Developing a Business Plan
Developing a Business Plan
Before starting a new business, it is critical to develop a business plan. Remember, "If you fail to plan, plan to fail." Success is not a matter of luck, though some people may think it is. Success most often comes from making a plan and then working the plan. A business plan can be the make-or-break difference. The process of developing a business plan is a valuable as the actual plan itself, because it focuses the attention and efforts on what it will take to succeed at the business, and helps identify potential weaknesses and problems and devise ways to prevent them from occurring. It also helps you to identify things you may have forgotten or overlooked that could hinder your success.
When a good coach is preparing their team for an upcoming game against an opponent, they do their research on the opponent to determine what its strengths and weaknesses are, what kind of tendencies the opponent has, and any other information they can get on the opponent. Then, taking the strengths and weaknesses of their own team into account, the coach develops a game plan and works on it with their players. As the game progresses, the coach will observe how the game plan is working and make adjustments as the game progresses.
So it is with starting a new business. You ask yourself some very basic questions about your business model - how you plan to make money - what strengths and weaknesses you and your competition have and develop a written plan for success. The plan covers your short-term and long-term [realistic] goals, details about you business, your management strategy, your method of operation, and timetables for accomplishing goals and objectives. Additionally, as you develop the business plan, you may discover unanticipated opportunities you had not seen before. Developing a business plan allows you to consider all aspects of your business and how it will work before committing time and money to it. Then, this plan serves as your road map to guide you through the initial days, months, and years of your business operation.
A well-prepared business plan serves at least three critical functions:
1. Getting the business started off right.
The business plan becomes the foundation for launching the new business, and helps you stay on track so the day-to-day activities don't distract you from your goals and working strategically on your business, not just working in your business.
2. A blueprint for success.
A contractor would never start building a house without having blueprint for knowing what the house is to look like and how it is to be built. A business plan is the blueprint for building your successful business.
The business plan details your business objectives - how you want your business to look and be, and how you intend to accomplish them - how you will build it. Having a written business plan helps you clearly focus where you need to spend your time, energy, and capital. Your business plan will help you to monitor and gauge the success of your business as you compare the actual results to what you had planned. This will help you identify areas that need your attention much quicker. Remember, just as the contractor refers frequently to the blueprint for building the house to make sure everything is going according to plan and design, so too you need to refer frequently to your business plan to do the same thing.
3. Raising Capital (Money).
A business plan is usually essential for raising money, whether that be through obtaining loans or investor capital. Undercapitalization is often cited as one of the main reasons for business failure. Businesses need capital (money) to get from the initial business concept or idea to success in the marketplace. Generally the amount of capital needed exceeds the resources of the business owner. Without a business plan it is virtually impossible to raise capital for the business from outside sources. Lenders and investors are more interested in the management team than in the product or marketing opportunities. They'll want to know if you have the knowledge and ability to make the plan work, and what makes you and your business unique -- what you have that no one else does. A well-written business plan gives you much more credibility with lenders and investors, and helps them have confidence that you know what you're doing and a good [safer] bet with their money than someone who has no plan.
How to Write Your Business Plan
A business plan should be written specifically to the audience for whom it is intended. When a business is in the formative stages, the business plan should be written to aid you in making sound decisions for getting the
business up and running. This kind of plan is designed to help you put the business together piece by piece.
Once the business is operating, the business plan should be written to convey your vision to employees and others who are helping you achieve your dream. It should provide a step by step recipe for what is going to be done and who will do it.
Any time a plan is needed to raise capital, it should be written with the lender or investor in mind. It needs to convey your enthusiasm and optimism about the anticipated success of your business without making unwarranted claims. It also has to explain how and when the lenders or investors will be paid off. Writing a business plan may seem like a lot of work. Which may explain why so few business people actually develop one -- and why so few new businesses succeed. You have to develop a course of action. For example, you should decide what marketing strategy (methods for selling your product or service) to use for your business. In the business plan, prepare to answer the following questions:
· What are the business' products and/or services?
· How will you market the products and/or services?
· Who are your competitors and how do propose to compete and win in the marketplace?
· Who are the members of the management team and what are their qualifications?
· When will the company show a profit?
· Who will do the work, and how many hours will be required?
