People planning to start their own businesses are taking a huge step. There are many risks and rewards, and comprehensive planning and preparation are the keys to success in the endeavor. If the business requires funding from lenders or investors, entrepreneurs must convince complete strangers that their ideas are workable, and that they have the knowledge and ability to make the business successful. The standard means for presenting such a proposal is called a business plan, and it follows an established format that is clear, concise and methodical to quickly convey complicated information in an organized way.
The process of writing a business plans forces people to analyze their proposals in a systematic and objective manner. The process may uncover severe weaknesses or identify special strengths, and writing the plan can be beneficial for owners who do not need outside funding because it helps them weigh the pros and cons with insight.
The plan must demonstrate an owner’s ability to organize and manage a complex endeavor. If an owner cannot provide a clear business plan, investors will be wary of entrusting money to the proposal. Business plans follow an established format that investigates fundamental operating criteria. Startup businesses have no track record, and the plan provides a roadmap of how a business intends to capture a share of a competitive market, deal with competition, manage employees, and organize operations.
The first part of planning involves locating an advisor or mentor with experience in the chosen field. Guidance can help in the planning process and identify pitfalls to avoid. Even people experienced in their respective fields need advice to translate that knowledge into a thriving business. The Small Business Administration can help locate a suitable counselor for any endeavor.
The planning process identifies a company’s strategy to make a profit. Business financing may come from personal resources, lending institutions, investors, or grants. Potential business owners must choose how to finance the business and write a plan that is designed to impress funding sources. Owners must describe their products and services in great detail and show why they provide alternatives customers will choose instead of competitive products.
The location of the business may be critical, especially for retail operations. Entrepreneurs should describe the chosen location or list the criteria that will be used to select a site. Investors will want to know how easily customers can find and access the business. Special features of retail locations may include display windows, ample parking, loading docks, or proximity to a large number of potential customers.
Financial planning must be realistic and comprehensive to impress investors. Some startup expenses only occur once, but other expenses will be ongoing, and a budget must be devised to meet the operating needs of a fledgling enterprise until it can pay its own way. Equipment, license fees, utility deposits, and business property are examples of startup costs. Rent, salaries, inventory, licensing fees, taxes, inventory, supplies, utilities, and business property rent are ongoing operating expenses that must be met on a daily, weekly, monthly or annual basis. Once planning is complete, it is time to begin creating an outline of the basic business plan.
Business Plan Outline
The business plan outline is the second step to take after determining the audience the plan must reach and convince to invest. The outline will determine where research must be concentrated to actually write the plan. The kind of business determines which details to emphasize. Retail operations discuss how prices are determined, what steps will be taken to control inventory, and how merchandising and advertising will be approached. Technology companies must discuss such topics as research and development, time to market, and intellectual property. Any business proposal should include the following information.
- Executive Summary: This is a mini business plan hitting all the key points of the proposal.
- Description: Describe the company in detail. Mention whether the company is new or an established concern. What business form does the company take—sole proprietorship, partnership, or corporation? Where will it be located? Does the business lease space or own the location? Answer all questions that investors may have. If property is leased, state the name of the landlord and the amount of rent.
- Product and Services: Describe major products and services thoroughly, but be concise.
- Sales and Marketing: Define the market and identify potential customers. Mention what the competition is like. Define marketing strategy, advertising plans, and any special promotions that may be planned.
- Operations: Discuss wholesale suppliers that will be used and how products will be produced or obtained for resale. Discuss any applicable legal issues that may affect the business. Mention any facilities that will be needed for manufacturing, sales, or office work. Analyze any insurance requirements. Detail any special equipment or company vehicles that may be needed.
- Management: Discuss how the company will be managed, including key supervisory positions. Organizational charts can be helpful here. What experience in the industry will management have? Include résumés of key personnel if available.
- Financials: This is frequently the heart of the matter, and should be presented as accurately as possible. Estimate expenses including employee salaries, overhead, and costs of buying or producing goods. Estimate income and determine the break-even point. If already in business, include financial details from the last three years. Project financial income for three years into the future.
- Strategic: Explain how you plan to meet projections in detail. What are the company’s short and long-term goals? How does the business plan propose to meet these goals? Do the owners have knowledge of the industry and experience in the field? Are there established clients willing to utilize the new company, and are these intentions backed by any contractual arrangements? Answering these questions will go a long way in establishing the viability of a business plan.
- SWOT Analysis: This term refers to strengths, weaknesses, opportunities and threats. Explaining each of these in detail will show that great thought has gone into the planning of the enterprise.
Once the outline is complete, owners can concentrate on research to fill in the details. The business plan should be written in plain business language, but offer a compelling plan due to the logic of the arguments. Porter’s Five Forces is a tool that impresses many investors by demonstrating that owners recognize the strengths of a company’s position.
Porter’s Five Forces
Michael E. Porter conceived Porter’s five forces in 1979 from his position at the Harvard Business School. The five forces are characteristics that determine how attractive a business proposal may be. Entrepreneurs who analyze the five forces in their business plan will impress investors with their planning and reasoning skills. The five forces are as follows:
1. Supplier power: The cost of supplies can impact any business proposal. Effective planning identifies availability of supplies and how vulnerable a business may be to price increases.
2. Buyer power: Buyers can drive prices down by switching allegiance if multiple versions of a product are available. Companies that depend on powerful wholesale buyers are very vulnerable. If a product is unique, it puts a company at a distinct advantage.
3. Competition: The number of competitors determines company strength. If many companies offer similar products, suppliers and buyers can take their business elsewhere.
