A good business plan can be the cornerstone upon which success is built. This plan serves many functions. It details your business goals, and how you intend to reach them using financial figures as reinforcement. A good business plan will explain: how the business functions, how it will be financed, marketed, and managed, as well as the operational characteristics of the business.
This plan has many uses. First, it is an ideal operational tool to help you in the management of your business. Second, it is a marketing/sales tool to assist you in obtaining financing and/or investors.
The plan should consist of a number of sections as outlined below:
1. Purpose of the business
2. Marketing plan
3. Management information
4. Financial plan statements
Purpose Of The Business
This section is where you describe the business activity. What products or services are provided? How does this business differ from others? Is there any uniqueness, or any market “niche” associated with it?
You should strive to be specific in this regard. Give numeric details, such as: “Our goal is to sell 2,000 widgets in the next year, with a 25% increase per year over the next 5 years.” In regard to product or service description, be as specific or technical as possible as well.
Marketing Plan
The marketing or sales plan is critical. In effect, it identifies who will buy your service or product, and how you will present your business to these buyers. So the first step is to describe your typical market. Explain “who, what, and where.” Who are your prospective clients? Do a profile of the typical customer–age, income level, and buying patterns are some of the client profile issues. What is the overall market potential? How much dollar potential is there? Is it a growing market? If so, at what rate? Where is this market? In geographic terms, describe your market area. Is it local, regional, statewide, or nationwide?
Next, give an overview of the competition, both the direct and indirect competitors. Look at what they do best and worst. How are they the same as your business? How are they different? Explain how you have enough uniqueness in one form or another to compete successfully. Some of the main areas to rate among competitors are: features, price, geographics, customer service, overhead, product/service adaptability, and technological differences.
Your marketing section should also set forth your advertising strategy. You could have the best product or service in the world, but if no one knows about it, you will fail. Thus, the advertising plan's purpose is to achieve effective communication with the buying public. That is, to inform, and convince them that they should buy from you. So an advertising plan incorporates all the advertising methods you plan to use in each step in this process. There is Direct Advertising in which you promote a specific product or service. Then there is Indirect Advertising in which you push the company–or a concept–in general.
Therefore, you should identify the types of advertising you will do, how you expect it to benefit your product or service sales, and how you will attempt to measure its effectiveness in dollar terms. Your ultimate goal is to be able to project how much sales will be generated from every dollar of advertising spent.
Accordingly, a big part of the marketing plan involves setting a budget for the advertising/marketing costs. This budget is a reflection of many items, not the least of which are your gross revenues and cash flow. The budget puts into perspective WHAT you wish to achieve and HOW MUCH it will cost you to do it. It also allows you to quantify the effectiveness of the various forms of advertising you will do. In short, it sets forth in practical terms the answers to three of the more important advertising plan issues:
1) How much advertising can be afforded?
2) What media should be used; and,
3) How to effectively measure your advertising results.
Management Plan
The management plan describes in detail who will be running the business, the experience/expertise available, and other advisors available to the business.
You should provide a history of the principals: a biography or resume is in order. Specific job descriptions as related to the business are a must. Similarly, specific experience or forms of expertise should be described in detail. Since these are going to be the people “running the show” it is imperative the management plan puts them in a favorable light. Remember, a business plan is also a “selling tool” for potential financing and investors; if they don't feel comfortable trusting their money in the hands of management, then they WON'T–even if the numbers look good.
Since running a business requires teamwork in many areas, it's important to list the other ancillary team members you will be using– your various professional advisors. Identify the accountant, attorney, insurance broker, and banker. Briefly describe the services and/or duties you expect each will provide in a positive way towards your business.
Finally, if you anticipate the type of future growth that will require extensive management changes, describe how easy (or difficult) it will be to handle these future personnel needs.
The Financial Plan
This is one of the most important parts of the entire business plan. This sets the stage for quantifying the current and future success of your business. It is the part most lenders or investors look at first since it allows them to compare your business with others. With brutal reality it answers the most important financial question: What profits can be expected?
