka joka 
Ray Sidhom and Four 
Food Studio and 
Cocktail Salon 

“right” location for a business. We will discuss the location decision in more detail in 

Chapter 16, “Location, Layout, and Physical Facilities.” 
Pricing. What does the product or service cost to produce or deliver? Before 
opening a restaurant, for example, an entrepreneur should know exactly what it will 
cost to produce each item on the menu. Failing to know the total cost (including the 
cost of the food as well as labor, rent, advertising, and other indirect costs) of putting a 
plate in front of a customer is a recipe for failure. As we will discover in Chapter 10, 
cost is just one part of the pricing equation. Another significant factor to consider is 
the image a company is trying to create in the market. “Price really is more of a 
marketing tool than it is a vehicle for cost recovery,” says Peter Meyer, author of 
Creating and Dominating New Markets. “People will pay more for a high value 
product or solution, so be sure to research your [product’s or service’s] total value.”23 

Ray Sidhom, co-owner of Four Food Studio and Cocktail Salon in Long Island, New York, 
is one savvy owner who reviews his business plan frequently. “We have so many details to 
watch, from the food and liquor to staffing costs,” says Sidhom. “If they’re not where they 
should be, the business suffers. We look at the intricacies of the business plan often and 
use analysts who do projections and models.”24 

Other pricing issues include: What is the company’s overall pricing strategy? Will 
the planned price support the company’s strategy and desired image? (See Figure 6.3.) 
Given the company’s cost structure, will the price produce a profit? How does the 
planned price compare to those of similar products or services? Are customers willing 
to pay it? What price tiers exist in the market? How sensitive are customers to price 
changes? Will the business sell to customers on credit? Will it accept credit cards? 
Will the company offer discounts? If so, what kinds and how much? 

Distribution. The area of distribution addresses logistic questions. How will the 
company get the product or service to customers? Will distribution be extensive, 
selective, or exclusive? What is the average sale? How large will the sales staff be? 
How will the company compensate its sales force? What are the incentives for 
salespeople? How many sales calls does it take to close a sale? What can the company 
do to make it as easy as possible for customers to buy? 

This portion of the plan also should describe the channels of distribution that the business 
will use (the Internet, direct mail, in-house sales force, sales agents, retailers, or others). 
An entrepreneur should summarize the company’s overall pricing strategies and its 
warranties and guarantees for its products and services. 

Competitor Analysis 

An entrepreneur should discuss the new venture’s competition. Failing to assess competitors 
realistically makes entrepreneurs appear to be poorly prepared, naive, or dishonest, especially 
to potential lenders and investors.An analysis of each significant competitor should 

FIGURE 6.3 The Links High 
Among Pricing, 
Perceived Quality, and 
Company Image 

Price 

Low 

Contradictory Image 
Target is unknown– 
this is a dangerous 
position to be in. 
Upscale Image 
Target is those who 
want the best and 
are able to pay for it. 
Bargain Image 
Target is those to whom 
low prices are more 
important than quality. 
Value Image 
Target is those who are 
looking for value for 
what they spend. 
Low High 

Perceived Quality 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 195 

be presented. Entrepreneurs who believe they have no competitors are only fooling themselves 
and are raising a huge red flag to potential lenders and investors. Gathering informationoncompetitors’market 
shares,products, andstrategies is usually notdifficult.Trade 
associations, customers, industry journals, marketing representatives, and sales literature 
are valuable sources of data. This section of the plan should focus on demonstrating that the 
entrepreneur’s company has an advantage over its competitors and address these questions: 

. 
Who are the company’s key competitors? 
. 
What are their strengths and weaknesses? 
. 
What are their strategies? 
. 
What images do they have in the marketplace? 
. 
How successful are they? 
. 
What distinguishes the entrepreneur’s product or service from others already on the 
market, and how will these differences produce a competitive edge? 
This section of the plan should demonstrate that the company’s strategies are customer-
focused. Firsthand competitor research is particularly valuable. 

Owners’ and Managers’ Résumés 

The most important factor in the success of a business venture is its management, and financial 
officers and investors weigh heavily the ability and experience of a company’s managers 
in financing decisions. A plan should include the résumés of business officers, key 
directors, and any person with at least 20 percent ownership in the company. This is the section 
of the plan in which entrepreneurs have the chance to sell the qualifications and the experience 
of their management team. Remember: Lenders and investors prefer experienced 
managers. Ideally, they look for managers with at least two years of operating experience 
in the industry they are targeting. 

A résumé should summarize each individual’s education, work history (emphasizing 
managerial responsibilities and duties), and relevant business experience. When compiling 
a personal profile, an entrepreneur should review the primary reasons for small business 
failure and show how the management team will use its skills and experience to avoid them. 
Lenders and investors look for the experience, talent, and integrity of the people who will 
breathe life into the plan. This portion of the plan should show that the company has the 
right people organized in the right fashion for success. One experienced private investor advises 
entrepreneurs to remember the following: 

. 
Ideas and products don’t succeed; people do. Show the strength of your management 
team. A top-notch management team with a variety of proven skills is crucial. Arthur 
Rock, a legend in the venture capital industry, says, “I invest in people, not ideas.”25 
. 
Show the strength of key employees and how you will retain them. Most small 
companies cannot pay salaries that match those at large businesses, but stock options 
and other incentives can improve employee retention. 
. 
Enhance the strength of the management team with a capable, qualified board of 
advisers. A board of directors or advisers consisting of industry experts lends credibility 
and can complement the skills of the management team. 
Plan of Operation 

To complete the description of the business, an entrepreneur should construct an organizational 
chart identifying the business’s key positions and the people occupying them. Assembling 
a management team with the right stuff is difficult, but keeping it together until 
the company is established may be even harder. Thus, the entrepreneur should briefly describe 
the steps taken to encourage important officers to remain with the company. Employment 
contracts, shares of ownership, and perks are commonly used to keep and 
motivate key employees. 

