The Business Plan Visualizing the Dream

Chapter 6—The Business Plan: Visualizing the Dream TRUE/FALSE 1. As the game plan for a new venture, the business plan focuses on the entrepreneur's bank account and other cash sources. ANS: F The business plan crystallizes the hope and dreams that motivated the entrepreneur to propose the start of a new business. PTS: 1 REF: p. 165 NAT: Communication | Finance OBJ: 6-1 TYPE: C 2. The business plan is essentially a selling document. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 166 OBJ: 6-1 TYPE: C 3. The business plan is used primarily to aid in the development of relationships with outsiders and not so much with insiders. ANS: F The business plan is used for both outsiders and insiders. PTS: 1 REF: p. 166 NAT: Communication | Dynamics OBJ: 6-1 TYPE: C 4. One of the primary functions of a business plan is to serve as a selling document to convince key individuals that the venture has real potential. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 166 OBJ: 6-1 TYPE: C 5. A business plan is a written document that sets out the basic idea underlying a business and its related startup considerations. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 165 OBJ: 6-1 TYPE: D 6. A business plan should describe where the entrepreneur is, where they want to go with the company, and how they plan to do so. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 165 OBJ: 6-1 TYPE: D 7. A business plan is used to provide a statement of goals and strategies for use by company outsiders, and aid in the development of relationships with insiders. ANS: F The plan provides goals and strategies for insiders to aid in development of relationships with outsiders. PTS: 1 REF: p. 166 NAT: Communication | Dynamics OBJ: 6-1 TYPE: C 8. A business plan should always be written before deciding to go forward with a startup business idea. ANS: F A business plan is not always needed as what matters is not writing a plan, but implementing it. PTS: 1 REF: p. 167-168 NAT: Communication | Value Creation OBJ: 6-2 TYPE: C 9. A written business plan helps to ensure systematic, complete coverage of the important factors to be considered in starting a new business. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 168 OBJ: 6-2 TYPE: C 10. Once the decision is made to prepare a business plan, it should always be a comprehensive plan. ANS: F A dehydrated plan is best for situations of high uncertainty in the environment or when timing is critical to take advantage of a new opportunity. PTS: 1 REF: p. 169 NAT: Communication | Value Creation OBJ: 6-2 TYPE: C 11. An extensive business plan that is not followed is more valuable than no business plan at all. ANS: F The purpose of the plan is to cause action not write a plan. PTS: 1 REF: p. 167 NAT: Communication | Value Creation OBJ: 6-2 TYPE: C 12. One advantage of preparing a formal written plan for a business is the discipline provided for the prospective entrepreneur. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 168 OBJ: 6-2 TYPE: C 13. A business plan may not be needed for very small companies with owners who have no plans for significant growth. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 169 OBJ: 6-2 TYPE: C 14. Time and money are factors that affect the extent of business plan preparation. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 168 OBJ: 6-2 TYPE: C 15. The executive summary of a business plan presents a firm's history and its form of organization. ANS: F It is the company description (not the executive summary) that contains this information. PTS: 1 REF: p. 172 NAT: Communication | Value Creation OBJ: 6-3 TYPE: D 16. The business plan should never include photographs because these tend to make the plan look unprofessional. ANS: F Photographs could be included in the appendix of supporting documents to expand the reader’s understanding of the plan. PTS: 1 REF: p. 179 NAT: Communication | Value Creation OBJ: 6-3 TYPE: C 17. The marketing plan should identify user benefits and show evidence of consumer interest. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 177 OBJ: 6-3 TYPE: D 18. Though all financial statements are important, the cash flow statement deserves special attention. ANS: T PTS: 1 NAT: Communication | Finance REF: p. 179 OBJ: 6-3 TYPE: C 19. Pro forma financial statements reflect the past financial performance of a firm. ANS: F Pro forma financial statements are projections of a firm's future financial situation. PTS: 1 REF: p. 179 NAT: Communication | Finance OBJ: 6-3 TYPE: D 20. The financial plan section of a business plan should include balance sheets and income statements on an annual basis and cash flow statements on a monthly basis, all projected out for 2-3 years. ANS: F The company’s financial statements are presented for at least three years and preferably up to five years. The forecasts ideally include balance sheets, income statements, and statements of cash flows on an annual basis for three to five years, as well as cash budgets on a monthly basis for the first year and on a quarterly basis for the second and third years. PTS: 1 REF: p. 179 NAT: Communication | Finance OBJ: 6-3 TYPE: D 21. The executive summary is often the most important section of the business plan. