The first basic purpose of writing a business plan is to insurance against launc hing a business destined to fail or mismanaging

a potentially successful company . Once the Plan has been written and show that the idea has some potential, ther e are three essential functions or purposes of the business plan that we discuss ed during class: Guiding the company by charting its future course and defining its strategy for following it; Attracting lenders and investors who will provide d needed capital; and Demonstrating that the entrepreneur understands the busine ss venture and what will make it succeed. I will start explaining each of these purposes including the relevant components that I consider belong to each case. 1a) Demonstrate the Knowledge of the Business I believe that the most important purpose, at least according to my experience, is to demonstrate that the entrepreneur understands the business in which he/she is getting into. This includes not only identifying what will make it succeed o r but also what can make it fail and which are the key variables that affect mos t his/her venture. For example thanks to the business plan the entrepreneur can realize that a certain product, despite its low revenue, contributes a lot to th e gross income when the sales volume increases because most of its cost is fixed . On the other hand, the entrepreneur can identify that a particular cost that sta rts small, like for example commissions to the sales team can spiral out of cont rol and be one of the major costs once sales surpass a certain threshold. Taking into account this information he can plan in advance that before reaching that limit, he will need to change the way in which he compensates his team. This means that the entrepreneur can stay focus in the business and give to each variable (and problem, because surely they will be a lot) the attention that th ey deserve. The business plan will help him to understands how all variables in terrelate and which ones have an important impact in many other variables and wh ich ones can double or triple in value without any major consequence in the prof itability of the business. I believe it is essential that the entrepreneur participates in the elaboration of the business plan and I encourage that he will be a principal actor in its pr eparation. Otherwise if he just asks (and pays for it) to another person to do i t for him and then he just reads it, he will lose the precious opportunity to le arn the ins and outs of his business. The actual learning process in the busines s plan it is done while you are writing it, not when you read it after it is fin ished. While the entrepreneur writes the business plan, he learns which role all variables (sales, prices, wages, rent, commissions, taxes, etc.) play in his bu siness. I believe that it is more useful to know that if we increase the salaries by 5%, the cash flow will decrease 15% than to know that we expect that our salaries w ill be $200 by the 6th month of operation. The first thing is something that you just learn while writing the business plan; the second is something that you gr asp by just reading it. Of all the components of the Business Plan, I believe that in this purpose the m ost important are: Financial Plan (Start-up funding, break-even analysis, Projec ted P&L, Projected Cash Flow, Projected Balance Sheet, and Business Ratios), Sta rt-up Summary (Start-Up expenses), and Products & Services (revenue streams). Be cause it is in these components that you have all the variables of the business at play and the entrepreneur will have a complete picture of which ones are the core attributes that can make or break the business. 1b) Attracting Lenders and Investors

The second purpose of the Business Plan is to assist the entrepreneur to attract financing. The business plan is to put in black and white entrepreneur's busine ss idea, in order that prospect investors can see the potential of the business and discover if there is any flaw or red flag in the implementation. Charlie Mun ger, the famous businessman, says that he never heard or read any business plan made by an entrepreneur saying that the business plan will not be a success. Investors and lenders know that all business plans that reach them look successf ul in paper, but they also know that more than 50% of new ventures close their doors before reaching five years of age . So they read the business plan with sk epticism, looking for red flags or variables that the entrepreneur has not taken into account into his analysis, e.g. an important threat that he did not consid er or too optimistic assumptions about the size of the target market. The lenders and potential investors will be interested in n a particular variable will affect the business. This is t the entrepreneur shows that he knows his business and, previous section, he will probably has a bigger chance to ion if he has participated in the writing of the business knowing how a change i when it is crucial tha as I described in the answer right the quest plan.

