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How To Write A
Business Plan
By Amy Fontinelle
http://www.investopedia.com/unviersity/business-plan/default.asp
Thanks very much for downloading the printable version of this tutorial.
As always, we welcome any feedback or suggestions.
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Table of Contents
1) Business Plan: Introduction
2) Business Plan: Do You Need One?
3) Business Plan: Describing Your Business
4) Business Plan: Composing Your Executive Summary
5) Business Plan: Analyzing Your Industry
6) Business Plan: Marketing And Sales
7) Business Plan: Your Organizational And Operating Plan
8) Business Plan: Your Financial Plan
9) Business Plan: Presenting Your Plan
10) Business Plan: Conclusion
Introduction
The purpose of a business plan is to explain in writing what your business idea is,
why it is needed in the marketplace, how it will succeed and who will make it
happen. In the process of writing a full business plan, you'll essentially be forced to
run your new business on paper before you get in over your head. The plan will
reveal any flaws in your idea or its execution and give you a chance to correct those
issues before you invest too much time or money, or pledge your house as collateral
for a commercial loan. Writing a business plan will also show you everything you
need to know about your business as its owner.
Once your business is up and running, your business plan will be a document you
can look back on any time your business is struggling or you are having doubts.
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Consulting your plan at times like these can show you if you are on track. Perhaps
you've strayed from your plan and need to return to your original ideas; on the other
hand, if you are on track and things just aren't working, the business plan will allow
you to easily examine every detail of your business and see where you need to alter
your plan to improve your business model.
In an ideal world, everyone would write a business plan before they actually started
their business, but sometimes this is not the case. If you are already up and running
but don't yet have a business plan, your primary motivation for preparing one will
almost certainly be to obtain financing. An existing business that is undergoing a
significant change would also benefit from preparing a business plan, regardless of
whether it is seeking financing. The good news about creating a plan for an existing
business is that you will have real-world experience and real-world financial data to
work with.
Do You Need A Business Plan?
Because writing a business plan forces you to look at your business in great detail,
every business owner should really write a business plan no matter what type of
business he or she is starting. But the main reason that most people are actually
forced to undertake this significant task is that they want to obtain external financing
for their business. A business plan is almost always necessary to obtain financing,
whether you are working in a new business or an existing one.
Your plan should convey your enthusiasm for your business and present it in the
best possible light. That being said, you should not use sales hype, exaggerate or
attempt to hide past mistakes. What's more, your plan should openly and honestly
address challenges that your business is likely to face. Addressing the potential
downsides shows that you are being realistic; it also puts you in a position to head
off problems before they occur, or avoid being blindsided if they do occur. If you
know what might go wrong and think about how you might be able to fix it ahead of
time, you may be able to turn a bad situation around quickly.
While it is helpful to consult books and websites on how to prepare a business plan
and what essential components you must include, it might not be the best idea to
use a prewritten template or software package to prepare your plan.
John S. Reilly, a Dallas-based business-plan-writing consultant, says that "lenders
and other funding sources can spot them a mile away because they all look the
same. Why risk letting the funding source wonder just how much thought has really
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been invested in this plan, if it's obviously done on cookie-cutter software?"
Another problem with templates is that they may induce you to include information in
your plan that doesn't make sense in your line of business or cause you to leave out
key information. The former scenario wastes your time, and either will make you look
lazy or foolish to your target audience.
Who Is Your Target Audience?
Since business plans are commonly used to seek financing, we'll assume that
potential lenders and investors are the audience for your business plan. However,
business plans are also often written for internal use, especially by owners and
managers.
Describing Your Business
In order to prevent your executive summary from being too long, and to give readers
more detail on what your business actually does, you'll want to include a business
description section in your business plan.
You probably spend most of your waking hours (and some of your sleeping hours)
thinking about your business. You understand what you do, how you do it and why
you do it better than anyone.
When you're writing your business plan, you have to think about your business from
the perspective of an outsider. The person who will be reading your plan knows
nothing about your business except: (1) what he or she knows about similar
businesses, if there are any and (2) what they assume. What the reader thinks he
knows (if anything) may not actually apply to your business. So, you need to explain
everything a financier might want to know about it.
Start with the basics: provide your business's legal name, operating name, contact
information (address, phone number, fax number, website address, email address),
and the name of at least one contact person. Also include the names of any owners
other than yourself and the names of your lawyer, CPA and insurance agent, if
applicable.
Next you must explain what, exactly, your business does. "We run a grocery store" is
not as descriptive as "We run the only grocery store in the greater Springfield area
that exclusively sells foods grown or produced within a 100-mile radius." The latter
description not only explains that you are in the grocery business, but it also says
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why your business is unique and shows that it fills a potentially untapped market.
Also include your mission statement, which should describe your company's
purpose, values and goals.
Relate the problem your business solves for consumers, and state the facts you
have gathered to support the existence of this problem. Be as specific as possible.
For example, describe the limited availability of locally grown and produced foods for
purchase despite the abundance of farmers and artisanal food producers in the area.
Describe the demand for these products and how your business would make them
accessible and affordable.
Define the industry that your business belongs to, the major characteristics of that
industry, and the major existing players in that industry. Where do their strengths
and weaknesses lie? How will your business be able to compete with their strengths
and improve on their weaknesses?
