Preparing a

Technology
Business
Plan
How to use this Booklet


This booklet is intended to help you prepare a
viable business plan which is appropriate for
technology based business ventures. It is part
of a series of documents and tools produced
by LIFT.

LIFT aims to build a bridge between those
requiring financing for the development of
commercial ventures based on the results of
their research and the finance world.




Preparing a Technology Business Plan



8 The Executive Summary

9 The Market

13 The Product

15 The Business and its trading position

16 Marketing Strategy

17 Manufacturing

18 Forecasts of sale, cash flow and break-even

21 Management and control of the business

23 The Required Financing Package

24 A Case Study Business Plan for Hephaestus Materials Ltd

25 Executive Summary

26 The Market

29 The Product and Process

30 The Business of Hephaestus

33 The Marketing Strategy

38 The Required Financial Package




2

PREPARING A TECHNOLOGY BUSINESS PLAN

INTRODUCTION OR HOW TO USE THIS BOOKLET

This booklet has been designed to help individuals in technology research or companies prepare a
viable business plan.

For this reason it does not follow the standard reference works on business planning which are not on
the whole intended to help R&D personnel with the subject of high technology business planning. It is
recommended that the reader gathers information from the various sources mentioned in this booklet
and seeks advice on how to proceed further from the LIFT helpdesk.

This booklet has four main sections, namely: an introduction, a practical guide to the theory and
practice of preparing a business plan, a case study to illustrate the theory and a list of information
sources to obtain further help in preparing the plan.

The section on theory and practice gives a guide to key topics for the plan, each followed by a
checklist of the points to be included in the plan. The checklists are not necessarily exhaustive but are
designed to help you compile the necessary material for the plan.

Let us assume that you are the project leader of a company or department which has developed either
a new material or a new processing method and you now wish to commercialise the results of the
research work.

You are probably asking six simple but profound questions about this guide, namely:

1. Why do we need a business plan?
2. When will we need it?
3. Who will be required to give input?
4. What will be needed to prepare the plan?
5. How do we go about it?
6. Where (failing any gaps in the above) do we get more information?

Although technical and scientific personnel may have already thought of the answers to these
problems, the most critical of all is perhaps When will we need the plan?

Much of the thinking about preparing a business plan to exploit results comes too late in the project.
Many projects run several years before project leaders begin to contact commercial, production or
marketing partners about exploiting the research results. Discussion with commercial staff at an early
stage is more likely to help exploitation than hinder the research effort and may identify unrealistic
assumptions about the market.

If a research institute employs you, you may require the assistance of outside marketing consultants to
help prepare aspects of the plan. If the plan is highly complex it may be necessary for you to sub-
contract the writing of the document but the input must come from all those who will have to
implement the plan. If there is no ownership of the input, the output will be disowned or implemented
in a disinterested manner.

1. Why Do We Need a Business Plan?
The primary objective in preparing a business plan is to set out a convincing case to secure financing,
internal or external, for the start-up or expansion of a business venture.

3
Many projects fail to be fully exploited because of poor communication amongst those expected to
carry out that exploitation. By preparing a business plan the originators, usually the R&D or Technical
Development Departments can begin to talk the language of commercialisation. It is the use of
commercial language which will help exponents of technology get their message across to non-
technologists and help demonstrate the value of R&D to other parts of the business or to sell an idea
to an outside backer. The business plan is effectively the first sales brochure for a new product or
process and is as necessary as the need for patents or publication in a scientific journal.

With any communication instrument it is vital to project a simple message rather than a complex,
correct but ultimately unwieldy technical discourse. Although the majority of business plans are
prepared for presentation to an outside group of investors or bankers, in the case of high technology
projects up to 60% of all presentations tend to be made to senior management or other interested
departments. In other words an R&D department has to be able to communicate its ideas to an internal
audience rather than outsiders.

In either case the business plan must demonstrate in a rigorous manner the commercial viability of the
proposed venture. The plan should cover all aspects of the business. From its conception, through
start-up, to the management and control of the business, right up to the achievement of forecast annual
sales targets. Typically the plan will cover a five-year planning period.

While the acquisition of the necessary funds is the initial reason for writing the business plan, it will
have other valuable functions. In its final form it will present a complete analysis of the business, its
objectives, the market in which its operates, the competition against which it must establish itself and
the problems which must be overcome in order for the plan to be fulfilled. As such, the business plan
is a comprehensive operating manual, which the management will use to navigate their way to their
objective.

The preparation of the business plan is also an exercise which must essentially cause the writers of the
plan to examine their basic assumptions in the minutest detail since these must be justified to an
impartial third party. It sometimes happens that the enthusiasm of a product champion or inventor will
demand a leap of faith to be made, which cannot be substantiated in the practicalities of the
marketplace. Any weakness of this nature would be clearly exposed in the course of preparing a plan,
which must stand up to the scrutiny of sceptical financial backers. Hindsight is a quality that many of
us have in abundance but a business plan is designed to eliminate the use of hindsight as much as
possible.

Note that it will be necessary to update the plan on a yearly basis. Each years trading must be
reviewed in the light of actual developments of the business. Any discrepancies between the original
assumptions and the achieved performance must be accounted for and the assumptions modified if
necessary. Forecasts for subsequent years must also be adjusted in line with the revised assumptions.
In this way the company will have a rolling five-year business plan which is responsive to the real
environment.

In the subsequent discussion in this brochure the term product will be assumed to refer to both the
physical products and processes and the intangible services supplied by a company to its clients.

Having discussed when a business plan is needed, it is only fair to point out that rigorous business
plans are not always required. This is particularly true when an R&D department has developed a new
or improved process for an existing product.

Here one may find that a simple cost benefit analysis is all that is required to convince the
management of the benefits of exploitation.

4
By providing an exact breakdown of all the costs of the new process (including unit costs) and
comparing the factory gate cost with that of the existing process it should be fairly simple to
demonstrate the commercial benefits.

R&D managers should note that accountants, venture capitalists and bankers usually look for a
payback within a reasonable period, particularly when times are hard. Although this may seem
shortsighted it must be recognised that financial personnel are risk averse mostly because of external
pressures. Other arguments are often needed to convince colleagues to switch to a new process, such
as competitor and customer pressures, improved quality that could justify raising prices or offering
warranties or increasing market share and environmental benefits.

2. Timing or When Will We Need It?
Recent history is littered with inventions which never came to market because of faulty business plans
usually prepared at the last minute and based on false assumptions, inaccurate information and
misdirected research. Talk to the marketing and production staff about the need for research before
the research is completed. Get a commitment to carry out a market research study for incorporation in
the plan. Get an idea of production costs! Collect information on competitors and the products
potential position in the market. Find out if the customer wants this product (see section 2.1). If he or
she doesnt want it, perhaps the research money should be better spent elsewhere.

3. Who Will Be Required To Give Input?
A business plan comprises information from various specialisations and it is unlikely that any one
person will be able to provide all the answers to the questions posed in this booklet.

If you are an SME it will be important to obtain input from the individuals in various departments
such as finance, production, sales and personnel. A research institute may find such resources to be
scarce and will need inputs from outside either through a joint venture or by contracting a consultant.

It is important to obtain agreement from all the parties involved as to the aims and objectives of the
plan and to obtain commitment to the contents of the plan. As with any project it is important to brief
the project participants as to the basic requirements of the plan and to impose deadlines for the
contributors. This technique known as pre-briefing has enormous benefits later on resulting in fewer
criticisms and internal politics, which might sink a project at a first presentation.

4. What Will We Need To Prepare The Plan?
The recipient of the business plan will be looking to see if the writer, or writers, has demonstrated a
sound mastery of the dynamics of their business and the industry in which it operates. Most
importantly, the readers will want to know how this mastery can be harnessed to provide a profitable
return on the funds to be invested at a minimum acceptable level of risk to the investor or parent
company.