No potential investor will be interested in investing in a business without read ing a detailed plan of it and without knowing that the future captain of the boa t (aka the entrepreneur) knows where he is heading. These two requirements are m et when the entrepreneur writes a good business plan. Otherwise the only potenti al investor that an entrepreneur without a business plan can attract is his fath er, well actually it will be more appropriate to say that his mother, because m others always believe in her kids no matter what; fathers probably will request at least a brief business plan. The key components of the business plan for this purpose are: Strategic Analysis Summary (SWOT, Market Segmentation, Target Market Segmentation Strategy, and Co mpetition and Buying Patterns), Implementation Summary (Competitive Edge, Market ing Strategy, Marketing Expenses, Sales Strategy, Sales Forecast, and Milestones ), and Management Summary. I also believe that it is important the Financial Pla n, but as we said above, the Financial Plan always looks rosy, so the potential investors perhaps are more interested in the strategic and implementation parts that in the actual Financial Plan. They will be probably more interested in how each cost and revenue stream affect the cash flow or net income than the actual number written in the Plan in order to verify that there is not any flaw in the thinking process of the entrepreneur. 1c) Guiding the Company by Charting its Future Course We might believe that a business plan, and especially the Financial Plan compon ent is like a map that the entrepreneur must follow as one blindfully follows d irections given by a GPS. But according to my own experience the Financial Plan component is just a rough guide, more similar to a compass than to a GPS. The en treprenur will surely find out the very first day it is open for business that t he real numbers will be very different from the ones originally wrote in the Fin ancial Plan. But this does not matter because, since he wrote the business plan, he knows how the variables are interrelated and what things he has to do in ord er to stay in the good course. For this reason, I do not consider that the Financial Plan is a major component when we are disscussing the guiding function of the Business Plan. I consider th at in this purpose the most relevant component is the Executive Summary (Objecti ves, Mission and Keys to Success). Because, as we saw during our first part of t he course when we disscussed the Vision and Mission: the mission statement defin es the fundamental, unique purpose that sets a company apart from other firms of its type and identifies the scope or domain of the company's operations in term

s of products (including services) offered and markets served. or even that the g uiding philosophy is where vision begins . The mission is what guides the entrepr eneur by charting its future course. 1d) Conclusion We have seen which are the three most important purposes of the Business Plan an d which are the relevant components in each purpose. We have seen that probably the crucial components to improve the likehood of financing will be to have the strategic and implementation parts right plus a clear understanding of the Finan cial Plan. We should add to that list the Mission and Keys to Success to make th e list complete of all the components that improve the likehood of success in th e venture. I believe that all the components of the Business Plan are important and each h as an special purpose in making a venture successful: either to get financing, g uide the entrepreneur in the treacherous business waters, or improve the chances of success. In other words we are ending as we started, because all this means that the Business Plan is an insurance against failure and it is the type of ins urance that a prospect entrepreneur cannot live without. 1. Explain how the balance sheet, the income statement, and the cash flow a re an entrepreneurs three best friends and how they keep the entrepreneur focused o n the pulse of the business. Explain how these three tools interrelate with one another and provide a complete picture. 2a) Key Tools The balance sheet, the income statement, and the cash flow are like the compass, and map for a sailor. They are key tools for making decisions, since they provi de information not only about the current of the company (i.e. the balance sheet snapshot), but also where is heading (i.e. income statement and cash flowmoving p icture). Of course experienced sailors can sail without a compass and map and find their way in the sea, thanks to their knowledge and information that they can get from the stars and sun. But they will find that they can navigate the waters in a mu ch efficient way and without taking unnecessary risks if they know how to read a map and a compass. 2b) Blindly Driving Entrepreneurs can also manage, at least small business, without any knowledge of its business balance sheet, income statement or cash-flow. Proof of this is my father-in-law who has owned successfully two car-washes in Argentina for 20 year s without knowing that a balance sheet and income statement even exist. He came from Spain to Argentina 40 years ago and started working as a waiter in several restaurants, until he saved enough to buy his first car-wash on 1989. During my last trip to Argentina, I paid attention in how he handles his busines s. Despite not having any formal education or knowledge about accounting, he has developed a kind of rudimentary cash-flow replacement. He uses different envelo pes to stuff cash and bills and makes notations in a regular notebook about dail y revenue and costs; obviously it is not a double entry notation. With his metho d he has been able to successfully manage his business for 20 years. There is on e major drawback with his method: he is the only one who knows it. No other pers on can understand it. 2c) Three Friends

