How to Write a Business Plan
An investor’s Perspective: “Convince me that your product or service has enormous market potential – and make sure you have evidence to support that.” The business plan must develop, evaluate, and optimize: The features of the product or service you are offering. A plan to market and deliver that product to your customers. An organizational and operational model for your business. A convincing picture of the potential profitability of your endeavor. A realistic assessment of the risks your business will face. A good business plan is the scaffolding that supports your business idea as you move it from concept to reality, taking it through the following steps: 1. Identify or create the business concept: This is the "aha" stage of the business lifecycle. Here, entrepreneurs first conceive of their business ideas. They might jot notes on a paper napkin, run their ideas past friends, or start looking around on the Internet to see if anyone has tried the idea before. 2. Refine the business concept: At this stage of the game, entrepreneurs start to do some real research and analysis to examine the feasibility of their business ideas. Along the way, they make discoveries or spot opportunities that help shape and define the business concept. 3. Develop the business plan: Now entrepreneurs put pen to paper. In the process of writing a business plan, entrepreneurs further refine their ideas, craft roadmaps to business success, and work to develop a persuasive case that their product or service is the "next big thing." 4. Obtain funding: At this stage, entrepreneurs use their business plans to convince potential investors and creditors that investing in their business concept is a good idea. Entrepreneurs need to raise the money not only to get their businesses off the ground, but also to keep them afloat while waiting to earn big profits. Entrepreneurs sometimes think that they can shut themselves up in their office on a rainy Sunday afternoon and emerge several hours later with a winning business plan. In reality, a business plan is not written in a vacuum. Crafting a credible and convincing business plan requires a lot of foresight, research, and analysis. A successful business plan document merely reflects the results of a properly executed business-planning process. As you prepare to write a business plan, you're really testing the viability of your business idea. Every claim that you make in your business plan must be substantiated with the results of your research and analysis. In order to evaluate an idea’s chance of real success, and to develop an action plan for realizing it, you must first do the legwork to analyze and refine it. Evaluating and planning your business is critical preparation for writing a convincing business plan. That process includes: Refining your business concept
Validating the market Analyzing your competition Assessing your market opportunity Planning marketing Modeling operations Assessing and adjusting your model
Before writing a plan for your business idea, you must be sure that you understand and have considered each aspect of your business idea. If you need help with executing any step of the planning process, make sure you get the support and guidance you need before you start writing your plan. THE BUSINESS PLAN (8 sections): I. Executive Summary The Executive Summary is the first section of your business plan that a potential investor reviews. It is also probably the last section of the plan that you will write. The Executive Summary is essentially a condensed version of the entire business plan, your overall idea and its possibility for success. Here, you must capture the trust and the imagination of your reader. You may not be able to judge a book by its cover, but an investor is quite likely to judge a business plan by its Executive Summary. If there are errors or omissions in this section, the investor might not even read the rest of your plan. An Executive Summary should be a brief (two to five page) introduction to the business plan that outlines the business opportunity and vision, the market for your product and service and trends and projections for the market, the competitive advantage offered by your product or service, the skills and experience of your company's management team, and a summary of the offering and anticipated returns. Investors want to know: What kind of company is this? (Is it a technology company, a manufacturing company, etc? What type of structure does it have: LLC, S-Corporation, etc?) What is the offered product and how does it differ from competing products or services? (For instance, will you sell a software product that is less expensive than the competition's? Or will your product give your customer more features than the competition's?) How many people will buy this product or service and what will they spend to get it? Who is running this venture and do they have what it takes to pull it off? How much money do they need, for what purpose, and when do they need it? How much money will my investment return and when will I realize that return? The Executive Summary must: Demonstrate your understanding of the business and industry. Predict and address concerns that a potential investor might have. Include highlights of how and when the business will pay back investors.
