Purpose of a Business Plan
Basically, a business plan is a vehicle for internal and external communication that provides a statement of where a business is going. The business plan can be in several formats. While the structure and length may vary from format to format, there is one common central theme regarding the development of a business plan: it is absolutely necessary. Without some form of plan, a business is doomed to almost certain failure.
Internally the business plan ensures agreement about the direction of the business, and externally it conveys to outside organizations (e.g., a lending institution) what the business intends to do. A business plan serves the same purpose as a map. It will guide you in your journey, helping you avoid roadblocks and detours on the path to success in the business. However, just like a map, it can only guide you; it cannot actually take you to your destination.
One of the major benefits of writing a business plan is the process itself, since it requires you to put your goals and plans down on paper. Even if there is no need to present the plan to an outside person or institution, the exercise of of writing the business plan, if done carefully, will provide a clear direction of where the business is going and how you hope to get there. The business plan can also be used to measure progress toward the stated goals of the business. For businesses that need outside funding, the business plan is a primary requirement to attract financial backing.
Organizing and Writing a Business Plan
There is no standard format or length for a business plan, nor are there shortcuts to writing a good business plan. Just like running a business, it takes a good deal of time and effort. If done correctly, the result makes it well worth the time and effort.
The first step in developing a good business plan is to simply write unit you have said all you need to say and no more. While every point needs a thorough explanation, it is important not to bore the reader with redundant or highly technical jargon (You may want to put the technical information in the appendices so the reader can choose whether or not to read it.) The plan will likely be in the “draft” stage for the first six months of planning activities. Ideally, the business plan is never fully completed, because it should become a dynamic living document.
Because each situation is unique, this section present a generic approach to organizing and writing a business plan. A standard business plan outline is provided in Figure 4-1. Each section and subsection of this outline is fully discussed below. The approach is flexible. For each section of the outlined plan, numerous options in the form of question are provided; select the options that are applicable to the requirements of your business. This “shopping list” approach enables you to tailor the items to your situation. The question format will stimulate you to think about what you need to say about each item. If a question does not apply, pass over it; if it does apply, answer it as thoroughly as possible.
As anyone who has ever tried to write a business plan can attest, the hardest part of the writing process is getting started. In reality, however, you have already started your plan. Your vision statement and the thought you have already given to involving others, demonstrating your product’s value, and developing a new product have given you the basis for your plan. Because your industry, product and market are so critical to your ultimate success, these areas will receive more detailed attention as you proceed to develop the written plan. But you have already begun your journey. The following information will help you complete your plan. Good luck on your journey, and remember, no shortcuts.
Business Plan Outline
- Executive Summary
- The Company, the Industry, and the Competition
- The Product and the Production Process
- The Market and Marketing the Product
- Management and Personnel
- Financial Data
- Company Financial Information Checklist
- Pro Forma Income Statements
- Pro Forma Cash Flow
- Pro Forma Balance Sheet
- Break-Even Analysis
- Schedule of Sources and Use of Project Funds
- Historical Income Statements, Cash Flows, and Balance Sheets (if available)
- Supporting Documents Checklist
- Resumes of Principal Parties
- Personal Financial Statements (when appropriate)
- Market Research Information Documentation of Customer Demand (customer orders, requests for the products, letters of support, etc.
- Legal Documents
- List of Key Advisors (CPA, attorney, etc.)
- Company Financial Information Checklist
The Business Plan
I. Executive Summary
The executive summary should be at least one page, but no more than two pages, and should be written after the business plan is complete. Make sure the summary is well written and brief, highlighting the significant points of the plan or proposal.
The executive summary is an overview of the business plan. When composing the executive summary, remember that it is an essential component to any business plan. A well-written executive summary should describe, in realistic terms, the opportunity for the reader to become involved in your business and the benefits of investing in the future of the company. Like the introductory chapter of a good mystery novel, the executive summary should arouse the curiosity of the readers and compel them to continue.
- Briefly describe the business (i.e, new or existing).
- Mention significant milestones (e.g., future goals, etc.).
- Where will the business be located?
- What will be the structure of the business (e.g., sole proprietorship, partnership, or subchapter S)?
- What product or service will be sold?
- What competitive advantages does the product have?
- Why will the customer buy it?
- Who and what is the target market?
- What is the market size and what percent will you capture?
- What will be the marketing strategy?
- Who is the competition and how will you compete with them?
- Who will manage the business?
