Writing a Business Plan is Just Good Business

September 11, 2019
Posted in: Uncategorized

Table of Contents

 

After enthusiastically sharing your product idea with loved ones, they give it the thumbs-up. Confident that customers will also love this product, you gear up for mass production. You become giddy as you envision the barrage of sales and the new lifestyle you’ll soon enjoy. Or will you?

As well-meaning as they may be, do your loved ones represent your target market? What if you invest a lot of time and money only to discover there’s no demand for your product? Writing a business plan will address these questions.

According to Entrepreneur magazine, “a business plan is a formal written document containing business goals, the methods on how these goals can be attained, and the time frame within which these goals need to be achieved. It also describes the nature of the business, background information on the organization, the organization’s financial projections, and the strategies it intends to implement to achieve the stated targets. In its entirety, this document serves as a road map that provides direction to the business”. 

Conducting market research is also a key component of the business plan. That’s how you’ll determine if there’s a need for your product.

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The Importance of a Business Plan

 

Would you jump into your car and start driving without knowing how to get to your destination? You likely wouldn’t. You’d use a map or GPS for directions. Why, then, would you expect to get to business success without knowing how you’re going to get there?

Just as a map and GPS are tools for successfully arriving at a physical location, the business plan is a tool for successfully arriving at a profitable business. Writing a business plan will provide you with the directions you’ll need along the way. It’ll guide you through the stages of starting and managing your business and help you avoid the pitfalls that lead to business failure.


Why Small Businesses Fail

 

For increasing the odds of success, awareness of the pitfalls that lead to business failure is half the battle. Addressing these pitfalls before launching your business is the other half:

  • Lack of a long-term vision for your business
  • Failure to set clear goals and objectives
  • Not understanding what customers want
  • Underestimating the competition
  • Inadequate financial planning
  • Lack of strong leadership/critical business skills
  • Ineffective procedures and systems
  • Inability to adapt/change as needed


Purpose Determines Business Plan Format

 

Every business needs a written business plan whether its purpose is to provide internal guidance or obtain funding. The format and degree of detail will depend on the plan’s purpose.  If you want to attract investors or obtain bank financing, financial projections are essential.  Funding sources will also be interested in the strength of your business concept and the backgrounds of your management team.

It’s not uncommon for a start-up to have multiple formats of the same business plan:

  • An elevator pitch is a synopsis of the plan’s executive summary which can be explained quickly (in 30 to 60 seconds).  You never know when you’ll be at a cocktail party with potential investors.
  • A pitch deck is a slide show and oral presentation to potential investors. It’s similar to what you’ll see on the NBC show Shark Tank.
  • The written presentation is intended for outside stakeholders and contains detailed information about the business with an emphasis on financial projections.
  • An internal operational plan is less formal and contains details that are of interest to management but that may not interest outside stakeholders.

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Key Components of a Business Plan

 

You may have multiple formats of your business plan but a typical plan, according to the Small Business Administration (SBA), will at least include the following components,

  • Executive Summary – a concise overview of your business
  • Company Description  – a high-level view of your business, what you do
  • Market Analysis – research on your industry, market and competitors
  • Operations Plan – how your business works, the logistics and technology
  • Organization and Management – your business structure and profiles of management team
  • Service or Product – clearly describe what you’re selling with emphasis on benefits
  • Marketing and Sales – describe how you’ll market your business and your sales strategy
  • Funding Request – how much money you’ll need for next 3 to 5 years
  • Financial Projections – your financial outlook for the next five years
  • Appendix – an optional section for supporting documents


Executive Summary

 

The Executive Summary will be the first section of your business plan. It introduces your business to the reader, explains what you do, and (if you’re seeking financing) what you want from the reader. Because potential investors often ask to review only the Executive Summary when evaluating a business, this section should be able to function as a stand-alone document.

Cover the key highlights of your business in a way that sparks interest. If funding sources are intrigued by what they read, they’ll likely request a complete business plan with detailed financial projections.

A great Executive Summary will include these nine components:

  1. Your mission statement which is a short statement of why your business exists, its core values, and its goals

    Here’s Coca Cola’s mission statement:  To refresh the world in mind, body and spirit. To inspire moments of optimism and happiness through our brands and actions. To create value and make a difference”.