He has been able to manage his business in this heterodox way because: he never needed to request a loan and he has no intention of selling his business (he is planning to leave it to my brother-in-law). These are two of the major reasons w hy the balance sheet, income statement and cash-flow are entrepreneurs three best friends. As we have discussed during class no angel, venture capitalist (aka shar ks), or commercial bank is going to lend him money without him providing the fin ancial information about his business in the standard way, no matter how simple and accurate his envelope method of accounting is. In the same way no buyer will b e interested in purchasing his business without taking a look at the financial s tatements. In addition to the mentioned two major reasons there is a third one and it is ab out the efficient way to manage a business. I am sure that despite the high succ ess that my father-in-law has achieved, the slide that we saw during class did not show the small business survival rate after 20 years (it only shows after 1 0 years) and I tried to research this rate of survival, but there is not trustwo rthy information about it. Notwithstanding, I estimate that this figure should b e anywhere between 10% and 5%; which makes my father-in-laws business venture a ra re avis in the small-business world. However, if he had used the balance sheet, income statement, and cash-flow; he w ould have been even more successful and perhaps now after 20 years of hard work instead of having two car-washes, he would have four, six or ten. With the assis tance of these three friends he would have been able to seize more opportunities, for example he would be able to know the actual cost of each job (something that he does not know) or which kind of job is more profitable (he simply assumes th at the higher the price, the higher is the profitability, which we know that it is not always the case) and act accordingly. Without the cash flow information, he does not know how much cash is tied in his operation, if he needs to extend sometimes the payment to providers in order to cover other expenses, or quickly collect credits that he has given to his custo mers. Without the balance sheet information he does not know the value of his as sets and his company and for example which is the return on investment (ROI), or the Net Profit on sales ratio in his business. If he does not have this infor mation, he is not sure if he can be earning more money in an alternative investm ent. Without the income statement, he does not know exactly if the previous year has been just an average year or an above average year according to net earning s; he does not know if he is paying the optimum amount of taxes . We have seen that my father-in-law and any other entrepreneur can survive withou t the mentioned three best friends as a sailor can survive in the sea without a co mpass and a map. The survival will be more difficult because he will be navigati ng the waters blindly, and he will surely miss new opportunities that appear, e. g. request a loan to a commercial bank in order to finance a growth opportunity , like an acquisition of a new car-wash. These three best friends keep the entrepr eneur focused on the pulse of the business, without them, my father-in-law all h e has are hunches. 2d) Complete Picture Having explained the importance of the balance sheet, the income statement and t he cash flow for an entrepreneur, I will try to briefly explain how these three tools interrelate with one another and how jointly they provide a complete pictu re about a business. As we discussed during class the Balance Sheet is a snapshot about how much the business is worth on a given date and the income Statement is the moving picture of the business over a period of time. An easy way to see how these two interrel

ate, it is to imagine that the balance sheet is the basin and the faucets are th e income statement. We take a photo of the basin at the beginning of the period and we see that it is 20% full with water, then we take another photo an hour (o r year) later and we find that it is 45% full with water. The balance sheet just gives us that static type of information, but we do not know what happened betw een those two moments. We do not know if during that time we filled it 80% and t hen we left that 35% of the water went down the drain hole or we just left the f aucets almost close and this is why we only have been able to fill it with 25% m ore water. We only will be able to know what exactly happened between those two balance sheets or snapshots if we have access to the income statement or the mov ing picture. In other words the balance sheet is just a mere description of the business, how much is worth and how it is on a given date, on the other hand the income state ment tells us the history about why the business looks like that on a given date . The cash-flow in some ways is much related to the income statement, because it also tells us a moving picture of the business. But the difference in this case is that the cash flow is focused in showing us the movie about the changes in a particular portion of the business, and perhaps the most important one: The Ca sh. The cash flow concentrates in the actual uses and sources of funds (revenue and payment streams) without taking into account non cash expenses, such as: amo rtizations and depreciations. It is also important to mention that it only count s the actual cash, it does not count the accounts receivable until they have bee n actually collected. I believe that the following graph can be useful in order to understand how thes e three best friends interrelated:

I am traveling to Argentina next December 18, 2010 to spend the holidays there; I am planning to try once again to introduce my father-in-law to these three good friends. I have my doubts because he is already 65-year-old and he has been succ essful without them. I will definitively ask him to introduce me to his trusted friend: his envelope method and I am planning to learn it. It will not hurt, and having four best friends is better than three, and who knows perhaps my fatherin-law is the next Carl Braun . 2. Explain why you feel there is a deterioration of ethics in the current c orporate environment. What are some of the causes of the current paradigm? How can this be changed? What is the role of middle managers in changing this para digm? Please give examples of firms and current situations in your answer. You can refer to the class discussion in your answer. 3a) Deterioration In the history of capitalism, there is always has been a sense of poor ethics. T he businessman is not typically seen as involved in positive duties beyond right and wrong, which is the definition of ethics . This is something that it has be en left to altruistic people and saints. The only moral requirement has been tha t the businessman stays within the limits of the law. This has been the case since Adam Smith visited the factories where children whe re working in really poor conditions back in 1700s, passing by the South Sea Bub ble scandal , the derivatives scandal of the last few years or the current Nike or Apple sweatshops in South East Asia. The problem during the last two decades or so, it is that the situation has turned worse due to two factors that act as