Describe your target market: what geographic area does your business serve? What
are the demographics of the customers you intend to reach? What are the
psychographics of your target customers? (Psychographic characteristics include
purchasing motivations, lifestyles and values.)
When and how was your company formed? Provide a brief history of your company,
lay out how your business is operated and outline its key players. Then explain how
your firm operates. What are the steps it takes to bring its product or service to
market? Are there unique characteristics of the way your company does this that
gives it a competitive advantage? For example, Wal-Mart's highly efficient
distribution system is one of the main factors that helps the company undercut its
competitors' costs. Specify how your company sells its product or service and what
quality control and customer service measures you use to make sure customers are
satisfied.
How do your firm's products or services fit into their industry, and how to they
interact with market conditions to create a potentially profitable opportunity? Explain
the concrete reasons you expect your business to flourish, and enumerate the steps
you will take to achieve your company's goals.
You should also state where your business is headed. What strategies have you
planned but not yet implemented to expand your business and your customer base?
(The answers to these questions may tie in directly with why you are seeking
financing.)
Provide an overview of the important financial details that will make your business
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successful, such as your anticipated sales volume, the profit margin on key products
and when you expect to reach your breakeven point. What are your financial goals?
What existing financing do you have, and what financing are you currently seeking
and why? Where does your company currently stand, financially speaking, and
where has it been in the past?
The business description provides greater detail than the executive summary, but it
is still essentially a summary. In later sections of the business plan, you will get into
the fine points of your marketing and sales plan, your organizational and operational
plan and your financial plan. The business description should provide a shorter and
less technical explanation of these things. Like the executive summary, the business
description should be one of the last things you write, since it draws on information
contained in other sections of your plan.
Remember that the reader doesn't really care if it is your lifelong dream to open a
local foods grocery store. They want to know how you will make the business
profitable and why they should invest or lend you money. Your description should be
based on facts, not feelings. Furthermore, every fact you present should be specific,
detailed and supported by credible secondary sources and by primary research your
company has conducted.
Composing Your Executive Summary
In order to prevent your executive summary from being too long, and to give readers
more detail on what your business actually does, you'll want to include a business
description section in your business plan.
You probably spend most of your waking hours (and some of your sleeping hours)
thinking about your business. You understand what you do, how you do it and why
you do it better than anyone.
When you're writing your business plan, you have to think about your business from
the perspective of an outsider. The person who will be reading your plan knows
nothing about your business except: (1) what he or she knows about similar
businesses, if there are any and (2) what they assume. What the reader thinks he
knows (if anything) may not actually apply to your business. So, you need to explain
everything a financier might want to know about it.
Start with the basics: provide your business's legal name, operating name, contact
information (address, phone number, fax number, website address, email address),
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and the name of at least one contact person. Also include the names of any owners
other than yourself and the names of your lawyer, CPA and insurance agent, if
applicable.
Next you must explain what, exactly, your business does. "We run a grocery store" is
not as descriptive as "We run the only grocery store in the greater Springfield area
that exclusively sells foods grown or produced within a 100-mile radius." The latter
description not only explains that you are in the grocery business, but it also says
why your business is unique and shows that it fills a potentially untapped market.
Also include your mission statement, which should describe your company's
purpose, values and goals.
Relate the problem your business solves for consumers, and state the facts you
have gathered to support the existence of this problem. Be as specific as possible.
For example, describe the limited availability of locally grown and produced foods for
purchase despite the abundance of farmers and artisanal food producers in the area.
Describe the demand for these products and how your business would make them
accessible and affordable.
Define the industry that your business belongs to, the major characteristics of that
industry, and the major existing players in that industry. Where do their strengths
and weaknesses lie? How will your business be able to compete with their strengths
and improve on their weaknesses?
Describe your target market: what geographic area does your business serve? What
are the demographics of the customers you intend to reach? What are the
psychographics of your target customers? (Psychographic characteristics include
purchasing motivations, lifestyles and values.)
When and how was your company formed? Provide a brief history of your company,
lay out how your business is operated and outline its key players. Then explain how
your firm operates. What are the steps it takes to bring its product or service to
market? Are there unique characteristics of the way your company does this that
gives it a competitive advantage? For example, Wal-Mart's highly efficient
distribution system is one of the main factors that helps the company undercut its
competitors' costs. Specify how your company sells its product or service and what
quality control and customer service measures you use to make sure customers are
satisfied.
How do your firm's products or services fit into their industry, and how to they
interact with market conditions to create a potentially profitable opportunity? Explain
the concrete reasons you expect your business to flourish, and enumerate the steps
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you will take to achieve your company's goals.
You should also state where your business is headed. What strategies have you
planned but not yet implemented to expand your business and your customer base?
(The answers to these questions may tie in directly with why you are seeking
financing.)
Provide an overview of the important financial details that will make your business
successful, such as your anticipated sales volume, the profit margin on key products
and when you expect to reach your breakeven point. What are your financial goals?
What existing financing do you have, and what financing are you currently seeking
and why? Where does your company currently stand, financially speaking, and
where has it been in the past?
