A finished business plan serves as an operating tool to help you
manage your business and work toward its success. It allows you to
put nebulous thoughts into concrete form. It is the difference
between those who merely have an idea and those who make money on
one. And it is the most important step you can take towards making
your dream of owning a business a reality.
Regardless of what you've been told by friends and associates, writing a business plan is necessary for success. How much capital will you need to start the venture? What legal form will the business take? How long will it be before the business breaks even? What is it about your business that will make it succeed? Inquiring minds want to know-especially bankers, venture capitalists and any other sources you approach for start-up funding and expansion capital. Although there are many different structures for a business plan, they all contain the following elements:
"An executive summary captures and presents succinctly the essence of the business plan. It is, in effect, a capsulized version of the entire plan," writes Harold J. McLaughlin, PhD, author of The Entrepreneur's Guide to Building a Better Business Plan (John Wiley & Sons). While the summary is placed first, you should write it last. "It is only after the entire plan has been thought through and written that one is able to capsulize effectively and concisely."
"In addition to facilitating a quick understanding of the proposal, an executive summary should get attention," says McLaughlin. "Many venture capitalists, investors and lenders indicate that it is not unusual for them to discard a proposal without reading beyond the executive summary."
The business description is a detailed preface of your proposed venture and should explain the purpose of your business and describe your product or service in more detail. It sets up the rest of the sections by discussing variables affecting the business, the industry, its markets and success factors. The business description can range from a few paragraphs to a few pages in length. If your description is long and drawn out, you will lose the reader's attention. Unless your plan is a complicated one, a short statement conveys the information much more effectively.
Define your business' market and sales potential. This will help you develop successful sales, pricing and distribution strategies and will give an indication of growth potential within your industry.
Begin your market analysis by defining the market in terms of size, structure, growth prospects, trends and sales potential. Your potential market can be defined by total sales of your primary competitors (those within your target market) or by a combination of sales figures from primary and secondary competitors (less frequent competitors within your target market). Most of this information is available through trade associations, periodicals and government agencies. You can also gather information from the annual reports of publicly held firms or by surveying private competitors.
Lenders or investors will be most interested in your sales potential figures. Make sure this forecast is conservative and has its basis in a well-developed methodology that supports your claim for market share.
Your marketing strategies, based on your market research, will impact your market share, and consequently your sales potential. They should encompass pricing, distribution, advertising and sales, and illustrate how you will achieve sales. Explain why you are adopting specific strategies. For instance, if you are positioning your product as an upscale item, due to the quality of the components or ingredients, and you set your price at 10 percent above the competition's product, explain this in the plan.
All too often, entrepreneurs fail to recognize that competition really exists, especially when they believe their product or service is the first of its kind. The purpose of the competitive analysis is to determine the strengths and weaknesses of your competitors, develop marketing strategies that will give you a distinct competitive advantage and erect barriers that will keep competitors out of your market share.
Identify both current and potential competitors in your plan, and group them by the intensity of their competition. Mail a questionnaire to your target customer base. Describe your product or service, and ask which companies the consumer would consider alternatives to yours.
A company's strengths and weaknesses are usually based on the key assets and skills that enable it to be competitive in the marketplace. An asset might be the ability to create a strong advertising campaign or a prime retail location. Examine your competitors' strategies and strengths, then list the skills and assets your start-up will need to be successful.
Design And Development
"It is not unusual to prepare a business plan before a business's full range of products and services is developed," say Eric. S. Siegel, Brian R. Ford and Jay M. Borstein, authors of The Ernst & Young Business Plan Guide (John Wiley & Sons). "In this light, it is worthwhile to present a summary of the development activities that the company will undertake."
If you have not yet designed and developed your product, this section of the business plan lets you formulate a procedural plan that charts all your product, organizational and marketing development goals; a schedule that associates timelines with the goals in the procedural plan; and a development budget that establishes costs to produce and bring your product or service to market. Those costs should include materials, direct labor, overhead required to operate the business during the development phase, the salaries of executive, administrative and office support personnel, miscellaneous product development costs and capital equipment costs.
Operations And Management Plan
According to the Business Plan Guide, "A production facility will probably require significant attention to operational issues. In contrast, most retail businesses and some service businesses will probably have less operational complexity."
The operations and management plan should provide a blueprint for the ongoing operations of the business once it becomes active, including its organizational structure and the expense and capital requirements associated with its operation.
The organizational structure (sole proprietorship, S-corporation, corporation, limited liability company, etc.) must be outlined to provide a basis from which to project operating expenses. This is critical to the formation of financial statements, which are heavily scrutinized by investors.
The expenses associated with the operation of the business (overhead) should be calculated and outlined in a table. Fixed expenses, such as rent and insurance, remain constant, while variable expenses like utilities, supplies and shipping fluctuate according to the volume of business you conduct. In addition to an operating expense table, include any other relevant costs and a schedule for depreciation and reinvestment into capital equipment.
Convert your market analysis into financial statements that chart the projected growth of your business over a three-to-five year period. Key financial statements that must be included in this section are:
- The income statement: A projected financial summary of
profit and loss, estimated income and expenses, with a monthly
breakdown for the first year and quarterly thereafter.
- The cash-flow statement: A detailed account of the
amount of money coming into and going out of the business monthly
for the first year and quarterly for each consecutive year
- The balance sheet: A detailed summary of your business
assets, liabilities and equity for each year profiled. Include a
personal balance sheet.
You should include with each statement a thorough written analysis that explains the basis for your calculations and any conclusions that can be drawn from your projections. You may also want to include a break-even analysis and ratios such as return-on-investment and return on assets.
"With a start-up business there is no financial history," says Patrick D. O'Hara, PhD, author of The Total Business Plan (John Wiley & Sons). "Therefore, you should emphasize the reliability of the supporting data."
Though a business plan, alone, can't guarantee your business will be a success, it does let you evaluate your business idea. Ultimately, it is an operating tool that helps put you on the road to success.