Chapter 2: Recycling Business Planning
Chapter 2 contains:
- Executive Summary
- Company Mission
- Company Overview
- Management Team
- Marketing Strategy
- Operations Design
- Financial Overview
- Contingency Options
- Business Planning Resources
A good business plan is important to obtaining financing for a new or growing recycling company. A written plan can help an entrepreneur explain to a financier how a loan or investment will be repaid and rewarded. In addition, the plan can be a document that the management team, advisers, board and staff work together to develop. The business plan can continue to provide strategic focus and coordination for the marketing, operating, financing and staffing activities of the growing business. While some recycling entrepreneurs have been able to succeed while making decisions based only on their business instincts, having a written plan can help to ensure sustained and continued success.
The business founder, owner or chief executive should write the business plan, with input from other company team members. Consultants, government agencies and software programs can provide suggested templates and advice on different sections. However, just as the founder owns the company, he or she should own and take responsibility for writing and carrying out its plan for success. By developing the plan, the entrepreneur can make some of the potential mistakes on paper, instead of in practice. The plan and its projections can become yardsticks for measuring the progress of the company.
Finally, the business plan should be a living document, in a loose-leaf notebook and computer files that are revised annually or more frequently as circumstances change. Staff hiring, fixed asset purchases, marketing activities, new facilities, financing actions and budgets should all be consistent with the business plan. If the entrepreneur is making decisions that are out of step with the plan, he or she may indeed be on the right track, given a change in the companys environment. However, the discipline of going back and revising the plan will help to point out unforeseen effects of a change in company strategy.
Ask for advice about your business plan from your accountant, lawyer, business partners, board members and consultants. Several books and software packages have been developed to help entrepreneurs in writing their plans. A few are listed in the Resources section at the end of this chapter.
Provided below is a brief overview of the important sections of a recycling business plan and some of the questions each section should answer. Depending on the size, type and stage of a business, some sections of the plan can be more or less extensive. Developing the business plan should not be seen as a big task separate from starting or running a business. Rather, developing the plan should involve compiling the market, management, operational and financial information necessary to the business into one well-organized document.
The remainder of this chapter is written as if addressed to an entrepreneur who is compiling and writing the business plan for his or her recycling company. The business plan sections are divided as shown in Figure 2-1.
In the executive summary, you should concisely communicate the nature of your business and why investors or partners should want to be involved. Investors sometimes receive stacks of business plans each week. You have to quickly catch their interest and convince them that your company deserves a second look.
Write the executive summary after all other sections of the plan are completed, highlighting:
Recycling Business Plan
Sample Table of Contents
- Executive Summary
- Company Mission
- Mission Statement
- Goals and Objectives
- Company Overview & Management Team
- Legal Business Description
- Management Team
- Board of Directors, Strategic Partners
- Products and Services
- Upcoming Product Developments
- Proprietary Technologies or Processes
- Marketing Strategy
- Market Definition, Customer Profile
- Competition, Risk Factors Market Research and Testing
- Sales, Distribution, Promotions
- Sales Projections
- Operations Design
- Facilities and Equipment
- Information and Quality Systems
- Financial Overview
- Historical Financial Statements
- Projected Financials and Assumptions
- Capital Requirements
- Exit and Payback Strategy
- Contingency Options
- Worst Case Scenarios
- Potential Company Responses
- Supporting Documents
- Business Mission and Description-What business are you in? Why? What unique products or services do you offer?
- Marketing-Who will be your customers? How will you increase your sales to them?
- Operations-What facilities, equipment and personnel resources will allow you to fulfill these sales?
- Management Team-Who are the founders and owners? How will this team be strengthened as the growing business demands new skills?
- Finances-How have you and how will you perform financially? What do you need from lenders or investors to meet your business goals?
Company MissionWhat is your business? You should be able to answer this question succinctly enough to pass the elevator test. That is, can you tell an investor or banker what your business is while you are riding the elevator to his or her office?