Finally, a description of the form of ownership—sole proprietorship, partnership, joint 

venture, C corporation, S corporation, or LLC, for example—and of any leases, contracts, 

and other relevant agreements pertaining to the operation is helpful. 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 




Pro Forma (Projected) Financial Statements 

One of the most important sections of the business plan is an outline of the proposed company’s 
financial statements. One survey found that 74 percent of bankers say that financial 
documentation is the most important aspect of a business plan for entrepreneurs seeking 
loans.26 For an existing business, lenders and investors use past financial statements to 
judge the health of the company and its ability to repay loans or generate adequate returns; 
therefore, an owner should supply copies of the firm’s financial statements from the past 
three years. Ideally, these statements should be audited by a certified public accountant because 
most financial institutions prefer that extra reliability. In some cases a financial review 
of the statements by an accountant may be acceptable. 

Whether assembling a plan for an existing business or for a start-up, an entrepreneur 
should carefully prepare monthly projected (or pro forma) financial statements for the operation 
for the next year (and for two more years by quarter). An entrepreneur can use past 
operating data, published statistics, and research to derive three sets of forecasts of the income 
statement, balance sheet, cash forecast, and a schedule of planned capital expenditures. 
(You will learn more about creating projected financial statements in Chapter 7, 
“Creating a Financial Plan.”) The forecasts should cover pessimistic, most likely, and optimistic 
conditions to reflect the uncertainty of the future. When in doubt, entrepreneurs 
should be up-front and include some contingencies for any costs that are in question. 

It is essential that all three sets of forecasts be realistic. Entrepreneurs must avoid the 
tendency to inflate the numbers just to make their businesses look good. Lenders and investors 
compare these projections against published industry standards and can detect unrealistic 
forecasts. In fact, some venture capitalists automatically discount an entrepreneur’s 
financial projections by as much as 50 percent. After completing these forecasts, an entrepreneur 
should perform a breakeven analysis and a ratio analysis on the projected figures. 

It is also important to include a statement of the assumptions on which these financial 
projections are based. Potential lenders and investors want to know how an entrepreneur 
derives forecasts for sales, cost of goods sold, operating expenses, accounts receivable, collections, 
accounts payable, inventory, taxes, and other items. Spelling out realistic assumptions 
gives a plan more credibility and reduces the tendency to include overly optimistic 
estimates of sales growth and profit margins. Greg Martin, a partner in the venture capital 
company Redpoint Ventures, says, “I have problems with start-ups making unrealistic 
assumptions—how much money they need or how quickly they can ramp up revenue. 
Those can really kill a deal for me.”27 

In addition to providing valuable information to potential lenders and investors, projected 
financial statements help entrepreneurs run their businesses more effectively and 
more efficiently after the start-up. They establish important targets for financial performance 
and make it easier for an entrepreneur to maintain control over routine expenses and 
capital expenditures. 

The Loan or Investment Proposal 

If an entrepreneur is seeking external financing, the loan or investment proposal section of 
the business plan should state the purpose of the financing, the amount requested, and the 
plans for repayment or, in the case of investors, an attractive exit strategy. When describing 
the purpose of the loan or investment, an entrepreneur must specify the planned use of the 
funds. General requests for funds using terms such as “for modernization,” “working capital,” 
or “expansion” are unlikely to win approval. Instead, entrepreneurs should use more 
detailed descriptions such as “to modernize production facilities by purchasing five new, 
more efficient looms that will boost productivity by 12 percent” or “to rebuild merchandise 
inventory for fall sales peak, beginning in early summer.” Entrepreneurs should state the 
precise amount requested and include relevant backup data, such as vendor estimates of 
costs or past production levels. Entrepreneurs should not hesitate to request the amount of 
money they need but should not inflate the amount anticipating the financial officer to “talk 
them down.” Remember: Lenders and investors are normally familiar with industry cost 
structures. 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 

ISBN: 0-536-77917-1 




CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 197 

Another important element of the loan or investment proposal is the repayment schedule 
and exit strategy. A lender’s main consideration in granting a loan is the reassurance that 
the applicant will repay, whereas an investor’s major concern is earning a satisfactory rate 
of return. Financial projections must reflect a company’s ability to repay loans and produce 
adequate returns for investors. Without this proof, a request for funding stands little chance 
of being approved. It is necessary for the entrepreneur to produce tangible evidence showing 
the ability to repay loans or to generate attractive returns. The plan should propose an 
exit strategy for investors—how they will get their money back plus an attractive return on 
their investments, such as the option to cash out through a public offering or acquistion by 
a larger company. 

It is beneficial to include an evaluation of the risks of a new venture. Evaluating risk in 
a business plan requires an entrepreneur to walk a fine line, however. Dwelling on everything 
that can go wrong will discourage potential lenders and investors from financing the 
venture. Ignoring the project’s risks makes those who evaluate the plan tend to believe an 
entrepreneur to be either naive, dishonest, or unprepared. The best strategy is to identify the 
most significant risks the venture faces and then to describe the plans the entrepreneur has 
developed to avoid them altogether or to overcome the negative outcome if the event does 
occur. 

