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Any business, whether starting out or in the process of growing, needs to have a solid business plan in place. Business plans provide you as a business owner with a roadmap to success. A well written business plan provides potential investors and other sources of funding with the answers to these questions:
The answers to these questions, when laid out in the business plan, give potential supporters insight to your thought process as an entrepreneur and can lead to access to the capital needed to realize your business dream, whether you are in the startup phase or an ongoing business concern.
Think of the business planning process in the same way you plan to take a trip, say to an unknown destination. Add to your travel plan a desire to drive from Point A, the place where you are currently, to Point B, the place you want to arrive. Before embarking on the trip you need to know what to take with you, how much fuel you will need that will take you from Point A to Point B, how long you will be driving and how long you will need for rest and rejuvenation along the way. Will you need the assistance of a second driver or a team of drivers to support your effort of going from your starting location to ending destination?
The decisions you make for your trip and the plans you establish mimic those that you establish for your business by way of a written business plan. The unknown destination in terms of business is the success you see yourself enjoying sometime down the road, after successful implementation of your plan. Having a long-term perspective on success makes the business plan a dynamic or living document (as opposed to a static, one-time exercise).
What a Business Plan Says About Your Business
What you write in your business plan says a lot about you and your business. The potential funders you seek are looking for clues as to how your business will operate and what potential for profit exists in order to get paid back on their investment and earn a profit for themselves. The more you communicate to funders, the more inclined they are to provide you with support. $103.4 billion in venture capital funding (VC) took place from 2009-2012, funding over 11,500 business dreams. The ability of the 11,500 companies to communicate their business vision via the business plan is considered to be one of the contributing factors for the average $8.9 million per VC deal completed in that 4-year period.
Attempting to write a business plan should be a priority for every business owner, regardless of motive or purpose. Setting forth your hopes, dreams and ideas on paper for the world to see represents a critical step in your resolve to launch or expand your business and seek the assistance (additional drivers?) needed for your company. Any planning process begins with an analysis of your business and staff in terms of strengths, weaknesses, opportunities and threats, known as a SWOT analysis. As voiced by Benjamin Franklin and again nearly eight score and a decade later by Sir Winston Churchill during World War II, those who fail to plan, plan to fail. Let’s figure out how to plan.
Essential Sections of the Business Plan
What are the elements of a well written business plan? There are differing opinions on this question but generally speaking your business plan should provide the reader with the following information:
- a statement of purpose for the business;
- a background on the industry your company is engaged
- a description of the business
- the amount of funding being sought and the purpose for that funding
- the products and/or services produced and offered by the business
- an analysis of the markets for your company’s products or services and the sources of competition for what you offer
- a well thought out marketing plan
- an equally well thought out financial plan, containing certain projections of cash flow, income and a valuation of the business
- an analysis of the regulatory climate as it relates to your business (i.e. tax policy, environmental issues, import/export duties and tariffs, etc.).
In addition to the essential sections of the business plan, you should also be prepared to provide supporting documents such as pro forma (projected) statements for your financial sections, descriptions of your products, any intellectual property that you hold patent, trademark or copyright to, and other documents that support the information you provide in the business plan. Below is a discussion of the essential parts of the business plan and what you should consider providing as you begin the business planning process.
(A) Statement of Purpose
The statement of purpose is a brief summary that you provide about the business. It gives the reader a quick insight into what it is they should expect from the business plan and a glimpse of the business, its desired goals and purpose for existing. The statement of purpose may also be referred to as the executive summary to your business plan or mission statement. The inclusion of the statement of purpose in your business plan should comprise no more than 2 pages at most, although ideally you should limit your writing in this section to 1 page if at all possible.
In this section of your business plan you want to use concise language that gives your intended audience a complete snapshot of the business. Certain keywords that you should provide in this section include the name of your business, how your business is structured legally (i.e. sole proprietorship, limited liability corporation or LLC, corporation, or partnership) and what amount of funding is being sought from investors, as well as the date the funding is needed. This approach will pique the interest of certain types of investors in particular and allow them to move to the remaining sections of the business plan with a greater interest.