· What equipment will you need and when purchase it?
· What supplies will you need and where will you obtain them?
· Does the business have any seasonal peaks and valleys and how will you weather them?
· How and when do you see the business growing, and what must be done to achieve that growth?
Business Plans Can Be Used as Part of a Loan Proposal
Business plans give lenders the information they need to decide whether to lend money to a new business or to an existing business for expansion. However, most business plans are ineffective because they do not include everything lenders require or because they are not specific enough. How can you present your case in a manner that will convince the loan officer and overcome any business prejudices? This can be done through a loan proposal. A loan proposal is an up-to-date business plan that shows how the bank’s loan will improve your company’s worth. Normally, the loan proposal begins with an overview of your company’s history, the amount of money you need, the proposed use and allocation of the loan proceeds, and the collateral you have available to secure the loan. The loan proposal should include:
• A cover letter stating the amount requested for your proposed term and a brief survey of your business and its financial goals.
• A market analysis explaining how your concept fits in with current business trends and why it will succeed in the marketplace.
• A description of how the business will be run. Include resumes of key personnel and their positions in the business.
• A financial plan including current and projected figures. Loan officers are particularly interested in liquidity and profitability, because this is where the funds will come from to repay any loans.
Components of The Business Plan
Each business plan is unique because each business is unique. While there are elements that should be included in a business plan, there is no standard format for business plans. Indeed, trying to follow some "cookie cutter" format is probably not a good idea. However, here are some of the elements that should be in a business plan, particularly if it is being used as a tool for raising capital through loans or investments.
• Cover page
The cover page shows the name of your company, its address and phone number, and the founder’s and chief executive’s name. If the plan is going to be distributed to several bankers or investors, make sure you number each plan prominently on the cover page and include a statement to the effect that the document contains proprietary material and should not be photocopied. You may also want to have a non-disclosure statement that is signed by an authorized representative of the lender(s) and investor(s). These steps enable you to keep track of who has your plans and hopefully deter recipients from copying or circulating the plan, particularly to potential competitors.
• Table of contents
This should include a sequential listing of all the business plan’s sections and the page numbers where each is located.
• Executive summary
This is the single most important section of the business plan because most readers – especially lenders and investors – turn to it first and decide, based on the three or four minutes they spend skimming it, whether to take the rest of the plan seriously. A good Executive Summary capture's the readers’ attention and imaginations, enticing them to read the plan further. When readers finish the executive summary, they should have a good sense of what you are trying to do in your business. They should be enthused enough to read on and learn more about your company.
* Products and Services Description
In this section, you describe what products and/or services you will be offering and what makes them unique from similar products and services in the marketplace. This is the section where you want to wow potential lenders and investors and build excitement for what the business is about. If there are any patents or copyrights in place or pending that may give your business a competitive edge in the marketplace, you will want to mention that fact as well. It is not necessary to give complete technical specifications of products in the business plan, rather a brief but interesting description of the products and services without as little technical or industry jargon as possible. Remember, the people reading your business plan will not likely be "technical types," so don't bore or put them to sleep.
• The market
Who are your potential customers? How large is the market - how many potential customers - and where is the marketplace located? Is it growing or stable? Describing the market involves identifying your prospective customers and determining how best to reach them. Please note that that marketing is not the same thing as advertising, selling, or promoting. These are subsets and part of marketing and are separate tasks. Advertising, selling, and promoting are the implementation of your marketing plan.
• Marketing Strategy
This is where your describe the business' approach to producing and selling its products and/or services. You should have certain underlying principles and approaches to doing business that enable you to build on your strengths and distinguish your company from the competition.