Finally, an entrepreneur should have a timetable for implementing the proposed plan. 
This should include a schedule showing the estimated start-up date for the project and noting 
any significant milestones along the way. Entrepreneurs tend to be optimistic; therefore, 
it is important to show why the timetable of events is realistic. The accompanying “Gaining 
the Competitive Edge” feature explains how two simple diagrams can communiate to 
investors both the risks and the rewards of a business venture. 

There is a difference between a working business plan—the one the entrepreneur is using 
to guide the business—and the presentation business plan—the one he or she is using 
to attract capital. Although coffee rings and penciled-in changes in a working plan do not 
matter (in fact, they are a good sign that the entrepreneur is actually using the plan), they 
have no place on a plan going to someone outside the company. A plan is usually the tool 
that an entrepreneur uses to make a first impression on potential lenders and investors. To 
make sure that impression is a favorable one, an entrepreneur should follow these tips: 

. 
Realize that first impressions are crucial. Make sure the plan has an attractive (not 
necessarily expensive) cover. 
. 
Make sure the plan is free of spelling and grammatical errors and “typos.” It is a 
professional document and should look like one. 
. 
Make it visually appealing. Use color charts, figures, and diagrams to illustrate key 
points. Don’t get carried away, however, and end up with a “comic book” plan. 
. 
Leave ample “white space” in the margins. 
. 
Include a table of contents with page numbers to allow readers to navigate the plan 
easily. Reviewers should be able to look through a plan and quickly locate the 
sections they want to review. 
. 
Make it interesting. Boring plans seldom get read. 
. 
Avoid overusing industry jargon and acronyms with which readers may not be familiar. 
. 
A plan must prove that the business will make money. In one survey of lenders, 
investors, and financial advisors, 81 percent said that, first and foremost, a plan 
should prove that a venture will earn a profit.28 Start-ups do not necessarily have to 
be profitable immediately, but sooner or later (preferably sooner), they must make 
money. 
. 
Use computer spreadsheets to generate financial forecasts. They allow entrepreneurs 
to perform valuable “what if” (sensitivity) analysis in just seconds. 
. 
Always include cash flow projections. Entrepreneurs sometimes focus excessively on 
their proposed venture’s profit forecasts and ignore cash flow projections. Although 
profitability is important, lenders and investors are much more interested in cash 
flow because they know that’s where the money to pay them back or to cash them 
out comes from. 
Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


198 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

198 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
Visualizing a Venture’s 
Risks and Rewards 
When reviewing business plans, lenders and investors 
naturally focus on the risks and the rewards of a business 
venture. Rather than taking dozens of pages of text and 
charts to communicate these important concepts to in-
vestors, entrepreneurs can use the following simple 
graphs to accurately convey both the potential risk and 
the returns of their proposed businesses. The first dia-
gram shows the amount of money an entrepreneur 
needs to launch the business, the time required to reach 
the point of positive cash flow, and the anticipated 
amount of the payoff. 
cash flow. Shallow cash holes and short chasms to posi-
tive cash flow are ideal, but businesses can tolerate 
deeper holes and longer cash chasms as long as their 
founders have a plan in place to carry the company 
through until cash flow does become positive. 
The second diagram that follows complements the 
first. It shows investors the range of possible returns and 
the probability of achieving them. In the following ex-
ample, investors can see that there is a 15 percent 
chance that their investments will be complete losses. 
The flat section shows that there is a very small chance 
that investors will lose only a small amount of money. 
The hump in the middle says that investors have a sig-
nificant chance of earning between 15 percent and 
45 percent on their money. (Note the probability of these 
returns is about the same as that of a total loss.) Finally, 
there is a small chance that their initial investments will 
yield a 200 percent rate of return. 
–100% 
(Total Loss) 
15% 45% 
Rate of Return per Year 
Flat 
Section 
200% 
(Big Hit) 
15% 
Probability 
Money 
Time 
Time to Positive Cash Flow 
Potential Reward 
Depth 
of Hole 
In this diagram, the “depth of hole” shows lenders 
and investors how much money it will take to start the 
business, and the length of the chasm shows how long 
it will take to reach positive cash flow. Experienced busi-
ness owners know that cash flow is the lifeblood of any 
business. As we will learn in Chapter 8, “Managing Cash 
Flow,” a company can operate (at least in the short run) 
without earning a profit, but it cannot survive without 
This diagram portrays what investors intuitively un-
derstand: Most companies either fail big or achieve solid 
success. 
Source: Adapted from William A. Sahlman, “How to Write a Great 
Business Plan,” Harvard Business Review, July/August 1997, pp. 98–108. 
. 
The ideal plan is “crisp”—long enough to say what it should, but not so long that it is 
a chore to read. 
. 
Tell the truth. Absolute honesty is always critical when preparing a business plan. 
Business plans are forecasts about the future that an entrepreneur plans to create. One 
expert compares it to “taking a picture of the unknown,” which is a challenging feat indeed! 
As uncertain and difficult to predict as the future may be, an entrepreneur who 
launches a business without a plan, arguing that “trying to forecast the future is pointless,” 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 

ISBN: 0-536-77917-1 


















CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 199 


































































































































































¦ 
Muscling In 
As a youngster in Mexico City, Rodrigo Alvarez enjoyed 
tinkering with the machines at his family’s plastic bag 
plant and helping his father boost production. “That factory 
was my playground,” Alvarez recalls. “That’s where 
I learned to be inventive.” Alvarez is hoping that his inventive 
talent will pay off. 

