Notice: Much of the above work below derives from information publicly available through the U.S. Small Business Administration (the SBA).
Your business
plan is simply a written document that describes in detail how your
new business is going to achieve its goals. A business plan will lay
out a written framework from a marketing, financial and operational
viewpoint. Sometimes a business plan is prepared for an established
business that is moving in a new direction, or is in search of new
capital. Your business plan is a compass to guide you, incrementally
and categorically, to the achievement of your vision – And of
course, in some cases, the document will be used as a selling tool to
solicit the interest of prospective acquirors or financiers.
You've
undoubtedly heard the truism that “If you fail to plan, then you
should plan to fail”. And the best plans are the result of a group
or team effort which is reduced to a writing.
A business plan
includes a description of a company or small business, its services
and/or products and how the business will achieve its goals. The plan
includes the overall budget, current and projected financing, a
market analysis and its marketing strategy approach. In a business
plan, a business owner projects revenues and expenses for a certain
period of time and describes operational activity and costs related
to the business.
The idea behind putting together a business
plan is to enable owners to have a more defined picture of potential
costs and drawbacks to certain business decisions and to help them
modify accordingly before implementing these ideas.
A business plan is also a road map that
provides directions so that a business can plan its future and helps
it avoid bumps in the road. The time you spend making your business
plan thorough and accurate, and keeping it up-to-date, is an
investment that pays big dividends in the long term.
Your business plan should conform to generally accepted guidelines
regarding form and content. Each section should include specific
elements and address relevant questions that the people who read your
plan will most likely ask.
Generally, a business plan has the
following components:
Title Page and Contents
A business plan should be
presented in a binder with a cover listing the name of the business,
the name(s) of the principal(s), address, phone number, e-mail and
website addresses, and the date. You don't have to spend a lot of
money on a fancy binder or cover. Your readers want a plan that looks
professional, is easy to read and is well-put-together.
Include the same information on the title page. If you have a
logo, you can use it, too. A table of contents follows the executive
summary or statement of purpose, so that readers can quickly find the
information or financial data they need.
Executive Summary
The executive summary, or statement of
purpose, succinctly encapsulates your reason for writing the business
plan. It tells the reader what you want and why, right up front. Are
you looking for a $10,000 loan to remodel and refurbish your factory?
A loan of $25,000 to expand your product line or buy new equipment?
How will you repay your loan, and over what term? Would you like to
find a partner to whom you'd sell 25 percent of the business? What's
in it for him or her? The questions that pertain to your situation
should be addressed here clearly and succinctly.
The summary or statement should be no more than half a page in
length and should touch on the following key elements:
Business concept describes the
business, its product, the market it serves and the business'
competitive advantage.
Financial features include
financial highlights, such as sales and profits.
Financial requirements state how
much capital is needed for startup or expansion, how it will be used
and what collateral is available.
Current business position
furnishes relevant information about the company, its legal form of
operation, when it was founded, the principal owners and key
personnel.
- Major achievements points out anything noteworthy, such as
patents, prototypes, important contracts regarding product
development, or results from test marketing that have been
conducted.
Description of the Business
The business description
usually begins with a short explanation of the industry. When
describing the industry, discuss what's going on now as well as the
outlook for the future. Do the necessary research so you can provide
information on all the various markets within the industry, including
references to new products or developments that could benefit or
hinder your business. Base your observations on reliable data and be
sure to footnote and cite your sources of information when necessary.
Remember that bankers and investors want to know hard facts--they
won't risk money on assumptions or conjecture.
When describing your business, say which sector it falls into
(wholesale, retail, food service, manufacturing, hospitality and so
on), and whether the business is new or established. Then say whether
the business is a sole proprietorship, partnership, C or Sub chapter
S corporation. Next, list the business' principals and state what
they bring to the business. Continue with information on who the
business' customers are, how big the market is, and how the product
or service is distributed and marketed.
