Lots of pundits these days are discounting the importance of a business plan, but most businesses that succeed plan their success rather than leave it to chance. Think of a business plan as your business’ “future resume,” but never think of it as a static document. Your business plan can and should change as your company matures. If you’re considering starting any type of business, I highly recommend using these steps and processes to map out where you want your new business to go.
I’ve written several business plans. My largest one was in graduate school where my strategic management professor required us to write a business plan to compete against WalMart. It was 144 pages long! Other business plans I’ve written were for real businesses – a small restaurant, a lumberyard, an Internet business, and a sandwich shop. Writing a business plan isn’t difficult, but it does require some time and forethought.
The first steps is to be realistic. You probably won’t be making $12 million in net profit one year in. Nor will you be selling franchises across the globe within 5 or even 10 years. Slow down, take a breath and get real. Your next step is to get started and understand what a business plan is and how it can help your business succeed.
What is a business plan?
A business plan is a report that documents your plans for starting and running your business. It can be 15–50 pages or more. Some of the key points it covers include:
- The employees you plan to hire (the specific positions and what they will do)
- A description of the firm’s day-to-day operations (how things will run and who will run them)
- The way you’ll create, market, and distribute products or services (these are the nitty-gritty details)
- The business model (how the business will make money).
- The capital requirements for investment as well as operations (you can’t run without cash).
Why Write a Business Plan?
The most common reason entrepreneurs write business plans is to secure financing for their business. But there are other important reasons to write a business plan if you’re considering starting a business. A business plan:
- Allows others, such as your banker, lawyer and employees (even your father-in-law), to understand the purpose and goals of the business.
- Provides a projection of the company’s expected growth rate and capital needs.
- Makes the business owners accountable and focused on the goals laid out in the plan.
Entrepreneurs often resist writing business plans because they think either it’s too time consuming or it ties their hands unnecessarily. They may even believe it will become dated and obsolete rather quickly. On the contrary, a business plan can be written in a weekend – I’ve written one in less than one weekend – and it CAN be altered at any time the market demands. In fact, it should be updated often to reflect the business’s ever changing needs and goals. A typical business plan should include a table of contents and then 10 sections, as follows.
1. Executive Summary
The first section, the executive summary, is a brief synopsis of everything the plan covers. It is the most important part of the plan, so it should be written last, after you’ve written the other sections of the plan. To write the executive summary, read through your plan and devise one brief paragraph summarizing each section. The executive summary should be less than three pages.
2. Industry Overview
Your industry refers to all the companies that do what your company does, selling the same types of products or services. To give the reader of your business plan a solid understanding of the opportunities in your industry, your industry overview should include the following:
- The size of your industry, or the cumulative amount of revenue that all of the companies in your industry make in one year (for example, a $2 billion industry is one in which all of the industry participants generate a combined total of $2 billion in revenue)
- The names of the major companies in your business and what percent market share (proportion of the industry’s total sales that they’re responsible for) each has
- The important trends and forecasts that affect your industry (for instance, technology shifts, new laws and regulations, or changes in customer spending patterns)
- The kinds of resources required to be successful (for example, available cash, access to low-cost suppliers, and loyal employees)
Depending on how large and popular your industry, the industry overview can be anywhere from one to five pages.
3. Market Overview
The market overview is appropriate if you run a local business; the industry overview will suffice for companies doing business nationally or internationally. Your market overview should cover the same information as the industry overview but apply to your local area only. It should include:
- The size of the local market, or the cumulative amount of money being made by all the local companies (finding out how much private companies make can be tough; you can get a general idea of a company’s sales by buying a credit report from Dun & Bradstreet)
- Information about your top 3–5 competitors
- Unique products or services you’ll offer to distinguish your business from those competitors
Because the focus is more targeted, this section should typically be about two or three pages long.
4. Business Description
The business description is a snapshot of your company. It tells the reader what you do, who is involved in the business, why you decided to start it, and how you expect it to grow in the next few years. It should include the following:
- Product or service – Whatever your customers buy from you.
- Customer base - The businesses or individuals who will buy your products or services.
- Management - The people involved in running the company’s day-to-day operations.
- Idea origination – Where the idea for your business came from or how the business was inspired.
- Growth - How large you expect the company to get in the next five years.
- Point of difference - How your business will be different from existing companies.
- Revenues - What you estimate your annual sales to be for each of the next three years.
- Legal structure - How your business is structured legally and who the partners or part-owners are.
In most cases, your business description will be only one or two pages long.
5. Product or Service Description
Now that you’ve told the reader briefly about your company, describe in detail the product or service your company offers. This is the who, what, when, why, where, and how of your business. Your product or service description should include:
- Benefits – What your product or service does for your customers.