While working on his master’s degree in bioengineering 
at the University of Pennsylvania, Alvarez created 
a new kind of flexible artificial muscle made of 
plastic. After joining up with two MBA students from the 
university’s Wharton School, Rahul Kothari and Howard 
Katzenberg, Alvarez launched MuscleMorph. The company’s 
objective is to use an artificial muscle to transform 
the prosthetics industry by providing a new way to move 
artificial limbs. 

Much like a human muscle, Alvarez’s device uses 
thousands of strands of microfibers. These strands respond 
to electrical charges from a battery by contracting 
smoothly and silently. In the lab, the founders claim, 
MuscleMorph’s prototype proves as strong and as responsive 
as human muscle. The company holds two provisional 
patents on the technology. 

MuscleMorph’s device comes at a critical time for the 
prosthetics industry. There are about 1.8 million amputees 
in the United States, and these numbers are increasing because 
of a rising incidence of heart disease and diabetes, 
in addition to returning veterans. Several motorized prosthetics 
already are on the market, but they are bulky, 
noisy, and power-hungry machines that cost between 
$50,000 and $100,000. Limbs using MuscleMorph’s 

technology offer more lifelike motion, will cost significantly 
less, and are completely silent, claims Kothari. “No 
one wants to sound like a cyborg,” he says. 

Alverez wrote a business plan and entered it in the 
Fortune Small Business business plan competition. He 
won first place and entered the plan in other business 
plan competitions. After accumulating $24,000 in startup 
capital from contest prizes, Alverez knew he needed 
some serious funding. To speed its path to market, 
MuscleMorph is seeking $1.5 million from angel investors. 
The new venture is not the only company seeking 
to flex its muscle in the market. Artificial Muscle in 
Menlo Park, California, spun off from SRI International, 
is one of the world’s largest contract research institutes, 
and has attracted about $10 million in venture capital. 
Artificial Muscle has a “muscle” product using technology 
similar to MuscleMorph’s. Although Artificial Muscle 
says it does not intend to focus on the prosthetics market, 
but on the consumer electronics, automotive, and 
industrial markets, it is a force that MuscleMorph must 
recognize. As they work to implement their business 
plan, Alvarez and his cofounders believe that Muscle-
Morph has a good shot at putting millions of amputees 
back on their feet. Time will tell if MuscleMorph has the 
strength to accomplish its mission. 

1. What benefits will a business plan offer 
MuscleMorph at this point of the venture’s life? 
2. What sections of the business plan would you 
consider the most critical for MuscleMorph and 
why? 
Source: Patricia B. Gray, “Giving Amputees New Hope,” FSB, 
November 2006, pp. 61–62, 64. 

ISBN: 0-536-77917-1

4. Explain the three tests every 
business plan must pass. 
is misguided. In the Harvard Business Review, William Sahlman says that “the best business 
plans...are like movies of the future. They show the people, the opportunity, and 
the context from multiple angles. They offer a plausible, coherent story of what lies ahead. 
They unfold the possibilities of action and reaction.”29 That is the kind of “movie” an entrepreneur 
should strive to create in a plan. 

Can Your Plan Pass These Tests? 

Preparing a sound business plan clearly requires time and effort, but the benefits greatly exceed 
the costs. Building the plan forces entrepreneurs to evaluate their business ideas in the 
harsh light of reality. It also requires entrepreneurs to assess their ventures’ chances of success 
more objectively. A solid business plan helps prove to outsiders that a business idea 
can be successful. To get external financing, an entrepreneur’s plan must pass three tests 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


200 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

200 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
5. Explain the “five Cs of credit” 
and why they are important to 
potential lenders and investors 
reviewing business plans. 
with potential lenders and investors: the reality test, the competitive test, and the value 
test.30 The first two tests have both an external and an internal component: 

1. Reality test. The external component of the reality test revolves around proving that a 
market for the product or service really does exist. It focuses on industry attractiveness, 
market niches, potential customers, market size, degree of competition, and similar factors. 
Entrepreneurs who pass this part of the reality test prove in the marketing portion of their 
business plans that there is strong demand for their business idea. 
The internal component of the reality test focuses on the product or service itself. 
Can the company really build it for the cost estimates in the business plan? Is it truly different 
from what competitors are already selling? Does it offer customers something of 
value? 

2. Competitive test. The external part of the competitive test evaluates the company’s relative 
position to its key competitors. How do the company’s strengths and weaknesses 
match up with those of the competition? How are existing competitors likely to react when 
the new business enters the market? Do these reactions threaten the new company’s success 
and survival? 
The internal competitive test focuses on the management team’s ability to create a 
company that will gain an edge over existing rivals. To pass this part of the competitive test, 
a plan must prove the quality of the venture’s management team. What other resources does 
the company have that give it a competitive edge in the market? 