Description of the Product or Service
The business
description can be a few paragraphs to a few pages in length,
depending on the complexity of your plan. If your plan isn't too
complicated, keep your business description short, describing the
industry in one paragraph, the product in another, and the business
and its success factors in two or three more paragraphs.
When you describe your product or service, make sure your reader
has a clear idea of what you're talking about. Explain how people use
your product or service and talk about what makes your product or
service different from others available in the market. Be specific
about what sets your business apart from those of your competitors.
Then explain how your business will gain a competitive edge and
why your business will be profitable. Describe the factors you think
will make it successful. If your business plan will be used as a
financing proposal, explain why the additional equity or debt will
make your business more profitable. Give hard facts, such as "new
equipment will create an income stream of $10,000 per year" and
briefly describe how.
Other information to address here is a description of the
experience of the other key people in the business. Whoever reads
your business plan will want to know what suppliers or experts you've
spoken to about your business and their response to your idea. They
may even ask you to clarify your choice of location or reasons for
selling this particular product.
Market Analysis
A thorough market analysis will help you
define your prospects as well as help you establish pricing,
distribution, and promotional strategies that will allow your company
to be successful vis-Ã -vis your competition, both in the short and
long term.
Begin your market analysis by defining the market in terms of
size, demographics, structure, growth prospects, trends, and sales
potential. Next, determine how often your product or service will be
purchased by your target market. Then figure out the potential annual
purchase. Then figure out what percentage of this annual sum you
either have or can attain. Keep in mind that no one gets 100 percent
market share, and that a something as small as 25 percent is
considered a dominant share.
Your market share will be a benchmark
that tells you how well you're doing in light of your market-planning
projections.
You'll also have to describe your positioning strategy. How you
differentiate your product or service from that of your competitors
and then determine which market niche to fill is called
"positioning." Positioning helps establish your product or
service's identity within the eyes of the purchaser. A positioning
statement for a business plan doesn't have to be long or elaborate,
but it does need to point out who your target market is, how you'll
reach them, what they're really buying from you, who your competitors
are, and what your USP (unique selling proposition) is.
How you price your product or service is perhaps your most
important marketing decision. It's also one of the most difficult to
make for most small business owners, because there are no instant
formulas. Many methods of establishing prices are available to you,
but these are among the most common.
Cost-plus pricing is used mainly
by manufacturers to assure that all costs, both fixed and variable,
are covered and the desired profit percentage is attained.
-
Demand pricing is used by
companies that sell their products through a variety of sources at
differing prices based on demand.
-
Competitive pricing is used by
companies that are entering a market where there's already an
established price and it's difficult to differentiate one product
from another.
-
- Markup pricing is used mainly by retailers and is calculated
by adding your desired profit to the cost of the product.
You'll also have to determine distribution, which includes the
entire process of moving the product from the factory to the end
user. Make sure to analyze your competitors' distribution channels
before deciding whether to use the same type of channel or an
alternative that may provide you with a strategic advantage.
Finally, your promotion strategy should include all the ways you
communicate with your markets to make them aware of your products or
services. To be successful, your promotion strategy should address
advertising, packaging, public relations, sales promotions and
personal sales.
Competitive Analysis
The purpose of the competitive
analysis is to determine:
the strengths and weaknesses of
the competitors within your market.
strategies that will provide you
with a distinct advantage.
barriers that can be developed to
prevent competition from entering your market.
- any weaknesses that can be exploited in the product
development cycle.
The first step in a competitor analysis is to identify both direct
and indirect competition for your business, both now and in the
future. Once you've grouped your competitors, start analyzing their
marketing strategies and identifying their vulnerable areas by
examining their strengths and weaknesses. This will help you
determine your distinct competitive advantage.
Whoever reads your business plan should be very clear on who your
target market is, what your market niche is, exactly how you'll stand
apart from your competitors, and why you'll be successful doing so.
