Ideas are wonderful things and they can lead to great prosperity—if you can turn them into a solid business. However, to do that requires focus and money. This is where the business plan comes into play. At its heart, a good business plan will guide you in building and operating your company. Still, before it does that, your business plan will "sell" your business to potential investors and lenders with the money to make your idea a reality.
While the sections of a business plan are uniform, meaning the same sections and information can be found in any business plan, this is nothing like a tax form. You cannot simply plug figures and text into the right spots and have a business plan. A good business plan comes from good business planning. The document you will be handing to lenders and investors is a reflection of the thought and work that went into developing the core business concepts and ideas presented in its pages.
From Concept to Completion
Your business plan is the point at which you put our business concept on paper, refine it and ready it for its debut. The business plan is actually the third step in a four-step process of developing a business, which includes:
1. Create the business concept. This is your great business idea. Once identified, you might do some preliminary research to get a feel for the market and the competition and get some feedback from family and friends. You might also do some research to see if your idea has been tried before and with what results.
2. Perform feasibility research and analysis. Here is where the real legwork begins as you try to determine if your idea will work. During this time, your business concept will be refined as you discover opportunities that have a direct influence upon it. You are going to be looking closely at the market and the competition, while developing a marketing strategy and getting a handle on your finances.
3. Write the business plan. Once you have created the concept and researched it, you are ready to write your business plan. Putting things on paper will lead to further fine-tuning, and you will find yourself revising your business plan as new information or ideas come up. This is not a project for a Saturday afternoon, but a task that could, and probably should, take time—enough time to do it right.
4. Find the funding. Your business plan's first use will be to impress potential investors and lenders enough to persuade them to lend you the money you need to get your business under way.
Anatomy of a Business Plan
Because your business plan will serve a variety of purposes, it is necessary for it to cover all of the major issues that your business will face from sales and marketing to finances to operations. According to the U.S. Small Business Administration, there are aspects that every business plan has to have:
Before you set out to tackle your own business plan, take a look at example plans used by successful businesses in your industry. Conducting this kind of research will give you a good idea of what you will need to address in order to make your plan as effective as possible.
Executive Summary.
Your executive summary is a two- to five-page introduction to the business plan. This summary outlines the business concept, the market for your product and service, relevant trends and projections for the market, the competitive advantage you offer, the skills and experience of your company's management team and a summary of the offering and anticipated returns. It must include:
-The type of company you want to start. (Technology, Manufacturing, Service, etc.)
-The legal structure of the company. (Sole Proprietorship, LLC, S-Corporation, etc.)
-The product or service your business will offer and how it differs from the competition.
-The size of your customer base and how much you plan to charge them.
-The management team and their qualifications.
-The amount of money you need, why you need it and when you need it.
-The expected return on investment and when you believe you will see a profit.
Company and Product Overview
This section offers an overview of your business as it exists today, as well as your vision for it in the future. Here, you will summarize how all the elements come together to create a strong business. The company and product overview discusses the various features and benefits of the product or service you plan to offer, convincing potential investors and lenders that you will have something that people will want to buy.
These sections should be clear and concise while strongly asserting your competitive advantages, such as cost and speed advantages and product differentiation. In this section, make sure to:
-Include a sales history, with profits and other vital information.
-Offer an honest assessment of the challenges you've faced and overcome.
-Demonstrate your industry knowledge.
-Discuss your talks with distributors, competitors, retailers and others in the industry.
-Describe the features and benefits of your product or service.
-Clearly chart the development of your product.
Market Analysis
Here is where you should articulate the way your business will generate sales and succeed, given current market conditions. You will discuss the advantages of your product or service, the target market, the things these customers care about, how you will reach them and convince them to buy, why they will choose to do business with you and how much money you expect them to spend on your product or service. The following components should be included:
Market opportunity. This is the number of potential customers and what they are willing to pay. Here you show that your revenue estimates are realistic and substantiated.
Competition. Identify your direct and indirect competitors and offer a convincing description of how your product or service differs from your competitor's offerings. This is also where you should include any government regulations or other outside factors that may come into play.
Marketing strategy. Include how your company will use distribution, advertising, promotion, pricing and selling incentives, and how you will sell your product to a single customer.
Market research. Substantiate your claims with some type of market research. Depending on the nature of your business, this research could include surveys or polls that you have personally conducted, existing industry research or research that you pay for (such as from a market research firm).