amplifiers: the first one is Globalization. In the past when you have a rotten apple in a basket, the basket was usually something small or local. For example the South See Bubble scandal only affected the London population, or the Charle s Ponzi Scheme was limited only to Boston but now the effects can be massive, covering the whole world. If you have a rotten apple in a small basket there is just a certain amount of d amage that you can suffer, but when the basket is the whole world, the scale cha nges. Poor ethics in the past used to damage up to one or two hundred people, no wadays a high profile executive with poor ethics can damage several thousands of people globally. So one effect why we have the impression that there is a dete rioration of ethics in the current corporate environment is that nowadays the co llateral damage of poor ethics is massive thanks to the Globalization. The second factor that acts as an amplifier of the deterioration of ethics is th e Hypercompetition . This Hypercompetition requires that the companies use all t he legal weapons that they have within reach in order just to stay afloat and su rvive. All this legal weapons are not usually high in moral ground. For example when Nike established his factories in Indonesia was in order to keep up with Ad idas who established sweatshop factories there too. Otherwise Adidas would have had a cost advantage, if Nike had set up its factory in Flint, Michigan, as Mich ael Moore requested. This same Hypercompetition is what is causing accountants to bend the accounting rules as much as possible (without breaking it), in order to hit the forecasted numbers that has been provided to the market analysts. This bending of the rule s includes: aggressive accounting and valuation of stock options as compensatio ns , for example. I believe that these two factors (Globalization and Hypercompetition) have cause d the deterioration of ethics during the last few years. The Globalization becau se it increases the impact of poor ethics and the Hypercompetition because it en courages to operate at the very limit of the law in order to stay competitive. 3b) Solution This shaky ground, in which we currently are in the moral sense, can be changed or at least smoothed first with the introduction of new legislation. The introd uction of the SarbanesOxley Act in 2002 was a good step into this direction and i t was introduced after the scandals of Enron and WorldCom . Second with educati on, I consider also a positive note the introduction of ethics courses in gradua te studies, such as in MBAs. It is important to teach students that it is not e nough to feel well with himself because he is acting within the limits of the l aw, but also because he is acting within the limits of his conscience. Third, I believe that the consumer should also change his behavior. As consumers , we should value the good ethical behavior. For example, we should be willing t o pay more for a sneaker that it has been produced in a factory in Malaysia acco rding to international standards of work safety and paying fair wages to the wor kers than instead of paying ten dollars less for the same sneaker produced in a sweatshop in Indonesia. If we do not change this behavior, it will be difficult to move away of the vicious circle of hypercompetency. If we do not move away, a company who decides to be ethical and it upgrades its factory (i.e. increase i ts production costs) will be just a prey of the sharks, i.e. its poorly ethical competitors. I believe that part of the problem why consumers are not changing his behavior a bout ethical issues, it is because companies still are not marketing well this change. Companies has done a fine job marketing the green initiatives (and cashi ng it) and altering consumer behavior about it. But they have not done nothing i

n the ethical side. I can only recall, Levis who has a line of jeans made in USA (all the others are made in sweatshops in Bangladesh, Guatemala or Mexico), whic h cost more than the double than the regular ones, but the jeans carry the messa ge that you are preserving jobs in America. Other example could be American App arel that makes all its products in Downtown, L.A. and in its ads it says that i t is sweatshop free. 3c) The role of Middle Management Finally, I believe that the role of the middle management is very important in c hanging the current paradigm, because it can generate ideas to promote a change toward a positive direction. For example giving ideas to introduce sweatshops-fr ee products as Levis and American Apparel has done or generating alternatives tha t are located in higher moral ground. The problem with the middle management is that usually it does not have much autonomy to make decisions, especially diffic ult decisions when one alternative means lower earnings for the company versus a nother which brings higher earnings (but a poor conscience). This problem is men tioned by Joseph Badaracco in his book Defining Moments, when he states that most ethics problems deal with right versus right problems in which neither choice i s wrong . The problems that middle managers face are usually the ones that Mr. Badaracco m entioned. The course of action in these cases should be the following: first the middle managers should take the high moral ground alternative if it is within t heir power of decision, or second as we said in our ethical case presentation ab out the GE case , when the middle manager cannot make the right decision because of his fiduciary duty, he at least should present the two alternatives to Sr. m anagers and let them know that there is one of those alternatives that has a hig her moral standard. Sometimes Sr. managers do not know that there is a better, m orally speaking, alternative and it is the duty of the middle managers to infor m them about it. Hence, the role of middle management can be presented in two w ays: when the change is within their power, they should do it and when it is abo ve them, they should present the alternatives, and encourage the change, to thei r superiors.