(B) Industry Background
A well founded understanding of the industry you are in gives investors a sense that you know your business and the factors that impact your growth and potential for profit. The industry background section should provide information about the top performing companies in your industry and how they are doing. This includes information about these companies in terms of their sales and revenues, profits, and share of the market. You should also be able to describe your company’s relationship to these top-tier performers.
This section allows you to express an understanding of the companies you compete with and the relative size of your operation to the larger companies in your industry. It gives your investors a way to gauge your plan against the results of more established, successful companies that make the same products you make or provide a similar service.
(C) Company Description
Once you provide an overview of your company’s industry, you should move on to writing about your company. In this section you want to provide the reader with information about the type of business you are in and any niche you have that sets you apart from other companies in the same industry. Your company description should also explain the market need your product or service fulfills and the way in which your company does this. You may also consider using this section to provide information about key management officials, their background and experience relevant to the business (you may also consider including a copy of resumes in the supporting documentation or appendix section discussed below).
A reader should get a sense of what it is about your company that distinguishes you from similar businesses and how providing you with support will allow you to separate yourself from the competition. Use this section as a form of an elevator pitch, the 30-second introduction that you make to someone that provides them with a general understanding of who you are and what you are all about. Taking this approach can prove to be an effective way of explaining the goals of your business and the value proposition you have to offer.
(D) Funding Sought
It is essential that you explain to a potential funder the amount of funding that you are seeking for your business in the business plan. Not only is it important to explain how much you need, you should also communicate the purpose for the funding. As a start-up business, you may express a need to fund certain start-up costs and capital equipment needed for your company. As a growing concern your need for funding may be for the expansion costs associated with entering a new market or staying current with the competition in your industry. Whatever the reason for funding, you have to be able to express in exact terms the amount needed and how that amount will be used to grow and make your company more profitable.
It should seem obvious but one of the reasons why businesses fail is their failure to ask for help in definite terms. An investor should not have to guess at the amount of money that you need for your business needs. You need to state what that amount is as well as provide information on how that money will be used for advancing your business purposes.
(E) Products and/or Services Provided
The products/services provided section of the business plan gives funders information about what you produce or provide by way of service to your customers. What is it about your product or service that is different from other companies that provide the same products or services? The answer to this question is an important one because funders seek a unique edge or advantage you provide that justifies the amount of investment they plan or contemplate to make in your business. You want to use this section to highlight your offerings and speak to those differentials that set you apart from the competition.
Pictures, schematic drawings and service descriptions should be provided here, as well as detailed descriptions on how your product or service meets a particular need in the marketplace. This information is relevant whether your business is a start-up or a more mature business concern seeking capital for growth and expansion opportunities. You can use the products and/or services provided section to demonstrate your belief in what it is that you offer to the market. The section provides you with a way to show excitement and passion for the business you are in and share that excitement with those you seek additional financial support from.
(F) Market Analysis & Strategy
A strong analysis of the market opportunities presented to your company and an explanation of your strategy for obtaining market share is provided in the market analysis and strategy section of the business plan. This section should contain research on the markets you are in and your knowledge of the competitive nature of your industry as well as your approach to being or becoming viable in the marketplace. Sometimes this section is placed right after the company description section discussed above.
You want to note in this section of the business plan a detailed description of the industry as well as an outlook. An investor is not interested in funding a business in a dying industry so clearly you want to show that the business you are in is one that is relevant to the market. You also want to provide information concerning your target market and those characteristics that distinguish these customers from others who may potentially support your business. What is the size of this market and what can you do to obtain a share of this market? Answer these questions and use your financial section to show the costs associated with your activities necessary to reach the marketplace.