4. Threat of substitution: Competitors may find a different way to supply the benefit a product provides. A good example of substitution in action involves printer cartridges. Printer manufacturers intend for consumers to buy their cartridges, but competitors have quickly learned to remanufacture old cartridges and market them at lower prices.
5. Threat of new entry: If it is easy for people to enter the market, a company is weakened. If patents and legal barriers restrict access, then a company operates in a position of strength.
Business Plan Software
Business plan software may be an excellent resource for companies if complicated financial projections are included in the plan. The software can simplify financial reporting and projections and guarantee the accuracy of all mathematical data. Nothing can destroy credibility more quickly than basic errors in the math of reported financial data.
Software can ensure that the plan is presented in the proper format, and that all essential material is included in the final copy of the business plan. Step-by-step planning can help budding entrepreneurs create professional documents. Lots of graphs, tables and charts are not needed—content is more important than flash. Write a business plan without enhancements to be sure it is compelling in content. Selected enhancements can be added later to enhance the presentation. Colorful graphics, charts and graphs can be produced by anyone with access to a computer. Insightful writing, clear proposals, and compelling arguments are much more difficult to produce.
Business plan software can help analyze marketing and strategic sections of the business plan by seamlessly charting costs, overhead, cash flow, and the financial details of the proposal. The software can assist in setting competitive prices for products and services, help develop sales plans, and analyze conversion rates from sales leads. The software can also help in business planning by assessing new ideas, suggesting tactics for reaching short-term goals, and creating an overall long-term strategy for business growth.
Tips to Create An Effective Business Plan
1. Write clearly and concisely. Lenders and investors are busy–get to the point.
2. Find an experienced mentor to review the plan before presenting it to anyone. The mentor may be an expert in the industry, an investor, or person who has read many business plans.
3. Scalability is important to investors. Businesses must demonstrate the ability to grow.
4. Business plans are technical documents. They should be written in business language. Avoid creative writing and stick to the facts presented in a professional format.
5. The plan must be realistic and cite facts and figures where appropriate. The marketing section cannot simply state the company will achieve a 10 percent market share without any evidence of how the figure was obtained. The strategic section must show how the business will target customers to achieve a 10 percent share, citing reliable sources for confirmation.
6. Existing businesses that are seeking to expand must include financial data for at least the past three years. Total revenue, gross profit, and net profit before taxes must be included. Owners must show how the additional funds will expand sales by opening new markets. Make conservative forecasts and project growth for the next three years.
7. Try to avoid technical jargon. Sometimes, it may be unavoidable, but try to keep it to a minimum. Analyze whether the information could be expressed in a different way that laymen might understand more easily. If technical terms must be used, explain them thoroughly.
8. Follow standard business plan format. Templates and business plan software can help provide suitable guidelines. It is easy to find outlines and information online to facilitate presenting a plan in acceptable style.
9. The executive summary section is critical. Investors may only read this section to see if an idea bears further study. The summary should outline the entire plan in outline form.
10. Edit several times. If a sentence only contributes fluff, strike it out. Check spelling several times with spell check, but do not rely on a spelling program exclusively. Technical terms may not be in the database, so check unusual word spelling in other sources.
FAQs About Writing Business Plans
Q. What are the most common mistakes to avoid?
Inexperienced aspiring business owners make many errors that serve as warning flags to lenders or investors. Eager people make unrealistic assumptions. Business planners are excited about their ideas, but if income projections exceed similar company performance within the industry, investors will be dubious. Market exaggeration can also torpedo a plan that is otherwise well prepared. A startup company does not immediately have millions of potential customers. Experienced businessmen may utilize years of experience, contacts and expertise to reach a few thousands realistic prospects. Investors want to see a business with the potential to grow successfully if managed effectively. Empty promises of pie in the sky will not impress hard-nosed investors.
Q. I have a small local business. Do I really need a business plan?
The answer to this question really depends on you and whether or not you need to raise money. To get a loan or attract investors, you need a plan that shows how serious you take the responsibility of managing a business. An insightful business plan will help you secure financing, but the benefits may be more comprehensive. Business plans help analyze the market and pinpoint marketing strategy in clear terms. The plan does not have to be a 100-page opus, but a few pages summarizing your plans, resources, goals, and analyzing your competition can be very beneficial.
Q. I know many successful business people who never wrote a plan. Why must I?
Many successful business people do not advertise in the media, never study the competition, or only hire relatives. People sometimes succeed in spite of the mistakes they make. You want to maximize your chances for success, not limit them from the start. Some people did not have the Internet or intense competition when they started their businesses. A company may claim not to advertise, but word of mouth promotion is advertising. Menus, brochures, window signs, and free publicity are forms of advertising. Locating a business on a busy street is advertising. People must know you are in business, or your company will not succeed. Companies that only complete the strategic section of a business plan average 50 percent greater profits than companies who do not.
Q. What is the most important part of a business plan?
All parts of the plan may be important, but the nature of the business may determine what you should emphasize. A business that plans to utilize the web must develop a strategic marketing plan that distinguishes it in a highly competitive environment. Professional website design and search engine optimization strategy are key components. Generally, the most important thing you can do is to customize the plan to impress your target audience. If your business depends on a clever product, you must detail the advantages of your product over the competition. If you must impress venture capitalists, you will need a detailed treatise full of verifiable facts and figures to support your reasoning. To impress a bank, you must prove the business is conservatively sound, and that any risks are minimal.
Q. Do I need a professional writer or consultant to do the writing?
A professional consultant can help with research and assistance, but it is often better to write the plan personally. You will be the one to defend the business plan or expound certain points, and you must show that you are intimately familiar with the contents. If you do use a consultant, make sure that you understand everything that is going into the plan so you do not appear clueless when questioned on how you came to certain conclusions.