- Discuss the people involved with the business; mention any previous experience in this or related fields.
- What contributions will each person make to the organization?
- What are the capital requirements of the venture, both immediate and in the foreseeable future?
- List the sources of funds (e.g., debt or equity).
- How will the funds be used?
II. The Company, the Industry, and the Competition
The purpose of this section of the business plan is to familiarize the reader with the business and how it is positioned in relation to the rest of the industry. It requires knowledgable insight and a realistic self-assessment of the situation.
The subsection titled “The Company” should give past, present, and future information about the company. The subsection titled “The Industry” can be a valuable learning experience for both the reader and the writer. Researching industry information and putting it in writing provides you with an opportunity to realistically assess your chances for success. This process of research and writing provides the business person with knowledge of which companies do well, why they do well, and what your chances are of successfully competing in the industry. It also provides the necessary information to convince investors that the business is viable and has a high probability of success.
- Give a brief history of the company to the present, if applicable.
- Is the business a start-up or expansion?
- When and where did the business open?
- What type of business is it (e.g., manufacturing, wholesale, retail, or service)?
- What products or services does the company offer?
- Is the business seasonal?
- Is it a franchise operation?
- What milestones and significant events has the company experienced?
- What are the strengths and weaknesses of the company?
- What does the future hold (e.g., new products, new people, etc.)?
- Are there many or few suppliers?
- Are there many or few customers?
- Will the business be at the mercy of suppliers or too dependent on a few customers?
- Are there many or few substitutes for what your business offers?
- Are there significant barriers to entry in this industry?
- Is the industry cyclical with the economy?
- What are the industry trends?
- What changes are taking place in the industry, and why?
- What government regulations apply to the business?
- Who are your closest competitors?
- Approximately how many companies/competitors are in the industry?
- Do the companies compete mainly in price, service, quality, or advertising?
- What are the competitors’ strengths and weaknesses?
- What are the strengths and weaknesses of the business?
- Have any companies recently appeared or disappeared, and why?
- What have you learned from watching the competition?
III. The Product and the Production Process
This section of the business plan explains the product or service the company offers as well as what the product does and who might use it. It describes any unique features or advantages the product has over its competitors. It also mentions any patents or copyrights that the company holds, or plans to hold, as well as any exclusive distribution rights.
In addition, this section explains whether the product or service is simple and easy to provide and has a wide range of application, or whether it is complicated and limited application that only a few businesses offer. It should also address whether a competitor can easily duplicate the product or service and what measures can be taken to ensure that the product’s unique features cannot be easily copied or exploited.
In this section, discuss research and development that is currently being done on the product and explain current changes in the production as well as in the industry. These discussions should be detailed. Assume the reader knows nothing about your company or the industry. Be careful, however, to avoid the pitfall of supplying too much technical or unnecessary information that the reader cannot understand or is distracting.
- What product will be sold?
- What are its unique features?
- What is the current development stage of the product (e.g., research, prototype, produced in quantity, etc.)?
- What research has been completed?
- Is the product still in research stage? If so, what research needs to be completed?
- Is the product durable or nondurable?
- What new products will be developed?
The Production Process
- How will the product be produced?
- Will the production process be capital-or labor-intensive?
- What materials are used to produce the product?
- What does it cost to produce the product? Does this cost allow you to charge a competitive yet profitable price?
- What facilities are needed to support the manufacturing process (e.g., rail access, loading docks, etc.)?
- Will any work be subcontracted?
- Is it feasible to have someone else manufacture the product?
IV. The Market and Marketing the Product
A very important point to remember when writing a business plan is to write the plan from the reader’s point of view, not your own. Anticipate the reader’s questions and answer them before they are asked. Keep in mind that there are some all-important questions the reader will want answered: “Will anyone purchase what you have to sell? Will enough people buy the product or service to support the business. If so, why?” This section of the business plan must answer these questions and explain, in detail, who will purchase the product or service, and why. This approach ensures that the business plan is market-drive rather than product-driven. Also it shows that the product is being produced and sold because consumers want it. If market demand is strong enough, sales will support the business, and the investor or lender will get what he or she wants: a return on investment. Unless your business plan presents realistic evidence that consumers will purchase the product or service, investors and lenders will not support the project, thus decreasing your chances of success.
- Who or what is your target?
- What is the size of the target market?
- What are the geographical boundaries of your target market?
- Will your product be targeted at a specific market segment?