Thus, it will be essential to demonstrate that the plan is robust enough to allow a shortfall in the
forecast sales levels as a result of unscheduled difficulties in trading conditions.

It can be tempting at the start of a venture to be over optimistic and assume that everything will
proceed exactly as planned. This rarely happens! There are almost always unbudgeted costs or
investments and other events that could not be foreseen. Therefore a sensitivity analysis should be
included in order to indicate the robustness of the plan to unforeseen events. A plan, which has little
sensitivity between the planned scenario and the worst case scenario, is unlikely to be considered
favourably.

The contents of a business plan for any particular enterprise will depend on the nature of the business
and the organisation from which finance is being sought. There are, nevertheless, certain categories of
information that must be included if the proposition is to be successful. The main categories on which
a business plan will be appraised can be summarised as follows:
5

Soundness of financial structure



- Liquidity
- Profitability
Market and products
Physical and production resources
Management

These categories can be further subdivided and they will be discussed under the headings indicated at
the end of this section.

It follows then, that the document has to be written from the point of view of the ultimate reader and
not that of the writer. It is sometimes the case that the writer of a business plan is the originator of an
invention and is thus a person from a scientific or engineering background. In such a situation there
can be a temptation to include technical data, formulae and diagrams in order to demonstrate technical
virtuosity. This must be wholly resisted! Technical information, where included, must be simplified to
make it comprehensible to non-specialists and must be used only in order to demonstrate the
commercial of financial viability of the proposed venture.

The content of the business plan will be compiled by producing the information and generating the
forecasts required for the following section headings. This data can only be obtained by making a
detailed analysis of the whole business and its environment. The process will require many
fundamental decisions to be taken. Decisions taken under one heading will inevitably affect decisions
taken under other headings and this will require the earlier decision to be reconsidered. An iterative
process thus writes the business plan. The process may require many loops until consistency is
achieved between all the sections. Writing of the business plan may take several weeks or months
work. The following is an outline of a typical business plan:

Executive Summary

The Market

The Product, Process or Invention

The Business and its Trading Position

Marketing Strategy

Manufacturing

Forecasts of Sales, Cash Flow and Breakeven

Management and Control of the Business

The Required Financing Package


5. How Do We Go About It?
This booklet provides a series of chapter headings for the business plan. Each Chapter has an
explanation of the topic to be included in the plan followed by a checklist of the main points. Note
that there are some very sophisticated techniques for analysing the risks; strategies, tactics and
approach to starting a new venture but the basics are always the same. It is possible to refine the basic
plan and a simple powerful message will have a greater impact than an elegant theological tract.

6
1. THE EXECUTIVE SUMMARY

This is the single most important chapter of the business plan. It must summarise in not more than 500
words the whole argument, which is set out in greater detail in the following chapters. The Executive
Summary will be the first thing that is read by the prospective financier. In a number of cases it may
be the only chapter which is read if it fails to present a convincing case. Most financiers receive many
more requests for funds than they are able to grant and so are not highly disposed towards unravelling
a potentially doubtful proposition.

There is a real danger that the Executive Summary may fail to perform its function since it is
inevitably the last section to be written. It may seem to be a simple matter to write only one or two
pages. But, the Executive Summary will be prepared after a lengthy and potentially time-consuming
process and so there may be an understandable desire at this point to finish as quickly as possible. The
writers will be confident that they have ironed out all the problems and they may feel that even if the
Executive Summary is not completely clear, all the necessary information is in the document
somewhere. However, it must not be assumed that the potential financier will take the trouble to
search through pages of data to uncover vital information.

Above all, it must be remembered that the page or two of the Executive Summary must contain the
most powerful and persuasive message of the whole document. So it is well worth the extra effort to
have the Executive Summary read and checked for completeness and clarity by each of the writers
involved. It is also helpful, if possible to have it read by any neutral persons who enjoy the confidence
of the compilers of the plan. The document should be well presented, neatly typed and in an easy-to-
read format.

Only the most important numbers must be used in order to make the case as strong as possible.
Careful attention must be paid to avoid clumsy grammar, obscure jargon and silly typing errors since
these all have a disproportionately negative effect.


CHECK LIST
1) What is the business name and area of activity?
2) Who are the key contacts?
3) What is the scope of the business and of the market potential for its products?
4) What resources, human and financial, are needed for the venture?
5) When will the business make a return?
6) What historical data do you have on your abilities to carry out the venture?
7) What is the mission statement of the venture?
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2. THE MARKET

The market is the arena in which the plan of campaign is to be fought out. It is therefore necessary to
define the market for the new product in terms of its size, its state of development, the types of
customers and the competitors.

How many customers are there and what is their influence in the market? There may only be one
customer for a titanium submarine and the price is therefore likely to be high but there are many
thousands of customers for carbon fibre tennis rackets.

The market size, or annual consumption of the product, will be defined in terms of the scope of the
business venture under consideration. The market size could therefore range from the annual
consumption of the product in a given city, to a country, to a group of countries or to the whole world.
If the company only has the resources to market in one country it would not be relevant to consider
the world market and thought should be given to licensing or joint ventures.

In addition to the total size of the market, it will be important to know the stage of development it has
reached.

There is a natural pattern for the evolution of almost any market and the stage of the cycle at which
the market is entered will significantly affect the business strategy that must be adopted. These phases
can be summarised as follows:

1. Embryonic
2. Growth
3. Maturity
4. Decline

Many high technology firms are researching areas which come under the first two phases but high
technology markets can reach phase 4 fairly rapidly e.g. the electronic typewriter which as been
superseded by the word processor.

IDEALISED PRODUCT LIFE CYCLE

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2.1. The customers
In addition to the geographical size of the market it will be relevant to a particular business venture to
segment the market by end use customers. This will break down the consumption of the particular
product among these types of customers. Thus if the company planned to market its product only to
the automotive industry it would ignore the consumption of the product in other sectors such as
aviation, civil engineering, shipbuilding etc.

There are many other possible segmentations of the whole market, which could be applied in order to
arrive at the size of the market, which is relevant to the enterprise being planned. The segmentations
selected will reflect the decision on who are to be the prime target clients. It may be relevant to
segment the market by size of customer in terms of turnover if it is considered that the clients will be
either predominantly large companies or, alternatively, predominantly small companies.

The profile of the customers will also require a listing of their needs. There will probably be several
important customer needs but it is likely that it will be necessary to concentrate on a limited number,
in order to focus the companys resources to the best advantage and to emphasise the products USP
(unique selling proposition).

Separately from customer needs, it will be important to identify purchasing criteria. While the two
may coincide, it is likely that other factors are important such as credit rating, status and reputation of
the supplier, technical service facilities available from the supplier, bulk purchasing discounts,
delivery speed, the desirability or necessity for the product to meet international performance
specifications.

2.2. Competitors
Information on the number and capabilities of the competitors to the new enterprise will be most
important. The new company will not have the luxury of operating in a vacuum. The better the new
business idea, the stronger will be the possibility of retaliation from those companies already in the
market or the stimulation of new entrants. The easiest response from existing participants would be
price cutting, but a number of other tactics are available depending on circumstances, resources and
expertise.

Knowledge of the mix of competitors already in the market will be vital in order to evolve a credible
business strategy. Convenient classification of competitors could be:

1. Dominant / Leader
2. Secondary / Strong
3. Niche / Fair
4. Minor / Weak

The dominant company, as the name suggests, dictates the key market indicators such as price and
performance quality. The company has the most comprehensive product range and its pricing
structure sets the standard for the rest of the industry. The dominant company is able to charge
premium prices due to its widely perceived position of leadership. The secondary company has a
slightly smaller product range but in some sectors may offer serious competition to the dominant
company. The company in the niche of the market will be a well-run small company, which does not
have the product range or resources to compete head-on with the dominant or secondary companies.
Its strategy is to be market leader in small, specialised market niches. The minor company has no
particular strengths and is at the mercy of commercial currents created by other players but may have
an underlying sound control of its manufacturing costs. The strategic position of these companies is
summarised in the table overleaf:
9
COMPETITIVE POSITION PRODUCT PRICE DISTRIBUTION COMMUNICATION

1. DOMINANT Many products with unique or
very competitive edge. Well
differentiated from
competitors. Used as the
industry standard.