3. Value test. To convince lenders and investors to put their money into the venture, a 
business plan must prove to them that it offers a high probability of repayment or an attractive 
rate of return. Entrepreneurs usually see their businesses as good investments because 
they consider the intangibles of owning a business—gaining control over their own destinies, 
freedom to do what they enjoy, and others; lenders and investors, however, look at a 
venture in colder terms: dollar-for-dollar returns. A plan must convince lenders and 
investors that they will earn an attractive return on their money. 
What Lenders and Investors Look 
for in a Business Plan 

To increase their chances of success when using their business plans to attract capital, entrepreneurs 
must be aware of the criteria lenders and investors use to evaluate the creditworthiness 
of entrepreneurs seeking financing. Lenders and investors refer to these criteria 
as the five Cs of credit: capital, capacity, collateral, character, and conditions. 

Capital. A small business must have a stable capital base before any lender will 
grant a loan. Otherwise the lender would be making, in effect, a capital investment in 
the business. Most lenders refuse to make loans that are capital investments because 
the potential for return on the investment is limited strictly to the interest on the loan, 
and the potential loss would probably exceed the reward. In fact, the most common 
reasons that banks give for rejecting small business loan applications are 
undercapitalization or too much debt. Investors also want to make sure that 
entrepreneurs have invested enough of their own money into the business to survive 
the tenuous start-up period. 

Capacity. A synonym for capacity is cash flow. The plan must convince lenders and 
investors of a company’s ability to meet its regular financial obligations and to repay 
the bank loan—and that takes cash. In Chapter 8, you will see that more small 
businesses fail from lack of cash than from lack of profit. It is possible for a company 
to be earning a profit and run out of cash—to be technically bankrupt. Lenders expect 
a business to pass the test of liquidity, especially for short-term loans. Lenders closely 
study a small company’s cash flow position to decide whether it has the capacity 
required to succeed. 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 201 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 201 
6. Understand the keys to making 
an effective business plan 
presentation. 
ISBN: 0-536-77917-1 

Collateral. Collateral includes any assets an entrepreneur pledges to a lender as 
security for repayment of the loan. If an entrepreneur defaults on the loan, the bank 
has the right to sell the collateral and use the proceeds to satisfy the loan. Typically, 
lenders make very few unsecured loans (those not backed by collateral) to business 
start-ups. Bankers view an entrepreneur’s willingness to pledge collateral (personal or 
business assets) as an indication of dedication to making the venture a success. 

Character. Before putting money into a small business, lenders and investors must 
be satisfied with the owner’s character. An evaluation of character is frequently based 
on intangible factors such as honesty, competence, polish, determination, knowledge, 
experience, and ability. Although the qualities judged are abstract, this evaluation 
plays a critical role in a lender’s or investor’s decision. 

Lenders and investors know that most small businesses fail because of poor 
management; therefore they try to avoid extending loans to high-risk entrepreneurs. 
Preparing a solid business plan and a polished presentation can go far in convincing 
potential lenders and investors of an entrepreneur’s ability to manage a company 
successfully. 

Conditions. The conditions surrounding a loan request also affect the owner’s 
chance of receiving funds. Banks consider factors relating to the business operation 
such as potential growth in the market, competition, location, form of ownership, and 
loan purpose. Entrepreneurs should provide this information in an organized format in 
the business plan. Another important condition influencing the banker’s decision is the 
shape of the overall economy, including interest rate levels, the inflation rate, and 
demand for money. Although these factors are beyond an entrepreneur’s control, they 
still are an important component in a banker’s decision. 

The higher a small business scores on these five Cs, the greater is its chance of receiving 
a loan or an investment. Wise entrepreneurs keep this in mind when preparing their 
business plans and presentations. 

Making the Business Plan Presentation 

Lenders and investors are impressed by entrepreneurs who are informed and prepared when 
requesting a loan or investment. When entrepreneurs try to secure funding from lenders or 
investors, the written business plan almost always precedes the opportunity to meet faceto-
face. The written plan must first pass muster before an entrepreneur gets the opportunity 
to present the plan in person. Usually, the time for presenting a business opportunity is 
short, often no more than just a few minutes. (When presenting a plan to a venture capital 
forum, the allotted time is usually less than 20 minutes and rarely more than 30.) When the 
opportunity arises, an entrepreneur must be well prepared. It is important to rehearse, rehearse, 
and then rehearse some more. It is a mistake to begin by leading the audience into 
a long-winded explanation about the technology on which the product or service is based. 
Within minutes most of the audience will be lost, along with the opportunity the entrepreneur 
has of obtaining the necessary financing for the new venture. A business plan presentation 
should cover five basic areas: 

1. 
The company’s background and its products or services. 
2. 
A market analysis and a description of the opportunities it presents. 
3. 
The company’s competitive edge and the marketing strategies it will use to promote 
that edge. 
4. 
The management team and its members’ qualifications and experience. 
5. 
A financial analysis that shows lenders and investors an attractive payback or 
payoff. 
No matter how good a written business plan is, entrepreneurs who stumble through 
the presentation will lose the deal. Entrepreneurs who successfully raise the capital their 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


202 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

202 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
companies need to grow have solid business plans and make convincing presentations of 
them. Some helpful tips for making a business plan presentation to potential lenders and investors 
include: 