Remember that just being in the recycling or environmental business is not enough. Indeed, for some financiers, your being a recycler may initially be a drawback. Instead, explain why your company is or will be successful with its customers. For example,
- We supply automotive rubber product manufacturers with above-spec crumb rubber at below market prices.
- We provide integrated janitorial and recycling services to office property managers that are the most cost-effective in the metropolitan region.
- We market ecological, recycled-content, trendy apparel to Generation Xers through mall retail outlets.
Many nonprofit organizations develop a mission statement to provide guidance for their board of directors and staff and to ensure that decisions are consistent with their charitable or educational mission. Private businesses may not think a mission statement is really important-after all, isnt the real mission just to be profitable? Yes, but most businesses achieve profitability by following a founding vision or mission that provides a unique service to their customers and society. Most small business owners dont put this in writing, but they intuitively run their business in concert with their purpose, vision or mission.(1)
Writing out the mission statement allows for investors, employees and even customers to help buy into the excitement of the founder and entrepreneur. An example could be:
Clean and Greens mission is to provide excellent and inexpensive janitorial and recycling services to office property managers thoughout the New York metropolitan region. We make offices clean and green by providing efficient, integrated services that ensure that all discarded paper, cardboard, bottle, can and organic materials are recycled or composted. By using only nontoxic, natural cleansers, we ensure that each morning, our clients arrive in offices that are clean and healthy work environments.
The company overview can include basic information on:
- Company history-founding date, achievements, predecessor companies
- Company legal status-sole proprietorship, partnership, corporation or limited liability company
- Company founders, managers, investors and board of directors
- Current and projected facility locations
- Company products and services, including descriptions and diagrams, benefits, stage of development and patent or other proprietary protections (A more thorough, separate Products and Services section can be included in the business plan, as well.)
Management TeamWhen equity investors are asked what is most important in their decision to invest in a company, they usually start off with the people-the owners, founders or management team. Indeed, as noted in Figure 2-2, some of the primary reasons that individual investors reject deals involve management. For bankers and lenders, also, the companys leadership team and its track record are critical in deciding to make a loan.
Deal Rejection Reasons for Individual Investors(2)
- Ventures chances for growth seemed limited
- Inadequate personal knowledge of firms principals or key personnel
- Firms management lacked experience or talent necessary for success
- Proposed value of firms equity was unrealistic
- Did not coincide with Angels long-term investment objectives
- Venture concept needed further development
- Not enough time for adequate appraisal
- Insufficient information provided
- Unable to assess technological aspects
Many business plans try to address the strengths of management by providing pages and pages of resumes. Although resumes are important, and can be included in an appendix, it is more vital to give the reader a feel for yourself and your team and your commitment to the business. Try to answer the following questions in a unique and persuasive manner:
- Who are the founders, active investors, key managers, directors and important advisors for the company? What experience do these people have in starting up and expanding companies in your industry?
- Why did you get into this business? What excites you and your team about the opportunities in this market?
- How will your company be organized? What roles will the directors and key managers play? What organizational structure best matches the needs of the company at this stage of development?
- Why is an investor likely to reap rewards and minimize risks by going with your companys team instead of somebody elses?
If you have not recruited and employed all of the managerial talent you will need to carry out the next immediate phase of your business plan, explain your plan for doing so. That is, assume that you are planning to market a recycled-content retail product to mass merchandisers and do not yet have experienced marketing staff. Then, lay out a plan for hiring a marketing manager with the appropriate experience or for contracting for these marketing services. Similarly, demonstrate that you have or will recruit and pay for the necessary expertise in the finance and operations areas.
Finally, how about the CEO? Who will make sure the business meets and exceeds business plan and financial targets? If you are the founder, inventor or visionary for the company, dont necessarily assume that you should always be the chief executive officer. Often very different personalities and skills are needed to have the vision to invent a unique product or service and to manage a companys successful growth. If you are initially successful, your company can outgrow your talents.