Pricing determines price levels
for other serious competitors.
When these change, others
move too
Large share of the business
enjoyed in all channels. Some
channels may be locked in.
Ability to dictate channel
terms.
All announcements are eagerly
awaited. Regular high profile
exposure. All influences
positively disposed.
2. SECONDARY Products are on a par with the
best input across the range.
Comprehensive selection for
most customer requirements.
Pricing may vary above and
below nearest competitors but
normally within a narrow
band. Room to price
strategically.
Some presence in most
channels and a major presence
in the important ones.
Regular exposure. Normally
included in media
comparisons. Respectable
image. Serious consideration
given by influences.

3. NICHE Most products are specialists
in their field. Gaps in range.
Can command premium prices
in areas of strength. Need to
have price edge elsewhere.
Little room for flexibility.

Probably holding good share
of one major channel with
minimal presence elsewhere.
Known and recognised mainly
in limited area of specialism.
Not seen to be in same league
as major competitors.
4. MINOR Product range limited.
Opportunities restricted.
Quality performance no more
than average.
Must have price advantage to
stay in the market. Margins
adequate rather than healthy.
Few channels open and only
small share of these. Little
incentive for new channels to
adopt unless bought with
heavy discounts.

Existence is known but little
awareness of products or
activities. Erratic low level
exposure.
5. MARGINAL Few products available. No
specialism apparent. Generally
below average quality. Not a
serious consideration.
Prices reduced across the
board. Margins suffering.
Heavy discounting. Backlash
signalling low quality
products.
Struggle to keep a foothold in
any channel.
Nearly invisible from almost
zero exposure. Alternatively a
bad image through excessive
bad publicity. Few influencers
prepared to associate.

11
CHECK LIST
1) What is the geographical scope of the market: World? Europe? Local?
2) What is the market value in terms of units and value?
3) How fast is the market growing and where are the opportunities? Which market segment
will you concentrate on and why?
4) What market share are you aiming for?
5) If there is no existing market or if the market is being developed when are the expected
breakthrough dates?
6) How would your companys entry affect the market?
7) What is the market structure? Are there many small customers or a few large customers?
What do the customers do with the product and how much is their business worth?
8) What are the key requirements of your customers?
9) How will your company meet these needs? Current and future?
10) Who are your major competitors? What are their strengths and weaknesses? What are
their patent positions, potential, operating methods and profitability?
11) How will they react to another player in the market?
12) What is unique about your business?
12
3. THE PRODUCT

This is probably the chapter with which the writer is most confident but the reader is least familiar.
Every effort must be made to explain the technology in simple terms and to explain the Unique
Selling Proposition (USP) of the invention.

This chapter must answer the questions relating to what the product or service is and why anyone
would want to buy it. In marketing terms products can be divided into two classes (see chapter 2 also):

Market pull
Product push

The market pull type of product is defined as having been conceived as a result of an identifiable
unsatisfied need. The product push type of product is brought into existence as a result of an invention
or development for which an application has to be found. Both of these types of product can be
successful but experience shows that the success rate for the market pull type of product is
significantly higher than for the product push. Often a product is created as a result of a combination
of these two approaches.

Typically, the product push type of product arises from the work of a companys research or
development department as process innovation does, e.g. the invention of polyethylene.

This may be the extension of an existing product range or perhaps a spin-off development, which is
considered to have potential application in a completely new sector. The market pull product arises as
a result of the companys marketing effort, which involves understanding their customers problems.
Information on customer needs and dissatisfactions will be gained on an ongoing basis by the
companys regular sales force. This will be supplemented on a general and specific basis by market
research consultants. Once the need has been clearly identified, the specification of a product is drawn
up which would solve these problems and work is then undertaken to develop such a product.

The vital aspect to emphasise in this section is the need to identify just one Unique Selling Proposition
for the new product.

Some possible USP's are:
lower price
higher quality
longer life
faster operation
rapid maintenance
comprehensive back-up service
smaller size

Then you must indicate how important this USP is to the customers in value terms. It will be
necessary to compare your product with others from competitive suppliers. These should be analysed
in terms of the end use segments of the markets, which they serve, their USP's, their drawbacks and
weaknesses, pricing, etc. This will enable the differences and advantages of the proposed product to
be seen more clearly in the context of its market potential.

In the case of a process innovation by an R&D or technical department the customers are likely to be
internal rather than external i.e. a manufacturing, production or finishing department. While it is still
necessary for the R&D department to communicate the USP's to an audience, the benefits need to be
presented in a slightly different way e.g. improved productivity may mean that expensive machines
may not need replacement. Alternatives include warranties could be granted or scrap levels and
inventory stocks reduced but whatever the benefits the R&D department still needs to convince
13
customers. There may also be additional spin-offs from technology which the marketing department
may be able to exploit and which can form part of the business plan (see case history).

The question of patents on the new product needs to be examined thoroughly and the impact the
patents will have on the marketability of the product.

CHECK LIST
1) Describe the product, process or service in simple terms.
2) Is it available for sale and, if not, when will it be ready? At what cost?
3) Do you have legal protection and if not why not? Have you taken advice on patents?
4) What is the Unique Selling Proposition (USP) of the product or process?
5) Will you provide other services such as warranties, guarantees or after sales service?
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4. THE BUSINESS AND ITS TRADING POSITION

This chapter gives an introduction to the business and the executives who are making the application
for the funding. The aim is to inspire confidence in the potential financiers that the business is
financially soundly based and the executives have the appropriate management and entrepreneurial
skills.

Any project backer has to appraise three non-financial aspects of a business:
The product/invention and its market (see chapter 3)
The physical and production resources
The management of the business

The reader is trying to assess whether this team will be able to transform an unproved product into
sales, which will exceed costs! Perhaps the only way of assessing the management is to look at their
history.

Information given will include a summary of recent trading results, the legal status of the business as
a limited company or any other type of standing, an organisation chart, biographies of the executives
giving their relevant experience, and the mission statement (or objectives) of the company. If the
application for financing is being made on behalf of a start-up business it will not be possible to give
evidence of the soundness of its standing. In this case it will be necessary to emphasise the track
record of the founding partners and their suitability to take on the risks of the proposed venture.

It will be critical for you to produce a company mission statement.

The mission statement will define the essential character of the company and will set out what the
company is aiming to achieve and your backers will hold you to this. It will state what business the
company is, not in terms of the technology that it employs but in terms of the type of clients it
supplies.

Most importantly, it will say how the company is uniquely different from any of its competitors. The
mission statement will demonstrate how the company satisfies clients needs better than any other
company.

A statement on the companys corporate objectives will be required. This will declare aims in terms of
growth of turnover and market share. These will be given for both the short term and the long term.
Financial appraisal of the business should include the following information:

Net tangible assets: the size of the proprietors capital. This value will influence the amount of
money, which can be borrowed.
Capital gearing: ratio of borrowing to shareholders funds. This will indicate the vulnerability
of the business to fluctuations in sales.

CHECK LIST
1) What is the business name and industry?
2) What are the backgrounds of the business team and what are their roles?
3) What skill gaps exist within the organisation and how will these be filled?
4) What are the resources required for the business over time?
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5. MARKETING STRATEGY

This chapter on developing an exploitation strategy will show how the company will develop its USP,
whether it is lower manufacturing cost, better quality product, better service and technical support or
lower price.

Obviously a price will have to be established for the product. If the product is completely new this
may be difficult. However it is usually possible to determine a price based on analysing the added
value offered to the customer by the product.