. 
Prepare in advance. Good presenters invest in preparing their presentations and 
knowing the points they want to get across to their audiences. 
. 
Demonstrate enthusiasm about the business but don’t be overemotional. 
. 
Focus on communicating the dynamic opportunity your idea offers and how you plan 
to capitalize on it. Fight the temptation to launch immediately into a lengthy 
discourse about the details of your product or service or how much work it took to 
develop it. Otherwise, you’ll never have the chance to describe the details to lenders 
and investors. 
. 
Hook investors quickly with an up-front explanation of the new venture, its 
opportunities, and the anticipated benefits to them. 
. 
Use visual aids. They make it easier for people to follow your presentation. Don’t 
make the mistake of relying on visuals to communicate the entire message, however. 
Visual aids should punctuate your spoken message and focus the audience’s attention 
on what you are saying. 
. 
Hit the highlights; specific questions will bring out the details later. Don’t get caught 
up in too much detail in early meetings with lenders and investors. 
. 
Keep the presentation “crisp” just like your business plan. Otherwise, says one 
experienced investor, “Information that might have caused an investor to bite gets 
lost in the endless drone.”31 
. 
Avoid the use of technical terms that will likely be above most of the audience. Do at 
least one rehearsal before someone who has no special technical training. Tell that 
person to stop you anytime he or she does not understand what you are talking about. 
When this occurs (and it likely will), rewrite that portion of your presentation. 
. 
Remember that every potential lender and investor you talk to is thinking “What’s in 
it for me?” Be sure to answer that question in your presentation. 
. 
Close by reinforcing the nature of the opportunity. Be sure you have sold the benefits 
the investors will realize when the business is a success. 
. 
Be prepared for questions. In many cases, there is seldom time for a long “Q&A” 
session, but interested investors may want to get you aside to discuss the details of 
the plan. 
. 
Anticipate the questions the audience is most likely to ask and prepare for them in 
advance. 
. 
Be sensitive to the issues that are most important to lenders and investors by reading 
the pattern of their questions. Focus your answers accordingly. For instance, some 
ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


















































































































































































ISBN: 0-536-77917-1 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 203 

investors may be interested in the quality of the management team whereas others 

are more interested in marketing strategies. Be prepared to offer details on either. 

. 
Follow up with every investor to whom you make a presentation. Don’t sit back and 
wait; be proactive. They have what you need—investment capital. Demonstrate that 
you have confidence in your plan and have the initiative necessary to run a business 
successfully. 
Conclusion 

Although there is no guarantee of success when launching a business, the best way to insure 
against failure is to conduct a feasibility analysis and, if that analysis is positive, to create 
a business plan. A good plan serves as a strategic compass that keeps a business on 
course as it travels into an uncertain future. A solid business plan is essential to raising the 
capital needed to start a business; lenders and investors demand it. “There may be no easier 
way for an entrepreneur to sabotage his or her request for capital than by failing to produce 
a comprehensive, well-researched, and, above all, credible business plan,” says one 
small business expert.32 Of course, building a plan is just one step along the path to launching 
a business. Creating a successful business requires entrepreneurs to put the plan into action. 
The remaining chapters in this book focus on putting your business plan to work. 

Suggested Business Plan Format 

Although every company’s business plan will be unique, reflecting its individual circumstances, 
certain elements are universal. The following outline summarizes these components. 

I. Executive Summary (not to exceed two pages) 
A. Company name, address, and phone number 
B. Name(s), addresses, and phone number(s) of all key people 
C. Brief description of the business, its products and services, and the customer 
problems they solve 
D. Brief overview of the market for your products and services 
E. Brief overview of the strategies that will make your firm a success 
F. 
Brief description of the managerial and technical experience of key people 
G. Brief statement of the financial request and how the money will be used 
H. Charts or tables showing highlights of financial forecasts 
II. Vision and Mission Statement 
A. Entrepreneur’s vision for the company 
B. “What business are we in?” 
C. Values and principles on which the business stands 
D. What makes the business unique? What is the source of its competitive 
advantage? 
III. Company History (for existing businesses only) 
A. Company founding 
B. Financial and operational highlights 
C. Significant achievements 
IV. Industry Profile and Overview 
A. Industry analysis 
1. Industry background and overview 
2. Major customer groups 
3. Regulatory restrictions, if any 
4. Significant trends 
5. Growth rate 
6. Barriers to entry and exit 
7. Key success factors in the industry 
8. Outlook for the future 
B. Stage of growth (start-up, growth, maturity) 
Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


204 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

204 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
V. Business Strategy 
A. Desired image and position in market 
B. Company goals and objectives 
1. Operational 
2. Financial 
3. Other 
C. SWOT analysis 
1. Strengths 
2. Weaknesses 
3. Opportunities 
4. Threats 
D. Competitive strategy 
1. Cost leadership 
2. Differentiation 
3. Focus 
VI. Company Products and Services 
A. Description 
1. Product or service features 
2. Customer benefits 
3. Warranties and guarantees 
4. Uniqueness 
B. Patent or trademark protection 
C. Description of production process (if applicable) 
1. Raw materials 
2. Costs 
3. Key suppliers 
4. Lead times 
D. Future product or service offerings 
VII. Marketing Strategy 
A. Target market 
1. Problem to be solved or benefit to be offered 
2. Complete demographic profile 
3. Other significant customer characteristics 
B. Customers’ motivation to buy 
C. Market size and trends 
1. How large is the market? 
2. Is it growing or shrinking? How fast? 
D. Personal selling efforts 
1. Sales force size, recruitment, and training 
2. Sales force compensation 
3. Number of calls per sale 
4. Amount of average sale 
E. Advertising and promotion 
1. Media used—reader, viewer, listener profiles 
2. Media costs 
3. Frequency of usage 
4. Plans for generating publicity 
F. Pricing 
1. Cost structure 
a. Fixed 
b. Variable 
2. Desired image in market 
3. Comparison against competitors’ prices 
4. Discounts 
5. Gross profit margin 
ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 205 

CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 205 
ISBN: 0-536-77917-1 

G. Distribution strategy 
1. Channels of distribution used 
2. Sales techniques and incentives for intermediaries 
H. Test market results 
1. Surveys 
2. Customer feedback on prototypes 
3. Focus groups 
VIII. 
Location and Layout 
A. Location 
1. Demographic analysis of location versus target customer profile 
2. Traffic count 
3. Lease/Rental rates 
4. Labor needs and supply 
5. Wage rates 
B. Layout 
1. Size requirements 
2. Americans with Disabilities Act compliance 
3. Ergonomic issues 
4. Layout plan (suitable for an appendix) 
IX. Competitor Analysis 
A. Existing competitors 
1. Who are they? Create a competitive profile matrix 
2. Strengths 
3. Weaknesses 
B. Potential competitors: Companies that might enter the market 
1. Who are they? 
2. Impact on your business if they enter 
X. Description of Management Team 
A. Key managers and employees 
1. Their backgrounds 
2. Experience, skills, and know-how they bring to the company 
B. Résumés of key managers and employees (suitable for an appendix) 
C. Future additions to management team 
D. Board of directors or advisers 
XI. Plan of Operation 
A. Form of ownership chosen and reasoning 
B. Company structure (organization chart) 
C. Decision-making authority 
D. Compensation and benefits packages 
XII. 
Financial Forecasts (suitable for an appendix) 
A. Key assumptions 
B. Financial statements (year 1 by month, years 2 and 3 by quarter) 
1. Income statement 
2. Balance sheet 
3. Cash flow statement 
C. Breakeven analysis 
D. Ratio analysis with comparison to industry standards (most applicable to existing 
businesses) 
XIII. 
Loan or Investment Proposal 
A. Amount requested 
B. Purpose and uses of funds 
C. Repayment or “cash out” schedule (exit strategy) 
D. Timetable for implementing plan and launching the business 
XIV. 
Appendices (Supporting documentation, including market research, financial statements, 
organization charts, résumés, and other items.) 
Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


206 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

206 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
Chapter Review 

1. Describe the steps in conducting a feasibility analysis. 
• 
A feasibility analysis consists of three interrelated components: (1) an industry 
and market feasibility analysis, (2) a product or service feasibility analysis, and 
(3) a financial feasibility analysis. The goal of the feasibility analysis is to determine 
whether or not an entrepreneur’s idea is a viable foundation for creating 
a successful business. 
2. Explain the benefits of an effective business plan. 
• 
A business plan serves two essential functions. First and most important, it 
guides the company’s operations by charting its future course and devising a 
strategy for following it. The second function of the business plan is to attract 
lenders and investors. Applying for loans or attempting to attract investors 
without a solid business plan rarely attracts needed capital. Rather, the best 
way to secure the necessary capital is to prepare a sound business plan. 
3. Describe the elements of a solid business plan. 
• 
Although a business plan should be unique and tailor-made to suit the particular 
needs of a small company, it should cover these basic elements: an executive 
summary, a mission statement, a company history, a business and industry 
profile, a description of the company’s business strategy, a profile of its products 
or services, a statement explaining its marketing strategy, a competitor 
analysis, owners’ and officers’ résumés, a plan of operation, financial data, and 
the loan or investment proposal. 
4. Explain the three tests every business plan should pass. 
• 
Reality test. The external component of the reality test revolves around proving 
that a market for the product or service really does exist. The internal component 
of the reality test focuses on the product or service itself. 
• 
Competitive test. The external part of the competitive test evaluates the company’s 
relative position to its key competitors. The internal competitive test focuses 
on the management team’s ability to create a company that will gain an 
edge over existing rivals. 
• 
Value test. To convince lenders and investors to put their money into the venture, 
a business plan must prove to them that it offers a high probability of repayment 
or an attractive rate of return. 
5. Explain the “5 Cs of credit” and why they are important to potential lenders and 
investors reading business plans. 
• 
Small business owners need to be aware of the criteria bankers use in evaluating 
the creditworthiness of loan applicants—the five Cs of credit: capital, capacity, 
collateral, character, and conditions. 
• 
Capital—Lenders expect small businesses to have an equity base of investment 
by the owner(s) that will help support the venture during times of financial 
strain. 
• 
Capacity—A synonym for capacity is cash flow. The bank must be convinced 
of the firm’s ability to meet its regular financial obligations and to repay the 
bank loan, and that takes cash. 
• 
Collateral—Collateral includes any assets the owner pledges to the bank as security 
for repayment of the loan. 
• 
Character—Before approving a loan to a small business, the banker must be 
satisfied with the owner’s character. 
• 
Conditions—The conditions (interest rates, the health of the nation’s economy, 
industry growth rates, etc.) surrounding a loan request also affect the owner’s 
chance of receiving funds. 
6. Understand the keys to making an effective business plan presentation. 
• 
Lenders and investors are favorably impressed by entrepreneurs who are informed 
and prepared when requesting a loan or investment. 
ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 207 
CHAPTER 6 • CONDUCTING A FEASIBILITY ANALYSIS AND CRAFTING A WINNING BUSINESS PLAN 207 
• 
Tips include: Demonstrate enthusiasm about the venture, but don’t be overemotional; 
“hook” investors quickly with an up-front explanation of the new 
venture, its opportunities, and the anticipated benefits to them; use visual aids; 
hit the highlights of your venture; don’t get caught up in too much detail in 
early meetings with lenders and investors; avoid the use of technological terms 
that will likely be above most of the audience; rehearse your presentation before 
giving it; close by reinforcing the nature of the opportunity; and be prepared 
for questions. 
Discussion Questions 
1. What does a feasibility analysis encompass and that a market for the product or service really does 
what value might it provide? exist? 
2. Why should an entrepreneur develop a business 6. How would you prepare to make a formal presentaplan? 
tion of your business plan to a venture capital 
3. Why do entrepreneurs who are not seeking external forum? 
financing need to prepare business plans? 7. What are the five C’s of credit? How do lenders 
4. Describe the major components of a business plan. and investors use them when evaluating a request 
5. How can an entrepreneur seeking funds to launch a for financing? 
business convince potential lenders and investors 