Take a management and vocational aptitude test and objectively assess whether you are the best person to lead the company. If not, recruit a CEO or business manager with the requisite skills, or show in the business plan at what stage such talent will be recruited. Even if it means giving up some of your ownership stake in the company, such humility and realism in assessing your strengths and weaknesses can help to ensure long-term success for a venture.
Succinctly communicating the skills, experience and motivation of the founders and management team does not just happen in the business plan alone. When seeking investors or lenders, nothing can substitute for direct personal contact. A young entrepreneur whose experience looks thin on paper may have such drive and determination in person that she or he inspires an investor to become a partner.
Referrals are essential to widening your realm of contacts. Always try to have a referral source when contacting a financier, rather than making a cold call. Venture capital partners and active individual investors often get so many business plans, that they do not give them a second look unless the company has been referred to them by a reputable attorney, accountant, entrepreneur or investor.
After your management team, the market for your companys products or services is the most important concern for many investors. You may be tempted to focus on a unique technology or service strategy you are using, without paying enough attention to how you are serving your customers. If you have invented an automated container sorting device that is technically elegant, but too expensive for processors to purchase, you will not have a successful business. Rather, the focus of your marketing and business plan should be on the unique value you provide to your customers, i.e., a cost-effective system for generating marketable commodities from commingled recyclable streams. Your marketing and business strategy should be built around providing your current and new customers with a unique value that they cannot get from your competitors.
Some of the specific questions the marketing section of your business plan should cover include:
- How are your products and services uniquely suited to meet customer needs?
- What market research or testing have you done to verify customer interest in buying your products or services? How many current or prospective customers have been interviewed? What directions did this research indicate for future offerings?
- What is the strategy behind your choices of product or service design, pricing, locations and marketing activities?
- What are your competitors strengths and weaknesses vis-à-vis your companys, and how will your marketing efforts exploit your advantages and minimize disadvantages?
- How much are you relying on the green or recycled features of your products or services to sell them? Are your offerings better than those of competitors without considering environmental benefits?
- What is the total market for your product and service? How is this total market segmented? Which particular market segments will your company pursue?
- What are the marketing expansion plans for the company? Will you keep the same product or service and offer it to a broader range of customers? Or will your company develop new products and services to offer to existing customers? Will you try to do both, and if so, how will you keep from becoming overextended?
- What are the sales projections for the company in the coming years? That is, how much of which products and services will be sold to how many customers in each period? What market share does this represent and how does this compare to your existing share and those of your competitors?
- What assumptions are your sales projections based on? What are worst and best case scenarios-i.e., if your products gain wider acceptance more quickly or if an unexpected, tough competitor enters your market?
These questions are just a few of those addressed in thorough market analyses and marketing plans. These sections can address more detailed issues of marketing and sales strategies, distribution channels, advertising and promotions, and public relations. As the company grows, management will need to continue to develop its marketing expertise and planning.
Once you have told your reader who you are, what you do and to whom you are going to sell, the next question is: Can you do it? That is, can the company deliver the products and services to the customer on time, at the right price, in the quantities desired and of a quality that meets or exceeds the customers expectations?
Managing a growing recycling operation requires expertise in personnel, equipment, facilities, information systems, shipping and materials flow. Your plan should demonstrate that your team has thought through what will be needed to meet the anticipated customer demands projected in the marketing section. If you have successfully managed complex operations before, financiers can be assured that you can do so again. If you have not, your operations section must assure them that you have anticipated the challenges, and will be tapping into appropriate expertise to ensure that products and services are produced within projected budgets.
Readers will be looking for answers to the following questions about your new or expanded operations:
- What facilities and equipment will be needed to meet your production or service schedule? Are existing buildings and equipment adequate, or have new sites and machinery been identified? Is the capital budget for these new fixed assets sufficient? Have quotations been obtained for these items?