The business description provides greater detail than the executive summary, but it
is still essentially a summary. In later sections of the business plan, you will get into
the fine points of your marketing and sales plan, your organizational and operational
plan and your financial plan. The business description should provide a shorter and
less technical explanation of these things. Like the executive summary, the business
description should be one of the last things you write, since it draws on information
contained in other sections of your plan.
Remember that the reader doesn't really care if it is your lifelong dream to open a
local foods grocery store. They want to know how you will make the business
profitable and why they should invest or lend you money. Your description should be
based on facts, not feelings. Furthermore, every fact you present should be specific,
detailed and supported by credible secondary sources and by primary research your
company has conducted.
Analyzing Your Industry
A good business plan starts with research into the potential business's industry,
competitors and market. This gives the business owner a complete understanding of
the playing field.
As a business owner, you must understand what is going on not just in your own
business but also in your entire industry. The factors that are hurting and helping the
entire industry will also impact your individual business. While you probably can't
control these external factors, you can control how your business will respond to
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them.
Potential financiers will want to see that you have a thorough understanding of how
your industry works and where your business fits in. They will also want to
understand the industry that they will be investing in (if they don't already) and be
convinced that your business will be a profitable addition to the industry.
Even if you haven't done all the work necessary to prepare a formal industry analysis
and sector analysis, you have probably already gathered a lot of the information you
need. It was probably an observation or a series of observations about the
conditions in your industry that made you decide to open your business in the first
place. You probably noticed a trend or an opportunity that you could exploit to earn a
profit.
This is the first section of your plan where you can (and should) go into detail.
Include the following information in your business plan's formal industry analysis.
Industry Overview
Explain what's going on in your industry as a whole. What does the industry life cycle
look like? Is the industry new, expanding, stable or declining? (Hint: if the answer is
not "new" or "expanding," your business is in for a rough ride.) Is it growing faster,
slower, or at the same pace as the economy as a whole? ("Slower" is not a good
answer.) If your company is affected by seasonal and/or cyclical changes, explain
how. List the market leaders and define their market share. Also note any other
important competitors in the industry, such as startups to keep an eye on. Analyze
the main products and services provided by the other companies in your industry,
and their major competitive advantages and disadvantages.
Make sure to go into detail. For example, when looking at what products and
services are provided by grocery stores, in addition to the obvious answer - grocery
stores sell the food people eat on a daily basis - you should note note the specialty
services offered by your competitors, such as freshly prepared hot meals, grocery
delivery, butchers, delis, pharmacies, gift card sales, lottery tickets, movie rentals,
banking services, florists and so on. When describing your major competitors, you
would include not just other grocery stores, but also mass merchandisers,
warehouse stores, and online stores that sell food. And while people need food year
round and in all economic climates, they do tend to buy more near major holidays
like Thanksgiving and Christmas.
Profit Opportunities
How do businesses make money in your industry? This might sound like an overly
obvious question, but think about it more carefully. Do you really know where and
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how grocery stores make money, for example? What wholesale prices can you
expect when purchasing your merchandise? By what percentage can you mark your
products up and still be competitive? What types of discounts can you profitably offer
during sales? What will your employees expect to be paid?
Legal, Economic and Political Factors
Consider the national, state and local issues that impact businesses similar to yours.
How is your business affected by environmental issues, trade regulations, labor
relations and health and safety regulations, for example? Consider the current
situation of the business environment and the potential changes that could affect the
industry.
In the case of the grocery store, the business owner would want to include
information in his business plan about the minimum wage, working hours, overtime,
workers' compensation and other laws that affect how grocery stores make
employment and compensation decisions. The plan should also include information
about grocery store employee unions and how this affects wages, working conditions
and business disruptions; food storage and handling laws; liquor licensing laws;
prohibitions on the sales of certain foods; tax laws, such as which foods are taxed,
which are untaxed and the other collection regulations such as the different deposits
on beverages sold in aluminum cans and glass bottles; and much more. What
happens if food sold by your store makes people sick? How do food expiration dates
affect your business? What about new regulations regarding the product you will sell,
or the potential tax changes on those products or services? All of these issues are
either things that your business will have to confront directly and/or things that affect
your competitors (and therefore your ability to take away their market share).
Technology
In this section, you should describe the role technology plays in your industry, and
how quickly the technology is changing your industry. What aspects of your business
are most sensitive to changes in technology? How can you position your business to
stay in touch with current, emerging and future technology? Do your competitors
employ technologies that you will not, and if so, why?
To continue our grocery store example, you might elaborate on questions such as
whether or not your competitors have websites, offer online shopping or use store
loyalty cards that facilitate data mining. What systems are used to ensure that food is
stored and displayed at the correct temperature? Remember to consider any
technologies – existing or emerging – and how they will influence your business and
the field in general.
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Logistics
In order to explore logistics, you must analyze the process of obtaining and storing
your products and moving them to the customers. Identify the major suppliers and
distributors in the industry, And evaluate how effective and accessible the existing
suppliers and distribution systems in your industry are. Describe how your business
will get its supplies, and how it will get those supplies to your business location.
Consider any challenges you might face along the way, and what you plan to do in
order to overcome them.