In addition, all costs associated with the manufacture, marketing and distribution of the product must
be calculated and apportioned on a unit basis. This is the benchmark from which the value of the
product to the client must be decided as distinct from its cost.

The sales process must be addressed once the marketing stage has been completed and the pricing
strategy decided. It is important to distinguish between sales and marketing since these are sometimes
considered to be the same thing.
Marketing is the process described in chapter 2 whereby a customer need is identified, and quantified.
Sales, on the other hand, are the process of communication with the potential customers and
converting their interest into firm orders and cash.

Once it has been established that a given market demand exists, it is essential to devise a workable
sales strategy. The essential elements of this will include:

the identification of a sufficiently large number of individual potential customer companies
identification of individual purchasing decision makers within each company
establishment of a priority listing of customers according to sales potential
training of sales personnel in selling techniques
development of an effective sales message
communication of the sales message to potential purchasers
provision of suitable answers to sales resistance and objections
conversion of customer interest into a purchase

This procedure calls for a plan involving the use of a sales force, distributors, agents, advertising,
publicity and the production of promotional brochures and videos. Management monitoring and
control procedures will have to be installed to ensure that the right customers are being contacted, at
the right frequency and that target performances are being achieved.

Decisions on all of these points must be translated into the resulting commitment to staffing levels and
associated costs.

CHECK LIST
1) Have you obtained prices of competitive products or processes?
2) Have you prepared a detailed cost breakdown for each stage of the products
manufacturing and sales?
3) Have you developed a price performance analysis comparing your product with that of
competitors?
4) Have you set a price based on steps 1 to 3 including discounts and terms?
5) Have you prepared product literature / leaflets or datasheets on the product?
6) Prepare a press release for the media and articles for serious journals
7) Prepare an advertising and promotional budget.
8) Prepare salesforce training programmes and possible responses to enquiries.
16
6. MANUFACTURING

The manufacturing operation can involve significant commitments to investment capital for plant and
equipment, which may require heavy financing expenditure. For a small company or a start-up
venture this could involve major risks which could render the venture unattractive to the potential
financial backers. It is possible to reduce capital requirements by sub-contracting manufacture to other
companies and by leasing certain types of equipment and machinery. However, these strategies must
be weighed against the need to achieve a sufficiently high and reliable level of production to satisfy
the companys customers. The potential backers will want to see that a satisfactory compromise has
been reached between the containment of capital requirements and adopting a penny-pinching
approach which could cause manufacturing problems and supply bottle-necks once the company has
started operation. All costs associated with manufacture will have to be fed into the business plan
five-year projections in order to produce cash flow forecasts, pro-forma balance sheets and break-
even forecasts.

The plan must also discuss how manufacturing will be controlled and monitored and the level of
stocks of raw materials and finished products, which will have to be maintained. Material
requirements, costs and supply sources and terms of supply must be included in the costing. The role
and responsibilities of key production management personnel must be specified.

The availability of a sufficiently skilled labour force must be indicated and the industrial relations
record presented.


CHECK LIST
1) Will you make the product yourself or sub-contract the work?
2) Will you hire or buy premises or machines?
3) What are the exact machinery requirements and what will they cost?
4) What are the manufacturing-costs?
5) How much raw material has to be bought and will you make to stock or to order? Who will
be your suppliers?
6) What are the delivery-times for orders?
7) Who will solve problems such as trials and quality control?
8) Have roles and responsibilities of the key management personnel been specified?

17
7. FORECASTS OF SALES, CASH FLOW AND BREAK - EVEN

The forecasts of sales and cash flow, and hence ultimate profitability, will be the bedrock on which
the potential financiers will assess the future viability of the business. It follows that these forecasts
will come under severe scrutiny and critical judgement.

7.1. Sales Forecasts
The sales forecasts cannot be simply a series of numbers plucked out of the air as a result of wishful
thinking. This is an area that is likely to come under vigorous cross-questioning from the financiers
during the application for funding. The forecasts must have sound backing from the information
which has been described in the earlier chapters of this brochure, i.e. market size, customer needs,
customer segmentation, state of development of the market, strengths and weaknesses of competitors,
etc.

In addition, it will be necessary to add supporting evidence from the companys current trading
activities such as volume of orders on the books, trading levels with key clients, historical growth of
business in the targeted market sector.

7.2 Cash Flow Forecast
Once a sales forecast has been prepared it is possible to calculate the cash flow forecast for the period
of the business plan. This is an estimate of the net cash position of the company on a month by month
basis. The cash flow forecast will itemise the difference between the income from forecast sales and
the planned monthly expenditure for all known liabilities such as rent, rates, wages, material costs,
interest payments etc. Some of these payments will occur on a regular monthly basis while others may
be at more irregular intervals, such as material purchases and capital investment in plant and
equipment.

A further complication is that there will be a protracted time delay between the purchase of raw
materials and the receipt of cash from customers. Large customers may well expect to be given the
provision to make payment of invoices 60 days after delivery and in many cases may delay payment
significantly beyond that. The company from the time of their purchase must therefore finance the
cost of the materials until such time as the payment is received from the client.

It therefore frequently occurs that the company will experience a heavy cash outflow despite a
buoyant level of sales. This is especially the case at the start of a new venture when capital investment
and associated start-up costs may significantly outweigh the income from sales. It will therefore be
essential to write into the business plan the provision of sufficient working capital either in the form
of a bank overdraft or a loan to cover the heaviest cash outflow that can be foreseen.

7.3 Break-even Forecast
The ultimate confirmation of the viability of the business venture is the demonstration of the break-
even point when sales revenue first equals the sum of fixed and variable costs. Fixed costs arise from
regular payments, which are not affected by changes in the short-term level of sales. These include
items such as rent, rates, and interest payments on loans and administration costs. Variable costs
include payments, which vary in proportion with changes in the level of sales revenue. Examples of
this include material costs and energy costs. The question of whether labour costs are fixed or variable
costs is one that must be answered in terms of the nature of the business. In some situations labour
may be available on a freelance or subcontract basis in order to carry out specific job-related tasks. In
other cases the company may retain a labour force with a high level of specialist expertise and it
would not be feasible to decrease and increase labour costs in line with fluctuations in sales revenue.
The break-even point of the venture is not an immovable milestone. Its timing can be adjusted
significantly according to whether the costs of the operation are predominantly fixed or variable. As
was mentioned in chapter 6, the planners of the venture may have considerable flexibility in choosing
the type of costing structure to incur. The installation of a manufacturing plant will require significant
18
capital investment and it will be possible to calculate how long it will take to repay these costs from
sales revenue.

If the alternative route is chosen of assembling subcontracted components, the variable cost of the
bought-in components will be higher than the variable costs in the first case but the break-even point
will be reached much earlier. In general terms, the sooner the break-even can be achieved, the more
attractive a venture is to the potential financial backers.

It will be necessary to calculate a number of alternative break-even scenarios, i.e. best and worst case
and showing sensitivity or robustness. Repeating the calculations by inputting different assumptions
on sales revenue and direct and variable costs does this. Typical variations might be to examine the
effect of a 10% reduction in sales revenue accompanied by a 10% increase in costs. Other
assumptions must be examined to establish the boundaries where the proposed venture becomes non-
viable.

In order to produce a comprehensive financing plan for the new venture, it will be necessary to build
up the break-even calculations in conjunction with a pro-forma balance sheet and a pro-forma profit
and loss statement covering the projected five year period after start up. Converting the estimates and
policy decisions of the previous chapters into hard numbers will produce these.

Note that very complex investment-projects e.g. chemical plant, steel plants and a number of high
technology businesses may require more sophisticated techniques of project appraisal.

These include:

Return on capital employed (ROCE)

Payback period

Discounted cash flow techniques i.e. net present value (NPV) and internal rate of return (IRR)

It is essential that specialist accounting expertise be acquired if such techniques of project appraisal
are to be used.