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 173 OBJ: 6-3 TYPE: C 22. Business plans should be prepared so that they are attractive in appearance and well organized. ANS: T PTS: 1 REF: p. 183 OBJ: 6-4 TYPE: C NAT: Communication | Value Creation 23. Business plans should provide facts to support the statements and not just tell a story. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 181 OBJ: 6-4 TYPE: C 24. Describing a product or service should be in lay terms even if the product is technical in nature. ANS: T PTS: 1 NAT: Communication | Value Creation REF: p. 173-174 OBJ: 6-4 TYPE: C 25. Even if the business plan reveals sensitive information (e.g., details of an advanced technology or the specifics of a marketing plan), prospective investors can be trusted with that knowledge. ANS: F Highly sensitive information should not be included in the business plan; the entrepreneur should submit only a summary of the plan to avoid exposing important details. PTS: 1 REF: p. 183 NAT: Communication | Dynamics OBJ: 6-4 TYPE: C 26. The prospective investor usually plays the role of the encourager, often seeing market potential in a business plan that others overlook. ANS: F The prospective investor tends to play the role of the skeptic, thinking more about what could go wrong than about what could go right. PTS: 1 REF: p. 182 NAT: Communication | Dynamics OBJ: 6-4 TYPE: C 27. Because prospective investors receive so many business plans, they cannot take time to review each in any detailed fashion. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 181 OBJ: 6-4 TYPE: C 28. Investors are more product-oriented than market-oriented. ANS: F Venture capitalists are more market-oriented than product-oriented. PTS: 1 REF: p. 181 NAT: Communication | Dynamics OBJ: 6-4 TYPE: C 29. A loss leader is a revenue stream where products are sold at a loss to hopefully create demand in a more profitable revenue stream. ANS: F PTS: 1 NAT: Communication | Finance REF: p. 186 OBJ: 6-5 TYPE: C 30. A business model explains how a business will generate profit and cash flow from its revenue streams considering its cost structure and investment size. ANS: T PTS: 1 NAT: Communication | Finance REF: p. 184 OBJ: 6-5 TYPE: D 31. A component of the business model that provides a framework for estimating the nature and types of costs and expenses a firm may incur is the maximum investment. ANS: F The cost structure provides the estimate of costs and expenses. PTS: 1 REF: p. 185 NAT: Communication | Finance OBJ: 6-5 TYPE: D 32. A restaurant that provides catering would have a single stream of revenue. ANS: F This example is a multiple stream revenue model as income is derived from both daily operations and from catering. PTS: 1 REF: p. 187 NAT: Communication | Finance OBJ: 6-5 TYPE: A 33. A computer may properly be used in a new business operation but not in preparation of the business plan. ANS: F Computers can facilitate the preparation of a business plan. PTS: 1 REF: p. 188 OBJ: 6-6 TYPE: C NAT: Technology | Information Technologies 34. With the right assistance from professional sources (e.g., attorneys, accounting firms, incubator services), the entrepreneur can avoid direct involvement in developing the business plan. ANS: F The entrepreneur must be the primary planner because his or her ideas are essential to producing a business plan that is realistic and believable. PTS: 1 REF: p. 190 NAT: Communication | Dynamics OBJ: 6-6 TYPE: C 35. Incubator organizations can provide advice on structuring a new business. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 189 OBJ: 6-6 TYPE: C 36. Most major accounting firms can guide the development of the written business plan. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 189 OBJ: 6-6 TYPE: C 37. Writing an effective plan is more important for internal purposes than for persons outside of the firm. ANS: F It is important for both internal and external purposes. PTS: 1 REF: p. 190 NAT: Communication | Dynamics OBJ: 6-7 TYPE: C 38. A good plan will be a means to an end. ANS: F The plan is an ongoing process that is as important as the final outcome. PTS: 1 REF: p. 190 NAT: Communication | Value Creation OBJ: 6-7 TYPE: C 39. A business plan should represent the entrepreneur’s vision and goals for the proposed company. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 190 OBJ: 6-7 TYPE: C 40. Because Jane has written numerous business plans for the same type of proposed business, she may not have to spend as much time on the plan as compared to someone who has never written a plan. ANS: T PTS: 1 NAT: Communication | Dynamics REF: p. 190 OBJ: 6-7 TYPE: A REF: p. 165 OBJ: 6-1 TYPE: D MULTIPLE CHOICE 1. A business plan is best described as a a. crystal ball picture. b. money plan. c. contingency plan. d. game plan. ANS: D PTS: 1 NAT: Communication | Value Creation 2. Identify a basic objective for a business plan. a. Identify the nature and context of the business opportunity. b. Outline the approach the entrepreneur intends to use to exploit the opportunity. c. Recognize factors that will determine whether or not the venture will be successful. d. All of the above are basic objectives. ANS: D PTS: 1 NAT: Communication | Value Creation REF: p. 166 OBJ: 6-1 TYPE: C 3. The primary outside users of business plans are a. employees. b. investors and lenders. c. customers. d. government agencies. ANS: B PTS: 1 NAT: Communication | Dynamics REF: p. 166 OBJ: 6-1 TYPE: C 4. Which group would be the most interested in a business plan for a new venture? a. b. c. d. Customers Lenders Supervisors The Internal Revenue Service ANS: B PTS: 1 NAT: Communication | Dynamics REF: p. 166 OBJ: 6-1 TYPE: C REF: p. 169 OBJ: 6-1 TYPE: D 5. A business plan is a. a legal document for raising capital. b. a guide for future development. c. a selling document. d. an offering memorandum. ANS: C PTS: 1 NAT: Communication | Value Creation 6. Jill is writing a business plan for a small home based operation. If well written, the business plan will assist her in determining if a. the business aligns with personal goals. b. an investor would be a perfect fit for the proposed company. c. suppliers can be found for the operation. d. outsiders can be made into insiders. ANS: A PTS: 1 NAT: Communication | Dynamics REF: p. 166 OBJ: 6-1 TYPE A 7. The document that assists an entrepreneur and the management team focus on important issues and activities is a. the organization chart. b. the budget. c. the sales analysis. d. the business plan. ANS: D PTS: 1 NAT: Communication | Dynamics REF: p. 168 OBJ: 6-2 TYPE: C 8. Which outsider does not need to read a new venture business plan? a. state comptroller b. banker c. individual investor d. venture capitalist ANS: A PTS: 1 NAT: Communication | Dynamics REF: p. 169 OBJ: 6-2 TYPE: C 9. The dehydrated plan would have the least amount of information about a. pricing. b. supporting documentation. c. competition. d. distribution channels. ANS: B PTS: 1 NAT: Communication | Value Creation REF: p. 169 OBJ: 6-2 TYPE: C 10. Capital-constrained entrepreneurs cannot afford to do much prior analysis and research because a. the affordability of properly conducted research is beyond the means at their disposal. b. the costs of any mistakes are lower than the risks of missing out on opportunistic actions. c. the limited profit potential and high uncertainty of the opportunity they pursue may make the benefits low compared to the costs. d. potential competitors could quickly discern the entrepreneurs’ intentions and motives from their research. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 168 OBJ: 6-2 TYPE: C 11. What should a feasibility analysis show before the entrepreneur moves to the business plan step? a. strong market potential b. an attractive industry c. the right team to execute the plan d. All of the above should be should be evident. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 170 OBJ: 6-2 TYPE: D 12. When making a decision regarding the extent of planning, an entrepreneur should consider the a. preferences of employees. b. complexity of the environment. c. level of uncertainty of the venture. d. competitiveness of the product. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 169 OBJ: 6-2 TYPE: C 13. Because Tom is planning a new business with a limited timeframe to capitalize on an opportunity, the best solution would be a ____ business plan. a. comprehensive b. narrative c. subjective d. dehydrated ANS: D PTS: 1 NAT: Communication | Value Creation REF: p. 169 OBJ: 6-2 TYPE: A 14. The most beneficial plan when facing significant change in the external environment is a a. comprehensive. b. narrative. c. subjective. d. dehydrated. ANS: A PTS: 1 NAT: Communication | Value Creation REF: p. 169-170 OBJ: 6-2 TYPE: C 15. Which objective is not critical for a business plan? a. It identifies the nature and context of the business opportunity. b. It outlines the approaches other entrepreneurs have taken in the same industry. c. It outlines the approach the entrepreneur plans to utilize in exploiting the opportunity. d. It highlights factors that will determine whether the venture will be successful. ANS: B PTS: 1 NAT: Communication | Value Creation REF: p. 166 OBJ: 6-3 TYPE: C 16. A business plan should generally project financial and operational aspects of the proposed business for the first a. six months. b. one year. c. three to five years. d. seven years. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 179 OBJ: 6-3 TYPE: C 17. Prior to writing a business plan, the entrepreneur should have completed a(n) a. feasibility study. b. executive summary. c. financial projections. d. mini-plan. ANS: A PTS: 1 NAT: Communication | Value Creation REF: p. 170 OBJ: 6-3 TYPE: C 18. John is a prospective entrepreneur who has just presented his business plan to a venture capitalist, enthusiastically pointing out the unique features of a new invention he is promoting. The most likely question in the venture capitalist's mind is: a. How strong is the patent protection? b. How costly will it be to produce the product? c. What is the demand for the product? d. What management skills does this venture have? ANS: C PTS: 1 NAT: Communication | Dynamics REF: p. 181 OBJ: 6-3 TYPE: A 19. An overview of the significant points of a business plan appear in the a. financial plan. b. general company description. c. executive summary. d. operating plan. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 173 OBJ: 6-3 TYPE: C 20. The executive summary part of a business plan should be written a. first. b. last. c. before the finance plan. d. before the legal plan. ANS: B PTS: 1 NAT: Communication | Value Creation REF: p. 173 OBJ: 6-3 TYPE: C 21. It is most important that the marketing plan a. describe how the firm will reach and service customers. b. show the degree of patent or copyright protection. c. summarize the location of potential customers. d. identify distribution channels. ANS: A PTS: 1 NAT: Communication | Value Creation REF: p. 177 OBJ: 6-3 TYPE: C 22. In a business plan, the legal form of organization would be discussed in the a. financial plan. b. company description. c. executive summary. d. marketing plan. ANS: B PTS: 1 NAT: Communication | Value Creation REF: p. 174 OBJ: 6-3 TYPE: C 23. Ideally, investors like a business plan that shows evidence of a. a management staff that will minimize overhead. b. a well-balanced managerial team. c. an entrepreneur who has studied management. d. an entrepreneur who will spend more time managing than selling. ANS: B PTS: 1 NAT: Communication | Dynamics REF: p. 178-179 OBJ: 6-3 TYPE: C 24. In a business plan, the discussion of the management plan should detail a. the proposed venture's organizational structure. b. profiles of employee needs during the first three years of operation. c. the projected growth of the proposed venture. d. the intended distribution of ownership in the firm. ANS: A PTS: 1 NAT: Communication | Dynamics REF: p. 178 OBJ: 6-3 TYPE: C 25. In a business plan, the facilities and location of the proposed venture are described in the a. executive summary. b. management plan. c. operating plan. d. product and service plan. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 177 OBJ: 6-3 TYPE: C 26. In a business plan, the key statement in the financial plan is the a. break-even analysis. b. estimate of returns and allowances. c. salary expense statement. d. cash flow statement. ANS: D PTS: 1 NAT: Communication | Finance REF: p. 179 OBJ: 6-3 TYPE: C 27. In considering the content of a business plan, an entrepreneur should think first and foremost about a. how to present factors related to the opportunity. b. formulating effective strategies and financial projections. c. who will be reviewing the plan. d. how to protect the confidentially of the plan. ANS: A PTS: 1 NAT: Communication | Value Creation REF: p. 170 OBJ: 6-3 TYPE: C 28. The type of executive summary that briefly covers all aspects of the business plan giving each topic relatively equal treatment is the ____ executive summary. a. narrative b. synopsis c. dehydrated d. comprehensive ANS: B PTS: 1 NAT: Communication | Value Creation REF: p. 174 OBJ: 6-3 TYPE: D 29. The narrative form of an executive summary a. is more straightforward than the synopsis form. b. allows the author to include hyperbole that builds enthusiasm. c. is a better format for ventures that have one dominant advantage. d. gives each topic relatively equal treatment. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 174 OBJ: 6-3 TYPE: C 30. A potential investor's single goal is to a. make as much money as possible. b. minimize taxes and minimize losses. c. avoid risk at all costs. d. maximize returns while minimizing personal risk. ANS: D PTS: 1 NAT: Communication | Dynamics REF: p. 181 OBJ: 6-4 TYPE: C 31. When describing the product in the business plan, the entrepreneur should a. use technical terms. b. state that product will sell itself. c. use layman terms. d. assume that others will like the product. ANS: C PTS: 1 NAT: Communication | Value Creation REF: p. 183 OBJ: 6-4 TYPE: C 32. When dealing with weaknesses in a business plan, the entrepreneur should a. use technical jargon to confuse reader. b. ignore the weakness as this might not attract investors. c. assume that investors will not find them. d. be straightforward with them and have an action plan. ANS: D PTS: 1 NAT: Communication | Value Creation REF: p. 182 OBJ: 6-4 TYPE: C 33. In writing the business plan, an entrepreneur should remember that a. interested investors will commit the time necessary to fully understand the proposed venture. b. certain features will be appealing to investors, while others are distinctly unappealing. c. investors are too busy to read through the business plans that come across their desk. d. the quality of this plan has little bearing on the potential for success in the startup. ANS: B PTS: 1 NAT: Communication | Value Creation REF: p. 181 OBJ: 6-4 TYPE: C