- In detail, describe your average customer (e.g., age, sex, income range, etc.)
- What share of the market will you have?
- What is the growth potential of the market?
- At what stage of the market life-cycle is the product (e.g., introduction, growth, maturity, or decline)?
- Will you be exploiting a market niche?
- Is exporting a possibility?
Marketing the Product
- How will you penetrate the market?
- What price will you charge for the product or service?
- How did you determine the price?
- How does the price compare with that of similar products or services?
- What will be the primary form of advertising?
- How much money will be used for advertising?
- Will direct mail or telemarketing be used?
- How will you maintain and increase market share?
- How will the product or service be distributed?
- Will your business offer credit to customers?
- Are you doing anything different from current industry practices, and why?
V. Management and Personnel
The purpose of this section is to provide financial information to the reader and substantiate whether the business has financial stability in the current marketplace. Three key ingredients determine whether a business succeeds or fails: money, marketing, and management. These factors are all equally important. Meeting these three criteria will increase, although not guarantee, the chances for success. If any of these criteria are not met, the chance of failure increases. This is the approach taken by investors and lenders. You have shown that the market is viable, and with capital you can make the business a success. It is essential to show in this section that given the financial security, you are the best person to take advantage of this opportunity.
When assessing the strength of the management team, heavy emphasis is placed on experience in the proposed area of business or an area that is similar. Because the initial stages of operation are normally the most critical in deciding the fate of a business, there is good reason to lean heavily on background. Errors can be costly, sometimes fatal. Experienced managers can often recognize a problem and solve it quickly or prevent it from ever occurring. It is very important to demonstrate that management has the knowledge and ability to meet problems head on and solve them expediently.
- What is the business background of management personnel?
- What is their eductional background?
- Provide personal histories of management personnel.
- Do you have managerial experience in this or a similar business?
- Do you have managerial experience in other fields of business?
- Who will do what for the company?
- What will management be paid?
- Are other resources available (e.g., lawyer, accountant, consultants, etc.)?
- How would the loss of a key member of the management team affect the business?
- Do you have an organizational chart drawn up?
- Who are the owners of the business? Supply names and percentages of ownership.
- How many full-time employees will be needed immediately and in the future?
- How many part-time employees will be needed immediately and in the future?
- What skills must these employees have?
- Will the size of the labor pool meet the needs of the business?
- Will workers be paid hourly, salary, commission, or a combination?
- Will there be fringe benefits?
- What training will be required?
- Will seasonal employees be hired?
Stakeholders and Champions
- Who are the key stakeholders in your company?
- Who are the key internal champions?
- Who are the key external champions?
VI. Financial Data
This section incorporates all of the preceding information in the business plan. It is important to show that a product is innovative and attractive and that people are willing to purchase it. However, if you cannot show the ability to produce revenue by selling your product or service, your audience will not be interested. Lenders and investors and looking for the answer to one all-important question: “When and how will I be paid back?”
This section summarizes the financial projections that are described in the exhibits in Section VII and provided in Appendix A. It also explains the assumptions that data use to develop the financial projections. Although it is necessary to show that the business will generate revenue, it is important that these numbers are determined using reasonable and realistic assumptions. To demonstrate the potential of the company as accurately as possible, it is in Appendix A to determine profit and loss projections, cash flow, and start-up costs. These completed forms will be included in Section VII Exhibits. The monthly profit and loss projections and cash flow sheets should also be completed for the first year of operation.
- What is the company’s financial situation?
- What re the total capital requirements for the business?
- What is the purpose of the funding?
- Short term:
- Specific one-time need
- Seasonally recurring need
- Long term:
- Permanent working capital
- Fixed assets
- Short term:
- What will be the sources of funding (e.g., bank, equity, other)?
- What will be the sources of repayment?
- What are the funding terms?
- Provide a detailed listing of what will be used as collateral.
- What is the projected net income and cash flow for the first three years?
- What assumptions are these projections based on?
- What is the break-even point for the venture in the first year?
- What percentage of costs are fixed?
- Will all the money be required immediately or can it be drawn down in installments?
- What are the advantages of purchasing vs. leasing or vice versa?
This section provides the details regarding the financial status and projections of the business. It should contain the following forms to be completed by you, as applicable:
Pro Forma Income Statements
Pro Forma Cash Flow
Pro Forma Balance Sheets
Schedule of Sources and Use of Project Funds
Historical Income Statements, Cash Flows, and Balance Sheets (if available)