• Advertising, Sales and Promotion
You need to determine how you will reach your customers and sell to them. In the movie "Field of Dreams," the main character played by Kevin Costner keeps hearing a voice saying, "If you build it, they will come." That may be fine for the movies, but is not the case in the business world. Just because you have a great, even superior product or service, if people don't know about it and how it will benefit them, they will not buy it. In this section, you describe how you will "get the word out" and convince people to buy your product(s) and/or service(s). There are a number of ways this can be done:
1. An in-house sales force
2. Manufacturer’s representatives
3. Direct mail
4. Contracted telemarketers
5. Newspaper and magazines
6. Infomercials
7. Internet strategies including web pages, email marketing, pay-per-click, etc.
8. Word-of-mouth (with the advent of social media, this has become potentially more powerful than ever before)
• The Company and Management Team
The section after the executive summary is where you describe the company. Here is where you will briefly describe the company's history (if it is an existing business). You also describe the company's basic strategy and its management team. For a new business especially, potential stakeholders will search in
your business plan for clues as to whether the people in your company are up to the task. Lenders and potential investors will want to know that there is a reliable team capable of achieving success. Investors and lenders generally feel most comfortable with a team managing a company rather than a single individual.
In describing the management team, you will list the names, positions, and brief bios of the members of the management team. A bio is not a complete resume, but rather a short, narrative synopsis of the individuals background and experience.
• Manufacturing (if appropriate)
This section should discuss any unique methodologies that may give you a competitive edge in efficiency or quality. Also, include such things as your supply sources, equipment, capacity, and quality control. If you plan to outsource any or all of your manufacturing processes, discuss how this will be done and what the subcontractors’ capacities are and what measures will be taken to assure quality and on-time delivery.
• Financial Information
The business plan needs to provide as clear and precise a picture as possible of your company’s current financial condition and projected results of operations and future financial condition. This is done primarily through a presentation of three types of financial statements: income statement (profit & loss statement), cash flow statement, and the balance sheet. You should also include a narrative explaining your assumptions used in making any projections and why these assumptions were used. Additionally, your business plan should discuss the most significant financial issues shown in the financial statements, such as the break-even point, when it is expected to become profitable, any significant expenses, how much of and when any capital infusions will be required. The general rule of thumb is to show projections over a three to five year time frame. Some people and some funding sources also like to see a month to month projection for the first year of operations as well. If you are using the business plan to seek a loan or investment, you should state how much you need and the form in which you prefer it (loan, overdraft, combination debt and equity, etc.)
• Supporting Documents
If you are using the Business Plan to raise capital for your business, you may also need to provide various supporting documents, including: personal resumes of owners and management team, personal financial statements of owners and/or loan guarantors, letters of reference, copies of leases, contracts, or legal documents, etc. Consult with the potential lenders and/or investors to determine what supporting documents they will need and the format in which they prefer them to be.
Double-check Business Plans For Accuracy And Consistency
Always double-check your business plan for accuracy and consistency. Pay attention to such things as spelling and grammar. Use the spell-check function on your word processor! But remember, spell-checkers have limitations and will not pick up spelling errors such as using male when you meant mail. Both correct spellings but have totally different meanings. Therefore, proof read, or better yet, have someone else proof read your business plan, especially if you are using it to raise capital for your business. Your business plan will be your ambassador and you want to make a good impression.
Once you have written your business plan, have an accountant or financial analyst verify the accuracy of your figures and financial analyses. Ask him or her to make sure that totals are correct and consistent throughout the plan. For example, the marketing costs specified in the marketing plan section should agree with the projections for marketing listed in the financial plan; the machinery called for in the manufacturing plan should be listed in the
financial plan. If the numbers do not add up, your business plan is likely to be turned down. Careless errors imply that the owner will be careless in other aspects of the business.
By preparing a quality business plan before you meet with a lender or investor, you increase your chances of success. To further increase your chances of successfully obtaining financing for your business, consider taking a CPA with you who has reviewed the business plan and financial information therein. Lenders and investors will want to speak to you to make sure that you are both passionate and realistic about the new venture; however, they don't expect you to have the financial or accounting background necessary to answer all of their questions in these areas, and a CPA will be able to clarify and answer these types of questions.
Business Plan Development Software
There are a number of off-the-shelf software programs designed to assist in developing business plans. While they are very good at guiding you step-by-step through the process of developing a business plan and starting a business, they are just that, a guide. Regardless of how good they are, and how many features they have, they are not a substitute for professional assistance, human judgment, research, and solid analysis. That being said, here are a few software programs you might consider using:
Business Plan Pro - Palo Alto Software - www.pasware.cm
Plan Write Business Plan Writer Deluxe - Nova Development Corporation - www.novadevelopment.com
Business Plans - www.planmaker.com
Biz Plan Builder