Opportunity
Where does your company fit into the industry? Having a compelling answer to this
question is crucial to your sales pitch, and be sure to identify the components that
are missing that you will provide, and what gives your business a competitive
advantage.
The industry analysis requires a great deal of research. If you're not sure how to find
the information you need about your industry, try starting with industry associations
(e.g., the National Grocer's Association) and government agencies (especially the
U.S. Census Bureau). If you can afford to pay for research, consider trade
publications (like Supermarket News or Progressive Grocer) and Standard and
Poor's Industry Surveys.
When writing your industry analysis, make sure you are being realistic. All is not rosy
in any business or industry, so you need to identify and analyze potential risks to
your business. If you don't yet know what those are, you're at a serious
disadvantage; chances are, your toughest competitors have already thought about
them. Financiers will expect that you have, too.
The industry analysis is also important as a foundation for your marketing and sales
plan, which we'll discuss next.
Marketing And Sales
The marketing and sales plan explains what your marketing strategy is, how you will
execute it and how you will ultimately generate sales. It addresses concerns such as
how you will convey your service or product's features, benefits and uniqueness;
how you will entice potential customers to buy your product or service; and how you
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will develop customer loyalty that will generate repeat business and referrals.
Your marketing and sales plan should also demonstrate a thorough understanding of
your target market as gained from both primary and secondary sources. Primary
sources include any market research your business conducts, such as interviews,
surveys, focus groups and market testing. Secondary sources include data and
publications produced by trade and industry groups, government agencies,
chambers of commerce, merchants associations and so on. Like the industry
analysis, the marketing and sales plan is research-intensive. (To understand the
qualities that make for a great company, investors must dig deep into "soft" metrics.
See Qualitative Analysis: What Makes A Company Great? for more)
Your marketing plan isn't just a document for potential lenders and investors. It's a
key tool in your business's money-making strategy. Even if you weren't looking for
financing, you would need a marketing plan. Let's delve into the detailed information
you'll want to include.
Devise Your Direction and Image
What is your business's ultimate goal? Investors will be curious about your long-term
plans. Do you just want to have just one very successful store, or do you hope to
expand to all 50 states?
What is your business's mission statement? If you look at the corporate websites of
Fortune 500 companies, you'll notice that they tend to have mission statements (or
something similar). For example, Coca-Cola's mission statement in its "2020 Vision"
is:



To refresh the world ...
To inspire moments of optimism and happiness ...
To create value and make a difference
Coca-Cola then elaborates on this simple mission statement by explaining its vision,
culture, values and more. Your business plan should do the same. In fact, the "about
us" and "company profile" sections of corporate websites can be great sources of
inspiration when writing your business plan.
What slogan will you use to convey the primary benefit(s) of your product or service?
For example, in 2011 Wal-Mart encapsulated the advantages consumers gain by
shopping at its stores with a simple phrase: "Save Money. Live Better." Competitor
Target's slogan is "Expect More. Pay Less." A slogan like the one McDonald's uses "I'm Lovin' It" - doesn't describe the business in any way, and might not be the best
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choice for your new company.
Branding
How will you brand your company? Think about what kind of image you want to
project and how this image will help you connect with your target audience. Include a
picture of your company's logo and any other visuals that convey your company's
image. These include your business's website, interior and exterior shots of your
store, photos of your product and the way it is packaged, the uniforms your
employees will wear and anything else that you will use to convey your business's
brand. (For related reading, see 10 Breakout Ideas For Small Businesses.)
Marketing
Your marketing plan must define your target market, and it must be very specific in
doing so. You aren't likely to be taken seriously if you define the target market for
your grocery store as "All people, because everyone needs to eat." While it's true
that everyone needs to eat, you'll need a more in-depth answer to this question,
one that reflects your business's unique features and benefits. A good target market
description provides detailed demographic and psychographic descriptions of your
potential customers.
What methods of marketing will you use to reach your target customers? For
example, how and where will you advertise? What promotions or giveaways will you
offer? What makes these marketing methods the best ones for conveying the unique
features and benefits of your product and for reaching your target market?
How much will it cost? Break down your marketing budget and be specific. You
might write, for example, "We anticipate spending $40,000 on marketing over the
first year. $10,000 will be spent on training employees to be extremely
knowledgeable about our products to increase customer confidence in our brand and
drive sales. $10,000 will be spent on professional public relations services. $20,000
will be spent mailing two-page color flyers every two weeks to customers who live
within a five-mile radius of the store."
Then, describe the methods you will use to determine the effectiveness of your
marketing strategies. For example, "The color flyers will contain a coupon for $5 off a
purchase of $50. The number of customers that bring in the coupon will show us
how many people read the flier and act on the special offer." You will also need to
project what return on investment your marketing plan might realistically produce. (If
you have a promising business that needs a boost, you may be able to put your faith
in these wealthy investors. See When Your Business Needs Money: Angel
Investors.)
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Understand the Competition
Where do your potential customers currently obtain the product or service you are
selling? What strengths and weaknesses do those businesses exhibit? How will you
offer a superior product or service?