II. Company and Product Overview The Company and Product Overview is sometimes a single section of a business plan, and sometimes two separate sections. Either way, your business plan should cover the same key content. The Company Overview provides a birds-eye view of your organization as it exists today and as you envision it existing in the future. Your goal is to summarize how all of the elements fit together into a cohesive business. In the Product or Service Overview section of your business plan, describe the features and benefits of the product or service you plan to offer in the most succinct and clear terms you can muster. Investors want to know: What is the company's mission? For instance, a new restaurant might be trying to capture 15% of the local market share within the next two years. Who is the customer base? A new restaurant might be looking to serve childless couples aged 25-45 in a particular neighborhood. Where is the business located and where will it conduct business? What stage has the company reached? (Is it at the seed stage? Is it an established business?) What are the company's business goals? For example, a restaurant might want to earn $10,000 monthly profit. In this section of the plan, you begin to convince your potential investor that you are offering something that customers will actually purchase, that you understand how the industry works, and that you've done the homework required to substantiate your claims. Writing a good Product or Service Overview entails walking a bit of a tightrope. You want to give your reader a clear understanding of what you're offering, and how it differs from other offerings, yet you don't want to get bogged down with technical details. In this section, you must articulate your "competitive advantage." Put simply, competitive advantage is what allows a company to earn more profits than its competitors. (Why would a customer buy your product or service over those of your competitors?) You should start thinking about how your product or service can offer a long-term competitive advantage. Types of competitive advantages include: Cost advantage: when your product or service gives your customers the same main benefits as competitors' products, but at a lower cost. Speed advantage: when you are able to be more nimble than your competitors and quickly take advantage of opportunities. Product differentiation: when your product or service gives your customers different or better benefits than competitors' products. The Company and Product Overview must: Include a history of sales, profits, or other company financial information. Be honest about challenges you've faced in the past and overcome. Demonstrate your understanding of the industry. Show that you've talked with distributors, competitors, or retailers. Articulate the features and benefits of your product or service.
Clearly chart the path to product development.
III. Market Analysis In the Market Analysis section of your business plan, your goal is to demonstrate how your business will generate sales and succeed given market conditions. Here, you really have to show your reader that you've done your homework (and research!). Investors want to know: What are the advantages of your product or service? What customers will you sell it to? (What’s your target market?) What do those customers care about? How can you reach those customers and convince them to buy your product or service? Why will they choose you over your competition? How much money will these customers spend on your product or service? Keep in mind that market analyses are often overly optimistic. Your goal is to convince your potential investor that you're being realistic and that you can back up your claims with actual research and a sound analysis of the marketplace. If there's not a market for your product or service, nothing will make your company successful. The Market Analysis should include discussion of: Market opportunity: Your market opportunity is a quantification of the number of potential customers and the amount that they are willing to spend. This information shows a potential investor that the revenue estimates for your business are realistic and substantiated. Be sure to consider any observable market trends in your analysis and projections. Competition: A potential investor tries to ascertain if you have identified all direct and indirect competitors. Have you presented a convincing description of how you will differentiate your product or service from competitor's offerings? Here, you should also present information on any government regulations or outside influences that help shape the competitive landscape. Marketing strategy: How will the business make sure customers know about this product or service and come to prefer it to similar products or services offered by competitors? Your Market Analysis should include a brief discussion of how your company will use distribution, advertising, promotion, pricing, and selling incentives. Explain to your reader how you will sell your product to a single customer. Note: You will elaborate on the Marketing Strategy in another section of the business plan. Your description of the strategy in this section should serve as a summary, rather than step-by-step map of the process Market research: Don't ask your reader to "trust you" on your analysis of the market. Substantiate your claims with some type of market research. Different types of research have varying degrees of credibility. Supporting research in this section might include, depending on the nature of your business: o Research you've done yourself (surveys, polls) o Existing industry research
o Research you pay someone to do on your behalf Financial forecasts: Other sections of your business plan will present more detail about your financial forecasts, but the market analysis should include your projected sales growth, market share, and amount of sales (by customer) – and details that can support your projections.