7.4 The Pro-Forma Balance Sheet
The balance sheet will be a statement of the source of funds for the business in terms of loans, equity
participation and retained profit and how these have been allocated. The allocation of the funds will
be broken down according to investment in fixed assets of plant and equipment, and also current
assets, which are defined as working capital. The current assets refer to the stock of materials and
completed manufactured goods and also cash funds, which are held by the company. The balance
sheet will also itemise the companys current liabilities, which are money owed to creditors, bank
overdraft and tax liability.

The balance sheet is a tabulation of pure numbers and there is no identification of the nature of the
individual creditors, sources of loans and equity, or the type of fixed assets, which have been
purchased. These will, however, be identified elsewhere in the plan. The assets and liabilities are
defined from the point of view of the business as an entity and not from the point of view of the
creditors or the providers of finance.

7.5 The Pro-Forma Profit and Loss Statement
The function of the profit and loss statement is different to that of the balance sheet. While the latter
will include a reference to the retained profit of the company, it will only do this in the context of a
source of finance for the company and will not indicate how the profit arose. The profit and loss
statement is a tabulation of the gross sales income to the company from which must be deducted all
19
attributable costs. For the purpose of the business plan it will be necessary to prepare the first years
projected profit and loss statement in some considerable detail. This is likely to require the year to be
broken down into monthly figures or on a quarterly basis at the very least. For the remaining four
years of the five-year business plan it will be adequate to produce annual profit and loss statements.
The assumptions on which the figures have been produced must be clearly stated. As with the break-
even forecast, it will be necessary to test the sensitivity of the forecasts by producing additional
statements based on lower sales income figures and higher figures for costs and expenses.

The initial deduction from sales income is the cost of the goods sold. This gives the gross profit. The
cost of goods sold is calculated by totalling all the relevant variable costs, i.e. the material and labour
costs.

It will not include the cost of the machinery on which the goods were produced or the cost of the
factory, which was constructed for their manufacture.

Next, it is necessary to deduct operating expenses from the gross profit in order to arrive at the profit
before tax (PBT). The operating expenses include rent, rates, administration costs, depreciation,
advertising costs, and other overhead costs.

Finally, having arrived at the profit before tax, it only remains to deduct the tax payments, the interest
charges and the directors emoluments. This leaves the profit after tax from which dividends to the
shareholders are distributed.

CHECK LIST
1) Does the business have firm orders?
2) Which customers are expected to place orders in the first year? How much and when?
3) What market research data is to hand to support a sales forecast?
4) Prepare a sales forecast for each major product group
5) Prepare a system for updating the sales forecast at regular intervals.
20
8. MANAGEMENT AND CONTROL OF THE BUSINESS

An integral role for the business plan will be the need to demonstrate to the financiers that the
business will be suitably controlled once it commences trading. It will be necessary to produce regular
records, which are useful, both to the management of the company itself and external authorities such
as tax inspectors, accountants and banks. It is sometimes considered by small businesses that
bookkeeping and the maintaining of records is a time consuming formality which must be endured
simply to conform with time honoured precedent.

This is a complete misunderstanding of the situation. These management controls are used to steer the
business in the same way that a cars controls are used to steer it along the highway.

It is necessary for the executives of the new venture to determine what are the key indicators of
successful performance in every important sector of their particular company. Systems must then be
devised for collecting the relevant data on a regular basis, analysing it and then presenting the
conclusions in a simple way which nevertheless paints a comprehensive picture of the state of play at
any one moment of time. The procedures devised must be both sufficiently comprehensive to provide
useable information yet are easily workable. In such a way that the data can be provided promptly
enough for remedial action to be taken if this is necessary. There would be little value in providing
detailed analyses if they were not available until a problem became critical.

The three principal areas in which control is required are:

Financial

Sales

Manufacturing

In the area of financial controls it will be necessary to decide whether the venture will be of a
sufficient size to warrant the services of an in-house accountant. This would be the preferred option
for any company that planned to grow to an appreciable size. However, if the resources were not
sufficient in the start up phase, the alternative would be to appoint someone within the company to
carry out the function of bookkeeper on a day to day basis and then use a firm of accountants to
process the data at regular intervals.

Sales data will most conveniently be collected and processed by a member of the sales force.
Information required may include records of sales by product type, sales by individual customer, sales
by individual sales representative, sales generated per visit, and sales generated by telephone call.
Customer record files or cards will be needed which summarise the sales achieved, the sales visits and
calls made together with the main points of the discussion. Other additional types of record may be
considered to be relevant.

Manufacturing records will be required which can be used to analyse the cost, efficiency, speed and
quality of production, the time required for the manufacture of individual components, scrap rates, the
output rate of individual machines, material costs, power consumption etc. These will be best
collected and analysed within the manufacturing department but they will also have to be made more
widely available within the company to people like the accountant so that they can be analysed in the
context of the total business costs.
21

CHECK LIST
1) What bookkeeping and accounting system have you chosen?
2) What control information does it produce and with what frequency?
3) Who will keep the accounts?
4) Who will be your auditors?
5) What other business controls (manufacturing, personnel, quality and environmental) are
important?
22
9. THE REQUIRED FINANCING PACKAGE

The steps, which have been followed in the preceding chapters of this brochure, will have finally led
to the provision of sufficient data to enable the financing requirements of the new venture to be
defined. The details of financing sources will vary throughout the EU and from time to time. It is thus
essential that expert advice be sought on what options are open to a particular business venture and
what their relative costs will be before a formal application is submitted.

The main options available will be equity participation by a venture capital company, long term and
short term loans, bank overdrafts, mortgages and debentures.

In deciding on the financing package it will be necessary to specify the need for working capital and
the need for capital for the purchase of plant and equipment. The timing of the financing must be
specified and whether this will be required in phases or in a single lump sum. The funding by the
proprietors must be specified since it will normally be a pre-condition that the backers commit a
satisfactory level of their own resources before the financiers are willing to advance any money. The
question of the availability of assets as security for loans must be considered.

CHECK LIST
1) Based on your financial projection state how much cash you require to set up the business
and state when repayment will be.
2) Based on the cashflow forecast, explain when you will need key amounts of resources.
3) How much money will come from you or the parent company?
4) Where do you expect to raise all other funds? Overdraft? Bank loan? Venture Capital?
Share issue?
5) If you are issuing shares how will you value the business?
6) What is on offer to an outside investor?
7) What exit route is available to an investor?
8) What security, if any, is available on a loan?
9) How could the business fail and what is the level of risk?
10) How do you intend to manage or minimise these risks and their consequences?
23



A CASE STUDY:





BUSINESS PLAN FOR
HEPHAESTUS MATERIALS LTD











Hephaestus Materials Ltd
48 Britannia Road
Little Blighty-on-the Wold
London UK

Tel.: 171-8285036
Fax: 171-8289318

Key Contacts: Dr Erebus
Technical Director
Mr U. Heep
Finance Director

24
EXECUTIVE SUMMARY

Hephaestus Materials Ltd is a materials development company with major interests in the advanced
ceramics field. The company is a manufacturer of carbon, transition metal boride and other hard
materials.

Hephaestus materials sells advanced materials to a variety of industrial customers in the heavy
engineering, aerospace, automotive and petrochemicals industries.

Hephaestus Materials has developed in conjunction with research partners, via a Community funded
RTD programme, an advanced composite with the wear resistance of alumina but with the ductility
and impact strength similar to hard steels. This material will have applications for wear resistant parts
such as tools, digger teeth and materials handling equipment and has the tradename Unobtanium.

The original research work on Unobtanium arose as part of a need to improve the existing Hephaestus
process for advanced ceramics. The level of scrap in most advanced ceramics processing is usually
very high but by using the results of research the company has been able to reduce the level of scrap
(and improve product quality) by 15%. This has resulted in a high level of productivity with existing
machines and a saving which will be invested in the new venture for Unobtanium products.