Let's say that currently, your potential customers are only able to obtain local foods
by shopping at the farmer's market - which is only open for four hours, once a week or through a community-sponsored agriculture (CSA) program, which makes people
commit to buying a certain amount of produce each month and doesn't let them
choose what they'll be eating. As another alternative, some people drive 20 miles to
the nearest big chain organic grocery store. Many people like shopping at the
farmers market because they get to meet the people who produce their food and
interact with members of their community. Others like the CSA program because
they no longer have to think about shopping for produce. And the big chain store
offers a great selection.
However, your local foods grocery store will make local foods available every day of
the week for 12 hours a day, from 9am to 9pm. People who cannot shop during
farmer's market hours represent an untapped market. You can also steal market
share from the people who make the long drive to the big chain organic grocery
store by offering a much more convenient location. Furthermore, you will offer a
wider variety than is available through either the farmer's market or the CSA
program, and unlike the CSA program, your store will not require customers to
commit to spending a certain amount of money each month and will give them
greater choice in the produce they eat. You will also host community events and
"meet the farmer" days to foster the same sense of community provided by farmers'
markets and CSAs. (Check out Which Is Better: Dominance Or Innovation?)
Don't commit the common mistake of claiming that your product or service is so
unique that it has no competition.
Make the Sale
What sales strategies will you use to make your marketing plan pay off? The best
marketing plan in the world is all for naught if you can't close the sale. If you send
out flyers that get people to come to your store, what customers find when they
arrive is what will ultimately make or break your sales. How products are displayed,
how your store is organized, how your employees behave, how much they know
about the products and numerous other factors - all within your control - will
comprise your sales strategy and should be discussed in your plan.
Another big point to hit is how you will price your product or service. What will make
this price appealing and worthwhile to consumers and profitable to your business?
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How does it compare to your competitors' pricing strategy? What profit margin do
you anticipate on your major products? (If an economic storm has your business
taking on water, we provide tips for bailing yourself out. Check out Keeping A Small
Business Afloat and 9 Tips For Growing A Successful Business.)
Essentially, your marketing and sales plan describes how you will convey to your
customers what's in it for them and then get them to actually purchase your product
or service. Professional help, if you can afford it, can help you prepare a better
marketing and sales plan, especially if you are inexperienced.
Your Organizational And Operating Plan
The organizational and operating plan describes how you will structure your
company and how you will actually carry out everything you present elsewhere in
your business plan. Without an execution strategy, the rest of your plan is
meaningless.
Like the marketing plan, your operations plan is essential to the success of your
business, and will be important not just to financiers, but also to you, to management
and to your employees. You can't take for granted that anyone, including you,
understands exactly how to run your business on a day-to-day basis unless you've
thought it through and made your expectations clear. One difference between the
operations plan that you would prepare for internal use and one you would give to
potential lenders and investors, however, is that you do not need to include as much
detail in the latter.
Here are the key components to address in an operations plan that will be used
externally.
Location
Provide the address where your business will be located. Describe the surrounding
area and explain why this location will be effective. Also, note any disadvantages or
possible problems presented by your location and what, if anything, you have done
or will do to counteract these negatives. If you have a virtual business, you should
explain why you have chosen to operate this way.
State whether you own or lease the property and provide the terms of your mortgage
or lease. Present information like the monthly payment, the length of the term,
whether you are legally able to sublet and the terms of the early termination clause.
Lenders will also want to know if your lease is net, double net, or triple net - in other
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words, is it you or the landlord who will be responsible for property taxes, insurance
and maintenance? If your company is responsible for any of them, how much do
they cost?
Provide details such as the square footage of the property, how your facility is laid
out, what type of loading area it has to receive merchandise (if applicable) and the
number and location of parking spaces. Also provide data about vehicle and
pedestrian traffic, accessibility from major roads and highways, related nearby
businesses and anything else that affects your location. If your business has more
than one location, be sure to describe each one. Also discuss the major fixtures and
equipment your business requires and how they work with your space. Note whether
you are likely to outgrow the space, and if so, how you plan to handle a
move/expansion. (For more, check out Starting A Business: Location And Licenses.)
Supply and Inventory Management
Who will be your suppliers/vendors? Do you have multiple options available, or are
you beholden to a single supplier, which may subject you to shortages and give you
little bargaining power with regard to price and delivery schedule? What terms have
you established with your suppliers? What kind of reputation do your suppliers have?
Will they extend credit to your business, and if so, how much and on what
conditions?
It's also important to explain how you will manage your inventory. If you have too
much inventory, you're wasting money; if you have too little, you're losing out on
sales (and possibly customers, if they perceive your business as unreliable). Having
good relationships with your suppliers can help you manage your inventory
effectively.
Production and Distribution
How will your production process work? Describe each major stage of production,
including any processes that are outsourced and the technologies you use,
remembering that you are writing for someone who may not understand the
acronyms and terms of art common in your industry. Detail what you will produce,
how much of it you will produce and how long it takes to produce each unit. Also
elaborate on what methods of quality control you will implement, both during and
after production.
Describe how will you distribute and sell your product or service. And if it's a product
you're selling, in what stores will you sell them? Consider any arrangements that are
already in place, and how you will get your product to the stores. You should also
consider how and why these arrangements will work.
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As you discuss each component of your operating plan, make sure to analyze what
competitive advantage or disadvantage your firm has in that area. (For more, see
Competitive Advantage Counts.)