This chapter begins 
with a discussion of 
the feasibility analysis 
to test the viability 
of your business 

ISBN: 0-536-77917-1 

concept. The following exercises will assist you in validating 
your business idea. You will also begin to work through 
the situation analysis part of the plan to enable you to better 
understand the market. Be as objective as possible as you 
work through these exercises. Rely on your ability to gather 
information and make realistic assessments and projections 
as the exercises require. 

On the Web 

Go to the Companion Website at www.prenhall.com/ 
scarborough and click on the “Business Plan Resource” tab. 
If you have not yet done so, find the Standard Industry Classification 
Code associated with your industry. You will find 
a link in the SIC Code information that will connect you to 
a resource to help you. Explore the information and links 
that are available on that site to learn more about the size of 
the industry, its growth, trends, and issues. Apply Porter’s 
five forces model based on the the industry and its SIC code. 
Assess the power of the five forces—the bargaining power 
of buyers, the power of suppliers, threat of new entrants, the 
threat of substitute products, and the level of rivalry. Again, 
you will find additional information on Porter’s five forces 
model in the “Strategy” section of this same site. Look for 
information on the Web that may assist you with this analy


sis. Based on this information, how attractive do you consider 
this industry? How would you assess the opportunity 
this industry presents? Does this information encourage you 
to become involved in this industry, or does it highlight significant 
challenges? 

In the Software 

Your text may have come with “Business Feasibility Plan 
Pro.” This software walks you through the essential steps of 
assessing the feasibility of your business concept. This software 
will address the overall feasibility of the product or 
service, help conduct an industry assessment, review management 
skills, and guide you through a preliminary financial 
analysis. The software provides “feedback-based” input 
in four components of the feasibility analysis with a numerical 
assessment. You can then export this information directly 
into Business Plan Pro. 

Business Plan Pro is another resource to help you assess 
the feasibility of your business concept in the areas of product, 
service, market organization, and financial feasibility. 
For example, you can enter the initial capital requirements 
for the business in the start-up and expenses section. The 
sales forecast will help forecast revenues and help to determine 
the anticipated return on investment. If you have these 
estimates available, enter that information into your plan. 
Now look at the profit and loss statement. At what point, if 
any, does that statement indicate that your venture will begin 
generating a profit? In what year does that occur? Do 
you find that amount of time acceptable? If you are seeking 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc. 


208 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 

208 SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS 
investors, will they find that schedule attractive? Is the return 
on investment promising, and does this venture merit 
taking on the associated level of risk? We will talk more 
about these sections of the plan in the remaining chapters. 

Review the start-up sample plans called “IntelliChild. 
com” and “Fantastic Florals.” 

1. 
What was the total amount of the start-up investment 
for each of these plans? 
2. 
At what point, in months or years, did the plan indicate 
that it would begin making a profit? 
3. 
What was the total profit projected in the following 
year after breakeven occurred? 
4. 
Based on the breakeven point, which of these ventures 
is most attractive? 
5. 
Based on the projections by year three, which plan appears 
to offer the greatest financial potential? 
6. 
How does the scale and potential of these two opportunities 
compare to those in your plan? 
Building Your Business Plan 

Review the information in the “Market Analysis” section. 
Continue to add information in this section based on the outline. 
Go to the “Sales Strategy” section and find information 
to help project expenses. You may enter the numbers in the 
table yourself or use the wizard that will pop up to assist you 
with this process. You may click and drag the visual graph 
to build that forecast base, or enter the actual data. If the 
business is a start-up venture, expenses will include those 
figures along with ongoing expense projections. At this 
point, do not worry about the accuracy of the projections. 
Enter the estimates you have even if they are just “rough” 
estimates; you can change them at any time. Look at the 
profit and loss statement. At what point in time will your 
business begin making a profit? Do you find this profit picture 
to be acceptable? 

As you build your plan, check to see that the outline 
and structure of the plan tells your story. Although the outline 
in Business Plan Pro is not identical to the outline presented 
in the chapter, right clicking on the outline allows 
you to move, add, and delete any topic you choose to modify 
the plan outline. 

ISBN: 0-536-77917-1 

Effective Small Business Management: An Entrepreneurial Approach, Ninth Edition, by Norman M. Scarborough, Douglas L. Wilson and 
Thomas W. Zimmerer. Published by Prentice Hall. Copyright © 2009 by Pearson Education, Inc.