The Market Analysis must: Demonstrate your understanding of the industry. Identify and address business risks. Include a detailed description of your target customer. Identify all direct and indirect competitors. Discuss your market position relative to competitors. IV. Marketing and Sales Plan The Marketing and Sales Plan section of the business plan puts the market analysis into action. In this section, you will describe how you will implement the marketing plan to achieve the expected sales performance. A complete and convincing Marketing and Sales Plan will outline the following strategies: Pricing: Here you need to document the cost of goods sold, explain why you are choosing to offer your product or service at a particular price, and elucidate why you think the market will support that price. You might also want to consider outlining the impact that changes in price would have on the expected gross margins of the company. Distribution: Your distribution strategy describes the process of actually getting the product into the hands of customers. Will you sell your product directly to customers? Will you sell through retail outlets? Explain why the distribution channels you've selected will contribute to your success. Promotions: A key component of your Marketing and Sales Plan is anticipating how your product will be promoted in the marketplace. How will you use what you know about the market to ensure that your target customers know your product and prefer it over the competition’s product? You should include a description of your advertising strategy, detail your plans for sales and distribution, and create a marketing budget. A good business plan will show that the entrepreneur has thought strategically about how to price the offering. The price you charge for your product or service should reflect and support your overall business strategy. When you establish a price for your product or service, you should keep in mind: Value: Customers need to feel like they're getting the benefits they want. In order to make sure your customers feel like they are getting a good value for the price, you must understand what it is that drives customer buyer decisions about your product or service. Know what's important to your customer.
Rationale: Customers also need to understand why prices differ between competitors. Good entrepreneurs help customers recognize why their products are more or less expensive than other offerings in the market. Positioning: Some companies charge higher prices when competition is minimal. When competition is fierce, companies may strategically price their products slightly lower than their competitors, or they may substantially under-price the market to get rid of competition altogether.
The Marketing and Sales Plan must: Consider the position of your product or service in the marketplace. Define a price based on the customer and the market. Complete a selling plan to offer the product. Describe the distribution channels you will use to sell the product or service. Include a complete budget for advertising and promotion. V. Operations Plan In the Operations section of your business plan, show your potential investors that you have truly considered all the practical aspects of running your business. In this section, put some specifics around such aspects of the business as location, equipment needs, labor requirements, and so on. Your operating plan should address all stages of running your business, including: Product development: Include a summary of all product development activities that the company will undertake, both before bringing the product to market as well as ongoing development activities. In other words, what needs to happen before you have a product designed, tested, manufactured, and ready to sell to the customer? Once you have brought your product to market, what activities does your company need to engage in to ensure that your product remains competitive in the marketplace? If you are in a very competitive industry, you will likely need to devote a considerable amount of ongoing resources to research and design. Manufacturing: Include a clear description of the manufacturing process. Show that you understand the techniques, plant, equipment, materials, and labor required to make your product. Discuss the business's production rates and any constraints on productive capabilities. What level of demand can your production capabilities support? Conversely, how would your production operation be impacted by lower-than-expected demand for your product? Maintenance and support: Here, discuss any post-sale support your company will provide to your customers and document the resources required to provide that support. For example, a software company might need to provide ongoing helpdesk support for their software, or provide patch and update support. How will you get that service to your customers? Will you staff a call center? Will you provide online support? The Operations Plan must: Ensure that your product addresses customers' needs and wants. Fully describe how the product works or how the service is used.
Allocate sufficient resources to research and development. Include highlights of how and when the business will pay back investors. Describe how and when services will be completed and delivered. Describe how your product or service will be improved on a regular basis.
VI. Management Team Don't underestimate the importance of the Management Team section of your business plan. As you complete this section of the plan, imagine yourself trying to pitch a potential investor on the competence advantage your business will have. Describe the distinct skills and talents of your management team, which at the highest level include investors, members of the board of directors, key employees, advisors, and strategic partners. The people behind a business are of critical importance. Many investors would sooner invest in a business with a top-notch management team and a mediocre idea, than invest in a mediocre team championing a brilliant idea. Ultimately, the people behind the business will have a huge impact on the venture's success or failure. The Management Team section of your business plan should include: An organizational chart: The organizational chart visually presents the relationships and divisions of responsibility within the company. Policy and strategy: In this section of the plan, describe how employees will be selected, trained, and rewarded. How will you manage the human capital of the organization? The Management Team must: Make sure your team has the skills required to run the business well. Select a board of directors with sufficient experience. Include a detailed action plan to meet staffing requirements. Make strategic alliances to compliment members' skill sets. VII. Financials In the Financials section of your business plan, make your explicit case for the potential profitability of your business venture. The financial plan is a set of projections that reflect your company's anticipated financial performance. This is arguably the single most important section of the business plan – and one you must be prepared to support, adjust, and refine as you move your business idea through the business lifecycle. In this section of the business plan, you're asking your reader to believe with his wallet. The format of this section of a business plan is not particularly flexible. Every business plan contains similar statements or schedules and each statement is presented in a conventional manner. Seek the resources or assistance you need to make sure you construct these financial statements appropriately. The Financials section of your business plan should include: An introduction that presents a clear and concise set of assumptions on which financial projections are based.
