The Business plan is the foundation of your business’ success.
‘Start up’ businesses with a solid, well-crafted business plan have the highest probability of success and survival.
A business plan does not guarantee success or survival, but going through the discipline of the business planning process minimizes the chance of missing something that is expensive or fatal to your business.
A business plan has three primary objectives:
- In the beginning, it is a reality check to see if your business concept works before you spend a lot of time and money.
- After you begin operating, it is a roadmap as you go to help you determine if the company is meeting the objectives and following the path you set out at the beginning. Business plans are never cast in concrete, but are a useful guide to check progress.
- It is the easiest path to access capital anytime. Your business plan answers the critical questions that financial people have: How much? When? What for? How am I getting it back? In Iowa, many of the state programs require a business plan to receive state assistance.
There are a number of different business plan templates- online and as software. There is no right or wrong template, but avoid the temptation to let it dictate how your business is presented. The plan must be a faithful representation of your vision for the business.
1. Executive Summary
A good executive summary is typically 2 pages long and is not a “cut and paste” restatement of the business plan but is a razor sharp synopsis that explains:
- What is the business concept?
- What product or service will be offered?
- Who is going to buy it?
- How are they going to buy it?
- When are they going to buy it?
- Where are they going to buy it?
- Why are they going to buy from this company instead of someone else?
- What is the sustainable competitive advantage?
- How will this company make money?
- How much money is needed to start up?
- What type of money is needed- debt or equity or both?
- When is the money needed?
- What is the money going to be used for?
- What is the exit strategy for the investors?
Write for the reader; be brief, be clear and avoid hype. You are not trying to ‘sell the product or the process’- You are trying to “sell” the company as a good investment. The reader has something you want (investment money); you have something they want (a significant return on their investment). Investors have become jaded because so many entrepreneurs try to blow smoke. The executive summary’s goal is to excite the reader enough to read the entire plan without exaggerated claims or focusing only on the positive. If only the positive is presented, the reader will question whether enough research was done.
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2. Business Concept
This is an overview of the industry, the company and the company’s product/service. It should be very clear where sales are coming from and where industry trends show sales are going to be going to. This section highlights the market research that created the company, but put supporting documentation, like industry and government reports, into the appendix.
The Business Concept section should address:
- What product or service will be offered?
- Who is going to buy it? Go into great detail about the customer.
- When are they going to buy it? Is this seasonal, impulse, …
- Critically important is why are they going to buy from this company instead of someone else? What is the company’s sustainable competitive advantage?
- How the industry is currently structured and whether this business is going to support or disrupt that structure.
- Briefly discuss current market size and trends.
- Briefly discuss key competitors. Be sure to include key competitors like the biggest market share and the biggest (real or potential) disrupter. Status quo/doing nothing may be the company’s biggest competition.
- What are the barriers to entry and exit?
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3. Financial Plan
This is a guaranteed read for any investor and consists of four mandatory elements and one optional element:
Plan on projecting 3 years out. Typically, the most difficult projection is sales; it is also the most important. It is comparatively easy to identify the costs associated with developing a company and producing a good or service. The great unknown for many entrepreneurs is how to get a customer to put their money down for that good or service.
Important Note: No investor is going to put money into a company so the founders can pay off their investment or retire other debt. You must have ‘skin’ in the game.
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4. Sales & Marketing Plan
There is an old motto “Nothing happens until somebody sells something.” The single biggest problem that start-up businesses encounter is living up to the sales numbers. Experienced investors automatically discount the sales numbers because they are almost always overstated. Most entrepreneurs do not have sales backgrounds, so they underestimate the time and difficulty of moving from lead to prospect to customer.
Be as clear as possible about how sales are going to be made, including:
- How is the customer going to buy it? Website/Catalog? Sales Representative?
- Where is the customer going to buy it? In their home? Office? Retail Store?
- If selling a regulated product or service (federal, state, local), be sure to address any advantages to or limitations placed on the selling process.