- What will be the staffing plan for the company? What skill levels, compensation and benefits are anticipated? How will employees be motivated to help provide value to your companys customers?
- What management and information systems will be instituted? What systems will help assure the quality of the product or service provided? How will production expenses and components be tracked? How will the critical information get back to employees and the management team to help inform continuous improvement?
- What risk management and insurance plan does the company have in the case of a mishap-equipment failure, natural disaster, labor stoppage, shipping problem, etc.?
- What strategies will the company use to manage materials and product flows? How will a regular supply of feedstock or raw materials be obtained, transported and stored? Has the production flow and process been designed to maximize efficiency and quality? How will finished products inventory be stored and distributed on a timely basis to customers?
- As the company grows, how will multiple sites maintain the operational procedures developed at the home location? How will product and service consistency be maintained while allowing for continued innovation and improvement?
Finally, you need to tell the story of your company in numbers. Some business plans go overboard in the financial section, printing page after page of spreadsheets with little explanation. It is more important that the reader understands the assumptions behind your financial projections. Your marketing section should explain how you arrive at your sales projections. Likewise, your operations section should describe what is behind the operating expense budget. Make sure to reiterate key assumptions or refer the reader back to the pages where they are explained in more detail.
If your company has historical and current financial statements, be sure
to include them. Note whether they have been prepared, reviewed or audited
by an outside accounting firm or prepared internally. (If you have not
yet done so, hire an accounting firm to assist in the preparation of your
financial section and move toward having an annual financial audit done
on the company.)
Business Plan Sections and Their Relative Importance to Individual Investors(3)
- Clear description of proposed financing needed from start to maturity
- Marketing plans, including segment on market sought or controlled by company, data on market size and characteristics, present and potential market competition, and future market strategy
- Summary statement of the purpose and goals of the enterprise
- History of the firm, financial statements and backgrounds (resumes) of key personnel
- Clear description of the technical aspects of the proposed project
- Direct personal knowledge about firms principals and key personnel
- Names of principal suppliers and customers
Entrepreneurs believe that profit is what matters most in
a new enterprise. But profit is secondary. Cash flow matters most.
Growing bodies need to be fed, and a business that grows fast devours
cash. You have to make constant investments just to keep even with
it. This is totally predictable, so getting caught in a cash crunch
is totally unnecessary.(4)
Peter Drucker, Clarke Professor of Social Science and Mgmt., Claremont Graduate School
Your projected financial statements should cover at least the time period for which you are seeking a loan or equity investment, and illustrate how these capital infusions will be repaid. The statements should include:
- Balance sheets for the beginning of the companys fiscal year and the end of each year covered by the plan, listing all assets, liabilities and company equity.
- A fixed asset budget, showing the anticipated schedule of investments in plants and equipment.
- Projected income statements for each year of the plan, broken down on a monthly basis for at least the first two years. The income statement should incorporate revenues consistent with the marketing section and expenses consistent with the operations, financing and marketing sections.
- Cash flow statements for the same time periods as the income statements, showing how cash levels will be affected by operating income, interest and financing charges, fixed asset purchases, changes to current liabilities and assets, depreciation, and anticipated capital infusions from equity sales or loans. Even if the company achieves a positive monthly net income according to the projected income statements, if cash flow is not monitored closely according to projections, a business can easily fail. This is especially true for recycling companies reliant on materials markets that are slow to pay for shipments and whose prices fluctuate widely with commodity prices.
Be sure to explain how each statement is derived such that the anticipated results will be achievable by the company. The cash flow statement, particularly, will be essential in predicting the amount of outside financing you will be needing to meet your start-up or expansion goals. Some of the questions your financial section should answer include:
- When will the company first achieve a net monthly income and a positive cash flow?
- What are the greatest expense items for the company-labor, equipment or material supplies? How will these expenses be managed and minimized?