Organization
Your team of managers and lower-level employees are the ones who will carry out
most of the operations plan, so it's important to describe who they are, what their
qualifications are and what their responsibilities will be. Include an organization chart
showing the hierarchical structure of your business. Also describe how your
business will be structured, what legal form of ownership it will use (sole
proprietorship, partnership, LLP, LLC, corporation, etc.), and the chain of command.
What is the company's management philosophy and business culture, and how will
these contribute to your business's success?
Your organizational plan should provide names and professional descriptions of
each owner and manager your business will have. The description of each top-level
member of your organization should explain what their roles and responsibilities will
be in your company, and what they have done previously. Emphasize past business
successes and key skills that will help your current business succeed. In addition to
your managers, what other essential jobs are there in your company, and which key
employees will perform them? What qualifications do they have in order to excel at
these jobs? Provide cross references in your descriptions to the appendix, where
you will include detailed business resumes for yourself and for each of these
individuals.
Lower-level staff members, if you plan to hire any, are also important enough to
mention in your business plan because they will be essential to the smooth
functioning of your business. Explain how you will locate potential employees and
what qualifications they must meet, what jobs they will perform, how you will
compensate them and so on. Basically, think about the information you would
include if you were advertising one of these job openings, and include that in your
business plan.
Also note whether your business will hire any outside consultants or other
independent contractors. If so, why? What functions they will perform? Finally,
describe any positions you might want to add in the future if your business is
successful enough to expand.
Depending on how much information you need to present, you may want to separate
the organizational plan from the operating plan. But if your business is extremely
small, the organization plan will be quite short. If your business is a sole
proprietorship, there really isn't anything to describe, since there are no managers,
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no employees and no chain of command.
Your Financial Plan
The financial part of a business plan includes various financial statements that show
where your company currently is financially, and where it intends to be. This
information helps you determine how much financing your business needs and helps
financiers determine whether lending you money or investing in your business is a
prudent use of funds.
While the financial statements are helpful in and of themselves, the data they contain
can also be used to calculate financial ratios such as gross profit margin, return on
investment and return on owner's equity. Ratios provide helpful information about a
company's liquidity, profitability, debt, operating performance, cash flow and
investment valuation.
Before you seek financing, ask yourself if your business is ready to take on new
debt. Do you know exactly what you will use the money for? Can your business
handle the cost and the risk of borrowing this money? What would the
consequences be if you were to default?
Begin your financial plan with information on where your firm stands financially at the
present time, and what its financial situation has looked like historically. Then lay out
your financial targets, such as return on investment, sales per employee, profit
margin and so on.
If your business plan is for the expansion of an existing business, your statements
will be based on your business's existing financial data. If your business is new, your
statements will be speculative, but you can make them realistic by basing them on
the published financial statements of existing businesses similar to yours. (Our
Financial Statements Tutorial will get you up to speed, if you're new to the subject.)
Your financial plan should include three key financial statements: the income
statement, the balance sheet and the cash flow statement. Let's look at what each
statement is and why you need it.
1. Income Statement
The income statement summarizes your company's revenue and expenses.
Revenues are your company's sales and/or other sources of income (for
example, a car dealership might earn money from car sales, car leases and
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auto loans). Expenses include items such as the cost of goods sold, payroll,
taxes and interest. The bottom line of the income statement shows the
company's net income. Financiers want to know what kind of numbers your
company is working with and whether your company is profitable.
2. Balance Sheet
The balance sheet shows your company's assets and liabilities. It's called a
balance sheet because the assets must perfectly balance the liabilities. Within
each category are numerous subcategories. For example, your assets will
include things like cash, accounts receivable, inventory and equipment. Your
liabilities will include things like accounts payable and loan balances. The
balance sheet is important because it shows the company's financial position
at a specific point in time, and compares what you own to what you owe.
3. Cash Flow Statement/Cash Budget
The cash flow statement shows the amounts of money you expect to be
coming into and going out of your business in a given time frame. Topics
you'll need to examine to predict cash flow include sales forecasts, cash
receipts vs. credit receipts and the time frame for collecting accounts
receivable. How much will these expenses be, and how often will you need to
pay them? Will you have trade credit, and how long will you have to pay your
suppliers? A realistic cash budget covering one year of operations and broken
down into one-month intervals is an important short-term planning tool. You'll
also need to prepare longer-term projections that go at least three years out, if
not five. These are called "pro forma" statements, and they are based on your
assumptions about how your business will perform.
Cash flow statements not only show potential investors that you know what you're
doing, they also help you to make sure your business model is financially viable and
to establish goals that you want to achieve.
Your financial statements should show both a long- and short-term vision for your
business. In business plans, three-year and five-year projections are considered
long term, and your plan will be expected to cover at least three years. Your
projections should be neither overly optimistic best-case scenarios, nor overly
cautious worst-case scenarios, but realistic in-between projections that you can
support. Also, be aware that lenders may want your statements presented in a
certain way. A bank, for example, may want to see monthly projections for the first
year, quarterly projections for the second year and annual projections for the third
year. In addition to financial statements for your company, if you are a new business,
you may need to provide personal financial statements for each owner.
