If you've ever dreamed of running your own business, it's important to have a plan in place. That is where the business plan comes in. A good business plan will not only help you make decisions on what path to take with your company but also help attract investors and partners for your venture. This blog post contains everything you need to know about writing an effective business plan from scratch!
The executive summary is the first part of a business plan and is the most crucial piece of your plan. It provides a very descriptive synopsis of the entire plan, along with a brief history of your company. This portion of the plan tells viewers where your business is and where you want to take it. It's the first thing your readers see; therefore, it is the thing that will both grab their attention and make them want to keep learning or make them want to close the cover and move on to something else. Most importantly, this part of the plan conveys the message of why you believe your business will be successful.
Here is a tip: The executive summary is most easily and effectively written at the end of your efforts in planning and writing the business plan. Once all of the details of your plan are in order, you will be prepared to condense it into the executive summary. Try to keep this section to fewer than 4 pages.
Included in the Executive Summary
- Mission Statement: The mission statement briefly explains the focus of your business. The statement can be any length as long as the point is conveyed and understood. It should be as direct and to-the-point as possible, and it should leave the reader with a clear picture of what your business is all about.
- When the business was started
- Key management and their roles
- Number of Employees
- The primary location of the business and other satellite locations
- Description of office, manufacturing plant, or facilities
- What are the products or services
- Current investor information and any additional financial relationships or arrangements
- Brief summary of the company’s financial accomplishments and any noteworthy market activities (i.e., your business tripled its value in a 1 year period or you became the leader in your industry by developing a certain product)
- Briefly describe management's plans for the business’s future. Except for the Mission Statement, the information located in the Executive Summary should be represented in a brief or bulleted style. Note this information is expanded upon in greater detail within the remainder of the business plan.
It’s not uncommon that if you are just starting a business, you most likely will not have a lot of information to populate the fields mentioned above. As an alternative, focus on your experience and background and the decisions that led you to start this business. Make sure that it contains information about the difficulties your target market has and what resolutions your business will provide. Explain how the business you have will allow you to make meaningful advances into the market. Advise your reader what you're going to perform uniquely or more effectively. Assure the reader that there is a definitive need for the product or service provided by your business, then go ahead and address the business’s prospective plans.
To help the reader in pinpointing specific sections within your business plan, provide a table of contents immediately following the executive summary. Be confident that the content titles are very broad; try not to include too much detail.
The market analysis portion is the second part of a well-written business plan. This part of the plan should demonstrate your knowledge regarding the particular industry that your business plans to engage. It should also provide basic statistics and key information of any marketing research data you have obtained; however, the itemized details of your market research studies should be placed in the appendix section of the business plan.
This part of the business plan should include a description of the industry, target market facts and information, market test results, timeframes, and an evaluation of your competition.
This overview section should include a description of your primary industry, industry size, current, trailing growth rates, market trends, and characteristics relating to the entire industry (For example, what is the life cycle stage of the industry? What is the industry’s expected growth rate?), and include the major customer groups within the industry (This can be as broad or narrow (businesses, governments, women over 35 years of age, children under 5, etc.) depending on the size and scope of the industry and the business represented.
Identifying Your Target Market
The business’ target market is the customer base that it wants to supply products or provide services to. When defining a target market, it’s vital to narrow the group to a realistic volume. Quite often businesses make the fatal miscalculation of trying to offer something to everybody. Most often this approach ends in failure.
Within the “Target Market” section, you should gather the information that identifies the following:
- Recognizing key characteristics of the primary group you are targeting. This segment should include information about the critical needs of your future customers, the level to which those needs are currently being met, and the demographics of the group. Be sure to also include the geographic location of your target market, identify the key decision-makers and any seasonal or cyclical trends that may impact the industry or your business model.
- Size of the target market. Herein, you will need to know the number of available customers in your primary market, the number of annual purchases they make relative to products or services at par with your own, the geographic area they inhabit, and the expected market growth for this group.
- The magnitude to which your business expects to obtain market share and the reasons why. When gathering this information, you need to decide how much market share and how many customers you expect to gain in a specific geographic region. In addition, one should provide the reader with an understanding of the reasoning that was used in developing these estimates.
- Pricing and gross margin expectations. In this section, it would be wise to define the structure of your pricing, your gross margin requirements, and any discounts or incentives that you plan to offer through the business, such as large-volume purchasing, bulk discounts, or prompt payment discounts that discourage customers from taking advantage of payment terms.
- Target market research and information sources. These resources could be purchased demographic research, directories, business associations, industry publications, and government documents.