The potential European market for this material is estimated at EURO 0.448 million in year XXX6,
EURO 1008 million in year XXX7 and EURO 3.2 million in year XX11. The total market is
estimated at EURO 10 million in Europe and EURO 40 million world wide by year XX15.

The total investment required by Hephaestus Materials for this project is EURO 200,000 over five
years.

* Note: Any similarity to existing persons or companies is purely coincidental.
** We are in year XXX6

The investment covers the following expenditure:

Purchase of one sintering and one hot isostatic pressing (HIP) machine

Recruitment of commercial staff

Training of a technical support team

A marketing budget

R&D development programmes

The product will need to be presented to Hephaestus existing clients who will need to evaluate
material. Design of the simpler components will take 12-18 months. Payback will be in year 4.
25
THE MARKET

IAL Consultants have estimated the European market for advanced engineering ceramics at EURO
226 million in year XXX3 growing to EURO 390 million by year XXX8. The total size of the market
is summarised in the following table:

Table 1. European Market for Advanced Eng. Ceramics

Year XXX3
Tonnes
year XXX7
EURO million
% by value year XXX8
EURO million
year XXX8 %
by value

A12 03 (non-electronic) 3.100 125 55 175 45
A12 03 (electronic) 120 45 20 70 18
A12 03 (bioceramic) 15 8 4 15 4
PZT/PLZT (piezoelectric) 15 7 3 10 2.5
Zr 02 120 8 4 15 4
Mg0 20 2 1 5 1
SiC (reaction bonded /
infiltrated)
40 5 2 10 2.5
SiC (sintered) 10 4 2 15 4
Si2 N4 (reaction bonded) 3 2 1 5 1
Si3 N4 (sinterec) 5 10 4 35 9
Sialons 5 10 4 35 9


TOTALS


3.453

226

100

390

100

Source: IAL Consultants

The projected growth rates of these materials are extremely high despite the fact that as with all new
material developments the estimated breakthrough dates are extremely long. See below:

Table 2: Annual Average Growth Rate year XXX3 - year XXX8

A12 03 (non-electronic) 7
A12 03 (electronic) 10
A12 03 (bioceramic) 15
PZT/PLZT (piezoelectric) 10
Zr02 15
Mg0 15
SiC (reaction bonded / infiltrated) 15
SiC (sintered) 30
Si3N4 (reaction bonded) 15
Si3N4 (sintered) 30
Sialons 30

Table 3: Estimates of Commercial Breakthrough Times

Year
(average)
Year
(upper extreme)
High temperature diesel engine components XXX4 XX13
High temperature gas turbine engine components XXX9 XX25
Low temperature wear resistant engine components XXX2 XXX8
Cutting tools XXX1 XXX5
Bearings XXX3 XXX8
Pump components XXX1 XXX5
Precision jugs XXX1 XXX5
Welding nozzles XXX1 XXX5
High temperature recuperators XXX5 XX25


The mechanical wear resistant applications represent the single most important end user sector of the
engineering ceramics market in Europe, accounting for some 45% of the total market value. The range
of applications included: cutting and grinding tools, wire drawing cones and guides, bearing nozzles,
26
burner nozzles, metal extrusion dies, welding pins and nozzles, pistons for metering pumps, plungers
for high pressure pumps, precision balls and valves, seal rings for rotary pumps, shaft protection
sleeves, sealing discs and cartridges for mixer valves.

However the share that advanced ceramics hold of the European wear resistant market is very small.
The total European Market for cutting tools is estimated at EURO 2-3,000 million and the overall
market for wear resistant materials could be as high as EURO 5,000 billion. Engineering ceramics
hold between 0.5 and 1% of the total market for these applications with the balance being held by
metal alloys such as manganese steel or high-speed steels.

Current projections of the European engineering ceramics market make no attempt to take account of
any dramatic technical or marketing breakthroughs, which would create an altogether different
scenario.

The reasons for this are purely technical. Existing engineering ceramics are still brittle, unpredictable
and difficult to manufacture compared to metals. A considerable amount of research has gone into
developing materials with the ductility, predictability and impact resistance of metals and anti-wear
properties of ceramics. Hephaestus Materials have developed a class of composite ceramic
materials, which display the best properties of both ceramics and tooling steels. This is a specialist
category of products currently used in the aerospace, military and power generating industries. These
materials are embryonic in terms of market growth and their value is about EURO 25 million p.a. and
included such products as SiC and Si3N4 reaction bonded materials.

The main customers for Hephaestus are firms in the industrial tooling field and those making wear
resistant metal parts for materials handling.

Number of Customers for Unobtanium Material

Sector UK France Germany Italy Rest of
Europe

Total
Cutting tools 10 10 20 24 10 74
Digger teeth / mining 3 4 5 5 5 22
Slides / jigs 112 110 110 112 105 549
Extrusion dies

5 5 10 10 0 30
TOTAL 130 129 145 151 120 675


In the cutting tools sector 10 firms control 50% of the total market. In digger teeth 10 firms control
70% of the market but in slides / jigs there is no dominant player.

Manufacturers of cutting tools have a wide product range including drill bits, milling inserts and
knives. The initial application for Unobtanium will be for the replacement of inserts. These devices
are quite small and are currently made from hard steels, polycrystalline diamond (PCD) and ceramics.

Unobtanium will fill the gap between high performance PCD and ceramic inserts and the steel tipped
inserts. The total European market is estimated at EURO 320 million p.a. of which Hephaestus hope
to capture a 1% market share within 5 years i.e. the same % sales of advanced ceramics today. Of the
remaining markets digger teeth / mining is thought to be worth EURO 10 million. The level of
penetration by Unobtanium is likely to be much higher because of fewer players and more
demonstrable advantages. Hephaestus hopes for a 10% market share of specialist tips in 10 years. The
markets for slides / jigs and extrusion dies offer good long term growth prospects but require more
development work. The values of these markets are thought to be EURO 50 million and EURO 20
million p.a. respectively.

Customers for cutting tools have strict requirements from material suppliers. These include:
27
Demonstrated material performance (data sheets, efficiency studies, cost benefit analysis)
High product consistency
Delivery lead times of less than 1 week
Customised tools for difficult materials
Good technical support

Such companies are not involved in long term projects or bespoke work. Quality, consistency,
delivery and a proven level of performance are more important than problem solving. Strong
marketing of a limited product range will be more important than developing a wide range of
Unobtanium material grades and initially Unobtanium will fill a specific niche.

The Unobtanium material has the following advantages for customers:
It has a price / performance level superior to its competitors
It is more consistent compared to ceramics
Standards shapes can be made rapidly ensuring quick delivery times
Hephaestus has detailed technical and scientific data on the product and a strong technical
team
Unobtanium has been tailored to meet customer needs in the tooling industry
Unobtanium meets internationally recognised standards

Unobtanium faces competition in ceramic metal matrix / ceramic inserts from the following firms.

Competitive Position Assessment
*


Companies
ABC PDQ XYZ LOS VIP

CATEGORY


Market share F S S S S
Pricing leadership F S S S S
Protected position F F F F F
Product line breadth F S S S S
Desirable brand names F F F W S
Breadth of customer base F S S S F
Total cost position F S F S W
Special business relationships F F F S S
Capacity / Location of the production F L S S L
Degree of integration
Forward
Backward

W
W

F
W

W
F

W
F

W
S
Technology position F F W W S
Technology capacity F F S S S
Management risk taking S ? F F F
Management responsiveness S W F F F
Resource sufficiency F F F F S
Profitability F S F F S


Rating system: (L) leader, (S) strong, (F) fair, and (W) weak

This table shows that there is no clear leader in this field and that equal participation exists. In certain
niches there are leaders in each niche. The competitor ABC is most vulnerable to competitive
incursions given its small size and it is probably less able to raise prices. Of the firms evaluated none
appears to have a clearly secured position by virtue of patents, know-how, outstanding distribution or
other business aspects.