- What levels of equity investment and debt are needed for the company to carry out its business plan? When and in what amounts will the financing be needed? What will the funds be used for-research and development, marketing, facilities, equipment or working capital? Are some of these uses more appropriate for debt financing and others for long-term equity investment?
- How much has been invested in the company to date and by whom? What are the total assets currently? What level of sales and income have been already achieved? How will these prior results be improved?
- How will debt financing be repaid? Is cash flow sufficient to more than cover anticipated principal and interest payments? What assets will collateralize the loan? Does the company have a secondary source of repayment if the primary revenue source falls through?
- How might new equity investors be repaid and what appreciation can they expect on their investment? Does the company anticipate repaying investors who wish to cash out in a few years through an internal refinancing, a merger with or acquisition by another company, an initial public offering, or a private equity placement of stock?
- How will the company deal with commodity price fluctuations? What recycled material price levels are assumed for the financial projections? How much would prices have to fall (or rise, if recovered material is used as a feedstock) before the business would have negative cash flow? How will the company protect itself against such commodity price fluctuations?
For the entrepreneur and investor, it is important to think through what may go wrong. As an entrepreneur, you are probably by nature optimistic about the prospects for your business and may have been a bit generous in even your most conservative projections. The contingency section forces you to think about the worst case and how you would respond to save the business and safeguard investor or creditor capital. Some risks you should consider include:
- Sharp decreases in recycled commodity prices if you are a collector, processor or supplier of materials (or sharp increases if you are a buyer and manufacturer).
- Price cuts or service or product expansions by strong competitors in your market.
- Natural disasters, equipment breakdowns, employee injuries, labor difficulties or working capital shortfalls.
- Government procurement or recycling mandate rollbacks that reduce the demand for your product or service.
- Difficulties with getting new technologies to operate effectively at desired production levels.
- Inability to penetrate markets dominated by established virgin materials manufacturers or waste management companies.
Develop creative and viable responses to the most likely setbacks your company could face. In so doing, you can demonstrate that in the negative scenarios you may be able safeguard investors principal, while in the positive scenarios financial partners will share handsomely in the companys success.
Entrepreneurs are often concerned about giving away proprietary information about their companies in a business plan. Many investors will likely be hesitant to sign a confidentiality agreement before looking at your business plan. Do not reveal any specific technical or competitive information in your plan that would weaken your business if a competitor obtained it. If revealing such information is necessary to persuade an interested investor to consider your company, it can be included later in an offering circular for which the investor must sign a confidentiality agreement to obtain.
The title page of the business plan can state This document contains confidential and proprietary information belonging exclusively to [Company], and the further disclaimer This is a business plan. It does not imply an offering of Securities.(5) The business plan copies should also be numbered, so that you can track their distribution and limit circulation.
Wrap up the business plan by reminding the reader why your company is a good partner for them. Touch on all of your key competitive strengths and invite the reader to contact you to talk further and to arrange a meeting.
What Investors Look for in Companies(6)
- Management team-Company management has been successful in managing other business ventures or corporate departments, preferably in the same industry area. In addition to a CEO or owner, the company has recruited a CFO or controller, a COO or operations manager, and has significant technical, engineering and marketing staff expertise suited to its business. If this broader management team has not been recruited, the business plan lays out a timeline and budget for recruiting and hiring necessary financial, operational, technical and marketing management and staff.
- Market opportunity and strategy-The companys products or services have a strategic advantage over competitors in the marketplace-they are of better quality, lower price, unique or proprietary design, or offer some other advantage to customers. The company has opportunity for expansion either geographically, through partnerships or licensing, or through offering a broader range of services or products to existing customers. The company is not excessively reliant on only one product, customer or contract. The company has a strategy for insulating itself from commodity price risk fluctuations, manufactures products with significant added value or has service contract revenue.