- Mediums the business will use to reach the target audience. The mediums may include Internet marketing, Internet radio, terrestrial radio, T.V., magazines, periodicals, or any other type of engaging media that has a potential interaction with the target audience.
- Buying patterns of your target market. The first step is to identify the needs of the potential consumers, conduct research in order to address their needs, review the possibilities, and identify the person or persons that can select the most effective solution.
- Trends that affect the potential customers, along with key characteristics of your secondary markets. Just like with your primary target market, you would again want to identify the needs, demographics, and significant trends which will influence your secondary markets in the future.
When you are including information about any of the market tests you have completed for your business plan, be sure to focus only on the results of these tests. Any specific details should be included in the appendix. Market test results might include the potential customers who were contacted, any information or demonstrations that were given to prospective customers, how important it is to satisfy the target market's needs, and the target market's desire to purchase your business's products or services at varying prices.
Lead time is the amount of time between when a customer places an order and when the product or service is actually delivered. When you are researching this information, determine what your lead time will be for the initial order, reorders, and volume purchases.
When you are doing a competitive analysis, you need to identify your competition by product line or service as well as by market segment; assess their strengths and weaknesses, determine how important your target market is to your competitors, and identify any barriers which may hinder you as you are entering the market. Be sure to identify all of your key competitors for each of your products or services. For each key competitor, determine what their market share is, then try to estimate how long it will take before new competitors will enter the marketplace. In other words, what is your window of opportunity? Finally, identify any indirect or secondary competitors which may have an impact on your business' success.
The strengths of your competitors are also competitive advantages that you, too, can provide. The strengths of your competitors may take many forms, but the most common include:
- An ability to satisfy customer needs
- A large share of the market and the consumer awareness that comes with it
- A good track record and reputation
- Solid financial resources and the subsequent staying power which that provides
- Key personnel
Weaknesses are simply the flip side of strengths. In other words, analyze the same areas as you did before to determine what your competitors' weaknesses are. Are they unable to satisfy their customers' needs? Do they have poor market penetration? Is their track record or reputation not up to par? Do they have limited financial resources? Can they not retain good people? All of these can be red flags for any business. If you find weak areas in your competition, be sure to find out why they are having problems. This way, you can avoid the same mistakes they have made.
If your target market is not important to your competition, then you will most likely have an open field to run in if your idea is a good one—at least for a while. However, if the competition is keen on your target market, be prepared to overcome some barriers. Barriers to any market might include:
- A high investment cost
- The time it takes to set up your business
- Changing technology
- The lack of quality personnel
- Customer resistance (i.e., long-standing relationships, brand loyalty)
- Existing patents and trademarks that you can not infringe upon
The final area that you should look at as you're researching this section is regulatory restrictions. This includes information related to current customer or governmental regulatory requirements as well as any changes that may be upcoming. Specific details that you need to find out include the methods for meeting any of the requirements which will affect your business, the timing involved (i.e., How long do you have to comply? When do the requirements go into effect?), and the costs involved.
The company description is Part 3 of the business plan. Without going into detail, this section should include a high-level look at how all of the different elements of your business fit together. The company description section should include information about the nature of your business as well as list the primary factors that you believe will make your business a success.
When defining the nature of your business (or why you're in business), be sure to list the marketplace needs that you are trying to satisfy. This should include the ways in which you plan to satisfy these needs using your products or services. Finally, list the specific individuals and/or organizations that you have identified as having these needs.
Primary success factors might include a superior ability to satisfy your customers' needs, highly efficient methods of delivering your product or service, outstanding personnel, or a key location. Each of these would give your business a competitive advantage.
Organization and Management
Organization and Management is Part 4 of the business plan. This section should include your company's organizational structure, details about the ownership of your company, profiles of your management team, and the qualifications of your board of directors.
Who does what in your business? What is their background and why are you bringing them into the business as board members or employees? What are they responsible for? These may seem like unnecessary questions to answer in a one- or two-person organization, but the people reading your business plan want to know who's in charge, so tell them. Give a detailed description of each division or department and its function.
This section should include who's on the board (if you have an advisory board) and how you intend to keep them there. What kind of salary and benefits package do you have for your people? What incentives are you offering? How about promotions? Reassure your reader that the people you have on staff are more than just names on a letterhead.
A simple but effective way to layout the structure of your company is to create an organizational chart with a narrative description. This will prove that you're leaving nothing to chance, you've thought out exactly who is doing what, and there is someone in charge of every function of your company. Nothing will fall through the cracks, and nothing will be done three or four times over. To a potential investor or employee, that is very important.
