Developing a Business Plan
Whether you are developing, restructuring, or acquiring a business, the necessity for writing an effective business plan cannot be overstated.
The business plan serves three essential functions. First, it represents an opportunity for strategic planning. With a business plan, you can explore the potential consequences of various marketing, operational, and financial approaches to running your business, as well as establish the human, physical, and financial requirements. In effect, the process of preparing a business plan allows you to refine and improve your operating plans through trial and error before they are implemented.
Second, the business plan serves as a benchmark against which the company’s performance may be assessed over time. This is useful on both a managerial and financing level. In the former case, any deviation between the plan and reality may reveal organizational strengths and weaknesses. In the latter case, using a business plan as a retrospective tool allows lenders and investors to monitor the performance of their investments.
Third, an effective business plan is necessary in order to secure funding. Before making a financial commitment to a venture, potential lenders and investors will want to ensure (as much as possible) that the company will be successful and profitable. Therefore, while being realistic, the business plan must demonstrate the company’s capacity to operate efficiently, exploit opportunities, overcome challenges, and realize earnings sufficient to retire indebtedness and generate attractive returns to equity investors.
Given the significance of the business plan, its creation can be a daunting task. To help guide you through the development process, we have included a brief overview of the necessary elements for an effective business plan:
Section 1: Business/Executive Summary
The executive summary needs to succinctly answer a number of key questions for prospective stake-holders, including investors, employees, vendors and customers. Often, an entrepreneur must summarize his/her new venture in a 250- to 500-word written summary or a three- to five-minute verbal description.
The executive summary should be able to describe how the business will solve a customer problem in one or two sentences. Keep it brief and to the point.
The business summary should also provide information on the management team, including experience, industry credibility, history working together and commitment to the venture. Include a specific plan to fill any gaps in your management team.
It is also necessary to include the business’s immediate objectives and resources required—including necessary capital milestones expected to be reached, and other information needed to understand the business and technical risk of the venture.
In addition to the executive team, a board of advisors is often very important to new companies. Members can serve as executive mentors, providing advice on topics including leadership, management, functional skills and industry expertise.
Section 2: General Company Description
This portion of the business plan should tell the story of your business, how it came to be, where it is today and where do you see it heading.
The company description should cover how you plan to grow and succeed and give investors and other interested parties a sense of your vision, knowledge and experience. Company history, current business position, objectives and ownership should also be included.
Section 3: Products and Services
This section is designed to simply explain to the potential party of interest about your products and services.
This section explains where you will source your supplies and inventory, specifies product comparison with those that are out in the market and explains your research and development plans.
In the introduction portion of this section, outline the most exciting characteristic or benefit of your product line or service, he said. How can it attract the target market? Summarize the value and offerings your product delivers.
Other important things to touch upon are features, benefits and pricing of your products or services. These are key areas where many entrepreneurs skimp on the details, but they are arguably among the most important element of the business plan.
This is where you have to really spell out how you are going to make money. You need to establish your margins, how you will set your pricing and what you offer relative to the competition.
You should outline how your products and services stack up against your competition, where their products are sold, and how yours compare to them.
Suppliers and inventory, along with research and development, should also be addressed in this section of the business plan.
Section 4: Marketing
A marketing section should be broken into internal and external communication, including a subsection that touches on traditional (print and TV ads) as well as new tactics (social media, blogging, photo and video sharing, etc.)
A media relations section would delve further into positioning staff and company executives as experts in particular fields, pitching story opportunities, setting up interviews, product reviews, use of bloggers, etc.
Potential investors also want to hear about how you plan to use mobile marketing to get the word out about your business.
The number of mobile devices connected to the Internet is very quickly going to exceed PCs. Mobile devices carry a much more personal brand and attachment to a consumer than a PC.
Section 5: Financials
When you get to the financial part of the business plan, that is what many people fear the most. Cash flow is the most important aspect to focus on. The balance sheet is the holy grail. Businesses run on cash. No business plan is complete without a cash flow plan. Aside from cash and income, there is the balance of assets, liabilities and capital. The plan should also cover profit and loss, incorporating sales, cost of sales, operating expenses and profits. In most cases it should show sales, less cost of sales, as gross margin, and gross margin less operating expenses as profit before interest and taxes. Normally there is also a projection of interest, taxes, and net profits. There should be a monthly sales forecast for the first 12 months and annual sales projections for the first three years of operation. You should also include a market forecast, addressing questions such as: “How many potential customers are there for the business?” and “How will market growth impact this business?”
- Small Business Administration (SBA) www.sba.gov/writing-business-plan