*
Against performance ceramic metal composites competing with Hephaestus
28
Also no single competitor provides all the products and services demanded by the industry. Only VIP
with their VIPER product has a brand name, which is identifiable. Each firm has a reputable name but
not associated with a strong leadership position. While brand names may be of some importance the
suppliers are more concerned with establishing and maintaining a viable customer base of growth.
PDQ, XYZ and LOS enjoy a superior cost position because of their size and multiple plant location.

Multiple location allows for the establishment of special business relations and many buyers like the
fact that they are dealing with the biggest in the business. VIP is perceived, as having the strongest
technology position as a result of its resources for R&D but this is not thought to be decisive.

Hephaestus marketing strategy is to offer Unobtanium to niche markets in the cutting tool field in
local markets to establish a viable product history and to compete in the added value tool field initially
exploiting the weaknesses of ABC, PDQ, and XYZ. Emphasising the superior technology of
Hephaestus compared to VIPER would not bring long term benefits since customers are more
interested in other business factors.

THE PRODUCT AND PROCESS

Hephaestus Materials has developed a range of metal matrix composite materials, the
Unobtanium range based on a steel matrix and titanium carbide and titanium boride fillers. Using a
manganese steel matrix and a TiB2 / TiC filler, impact wear rate better than Nihard and equivalent to
Steel/TiC materials has been achieved.

The use of metal matrix composites has been largely limited to specialist applications in the
aerospace, high performance and military sector e.g. tank armour. Hephaestus have extended the
principle to the production of low cost medium value parts by means of:
Novel material combinations
Advanced manufacturing and improvement of existing material
Detailed market analysis

The materials produced have equivalent or superior properties to several commercially available wear
resistant composites and ceramics. Hephaestus has improved existing carbothermic and hot isostatic
pressing (HIPing) processes for manufacturing small to medium sized parts by working in conjunction
with partners in the Community RTD Programme research project.

Hephaestus has already made use of the technology in a process upgrade for its advanced ceramics
lines. Using Unobtanium in the green machining of the ceramic blanks and the high pressure
chamber of the hot isostatic pressing machine has resulted in a major reduction in tool wear and lower
scrap levels for finished and semi-finished products. The company is able to reduce costs in the
following ways:

lower unit costs per item
lower planned maintenance levels and reduced level of indirect labour
lower machine tool inventories
lower raw materials
fewer quality inspections

Overall savings for these two process innovations are likely to be worth a 15% increase in profits
before tax which means a year XXX7 pre-tax profit figure of EURO 421,000 on a turnover similar to
year XXX6

Moreover these savings will be worth over EURO 250,000 over five years which is equivalent to the
cost of replacing 1 of the current 5 production machinery lines.

29
Also Hephaestus has commissioned an extensive market research programme of both its existing
customers and potential new clients for these materials. Under the existing Brite / Value programme
Hephaestus will be looking to licence the process improvements.

Detailed market research shows that customers are prepared to pay up to 41% more for an
Unobtanium type product.

USP Value

% Increase Value Over Steel

Faster cut out 15
High batch quality 3
Long tool life 18
Faster delivery 5

TOTAL 41


It is unlikely that Hephaestus can supply Unobtanium more quickly than suppliers of standard steel
inserts but it should be possible to match existing firms.

It is clear that Hephaestus should concentrate on the market for inserts as a first step. Second and third
grade material instead of being scrapped can be promoted to manufacturers of digger teeth and wear
parts who do not have such tight specifications.


THE BUSINESS OF HEPHAESTUS MATERIALS

Hephaestus Materials is a supplier of specialist materials to the metal working industry and were part
of the original research team under the Community funded RTD programme. The company is based
in the UK but has licensees worldwide for its range of carbons and hard ceramics.

The main aim of the company is to develop and supply high quality ceramic/composite materials to a
wide range of specialist customers.

Company Reg. No: 0031726711, Incorporated year XXX0
EURO000


Date of Accounts year XXX6 year XXX5 year XXX4

Turnover 4,274 3,686 2,649
Profit before Tax 366 266 -13
Fixed Assets 1,829 1,739 1,803
Current Assets 1,157 1,094 775
Current Liabilities 1,037 1,070 689
Shareholders Funds 1,671 1,492 1,365
Capital Employed 1,949 1,763 1,889
ROCE % 18.8 15.1 -
ROT % 8.6 7.2 -


As can be seen from the accounts Hephaestus has been trading steadily ever since 1988 when it won
major long-term orders for military ceramics. Since then the company has traded steadily and
profitably but it requires more capital to take advantage of Unobtanium developments.

Hephaestus Management team are as follows:

MD & General Management: P.W. Gross, 18 years business experience,
Manythings Plc. Previously managing director of
30
WearnTear Plc.

Technical Director: Dr. Erebus, 8 years Technical Director Patently
Brilliant Inst. Research Manager of Cerebral Inc.
(manufacturers of high technology products)

Finance Director: Mr U. Heep, 4 years partner of Psycho
Accountants, 10 years at Pastit Equipment Co.

Marketing Director: Mr A. Bonus, formerly sales manager of
Metropolis Military. 5 years business manager at
Big Rockets & Tools Ltd.


31
Current staff

N of Employees
Management 4
Research 10
Production 16
Sales & Administration 10
TOTAL 40

As a result of this new venture the following additional establishment will be required.

Unobtanium Manpower Requirements
year XXX7 year XXX8 year XXX9
Capital Equipment 1.5* 2.5 2.5
Cutting Tools Development 1.0 1.0 1.5
Other Development 1.0 1.0 1.5
Sales to Cutting Tools 2.0 3.0 3.0
Sales for Others 0.5 1.0 1.0
Process engineering 2.5 2.0 0.5
TOTAL 8.5 10.5 10.0

* Staff to operate capital equipment will not be required until 2nd half of year XXX7.

32
Unobtanium Competitive Assessment

Companies

Hephaestus ABC PDQ XYZ LOS VIP

Category


Protected Position S S F F F S
Product Line Breadth L W W W W L
Product Line Differentiation L S W W W L
Desirable Brand Names S W W W W S
Total Cost Position F S S F S W
Capacity / Location of Prod W F L S S S
Technology Position L F F W W S
Technology Capacity L F F S S S
Congruency with Competition L S F F F S
Rating System: (L) leader, (S) strong, (F) fair, and (W) weak

Hephaestus has the strongest patent and know-how position along with ABC & VIP. Hephaestus is,
along with VIP, the leading firm in terms of product line and desirable brand name.

Hephaestus is fairly weak in terms of total cost position but the investment programme outlined will
remedy this. Investment in the new plant and training of a sales team will place Unobtanium in the
position of dominance within three years.

The aim of Hephaestus is to become the leading supplier of ceramic composites for the cutting tools
market in Europe. This implies manufacturing materials for its customers that offer improved cost
performance, quality and consistency.

THE MARKETING STRATEGY

The unique selling points of Unobtanium have already been listed but effectively they offer better tool
life and faster cutting speeds. Unobtanium materials are perceived to fill a niche between expensive
PCD tools and cheaper throwaway metal or tungsten carbide tools. They are speciality products used
for those projects which do not justify the purchase of expensive diamond tools but where metals do
not have the performance.
Both diamond tools and metal tools are sold in fairly high volumes but the production of Unobtanium
will have to be limited for the short to medium term. Unobtanium will be targeted to those areas with
specific technical problems using conventional tools at a price just below the more expensive existing
systems. Unobtanium will be differentiated by its superior performance, its niche application and by
superior technical service.
Hephaestus Materials aims to get maximum benefit by selective advertising and sales promotion and
by using the prestige gained through Community funding. Workshops and seminars will be set up in
conjunction with industrial partners and a customer service manager will be allocated to key
accounts.
Hephaestus feels that many of its competitors have focused on the technology of advanced ceramics.
Hephaestus will stress the customer benefits in terms of cost performance. A study of all customer
costs and the product unit costs will be prepared in order to assist the value-added strategy for
Unobtanium.