Preparing your financial plan shows how much money will you need. Perhaps this
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sounds obvious, but you really should know how much money you need from
lenders or investors before you ask. If you can't ask for a specific amount of money,
explain why you need that amount of money and show exactly how it will be used,
any reasonable lender will be very hesitant to give it to you. Lenders and investors
will also expect that you have invested your own money in the firm - this shows that
you are committed to your idea and confident that your business will succeed. The
amount of your own money the lender will expect you to have invested in the
business compared to the amount you want to finance varies, but it usually ranges
from 20-50%.
You must also determine what type of financing would be most suitable for your
business. Banks offer several types of financing to businesses that do not present
too much risk. Do you need a short-term working capital loan to increase your
inventory? Do you want a transaction loan, where you receive all the money at once,
or a line of credit, where you draw on funds as you need them? Do you need an
intermediate-term loan to purchase larger assets such as real estate or equipment?
Would you prefer revolving credit, which has a longer time frame than a line of credit
and allows you to re-borrow funds that you have previously paid back?
Potential lenders will also want to know how and when you intend to repay the loan
or line of credit, so you should put together a proposed repayment schedule and
terms. They may not agree with you, but your proposal shows that you are
considering the loan from the lender's perspective. Also describe what collateral is
available to secure the loan, such as inventory, accounts receivable, real estate,
vehicles or equipment. Be aware that lenders do not count the full value of your
collateral, and each lender will count a different percentage.
Potential investors will want to know when their investment will pay off and how
much of a return to expect. They will also want to see that you have an exit strategy
to cash out on your investment.
When you put together your financial statements, make sure there are absolutely no
typos or mistakes in your calculations. If you are inexperienced in preparing these
statements, hire a professional to help you. Even if you and all of your business
partners know exactly what you are doing, you may still want to hire an unbiased,
outside professional to check your work and give you a second opinion on whether
you are being realistic in your projections. You don't want to be blindsided by
mistakes or problems in your financial statements when a potential lender or investor
rejects your proposal.
Keep in mind that no one has to lend you any money or invest in your company, and
when they are considering doing so, they will be comparing the risk and return of
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working with you to the risk and return they could get from other investments, such
as bonds and stocks.
Presenting Your Plan
Now that you've invested dozens of hours doing research, compiling data,
organizing your information and writing it down, it's time to discuss how you should
present your plan. But first, you may want to take some time to clear your mind.
Reilly says, "The biggest mistake is the management team not putting the newly
crafted plan on a shelf for a couple of days and then coming back and reviewing it
with fresh eyes. All of the various elements may look good by themselves, but may
still not fit together well." A bad business plan is "one that has not been thoroughly
vetted to remove inconsistencies ... [It is] much better to spot those problems at the
front end and solve them then," he says. Reilly suggests a business plan consultant
if you need a fresh pair of eyes to locate the logistical errors in your plan.
The Written Presentation
The importance of your plan's appearance can't be understated: it's your business's
first impression. If your plan looks sloppy, it will be assumed that the information it
contains is inaccurate and not well-thought-out and that your business is run
carelessly.
Your plan must have a formal layout with consistent formatting. It should use visual
aids where appropriate, but any graphics you include must be relevant (charts,
graphs and tables presenting data pertinent to your business) and professional - this
is not the time for decorative clip art of cows, even if your business does sell milk.
Consider hiring a professional graphic designer to give your plan a polished look.
Another professional you should consider hiring is an editor, who will see mistakes
that you don't, point out sentences that are unclear and sections that are
disorganized. They will make sure that the tone of your business plan is appropriate
- formal, but easy to understand. They will also make sure there are no spelling or
grammar errors. You don't want to look careless or uneducated. Overall, a
professional editor will make the plan more readable and make sure your message
is presented clearly and concisely. Concise doesn't mean that you have to leave out
important details to save space, but that you present all the necessary information in
the most efficient way possible.
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Include a cover letter to introduce yourself and your plan. A title page and table of
contents will show that you are professional and organized and make it easy for the
reader to locate key information within your plan. Include subsections in your table of
contents so that, for example, the reader can easily locate your income statement
instead of having to thumb through the entire financial plan section to find it. Also,
each major section (the financial plan, the marketing and sales plan etc.) may benefit
from a brief summary at the beginning that ranges in length from one paragraph to
one page.
There is nothing that says you have to lay out your plan exactly as described in this
tutorial. While it is important to include all the information we've mentioned, you may
find, for example, that even though marketing and sales are closely intertwined, you
have enough to say about each subject that you would rather present them in
separate sections. There is also flexibility in the order in which you present your
plan, outside of putting the title page, table of contents and executive summary at
the beginning, in that order, and the appendix at the very end. Present your
information in a logical order, but be aware that financiers are likely to skip around
and read the information in the order that best suits their purposes.
The Appendix
Including an appendix section in your business plan allows you to supplement the
information provided in the main sections. Since you don't want your main sections
to be too long or too detailed, the appendix is where you should include supporting
documents that provide additional details that potential financiers will want to see if
they decide that your plan has merit.
For example, while you should have provided descriptions of your professional
background and the professional backgrounds of your management team and key
employees in the main document, you should save full resumes for the appendix.