This section should also include the legal structure of your business along with the subsequent ownership information it relates to. Have you incorporated your business? If so, is it a C or S corporation? Or perhaps you have formed a partnership with someone. If so, is it a general or limited partnership? Or maybe you are a sole proprietor. Important ownership information that should be incorporated into your business plan includes:
- Names of owners
- Percentage ownership
- The extent of involvement with the company
- Forms of ownership (i.e., common stock, preferred stock, general partner, limited partner)
- Outstanding equity equivalents (i.e., options, warrants, convertible debt)
- Common stock (i.e., authorized or issued)
Experts agree that one of the strongest factors for success in any growth company is the ability and track record of its owner/management team, so let your reader know about the key people in your company and their backgrounds. Provide resumes that include the following information:
- Position (include brief position description along with primary duties)
- Primary responsibilities and authority
- Unique experience and skills
- Prior employment
- Special skills
- Past track record
- Industry recognition
- Community involvement
- Number of years with the company
- Compensation basis and levels (make sure these are reasonable—not too high or too low)
Be sure you quantify achievements (e.g. "Managed a sales force of ten people," "Managed a department of fifteen people," "Increased revenue by 15 percent in the first six months," "Expanded the retail outlets at the rate of two each year," "Improved the customer service as rated by our customers from a 60 percent to a 90 percent rating").
Also, highlight how the people surrounding you complement your own skills. If you're just starting out, show how each person's unique experience will contribute to the success of your venture.
Board of Directors' Qualifications
The major benefit of an unpaid advisory board is that it can provide the expertise that your company cannot otherwise afford. A list of well-known, successful business owners/managers can go a long way toward enhancing your company's credibility and perception of management expertise.
If you have a board of directors, be sure to gather the following information when developing the outline for your business plan:
- Positions on the board
- The extent of involvement with the company
Historical and future contribution to the company's success
Marketing and Sales Management
Marketing and Sales Strategies is Part 5 of your business plan. Marketing is the process of creating customers, and customers are the lifeblood of your business. In this section, the first thing you want to do is define your marketing strategy. There is no single way to approach a marketing strategy; your strategy should be part of an ongoing business evaluation process and unique to your company. However, there are common steps you can follow which will help you think through the direction and tactics you would like to use to drive sales and sustain customer loyalty.
An overall marketing strategy should include four different strategies:
- A market penetration strategy.
- A growth strategy. This strategy for building your business might include an internal strategy such as how to increase your human resources, and acquisition strategy such as buying another business, a franchise strategy for branching out, a horizontal strategy where you would provide the same type of products to different users, or a vertical strategy where you would continue providing the same products but would offer them at different levels of the distribution chain.
- Channels of distribution strategy. Choices for distribution channels could include original equipment manufacturers (OEMs), an internal sales force, distributors, or retailers.
- Communication strategy. How are you going to reach your customers? Usually, a combination of the following tactics works the best: promotions, advertising, public relations, personal selling, and printed materials such as brochures, catalogs, flyers, etc.
After you have developed a comprehensive marketing strategy, you can then define your sales strategy. This covers how you plan to actually sell your product.
Your overall sales strategy should include two primary elements:
- A salesforce strategy. If you are going to have a sales force, do you plan to use internal or independent representatives? How many salespeople will you recruit for your sales force? What type of recruitment strategies will you use? How will you train your sales force? What about compensation for your sales force?
- Your sales activities. When you are defining your sales strategy, it is important that you break it down into activities. For instance, you need to identify your prospects. Once you have made a list of your prospects, you need to prioritize the contacts, selecting the leads with the highest potential to buy first. Next, identify the number of sales calls you will make over a certain period of time. From there, you need to determine the average number of sales calls you will need to make per sale, the average dollar size per sale, and the average dollar size per vendor.
Service or Product Line
Service or Product Line is Part 6 of your business plan. What are you selling? In this section, describe your service or product, emphasizing the benefits to potential and current customers. For example, don't tell your readers which 89 foods you carry in your "Gourmet to Go" shop. Tell them why busy, two-career couples will prefer shopping in a service-oriented store that records clients' food preferences and caters even the smallest parties on short notice.
Focus on the areas where you have a distinct advantage. Identify the problem in your target market for which your service or product provides a solution. Give the reader hard evidence that people are, or will be, willing to pay for your solution. List your company's services and products and attach any marketing/promotional materials. Provide details regarding suppliers, availability of products/services, and service or product costs. Also include information addressing new services or products which will soon be added to the company's line.