    A compelling mission statement like that of Coca Cola will whet the reader’s appetite for more details about your company. It’s even more effective if it describes what your company does.

  2.   A summary of the problem you’re solving or need you’re filling
  3. Your proposed solution to the problem or need
  4. Specific information about your target market or ideal customers
  5. The alternatives to your product that currently exist (competitors)
  6. An overview of your team and how you’re qualified to execute your plan
  7. Key highlights from your financial plan (sales, expenses, profitability)
  8. Details of your funding requirements if you’re seeking funding
  9. Any accomplishments you’ve made so far and what you hope to accomplish in the near future. Is there already interest in your product?

Although the Executive Summary is the first section that’ll be read, it should be written last. Why? It’s a summary of all the sections that follow. After you’ve written the other sections of the business plan, you’ll be better prepared to write the Executive Summary.

If you’re writing a business plan for internal guidance only, the Executive Summary doesn’t need to include details about the management team, funding requirements, and accomplishments. Instead, it can serve as an overview of your business’s strategic direction.


Company Description

 

Provide a snapshot of your business by including the registered name, physical address, company history, nature of the business and more details about your product or service.

If you have intellectual property (i.e. patents) that’ll help your business defend itself against competitors, provide that information in this section. If you’re still in the patent application process, list that as well.

If you’re writing a business plan for an existing company, include a brief history of the company highlighting any major accomplishments. The company history can also provide new employees with background on the company and its progress over the years.

Lastly, the current business location and any facilities owned by the company should be disclosed. In addition to the physical address, indicate whether the location is a storefront where customers can buy your products. If your business requires large facilities such as factories or warehouses, include that information.

If you intend to use your business plan as an internal guide only, the Company Description section can be omitted altogether.

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Market Analysis

 

Whether you’re writing your business plan as an internal tool or to obtain funding, you must define your target market. Who do you plan to sell to? What’s your best estimate of the number of customers in your target market? If there aren’t enough potential customers for your product, your idea may be dead in the water.

When defining your target market, be careful not to include everyone in it. For example, a gloves retailer might be tempted to say that their target market is everyone in a particular geographic area who has hands. To be successful, however, they should target a specific group within that geographic area such as gardening professionals (who require a special type of glove).

If the gloves retailer defines its target market as gardening professionals, they must next perform market analysis to determine the size of that segment of the market. This will help them to determine if there are enough potential customers to make their venture worthwhile.


Volume & Value

When assessing the size of the market, there are two factors that need to be considered:  the number of potential customers (volume) and the value of the market.

To estimate the volume of their target market, the gloves retailer could include all landscaping/gardening businesses within a certain radius from their shop (if they won’t offer delivery).

To estimate the value of their target market, the retailer could check to see if the figure has been made public by a consulting firm or government agency.  If not, they could employ a market research firm to find this information or attempt to estimate it themselves.  For a rough estimate of the value of their target market, they would make the following assumption: If there are 125 landscaping/gardening businesses within a certain radius from their shop and the estimated average sale is $100, the estimated value of their target market is $12,500 (125 x $100).

Since the retailer is targeting businesses (B2B) as its primary customer base, they may have established relationships with a few that they feel will be critical to their success.  Details about these key customers should be noted in this section of the business plan.


Competitor Analysis

The value of the glove retailer’s target market being $12,500 doesn’t mean they’ll have exclusive access to this $12,500 in potential sales. Are there other glove retailers vying for that same target market? If so, what is the retailer’s advantage over these competitors? This is where competitor analysis comes into play.

To easily compare their company’s features/benefits against their competition, the retailer can use a competitor matrix (as shown below). The matrix should illustrate how the retailer’s product is different or better than other products that a potential customer might consider. Investors will want to know what advantages they have and how they plan on differentiating themselves.

A business shouldn’t state that they have no competition. All businesses have competition even if it’s not direct competition (competitor offers a similar solution). If potential customers are currently solving their problems with a completely different type of solution, the business has at least indirect competition.