- Current and projected financial statements-The company has kept thorough and accurate financial records since inception, with annual financial reports prepared and preferably audited by a reputable accounting firm. Financial projections are reasonable for the companys industry segment and project investment returns for outside investors commensurate with the investment risk. Margins allow for near-term profitability at realistic sales levels.
- Company stage and status-Business strengths needed at
different stages of company development include:
- Start-up, needing seed financing-Strong founding management, unique and tested product or service, significant untapped market potential, weak or nonexistent competition.
- Early stage, needing expansion financing-Existing sales with current or near-term profitability, new capital will allow company to serve a larger market more efficiently; building a management team, 1+ years of operations.
- Growth company, seeking mezzanine financing-Annual sales over $3 million, current profitability, capital will allow for more efficient operations, expanded sales, or stronger capital structure, experienced management team, 3+ years of operations.
- Mature company, seeking initial public stock offering, merger, or acquisition financing-Annual sales over $10 million, strong sustained profitability and cash flow, strategic market advantage, proven management team, 5+ years of operations.
Business Planning ResourcesCheck your community or business school library for books on business planning and entrepre-neurship. Some useful books to look for include:
- Allen, Kathleen, Launching New Ventures, 1995, Upstart Publishing.
- Baty, Gordon B., Entrepreneurship for the Nineties, 1990, Prentice-Hall, Inc.
- Franklin, Burke et. al., Write a Winning Business Plan-Reference Guide for BizPlan Builder, 1995, JIAN Tools for Sales, Inc.
- Hawken, Paul, Growing a Business, 1987, Fireside, Simon & Schuster.
- Kotler, Phillip, Marketing Management, Prentice-Hall, Inc.
- Siegel, Eric, Brian Ford and Jay Bornstein, The Ernst & Young Business Plan Guide, 1993, John Wiley & Sons, Inc. (Many large accounting and law firms publish similar business planning and start-up guides.)
- State and regional recycling market development offices and state recycling organizations sometimes publish recycling business guides. For example: A Guide to Starting a Recycling Business, 1994 & Funding Opportunities for Recycling Business Enterprises, 1992 [California Department of Conservation, (916)445-1490] and North Carolina Resource Guide for Recycling Businesses, 1994 [NC Recycling Association, (919)851-8444.] For a guide to all state recycling market development contacts, order the Market Development Directory from the National Recycling Coalition at (703)683-9025.
- US Small Business Administration offers a range of business and financial planning publications, software and resources. Contact the SBA Answer Desk at (800)8-ASK-SBA and ask for the Resource Directory for Small Business Management publication guide as well as the phone number for your SBA District Office. The district office can put you in touch with a local Small Business Development Center (SBDC) or Service Corps of Retired Executives (SCORE) where small business counselors can help with business planning. If you have a computer modem, access SBAs home page on the world wide web at http://www.sba.gov/ or dial in to their electronic bulletin board at (800)697-4636. Information on SBA-guaranteed loans and local lenders, Small Business Innovative Research (SBIR) grants, and Small Business Investment Companies (SBICs) can also be obtained from the SBA.
- For an eloquent description of mission-driven businesses, see Growing a Business by Paul Hawken, 1987, Fireside, Simon & Schuster.
- Responses from nationwide survey of individual investors as reported in Gaston, Robert J., Finding Private Venture Capital For Your Firm, John Wiley & Sons, 1989, p. 91.
- Gaston, Robert J., Finding Private Venture Capital For Your Firm, John Wiley & Sons, 1989, p. 85.
- Drucker, Peter, Flashes of Genius,; Inc. Magazine, May 21, 1996, p. 30.
- Franklin, Burke et. al., Write a Winning Business Plan-Reference Guide for BizPlan Builder, 1995, JIAN Tools for Sales, Inc., p. 1-3.
- Kirkpatrick, David, Recycling Venture Forum Study, Final Report, June 1995, KirkWorks, sponsored by US EPA, the Northeast Recycling Council, the National Recycling Coalition, and the New York State Office of Recycling Market Development, p. 14.