The marketing plan is integrated into and designed to support the sales plan and addresses:
- Product or Service – Cite advantages/disadvantages versus competitors and alternatives. Mention planned line extensions, add-ons and other new products or services, but do not go into detail. If this plan doesn’t work or can’t be funded, future plans become moot.
- Position – On the continuum from basic necessity to luxury, where does the product or service fall? What impact on price and customer profile?
- Placement – How does the product have to be presented and sold? Is the sales channel compatible with the product/brand image? Neiman Marcus doesn’t sell baking soda and Wal-Mart doesn’t sell mink coats.
- Pricing – What is the value proposition? Value is not what you think it is; it is what the customer thinks it is. How does it compare to competition? Are there any value added services or other enhancements that improve customer value?
- Promotion – How will the target customer be reached? Advertising? PR?
- Location – How does the location help/hinder the marketing of the product? Why was it chosen? Very important for retail, but may be less so or not at all for commercial and industrial companies. Touch on customer accessibility, parking, safety, etc. if it is important to the operation and marketing of the product or service.
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5. Design & Development Plan
If, as part of the business plan, the company is developing a new product, this section discusses:
- Technology or technologies employed
- Prior art or existing examples
- Patents, Copyrights, Trademarks or other Intellectual Property
- Prototype schedule
- Certifications required (i.e. UL, ETL, CSA, …)
- Percentage/types of operations outsourced
- Critical processes that will be controlled in-house
- Key suppliers and alternatives
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6. Operation Plan
This section outlines the nuts and bolts of how you are going to deliver the good or service. For a manufactured product, the Operations Plan should agree with the Design & Development Plan. Other questions/issues to address are:
- All legal documents relating to incorporation- copies into Appendix
- Unique transportation and utility needs
- Key regulations (OSHA, EPA,…) and any hazardous waste created
- Key barriers and how they will be addressed
- Critical timelines
- Security including:
- Inventory control
- Data security (Trade and operational secrets, Identity Theft, HIPAA,…)
- Physical security
- Internet and E-mail
- Disaster recovery/business continuity
- Characteristics of the workforce needed
- Pay ranges and benefits
- Employee screening/pre-screening
- Codes of conduct
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7. Management Team
In this section, all owners should be identified and their percentage of ownership. Any conflicts of interest, contracts (personal or professional) or any other agreements (verbal or written) must be disclosed.
There should be very brief (2 paragraphs max) curricula vitae for every manager, advisor and key employee; resumes go into the appendix. Include an explanation about what each person brings to the business to help it achieve its goals.
There is an old saying that ‘you don’t bet on the horse, you bet on the jockey.’ What types of people are on the management team and acting as advisors? Look for a blend of different skills and try to recruit people to fill in gaps. Some of the areas to consider:
- Sales- The overwhelming preference is for the owner to be intimately involved in the sales process, not functioning as an administrator or operations person.
- Finance- It helps to have a banker on board. They have a tendency to be conservative, but are invaluable at assessing financial health.
- Accounting- If there is only a bookkeeper on staff look at having a CPA advisor.
- Design & Development
- Human Resources
- Legal Needs, General Business & Intellectual Property (Patents)- If the business is in a contract-intensive market, consider having the company’s outside counsel as an advisor.
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The probability of being ‘on schedule’ at any time is almost zero. Give it your best shot; projecting out 36 months. Your priorities are rarely other people’s priorities. Expect things to take longer than planned- especially where financial negotiations and product development are involved. Identify those few critical milestones along the way that must be met and focus on making those specific goals. Recognize that it may be necessary to reproject the schedule at those key milestones and be prepared for it to impact the financial projections. It is imperative to keep all investors (equity and debt) informed to schedule slips. They won’t be surprised. They won’t be happy. However, they will appreciate it.
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9. S.W.O.T. Analysis
Strengths, Weaknesses Opportunities and Threats Analysis can be one of the best ways to clarify what the business’ long-term chances for survival are.
Strengths and Weaknesses are internally focused. Look at all the functional areas of the company- Financial, Product Development, Operations, Sales, Marketing, Human Resources… Clarify why something represents a strength or weakness and what, if necessary, is going to be done about it. For example:
“Four person sales force experienced in selling VoIP systems can close sales faster, providing revenues” would be a strength if the new business sells VoIP systems.
