Business Plan

A business plan (BP) may be defined as a comprehensive selling document that communicates the promise of a business to potential backers. Thus a BP needs to fit the audience and convey excitement and promise.

Typically, the purpose is to raise funds in support of a new business, product, or service. Given the many changes in the health care industry, there are an increasing number of examples of BPs to gain funds. Indeed, there may be three broadly different situations requiring a BP. These include startup ventures seeking funding, existing firms seeking additional financing, or new activities within existing companies. In the first category, a group of physicians may develop a BP to seek debt financing from a bank to develop an ambulatory surgery center. An existing pharmaceutical company might seek equity funding from investment bankers to acquire a biotechnology company in the second situation. In the third situation, an existing acute care hospital may develop a BP to gain support to launch home health care services.

Because a health care BP may seek millions of dollars in funding, the document should include a substantial, comprehensive description of the business, in about 25 pages. BPs of fewer than 10 pages often do not do justice to the business, whereas 100-page BPs may not be read because of their imposing size. In those 25 pages, the major parts of a BP include the executive summary; a company overview, often with statements of mission, vision, values, and goals; the strengths and weaknesses inside the business, as well as the opportunities and threats in the external environment; strategies for delivering value to customers and for beating competitors; processes for conducting stable operations; a time-phased financial plan; and an implementation action plan. The implementation is especially important to persuade the investor that the plan is more than a dream. Thus, good business plans are full of specifics such as milestone dates, budgets, and specific responsibilities by person so that investors can measure and track results.

To develop a comprehensive understanding of the business, investors often use the following questions to evaluate a BP: Are investor expectations realistically addressed? Is the financial justification realistic? How marketable is the product or service? Are the operational processes to deliver the service or product realistic? How experienced is the management team charged with integrating the business?

Given that a BP is a selling document, intended to persuade backers to finance the business, there are at least four ways to attract potential investors. The most important is evidence of customer acceptance, because if sales and revenue cannot be realized in an income statement, losses[Page 54] will be substantial. A hospital with a high occupancy rate and an increasing length of stay among patients can readily document customer acceptance. Demonstration of a proprietary position can be exciting to investors, because it increases the odds that the revenues will continue. Backers welcome evidence of focus by the business and appreciation of investor needs.

Similarly, there are at least four ways to repel investors. Unrealistic growth projections and unrealistic financial projections can damage the credibility of the entire BP. A hospital that assumes companies will always accept escalating prices for in-hospital care may be rudely surprised to see such financial projections unmet. Custom engineering can be dysfunctional, because it will preclude expansion of scale and limit sales revenue. Infatuation with a product can be a warning signal that the management team may miss important customer requirements.

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