Financial forecasts. This section should include projections on sales growth, market share and amount of sales (by customer), as well as any details that can support your projections.
The PITFALL OF Excess Optimism
Market analyses can often be overly optimistic. The classic is to say that if you get just 1 percent of a huge market (China, for example), that's all you'll need to see great profits. This argument will send up red flags in your investors faster than anything else. They will ask you things like, "Why just 1 percent?" and you better have a good answer. Replying with, "Because it's doable," won't cut it. Your lenders want to know why each customer will pick your product or service over the competition and how you will convince them to do so. They need to be convinced that you are being realistic, so you need to be able to back up your claims with actual research and a sound analysis of the marketplace.
Marketing and Sales Plan
This is the section where your market analysis is put to the test. Here you discuss the implementation of your marketing plan to achieve the sales performance that your projections suggest. This is accomplished by addressing the following issues:
Price. Why are you offering your product or service at a particular price? You will also need to support that decision by explaining why you believe the market will support that price. You should also outline the effect that price changes would have on your expected gross margins, as well as document the costs of goods sold.
Distribution. How will you get your product or service to the customer? Will you use direct sales or retail outlets? How will the distribution methods you've chosen contribute to your success?
Promotions. How will your product be promoted in the marketplace? How will you ensure that your target customers know your product and prefer it over the competition's product? Here you discuss your advertising, sales and distribution strategies and develop a marketing budget.
Operations
The operations section of your business plan demonstrates to your potential investors that you have considered all the day-to-day issues that come with running your business—including location, staffing, equipment and other needs. This section should address all aspects of business operations, including:
Product development. Summarize your product development activities before bringing the product to market and as ongoing development activities.
Manufacturing. Clearly describe your manufacturing processes. You need to demonstrate that you understand the techniques, plant, equipment, materials and labor required to make your product. You also need to include production rates as well as any constraints on production.
Maintenance and support. This is the support your company will provide to your customers. You will also need to document the resources required to provide that support.
Management Team
It is vital to investors and lenders that your management team knows what it is doing and how to run a business. Here you have an opportunity to sell these people on the competence and experience your business will offer. This is the section in which you will discuss the talents and skills of the people who are running your business. These people include investors and board members, key employees, advisors and strategic partners.
You will need to include an organization chart to show all the different jobs in the company, and what type of employee will report to which type of supervisor. You'll also need to include full descriptions of both your hiring process and human resource policies. Make sure to clearly explain how you will select, train and reward your employees.
Financials
The financials section is the place for you to make your case for the profitability of your business by offering projections of your company's anticipated financial performance. This is, perhaps, the most important section of the business plan. You need to be able to support, adjust and refine this section as your business changes and develops.
The format of this section is fairly uniform, with similar statements or schedules presented in a standardized fashion. If you need to, find assistance to ensure that your financial statements are written appropriately. Potential lenders and investors will be expecting to see the following:
Introduction. Here you present the assumptions that form the basis of your financial projections.
Income statements. These should be for three to five years (only necessary if you're already in business). The first year should reflect monthly or quarterly performance. After that, annual statements will do.
Cash flow statements. These should be for the first two years (again, only necesssary if you're already in business) and be as detailed as possible. You will also need to include quarterly or annual cash flow statements that correspond to the income statements you provide.
Current balance sheet. This is a picture of the business' financial position as it is today, including assets, liabilities and equity. You will also need to provide projected year-end balance sheets for two years. If any assets or liabilities can be turned to cash within a year, they are considered current. If not, then they are considered long-term.
Break-even analysis. This analysis shows how much you need to make in sales to break even at any given time.
Finance comparisons. You need to compare your projected finances to those of existing businesses within your field. You can use this as the basis for an operating budget as well as to set objectives to be achieved, milestones to gauge the success of your business.
Funds required. There are three main types of costs to consider and include in the financial section of your business plan. These include start-up costs, fixed and variable expenses.
Writing a business plan is a time-consuming task that, if done correctly, will yield great rewards. It is the final step you need to take before seeking the funding that will get your business—and dreams—off the ground, so do it right. For more information on what to do, examples, resources and mentoring, log on the website of the U.S. Small Business Administration at
sba.gov.
Be sure to check out the
Business Plan Checklist!