Your appendix could also include letters of reference from individuals familiar with
your business performance, such as former bosses and high-level co-workers;
additional details from your market research; legal documents pertinent to your
business such as your business license, articles of incorporation, and the lease or
purchase agreement for the building you will operate out of, and more.
You might also need two to three years of tax returns for each owner if your
business is new, or for your business if you are already established. Because of the
sensitive data they contain, you may want to find out if tax returns are required
before you include them.
Finally, anything else you think is important enough to be part of the business plan
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but too cumbersome to include in the main document can go in the appendix.
The Oral Presentation
If you have excelled in putting together your written business plan, you will have a
chance to make your case on the phone and/or in person. You must be thoroughly
prepared to make a positive and lasting personal impression and a strong argument
for your business. How will you accomplish this?
First, practice your pitch. Even though the potential financier should have looked at
your business plan by this point, you should still prepare a short summary speech
that highlights the points you made in your executive summary. Don't memorize an
entire speech; just memorize the outline of what you want to say. That way, you will
hit all of the important points but sound sincere in your delivery. You may even want
to visit a public speaking club to practice your public speaking and presentation skills
ahead of time and get constructive feedback on how you can improve. Even if you
don't want to present your plan to a group of strangers since it may contain
proprietary business ideas, getting practice speaking on other topics will still help
you.
Brainstorm questions that the person or group you are meeting with is likely to ask
you, and prepare answers to those questions. It might help to ask trusted, businesssavvy friends to review key parts of your plan as devil's advocates so you can
practice and be prepared to defend everything in your plan.
A common mistake business owners make is to get feedback only from friends and
relatives. The problem with this is that, often, the people who care about you will be
inclined to support you or tell you that your ideas are good because they simply
believe in you or don't want to hurt your feelings. Even if you have less-sympathetic,
brutally honest friends and relatives, they may not understand your idea from a
business or investment perspective, and thus will not be able to give the kind of
feedback you really need.
If you're not a numbers whiz, you don't have to become one, but, as the owner, you
should thoroughly understand the financials included in your plan. Bring other
members of your management team onto the call or into the meeting if they will
strengthen your presentation or compensate for any weaknesses you may have. For
in-person meetings, make sure that you present yourself with a professional and
confident appearance and manner, just like you would do for a job interview.
Success or Failure
Whether you're presenting your business plan in writing or in person, remember that
the presentation itself must be engaging or your business, not just your presentation,
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will seem unappealing. Don't assume that your audience is familiar with your
industry or line of business, and avoid using industry jargon or acronyms.
Remember to make your case from the potential lender or investor's perspective.
Are you offering them a realistic risk and return scenario and one that fits the profile
of their usual investments?
Plan to shop around for financing: First, because you may be rejected, and second,
because one financier may give you a more favorable offer than another. If you are
rejected, and there's a very good chance you will be at first, it doesn't necessarily
mean that your business idea isn't viable. It may mean that your business isn't the
right match for that particular investor, or that something is lacking from your plan or
your presentation. If you are rejected, set aside your pride and get as much
information as possible about why that person wasn't interested so you can fix
problems and improve your chances of succeeding at your next pitch.
If your business plan is rejected repeatedly, there's probably a good reason for it.
Why don't experienced financiers think your business will succeed? How can you
change your business model and reformulate your plan into something that has
greater potential? Would the lender or investor be willing to consider an improved
version of your proposal at a later date, or are they not interested no matter what?
Don't be too quick to blame the economy, but sometimes unfavorable economic
conditions will prevent a funding request from getting approved that might look more
appealing in a better economic climate. Also, sometimes a marginal loan request
can be funded with a loan from the small business administration, but if the only loan
you qualify for is a high-risk government-subsidized loan, you have to ask yourself if
your business is really ready to take out a loan or if there are problems that need to
be worked out first.
Conclusion
A business plan is not just a lengthy document that helps you obtain financing. It's
truly a thorough examination of whether your business idea is viable. Preparing your
business plan in the early stages of developing your business can save you a great
deal of time, money and heartache by showing you where the weaknesses in your
idea lie and giving you a chance to correct them before you make any serious
mistakes.
For example, in the process of putting together your business plan, you might
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discover that you haven't really thought enough about your marketing budget or you
haven't done enough research on government regulations that will affect your
business. In putting together your plan, you will be forced to examine your business
from the viewpoint of the skeptical potential investor and the skeptical potential
consumer, not just from the perspective of the enthusiastic entrepreneur.
Once you've completed your initial plan and, hopefully, obtained the investment or
loan you were seeking, keep in mind that your business plan should be a living
document. Don't just store your business plan on a shelf and never look at it again,
thinking that it has served its purpose. You will want to revisit your plan from time to
time, dropping some components and adding others as you learn what works for
your business and what doesn't. As your business evolves, you'll find that older
versions of your plan provide a helpful reminder of how far you've come. As a bonus,
continually updating your plan will put you ahead of the game if you later need to
secure additional financing.
There's no question that putting together a good business plan takes a tremendous
amount of work. But if you do it right, your effort will pay off. (For more small
business tips, see Start Your Own Small Business and Starting A Small Business In
Tough Economic Times.)
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