Manufacturing
The production of Unobtanium will take place at existing Hephaestus premises but more
administration space will be required rented for adjoining premises. The total equipment demands are

Cost EURO
One sintering machine 60.000
One HIP machine 40.000
33
Testing equipment 10.000
TOTAL 110.000

The new equipment will be modified to take into account the process innovations from Unobtanium,
which provide a 10-15 % improvement over existing machines mentioned previously.
Further equipment will be purchased in year XXX9 in order to double production capacity from
EURO 1,500,000 p.a. to over EURO 3,000,000 in year XX11. Expected order lead times are thought
to cover 2 weeks for inserts and one to two weeks for digger teeth and slides.
Existing laboratory and R&D facilities will be used as far as possible for year XXX7. Field trials will
be carried out at the customers premises or subcontracted to independent research bodies, e.g.
Universities.
The use of Unobtanium is a good example of synergy and spin-offs from exploiting production and
processing technologies.

Annual manufacturing costs for Unobtanium
Unobtanium Range (at 80 % plant utilisation) EURO 000
Raw materials 68,400
Energy 1,000
Fixed Cost 60,000
Utilities 1,000
Capital charge 7,200
Labour 136,320
TOTAL 273,920

There are no special environmental or safety hazards to be accounted for.
The independent valuers Beancounters Ltd. using sophisticated management and cost accounting
techniques not described in this plan developed these cost estimates.
The existing top management team at Hephaestus remains but a sales manager will operate the plant
for Unobtanium and production development manager will be appointed to run the day to day
business. The sales manager has yet to be appointed but the current deputy R&D manager Mr
Calculus will take over the production development department full time.

Sales Forecast
EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11
Cutting tools
Mills 200 400 800 1,100 1,200
Inserts 150 300 600 1,050 1,150
Discs 50 150 150 150 250
Blades 48 158 160 264 300
Digger teeth 200 300 300
448 1,008 1,910 2,864 3,200

Sales Concentration
EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11
UK 448 608 1,110 1,500 1,600
France 200 250 450 550
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Benelux 100 200 350 350
Germany 100 250 400 500
Others 100 164 200
TOTAL 448 1,008 1,910 2,864 3,200

Firm orders for mills and inserts have been placed by Grindup, AbrasivenBoring Co and
Rubemwrong at EURO 1,000 p.a. each while discs have been ordered on a sale and return basis from
5 customers. The independent management consultancy firm, IAL Consultants, in London has carried
out the initial market research into the cutting tools and advanced metal matrix composites market for
Hephaestus.
Hephaestus will update the sales forecast on a quarterly basis in-house and commission further market
research from IAL Consultants in Year XXX8.
35






ompany
























Hephaestus Unobtanium Year XXX7 Cash Flow
Inflow 1 2 3 4 5 6 7 8 9 10 11 12 Total
Sales 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 448,008
Parent C
Capital 50,000 50,000
Other Capital 60,000 60,000
Investment
Capital 100,000 100,000
247,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 37,334 658,008
Outflow
Capital Expenditure 110,000 110,000
Raw Materials 11,400 11,400 11,400 11,400 11,400 11,400 68,400
Labour 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 11,360 136,320
Rent 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 4,500 54,000
Rates 500 500 500 500 500 500 500 500 500 500 500 500 6,000
Advertising 2,000 2,000 2,000 2,000 2,000 8,000
Overheads 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 60,000
Administration 800 800 800 800 800 800 800 800 800 800 800 800 9,600
Loan interest 600 600 600 600 600 600 600 600 600 600 600 600 7,200
36,160 132,760 34,160 24,760 34,160 22,760 36,160 22,760 34,160 24,760 34,160 22,760 459,520
Net inflow/
(Outflow) 211,174 (95,426) 3,174 12,574 3,174 14,574 1,174 14,574 3,174 12,574 3,174 14,574 198,488
36

Management Controls of the Business
The management of Hephaestus intends to set up a special Unobtanium working group with weekly
meetings to discuss progress and systems with targets for sales, production, quality, customer
services, marketing and distribution roles. The financial controls will follow the business plan
projections, which have been set out as follows:

Pro Forma Profit and Loss Account for Year to 31 December

Unobtanium Materials
EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11
Sales income 448 1,008 1,910 2,864 3,200
Cost of goods 274 614 1,166 1,748 1,952
Gross Profit 174 394 744 1,116 1,248

Expenditure
Administration/
Distribution 10 56 60 60 80
Rent & Rates 60 120 210 210 210
Advertising 8 16 28 40 40
Overheads 60 120 210 210 210
Depreciation 22 22 44 44 44
Interest 14 16 36 36 36
TOTAL 174 350 588 600 620
PBIT (Profit before
interest and tax) 0 44 156 516 628

Taxation 0 14 56 110 160
Profit after tax 0 30 100 406 468
Gross % 39 39 39 39 39
Total expenditure % 39 35 31 21 19
Profit before Tax % 0 4 8 18 20
ROI % 0 14 48 1.88 2.27
Gearing % 67 24 17 11 8

Note to the P & L Accounts. The NPV calculations for Unobtanium are reproduced in a separate
report but they show a positive result and on this basis project will proceed.

37

Pro-forma P & L Sensitivity Analysis Sales Down 20 %
December 31
EURO 000 Year XXX7 Year XXX8 Year XXX9 Year XX10 Year XX11
Sales income 358 806 1,528 2,291 2,560

Cost of goods sold 216 491 932 1,398 1,561
Gross Profit 142 315 596 893 999
Expenditure

Administration/
Distribution 10 56 60 60 80
Rents & Rates 60 120 210 120 210
Advertising 8 16 28 40 40
Overheads 60 120 210 210 210
Depreciation 22 22 44 44 44
Interest 14 16 36 36 36

TOTAL 174 350 588 600 620
PBIT (Profit before
interest and tax) -32 -35 8 293 379

Taxation 0 14 56 100 160
Profit after tax -32 -35 8 193 219


Gross % 39 39 39 39 39
Total expenditure % 48 43 38 26 24
Profit before Tax % (9) (4) 0 13 15
ROI % - - - 91 104
Gearing % 67 24 17 11 8


Note: This assumes that R & D expenditure is written off as incurred.
Mr U Heep will hold the responsibilities for the accounts while the auditors will be Beancounters Ltd.
The Hephaestus MD and General Manager Mr Gross will modify the existing operations control
systems used at Hephaestus.

THE REQUIRED FINANCIAL PACKAGE

Hephaestus Materials has a long history of producing high quality ceramics for specialist customers.
As a result of a major military funded R & D programme the company grew rapidly by selling high
quality military ceramics. By December of year XXX6 profits had risen five times over five years and
growth is expected to continue despite military cutbacks.
38

At the same time Hephaestus in conjunction with other partners developed Unobtanium via a
Community funded RTD. Although Hephaestus will receive further promotional assistance from the
EU via these programmes the company wishes to exploit the Unobtanium technology.
To do this Hephaestus requires up to EURO 210,000 over three years for a capital investment
programme. The first EURO 110,000 of investment is required in year XXX7 while the remainder
required to increase overall capacity and meet projected demand is required in year XXX9.
If sales do not reach the required level at the end of year XXX8, the 2nd phase of the investment
programme will be postponed by one year.
Hephaestus intends to raise the required capital for the Unobtainium project in the following ways:

EURO
Investment by Hephaestus 50,000

New Share Capital 60,000

Loan Capital (overdraft facility) 100,000
TOTAL 210,000


The financing programme is extremely conservative and covers all the first years operations in full.
Unobtainium is a unique product and Hephaestus is hoping for a 1% market share in a business worth
EURO 390 million by year XXX8. Even with sales at 20 % below projected levels Unobtainium
would make profits by year XX10.
The Hephaestus Company offers security on the loan capital in terms of the machinery and
guarantees.

39