 

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Operations Plan

The operations plan details how your business works. It gives information about logistics, technology and other components of your business operations.

Sourcing & Fulfillment

If you’ll buy the products that you sell from other vendors (sourcing), include vendor names, how products will be delivered to you, and how you’ll deliver products to your customers (fulfillment).

Technology

If you’re a technology company, describing your technology is a must. You don’t want to share your trade secrets, of course, but give an overview of how your technology works and how it’s better than other solutions.

Distribution

If you’re a product company, how will you get your product into customers’ hands? Distribution channels vary depending on the industry. Research companies in your industry to see what their distribution models are.

Here are some distribution models to consider:

  • Direct Distribution – Selling directly to your customers is the simplest and most profitable model. Detail how you’ll get the product from your warehouse to the customer.
  • Retail Distribution – If you want your products sold by large retailers (who generally don’t deal with individual suppliers), you can have your products sold by a distribution company. The distribution company makes your products, along with those of other companies, available for retailers to purchase.
  • Manufacturers’ Representatives – Manufacturers’ reps are often necessary for new companies to gain access to the retailers that the reps have relationships with.
  • OEM – If you sell a product that another company will incorporate into their finished product, you’re using an OEM (original equipment manufacturer) model. For example, if you sell car parts to auto manufacturers.

You may decide to use more than one distribution model. Philosophy sells directly to customers via philosophy.com and through retailers such as Sephora and Ulta.

Milestones & Metrics

Investors will want to see that you have a realistic schedule for reaching your goals. Incorporating milestones, or planned goals, into your plan will show investors that you understand what needs to be done and that you have a system in place for checking your progress towards reaching those goals. Detail the key metrics (numbers) you’ll be watching to assess the health of your business, monitor growth and spot problems early on.

 

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Key Assumptions & Risks

The key assumptions you’ve made relative to your business’s success can be thought of as risks. For example, as a business owner you’re taking a risk when assuming that a certain number of potential customers will buy your product if there’s been no proven demand.

Recognizing and effectively articulating the risks that your business faces can go a long way with funding sources. It’s a mistake to indicate that there are no risks — funding sources understand that all businesses face risk. A better course of action is to list the risks and describe how you plan to mitigate them.

Contingency Plan

Alleviating the fears of funding sources is important, however, a plan that addresses catastrophic events is also an essential operating tool. A contingency plan (or “plan B”) will help you head off these unforeseen events and help you deal with them should they occur in spite of your best efforts to avoid them.

What are the types of events that are often addressed by contingency plans? Natural disasters such as fires, floods and tornadoes are commonly addressed but what if your main supplier goes out of business or your website is hacked and you lose all of your data? A sound contingency plan will ensure that you’ve got a backup option for anything that may go wrong in your business. In a nutshell, it’s a way of preparing for the worst-case scenario.

 

Organization and Management

Your business’s legal structure (sole proprietorship, partnership, LLC, C-corporation, or S-corporation) and key team members, managers or owners will be listed in this section. If there are multiple owners, list the percent ownership and amount of involvement for each owner.

Investors are especially interested in the backgrounds of key team members. They want assurance that they’re qualified to turn the business idea into a profitable enterprise. Some investors would rather invest in a so-so business idea with a stellar team behind it than a superb idea with a so-so team. Here’s where you assure investors you have the right team in place. Include brief bios that highlight the relevant experience of each key team member. This will show that you’ve considered the roles and responsibilities your business needs to flourish.

If you don’t have all of your key team members in place, include a proposed organizational chart. Some funding sources will require it and it’s also a useful tool for filling key roles in the future.

Service or Product

Describe the problem that your target market is facing and how your service/product will solve it. Explain how your service/product is superior to existing solutions. Do you offer a more affordable or better quality solution?

For physical products, include an illustration that shows how the customer will use your product. Highlight the unique features. Consider before/after images that show how customers solved a problem before and after the existence of your product. Include a narrative detailing how your product can positively impact someone’s life.

Identifying the problem that your offering solves is perhaps the most vital information in your business plan. If you can’t pinpoint a problem that your potential customers have, your business idea may not be viable. To ensure that you’re proposing a solution to a real problem, validate that the problem exists by employing such tactics as a focus group comprised of your target market.