Overall, this section should include:
- A detailed description of your product or service (from your customer's perspective). You should include information about the specific benefits of your product or service. You should also talk about your product/service's ability to meet consumer needs, any advantages your product has over that of the competition, and the present development stage your product is in (i.e. idea, prototype, etc.).
- Information related to your product's life cycle. Be sure to include information about where your product or service is in its life cycle, as well as any factors that may influence its cycle in the future.
- Any copyright, patent, and trade secret information that may be relevant. This should include information related to existing, pending, or anticipated copyright and patent filings along with any key characteristics of your products/services that you cannot obtain copyright or patent for. This is where you should also incorporate key aspects of your products/services that may be classified as trade secrets. Last, but not least, be sure to add any information pertaining to existing legal agreements, such as nondisclosure or non-compete agreements.
Research and development (R&D) activities you are involved in or are planning to be involved in. These would include any in-process or future activities related to the development of new products/services. This section would also include information about what you expect the results of future R&D activities to be. Be sure to analyze the R&D efforts of not only your own business but also that of others in your industry.
The Funding Request is Part 7 of your business plan. In this section, you will request the amount of funding you will need to start or expand your business. If necessary, you can include different funding scenarios, such as best and worst-case scenarios, but remember that later, in the financial section, you must be able to back up these requests and scenarios with corresponding financial statements.
You will want to include the following in your funding request: your current funding requirement, your future funding requirements over the next five years, how you will use the funds you receive, and any long-range financial strategies that you are planning that would have any type of impact on your funding request. When you are outlining your current and future funding requirements, be sure to include the amount you want now and the amount you want in the future, the time period that each request will cover, the type of funding you would like to have (i.e., equity, debt), and the terms that you would like to have applied.
How you will use your funds is very important to a creditor. Is the funding request for capital expenditures? Working capital? Debt retirement? Acquisitions? Whatever it is, be sure to list it in this section.
Last of all, make sure that you include any strategic information related to your business that may have an impact on your financial situation in the future, such as: going public with your company, having a leveraged buyout, being acquired by another company, the method with which you will service your debt, or whether or not you plan to sell your business in the future. Each of these is extremely important to a future creditor since they will directly impact your ability to repay your loan(s).
Financials is Part 8 of your business plan. The financials should be developed after you've analyzed the market and set clear objectives. That's when you can allocate resources efficiently. The following is a list of the critical financial statements to include in your business plan packet.
Historical Financial Data
If you own an established business, you will be requested to supply historical data related to your company's performance. Most creditors request data for the last three to five years, depending on the length of time you have been in business.
The historical financial data you would want to include would be your company's income statements, balance sheets, and cash flow statements for each year you have been in business (usually for up to three to five years). Often creditors are also interested in any collateral that you may have that could be used to ensure your loan, regardless of the stage of your business.
Prospective Financial Data
All businesses, whether startup or growing, will be required to supply prospective financial data. Most of the time, creditors will want to see what you expect your company to be able to do within the next five years. Each year's documents should include forecasted income statements, balance sheets, cash flow statements, and capital expenditure budgets. For the first year, you should supply monthly or quarterly projections. After that, you can stretch it to quarterly and/or yearly projections for years two through five.
Make sure that your projections match your funding requests; creditors will be on the lookout for inconsistencies. It's much better if you catch mistakes before they do. If you have made assumptions in your projections, be sure to summarize what you have assumed. This way, the reader will not be left guessing.
Finally, include a short analysis of your financial information. Include a ratio and trend analysis for all of your financial statements (both historical and prospective). Since pictures speak louder than words, you may want to add graphs of your trend analysis (especially if they are positive).
The Appendix is Part 9 of your business plan. This section should be provided to readers on an as-needed basis. In other words, it should not be included with the main body of your business plan. Your plan is your communication tool; as such, it will be seen by a lot of people. Some of the information in the business section you will not want everyone to see, but, specific individuals (such as creditors) may want access to this information in order to make lending decisions. Therefore, it is important to have the appendix within easy reach. The appendix would include:
- Credit history (personal & business)
- Resumes of key managers
- Product pictures
- Letters of reference
- Details of market studies
- Relevant magazine articles or book references
- Licenses, permits or patents
- Legal documents
- Copies of leases
- Building permits
- List of business consultants, including attorney and accountant
Any copies of your business plan should be controlled; keep a distribution record. This will allow you to update and maintain your business plan on an as-needed basis. Remember, too, that you should include a private placement disclaimer with your business plan if you plan to use it to raise capital.
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