Obviously, there are other questions to be answered in this section as well. For a relatively new business, the issue of “when and where” the breakeven point is reached has great importance. Similarly, items such as Capitalization costs, Overhead cost, Gross sales increases, and Cash flow analysis must be handled in the financial plan section.
The core of the financial plan is a series of Financial Statements that put into dollar terms a way for your business to be analyzed by yourself and others. While the number of reports that can be generated and analyzed is staggering, the most important ones for you to consider in the financial plan are the following:
Profit And Loss
Balance Sheet
Source Of Funds
Cash Flow Analysis
Each of these reports consists of two main parts. First, actual numbers as they currently exist. Second, projections as to how they will be in future times. The actual numbers tell how you currently shape up. The projections tell how you will do (or hope to do) down the road.
Profit And Loss: This standard report breaks out the expenses by category, subtracting them from the revenues to arrive at your Profit or Loss. It is generated for a specific period–a month, a year, etc. A projected P & L usually consists of a 12-month breakout and a 5-year annual breakout.
Balance Sheet: This form shows you what your business looks like “at a moment in time” from a standpoint of the Assets, Liabilities, and Capital. In short, it shows the business “Net Worth.” It subtracts what you owe from what you own to determine your business capital. The higher your business Net Worth, the better. This is a critical form that lenders and investors review.
Source Of Funds: This schedule indicates from where the funds come to capitalize the business and it shows where they will go to support the fixed assets and working capital. You list all the assets you need for the business (by category), how much investment each requires, and the source of this investment.
Cash Flow Projections: This is a very important report, especially if the business will be paying down debt, either current or in the future. It shows what cash you will have to make necessary payments for such areas as loans, equipment, etc. It serves as an “early warning” barometer to let you know the cash that will be needed vs. what will be available in a given time.
This projection should be done on a month-by-month basis for a period of 12 to 60 months at least. Most lenders require a cash flow report for at least 12 months, and any SBA lender usually wants a 60-month projection.
For the business owner, this cash flow projection is often the most important report of all. Many businesses lag–or fail–because of poor cash management. All of a sudden (or so it seems) the money runs out at the worst possible time resulting in disaster. Ironically, the best time to go looking for cash is NEVER the time when you need it. It's always before that!
Some Pointers On A Business Plan
Remember that there are two basic purposes for a good Business Plan. First, to serve as an important tool for the business owner and business advisors. Second, to serve as a “Sales” tool to obtain funding from lenders and/or investors.
If you are going to use it as a “Sales” tool, prepare it accordingly. The business plan should be neat, typed, with no spelling errors, and no math errors. Remember, you want to evoke a feeling of confidence, so there is no room for careless errors.
Lenders and investors are looking for REALISM. That means your sales and expense numbers should be realistic, especially the projections. No “Pie In The Sky” fluff. They want to know when Breakeven will be– preferably within 12 to 18 months for most small-to-medium size businesses without heavy capital equipment or research needs. Most importantly, they want assurances that the debt service can be maintained, and the net worth of the business will increase over time.
Also, make sure you have a good, interesting initial summary of the business plan. Although this business plan may be a work of art to you, to most outsiders who deal in these on a daily or weekly basis, they do not want to spend their valuable time on you unless it peaks their interest.
So a good leadoff summary is important–it makes them want to go into more detail–and read your entire plan. The summary or initial synopsis should be no more than 10% of the size of the entire plan. Thus, a 20-page business plan should have a 2 page initial synopsis. This synopsis is your “attention grabber” so make it great.
Finally, remember that a good business plan is meant to be a fluid instrument to assist you in making your business succeed. It should be reviewed periodically, and updated accordingly as changes occur with you, your business, and its activity. In running a business, knowing WHERE you want to go is only one half the battle. The other half is in knowing HOW you will get there.
That's what a good business plan does. It tells in both descriptive and quantitative terms WHAT the business is doing, WHERE it is heading, and HOW it will get there. If you can do a business plan that answers these questions in an effective, efficient, and interesting way, it will open many doors for you both in the present and future.
