How To Create a Business Plan¹
As with most things in life, having a clear vision of where you want to go and a detailed plan of how you will get there will increase the odds of your vision coming to fruition. This concept is true when it comes to starting a business. Coming up with your vision and thinking through all of the steps that are needed to accomplish the vision is exactly what a business plan is. First, we will look at why you would need a business plan and, then, who will be using the plan. Finally, we will look at the major components that make up a business plan.
Why You Need a Business Plan
Essentially, a business plan is thinking through all aspects of the business and then writing it down before actually starting the business. A builder would not start building a house without plans that have been thought through ahead of time. The business plan answers the “who”, “what”, “why”, and “how” of the business. Who will be operating the business? What exactly is the business? What is the purpose of the business? And, how will the business be operated?
Going through the process of writing out a plan forces you to think through all aspects of the business ahead of time so that you can anticipate everything that is needed and involved with the business. As the saying goes, you either “fail to plan or plan to fail”. The benefits of writing down a well-thought out business plan are:
- Deciding if this business is for you: Once you have created the first one or two drafts of your business plan it will become apparent if this is a business you really want to be involved in. Does it match your skill set? Now that you know all that is involved you may decide that it just may not interest you after all. This is the best time to find out if the business may not be a good fit because you have not committed much money or time to it;
- Finding out how much money will be needed: Having a clear picture of the financial requirements needed will help you decide if you have enough capital to start and operate the business with. If you do not have enough capital to start the business based on your plan, revising the plan or procuring financing may be needed;
- Getting the help of trusted advisors: Having a clear written plan will allow your family, friends, and trusted advisors to assist you by giving their feedback. They will be able to look at the plan from a more objective perspective and give insight that you may miss;
- Easier to borrow money: If financing is needed to fund the business you will have a much easier time getting a bank to lend money by having a well-thought out plan. The banks will be using the business plan to assess whether or not it has enough potential for them to get paid back;
- Easier to attract investors: Any potential investor will want to see a detailed plan to ensure two main things: that the business is worthy for them to invest in AND that you are worthy to invest in. They know that having a great plan is not enough; they want to see if you have the ability to execute the plan.
Who Will Use the Business Plan?
As you can tell, many different people will be going through your business plan. Below are three groups of people that will be using the plan:
- You, the business owner: First and foremost, any business that you plan to start has to be fully understood and committed to by you. If you do not believe in the vision, no one else will either;
- Lenders and Investors: As mentioned earlier, banks as well as investors will be utilizing the business plan to evaluate whether or not they should lend or invest their money into your business;
- Management and Staff: If the plan is well-thought out and as detailed as possible, your management team and staff should be able to use key components of the plan to execute your vision.
Sections of the Business Plan
Just as no two businesses are alike, no two business plans are alike. They come in many different varieties. You can do a quick search on the internet and find many different templates and ideas for a business plan. Below are the main sections, or components, of a typical business plan:
- Executive Summary: The executive summary is a high-level synopsis of the business. This is where you can paint your vision of the business with the goal of getting those that are reading this section as excited about the vision as you are. The executive summary needs to be clear and concise. It should contain the main questions most people would ask when wanting to inquire about your business: what your business does, what problem does the business solve, what market is your business in, what the potential growth would be and what the overall vision for the business is;
- Products/Services Offered: In this section, you are explaining in detail exactly what the business will offer and how it will make money. Try to be as detailed as possible while keeping in mind who your audience is. Explain the products and services so that someone outside of your industry will be able to clearly understand what it is that you are offering. Remember, if one of the goals of the business plan is to procure financing you will want to make each aspect of your business plan clear for the lenders and investors;
- Market: This section will explain exactly what your target market is and who your target customers are. Even though it may seem obvious to you, other people may not fully understand your industry and the type of market you will be operating in. Answering key questions like the following will assist an outsider with understanding the market:
- Will this business be a direct competitor to a major player already in the market or will it be offering a niche or complimentary service or product that is currently not available in the market?
- Is the market growing or shrinking?
- How long has the market been around?
- What is your projection for where the market is headed in the next three to five years?
- Why does your market need your product or service?
It is important to also explain who your target customer will be by describing a target customer’s profile such as their demographics and buying habits;
- Marketing/Sales: Of course, the lifeblood of any business is sales. This section should explain what the plan is for marketing the business as well as the plan for actually selling the product or service. What methods will you use to market your business? Will you utilize advertising or does your business rely on direct sales reps? If you are utilizing advertising, explain the various types of advertising mediums that will be used, such as radio, TV, and digital.
Also, give samples of the advertisement as well as the projected costs and return on investment you expect from each advertising medium. If you are planning on using a sales staff to sell the product or service include the plan for how the sales force will be recruited, trained, and compensated;
- Competition: Unless the business is highly specialized and unique, there will most likely be competition. This section should be made up of two parts. The first part explains who the competition is and offers detailed information about each competitor. Include how long they have been in business, who their target audience is, what their pricing strategy is, and what their marketing strategy is.
The second part of this section should explain, in detail, how your business will be different from the competition. Include what makes the business unique, what the difference is in the product or service, how the pricing strategy compares, and why would a potential customer choose your business over a competitor. These types of questions will not only assist any lenders or investors with understanding your market they will help you better understand who you will be competing against.
- Operations: In the previous sections you have painted the vision and explained what exactly the business will do. This section will explain, in detail, how you will execute on the plan by providing information on the setup, staffing, and actual day-to-day operations. In the setup sub-section, include all information related to the setup of the business operations such as what supplies will be needed and where those supplies will be procured, what the equipment needs are, and what the facility needs are. In the staffing sub-section, include the staffing structure and what the role of each position will be.
Finally, in the day-to-day operations sub-section, explain what the plan is to produce the product or deliver on the services. This entire section should be a condensed version of your Standard Operating Procedures;
- Management: The lenders and investors are not only assessing the plan of the business but are also assessing how much confidence they will place in the key leadership of the business such as yourself. This section should explain who the key members of management are and give specific information about what their background is and why they are a match for this business. A strong core management team is vital for any business. You can have a great plan but without a strong management structure to execute the plan the business will flounder;
- Financials: This section will focus on explaining the business in financial terms by providing clear and realistic projections for the business. There are three main components that will need to be explained in detail: income, expenses, and cash flow.
These three components should be projected out by month for the first year and then projected out on a yearly basis for at least the following two years. The income component should clearly explain your realistic projections for sales itemized by product line, division, or some other product or service category. The expense component should itemize all projected expenses and offer explanations and justifications for the expenses. The third main component, which is key, is projecting your cash position, by month, to ensure that you can pay all obligations.
Even though it is tempting to make these projections look as good as possible, make sure that you are very conservative in your estimations. It is important to under-promise and over-deliver.
Your business plan should act as a compass and a guide to ensure that your business is on track to meet the vision that you have outlined. Keep in mind that a plan is not going to be perfect. Once you start the business your plan will change and evolve over time for the better. As mentioned earlier, if you fail to plan then you are planning to fail. By planning ahead and preparing a thorough plan of the business you are increasing the odds of success for yourself and for your business.