Operations and Management
The operations and management
component of your plan is designed to describe how the business
functions on a continuing basis. The operations plan highlights the
logistics of the organization, such as the responsibilities of the
management team, the tasks assigned to each division within the
company, and capital and expense requirements related to the
operations of the business.
Financial Components of Your Business Plan
After
defining the product, market and operations, the next area to turn
your attention to are the three financial statements that form the
backbone of your business plan: the income statement, cash flow
statement, and balance sheet.
The income statement is a simple and straightforward report on the
business' cash-generating ability. It is a scorecard on the financial
performance of your business that reflects when sales are made and
when expenses are incurred. It draws information from the various
financial models developed earlier such as revenue, expenses, capital
(in the form of depreciation), and cost of goods. By combining these
elements, the income statement illustrates just how much your company
makes or loses during the year by subtracting cost of goods and
expenses from revenue to arrive at a net result, which is either a
profit or loss. In addition to the income statements, include a note
analyzing the results. The analysis should be very short, emphasizing
the key points of the income statement. Your CPA can help you craft
this.
The cash flow statement is one of the most critical information
tools for your business, since it shows how much cash you'll need to
meet obligations, when you'll require it and where it will come from.
The result is the profit or loss at the end of each month and year.
The cash flow statement carries both profits and losses over to the
next month to also show the cumulative amount. Running a loss on your
cash flow statement is a major red flag that indicates not having
enough cash to meet expenses-something that demands immediate
attention and action.
The cash flow statement should be prepared on a monthly basis
during the first year, on a quarterly basis for the second year, and
annually for the third year. The following 17 items are listed in the
order they need to appear on your cash flow statement. As with the
income statement, you'll need to analyze the cash flow statement in a
short summary in the business plan. Once again, the analysis doesn't
have to be long and should cover highlights only. Ask your CPA for
help.
The last financial statement you'll need is a balance sheet.
Unlike the previous financial statements, the balance sheet is
generated annually for the business plan and is, more or less, a
summary of all the preceding financial information broken down into
three areas: assets, liabilities and equity.
Balance sheets are used to calculate the net worth of a business
or individual by measuring assets against liabilities. If your
business plan is for an existing business, the balance sheet from
your last reporting period should be included. If the business plan
is for a new business, try to project what your assets and
liabilities will be over the course of the business plan to determine
what equity you may accumulate in the business. To obtain financing
for a new business, you'll need to include a personal financial
statement or balance sheet.
In the business plan, you'll need to create an analysis for the
balance sheet just as you need to do for the income and cash flow
statements. The analysis of the balance sheet should be kept short
and cover key points.
Supporting Documents
In this section, include any other
documents that are of interest to your reader, such as your resume;
contracts with suppliers, customers, or clients, letters of
reference, letters of intent, copy of your lease and any other legal
documents, tax returns for the previous three years, and anything
else relevant to your business plan.
Some people think you don't need a business plan unless you're
trying to borrow money. Of course, it's true that you do need a good
plan if you intend to approach a lender--whether a banker, a venture
capitalist or any number of other sources--for startup capital. But a
business plan is more than a pitch for financing; it's a guide to
help you define and meet your business goals.
Just as you wouldn't start off on a cross-country drive without a
road map, you should not embark on your new business without a
business plan to guide you. A business plan won't automatically make
you a success, but it will help you avoid some common causes of
business failure, such as under-capitalization or lack of an adequate
market.
As you research and prepare your business plan, you'll find weak
spots in your business idea that you'll be able to repair. You'll
also discover areas with potential you may not have thought about
before--and ways to profit from them. Only by putting together a
business plan can you decide whether your great idea is really worth
your time and investment.
If yours is a startup business and you'd like to
download a high-quality template and instructions to follow for the
preparation of your own business plan, simply click HERE.
If yours is an existing and established business and
you'd like to download a high-quality template and instructions to
follow for the preparation of your own business plan, simply click
HERE.
Notice: Much of the above work derives from information publicly available through the U.S. Small Business Administration (the SBA).
***************
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