Projected income statements spanning three to five years that reflect monthly or quarterly performance for the first year, and annual statements thereafter. Projected cash flow statements for the first two years, developed with as much detail as possible, and quarterly or annual cash flows, corresponding to the period used for the income statements, over a three to five year time span. Current balance sheet reflecting the financial position of the company at its inception and projected year-end balance sheets, typically for two years. The balance sheet should show everything a company owns (its assets) or owes (its liabilities) as well as the owners' investments in the company and the accumulated earnings or losses of the company (its equity). Assets and liabilities are current if they can be converted into cash within a year. Otherwise, they are considered long-term. A break-even analysis that shows the level of sales required to break-even at a given time.
A credible financial plan will compare projected finances of the venture to that of similar existing businesses. The plan can be used as the basis for a detailed operating budget and to set objectives that must be achieved if the business is to be successful. In essence, when you create financial assumptions for a business, you make the best assumptions possible about: Revenue: Based on your market analysis and your marketing and sales strategy, estimate reasonable sales volume and revenue growth for the company over time. Costs: There are three main types of costs to consider and include. o Start-up costs: These are expenses that must be incurred before the business starts operating, such as real estate or equipment purchases. o Fixed expenses: These are expenses that do not change, or vary, based on the amount of sales, such as insurance or professional services. o Variable expenses: These are expenses that fluctuate directly with the volume of business, such as labor or raw materials. Investors want to know: Is the profit picture for this enterprise credible? What return will I earn on my investment? When will I earn a return on this investment? What is my potential exit plan? How will I know if the investment is performing according to my expectations? The Financials must: Complete research required to support your revenue assumptions. Include all funds required to launch your business. Consider ongoing cash flow needs. Include an exit or payback plan for lenders or investors. Forecast financials for an appropriate time period. Explicitly indicate when the company will earn a profit.
VIII. Funds Required and Uses In the Funds Required and Uses section of the business plan, describe how much money is required to finance the business, where these funds will be spent, and when they'll be needed. Potential uses include: Research and development: Research and development funds will be spent on all current and future activities related to the development of new products and services. Fixed asset purchases: Funds might be used to purchase long-term assets that are to be used by the business and aren't expected to be converted into cash in an upcoming fiscal year. Examples include real estate, manufacturing equipment, or furniture. Working capital: Working capital is money you will use to pay short-term debts like salaries or the purchase of raw materials. These are the funds you will need to keep the business operating day-to-day before it starts turning a profit. The key to a successful Funds Required and Uses section is to be sure that the assumptions you've used to develop the other sections of the plan are sound and are consistently represented in this section. REFINE YOUR PLAN A business plan is a living document. It's not something you create once and preserve, undisturbed, for posterity. There are three major reasons to revisit and revise your business plan: You determine during the process of researching and writing your business plan that your idea isn't likely to generate as much profits as you had hoped. That doesn't necessarily mean you should throw the baby out with the bathwater. First, revisit all the decisions you made during the planning process to look for opportunities to improve the profit picture of your business idea. A potential investor provides feedback and insight about your business plan. In some cases, an investor might ask you to do some additional or alternative research and analysis and return the plan to them for further consideration. Other times, a rejection triggers your own ideas for improvement. You launch your business. As you begin operating your business, unexpected changes occur. Your business plan can help you to evaluate the impact of these changes and provide strategic guidance for your decisions. When revising your business plan, always be on the lookout for strategic improvements. Ask yourself questions such as: Can I charge a higher price or get my target market to buy more products or services? Can my product or service meet the needs of a larger group of people? Can I produce a larger volume? Can I increase my market opportunity? Can I lower the cost of delivering my product or service to the customer? Can I better distinguish myself from my competitors?
Can I market more successfully to my target customers?
As you do the research, planning, and analysis required to write a business plan, you use these tools to help turn your business idea into reality. Few endeavors are as important to the future success of your business. Remember that you use your business plan to: Refine your business strategy and look at your business idea from multiple perspectives. Raise capital to start or support your businesses. Keep your company on track. At every step along the way, seek the guidance, advice, and support you need to create a winning business plan and strategy.