 

Marketing and Sales

The marketing and sales section of your business plan details how you plan to reach your target market , how you’ll sell to that market, what your pricing plan is, and what types of sales activities and partnerships you’ll engage in. To successfully write your marketing plan, your target market must be well-defined so that you understand who you’re marketing to. 

Positioning Statement

How will you present your business to customers? What benefits do you offer that your competitors don’t? Your positioning statement should convey this.

Your positioning statement should also be brief, memorable, and true to your business’s core values. Here’s Trader Joe’s positioning statement:

“to give our customers the best food and beverage values that they can find anywhere and to provide them with the information required to make informed buying decisions”

Pricing

The positioning strategy often determines how a company prices its products. A premium product typically warrants a premium price. Other pricing strategies:

  • Cost-plus pricing – You consider your costs then add a mark-up.
  • Market-based pricing – You set your prices based on what the market is expecting (what competitors are charging).

Promotion

How will you communicate your offerings to potential customers? As part of your promotion strategy, consider the cost of promotions and the sales they generate.

Other areas to consider as part of your promotion plan:

  • Packaging – Include images of your packaging which should reflect your positioning strategy and look as good as or better than your competition.
  • Advertising – Include an overview of the types of advertising you plan to implement. How will you measure the success of your advertising?
  • Public Relations – Will you seek media coverage to gain exposure for your product?
  • Content Marketing – Will you publish useful information and tips to reach your target market? This is a great way for your target market to get to know you.
  • Social Media – Potential customers use social media to learn about companies. Being on the same social media platforms as your target market is essential.
  • Strategic Alliances – Will you partner with other companies to gain access to a new segment of your target market?

 

Funding Request

If you’re seeking funding, detail how you plan to use the funds. Show the major areas where the funds will be spent such as marketing, inventory, or R&D. For now, leave out details like repayment terms which can be negotiated later.

Financial Projections

Some entrepreneurs are intimidated by the financial projections section of the business plan. However, startup financials aren’t as complicated as they might think. There are also tools and resources like LivePlan  to help entrepreneurs develop sound financial projections.

Typically, financial projections will include monthly sales and revenue forecasts for the first 12 months, and then annual forecasts for the remaining three to five years.

Include these financial statements in your business plan:

Sales Forecast

Your sales forecast is your projection of how much you’ll sell over the next few years. Keep it high-level and don’t worry about breaking it down into too much detail. If you sell multiple products, you may want to break your forecast down by major product categories.

Next, include a corresponding row for each sales row to account for Cost of Goods Sold (COGS). This row will show the direct costs associated with making your product. COGS doesn’t include business expenses like rent, insurance, etc. Only the cost of raw materials or cost to acquire the product should be included.

Profit & Loss Statement

The profit and loss statement (P&L), or income statement, lists the sales and COGS figures taken from your sales forecast along with other ongoing business expenses.

The ultimate focus of the P&L is net profit or the “bottom line” which will show whether your business expects to make a profit or experience a loss during a given reporting period. 

Cash Flow Statement

The cash flow statement will show how much cash you have at a given point in time. A typical cash flow statement takes the amount of cash you have on hand and adds any cash received through cash sales and paid invoices. As you pay bills, loans, taxes, etc., this is then subtracted leaving you with your total cash flow (cash in less cash out).

The cash flow statement will highlight when you might be low on cash so you can consider options for raising or borrowing money to keep your business afloat.

Balance Sheet

The balance sheet provides an overview of your business’s financial health. It lists your business’s assets, liabilities, and your (the owner’s) equity. Liabilities are subtracted from assets to determine net worth.

Appendix

The appendix to your business plan is where you’ll include resumes, charts, graphs, illustrations, patents, and other critical information. It’s not a required section but can prove useful for housing the aforementioned documents.

Final Thoughts

As important as a well-researched, well-written business plan is, it can’t guarantee success but it can definitely increase the odds. In business as in life, it’s not always the most skilled who succeeds but the one who is most prepared.

 

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