- Customers - Who is in your target market, or your core group of customers.
- Purchase decision - Why companies or individuals buy it.
- Competitive advantage - How it’s different or better than what’s currently available.
- Seasonality - When will customers typically purchase your product or service.
- Price - How it compares to the competition cost-wise.
- Distribution - How you’ll sell it—from a storefront or online—and whether you’ll hire full-time sales employees.
Depending on the complexity of your offering, this section could be as little as two pages or as many as nine.
The personnel section should specify the employees you expect to hire (if any) and describe the individuals on the management team who will execute the company’s plan. The section should include:
- Any background or expertise you have that will benefit the business.
- What your role will be in running the company, and whether it will change over time.
- What employees you’ve already hired, if any, and what their responsibilities and qualifications are.
- What other positions you expect to fill in the next year as the company grows.
- What types of experience you’ll be looking for in each of the new hires (create a mini job description for each).
- A simple organization chart to indicate which positions are already filled and which will be added later.
Since your team can be an important factor in your company’s success, this section should be at least two pages in length and could run as many as five or six.
Marketing is everything you do to alert customers of what you’re selling and persuade them to buy from you. Customers make or break a business, so marketing is one of the most important aspects of any company. Evaluate your options and decide which marketing methods to use, including:
- How you want your potential customers to think of your company and its offerings. For instance, are your products high-end and exclusive? Is your service low-cost?
- How you will sell your products or services. (For example, through manufacturers’ reps, at a retail store, through catalogs, or using a sales staff.)
- How you will promote your company?
- How you will price your offerings appropriately?
This is one of the most substantial sections and could be as long as 10 pages.
Business operations are the internal processes used to produce what you’re selling, be it consulting services, restaurant meals, or skateboards. This section should explain that process, perhaps in the form of a flowchart, a visual diagram showing how each step in the process impacts all the rest. The flowchart addresses:
- The type of equipment you’ve bought or plan to buy.
- The type of capacity (how many items can be produced per hour or day) you provide.
- The types of supplier relationships you’ve formed to ensure a steady stream of products.
- The steps you can take to improve this process in the future.
Operations sections for businesses involving manufacturing or production will be about four or five pages long. Operations sections for service-oriented businesses may be only two or three pages, depending on the processes the business uses to sell its products or services.
9. Financial Statements
Financial statements are four documents you create to figure out how much money you expect to make in the following year. Once you create them, though, you’ll want to update them constantly so you know where you stand. The information you’ll want to cover in this section includes:
- A monthly cash flow statement for the next 12 months. This statement provides a month-by-month look at the sales you expect to make and expenses you need to cover.
- A profit-and-loss statement through December 31 of the current year. A profit-and-loss statement is a summary of the revenue and expenses you expect to make and incur, respectively, in the next 12 months.
- A balance sheet as of December 31 of this year. This summarizes what you own and what you owe on a particular day (usually December 31). It’s a snapshot of your business at the end of its fiscal year, which is typically the end of the calendar year as well.
- A statement regarding funding you have identified or already set up, such as a revolving line of credit.
The financial section is another important one and will generally run at least five pages, or as many as ten, depending on how you format your financial statements and how many pages each of those takes.
Inevitably, you’ll end up with information that’s important but doesn’t need to go in the front of the plan and doesn’t fit anywhere else. You can include this information at the end, in the appendix. The appendix may contain:
- Résumés of members of the management team—including yours.
- Signed contracts or agreements.
- Up to three recent articles or reports, which indicate demand for your type of products or services, obtained from major newspapers and magazines.
If all you include in this section is resumes, you may end up with two or three pages. But if you also have contracts or articles, the appendix can balloon to 12 to 15 pages.
How to Use Your Business Plan Effectively
A business plan isn’t just any multipage document – it’s a guide to how you should run your business. Think of your business plan as your guidebook or workbook that you should read through on a regular basis (meaning weekly or monthly). Doing that will keep you on track and possibly keep you from making an emotional decision in the heat of the moment. By following the strategies you identify within the pages of your plan, your business should grow and prosper.
In addition to reading your business plan regularly, you can also use it to:
- Apply for a business loan at a bank
- Interest angel investors or venture capitalists (early investors ) in investing in your company
- Apply to small business awards programs
- Request feedback from colleagues and advisors
Planning Produces Performance
By taking the time to thoroughly think through all aspects of your business venture with a plan, you can avoid a lot of the pitfalls your competitors didn’t or couldn’t. Starting a business isn’t something you should take lightly. Make certain you give your new venture the attention it needs and deserves by planning. Remember: proper planning produces peak performance.
Photo by norwichnuts