The marketing section speaks to the activities you have or will undertake to promote and advertise your products and services to potential customers. How you plan to offer your products and services and the cost of those activities necessary to attract new customers, as well as maintain current ones, is going to be highlighted in this section of the business plan. Your marketing plan should reflect a well thought out and detailed explanation of the approaches you propose for promoting and advertising your products and services and the proven approaches that have been used by your competitors.
Whether or not you have a background in accounting or finance, every business owner needs to have an understanding on how money flows in and out of the business. Your business plan must include a section that discusses the financials for the company in terms of income projections, how cash flows and the assumptions that you use to achieve your revenue and profit results. A mastery of the numbers is deemed essential by nearly every investor looking to invest in your business. It also helps you provide clarity on how your idea for the market will actually make money.
Any financial analysis presented in the business plan should include what is known as a breakeven analysis. The breakeven analysis provides information that can help you determine the feasibility of your business idea as well as help set or confirm your pricing methods. The analysis looks at the point in time in which your revenues reach and exceed your costs, sales and expenses. When this crossover takes place you begin to show a profit. The analysis involves a look at your fixed costs (i.e. rent or lease costs, payroll, etc.), variable costs (i.e. cost to ship your products, certain supply costs, commissions on sales, etc.) and your average price per item unit. There are plenty of templates available for determining your breakeven analysis, as well as the other types of financial models needed for your business plan.
(I) Regulatory Analysis
You plan should also include an analysis of the regulatory climate as it relates to and affects your business. If you are in an industry that is heavily regulated by local, state or federal officials or are impacted by changes in tax policy, trade policies affecting the import and export of goods between countries or other regulatory and compliance requirements for the industry, it is important to explain how these impacts hinder or help your business.
Even if you are not overly burdened by certain regulatory or compliance issues, your business has to make certain filings and provide information on product and employee safety, quarterly tax filings and other data necessary for certain government bodies to analyze the state of business in the country. Show that you understand the regulatory impacts on your business by expressing them in this section of the business plan.
(J) Supporting Documentation
The supporting documentation that you provide as part of your business plan should serve as an appendix. The types of documents that you include as supporting material to your plan may include copies of lease agreements, credit reports (both personal and business, especially if you have established a business credit profile or D-U-N-S number for your company), a profile of the products your business produces, copies of any market studies or other research you may have had commissioned, licenses, permits and patents obtained by the business and contracts that are relevant to the funding request you are making.
You may also use this section to provide a complete pro forma schedule of financial documents including a summary of start-up costs (for a new business), statement of income, and cash flow statement for 1 and 5 years. You can provide summaries of these statements in the financial section of the business plan with reference to their location in the appendix. Placing more comprehensive financial statements in the supporting documentation section and leaving a data summary of data in the financial section allows the investor to breeze through the highlights and find more detailed references in the appendix.
Writing Your Successful Business Plan
Writing a business plan is as much an art as it is a science. Simply including the 10 essential elements of a business plan mentioned in the previous sections is not enough to attract the type of attention or create the interest you need for your business. A business plan is about more than rote facts and standard formulas; it is an expression of who you and your business are and what you hope to become as the plan is implemented. A business plan tests your ideas about the type of business you have and the type of business you want to have.
When writing your business plan, write for yourself first and others second. Make the business plan an expression of your dream as a business owner and allow the words to mimic your passion for what it is that you do. There are basic elements, as previously discussed, that must be included in the business plan; however the way in which you include this information in terms of tone and style will provide more valuable insight for your audience than the order of words. Like any writing assignment that you have faced in your life, make the business plan a personal expression of yourself and your business.
Keep in mind that your business plan should be well researched and demonstrate your knowledge and experience in your field. The plan should show restraint with respect to your financial projections and present a realistic expectation of where you see the company heading. The more creative you are the better able you will be to communicate your ideas successfully. The use of visuals helps break the monotony of the words and create a better flow within the plan. Finally, you should proofread the plan and remember to spellcheck your work before submitting to any potential funder. If you follow these tips for creating your business plan, you will find more success in your business endeavors.