“Four person sales force experienced in selling VoIP systems requires retraining in selling switching technology in first 30 days,” could represent a weakness.
Opportunities and Threats are externally focused. Look at the market and the competitive and regulatory environments; clarifying why it is perceived to be an opportunity or a threat.
“Governor plans to sign a bill creating economic incentives for school districts to switch to renewable fuels, affecting 15,000 schools in 300 districts,” could be a great opportunity if the company makes renewable energy systems suitable for schools.
“Governor plans to sign a bill increasing cigarette tax by $1.00 per pack, reducing annual cross-border purchases by $1,000,000 and inducing approximately 10,000 people to quit,” could be a threat to a company that distributes cigarettes.
“Individuals over the age of 60 to be fastest growing demographic group for next 20 years,” can be a threat if the company makes skateboards or an opportunity if the company makes adult diapers.
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The appendix is the ‘catch all’ where the supporting documentation goes. Research and statistics supporting a claim or an assumption goes here. This would include purchase orders, resumes, bids, contracts, etc. Use tabs to make things easy to find.
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Things to Do/Avoid in your Business Plan
DO be simple, specific and focused. Business plans are not financed ‘by the pound.’ Debt and equity investors may have to read dozens in a day. If you communicate with razor sharp clarity, so they get it immediately, there is a better chance of a ‘yes.’ If the reader has to go looking for the information they need, the plan will go quickly into the ‘no’ pile.
DO be brief. See above. Show respect for the reader’s schedule. They will give you a fair hearing if you don’t waste their time.
AVOID Jargon. Everyone reading the business plan expects you to know more about the subject than them. Show your superior communication skills by putting it in laymen’s terms that everyone can understand. Under no circumstances should the plan ‘talk down’ to the reader. You may have a superior intellect and/or advanced degrees, but the reader has a superior financial position. Knowledge good; arrogance bad.
AVOID Clichés (like the plague). Sorry, couldn’t resist. This is a for-profit business plan that is looking for funding. Show the requisite amount of gravitas. Metaphor can be used only if it clarifies a complex concept.
AVOID Hyperbole and Hubris. Also known as exaggeration and bragging. The people reading business plans are experienced and ignore all the b.s., including:
- The market is huge and it’s variant [Big Research Firm] says market will be $xx billion by 2010.
- No one else is doing what we are going to do (Then there is no market or you are completely clueless about competition.)
- We can keep the competition out/No one else can do what we do. (Be sure to clarify whether you are naïve or delusional)
- Competition is too Big/Dumb/Slow to be a threat. (Wanna bet?)
- We have a proven management team. (Not very likely, but they may be experienced.)
- [Big Company] is prepared to purchase. (Then come back when you have a PO.)
- Our projections are conservative. (This is a special case because our experience is that while cost estimates are usually pretty good, every start up over-estimates their sales. If the product is technical, they usually blow the intro date too.)
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For a start up, it is critical to capture all the expenses already invested in the company as well as the expenses yet to come. Past investments can sometimes be used as matching funds/equity for government programs. The Start Up Expenses worksheet lists different expense categories to consider.
The income statement is also known as the Profit & Loss statement (or P&L). A three year projection shows how the business will grow based upon assumptions or research. The most critical assumption is the revenue or sales forecast. This is the most important area, the most difficult to forecast accurately and the most typically wrong. If revenues appear unrealistic, the entire financial analysis will be considered suspect. The Income Statement worksheet is typical.
The Balance Sheet worksheet captures a snapshot of the business in future time. It provides a good representation of financial position. Looking at the Balance Sheet on a month-to-month basis shows whether that position is getting stronger or weaker.
Statement of Cash Flow
It is argued that a Statement of Cash Flow is more important that the Income Statement. The old mantra “Cash is King” is very, very true. The leading cause of problems for high growth companies is overrunning their cash supply. A company’s income statement may be very profitable on paper, but if receivables do not match up with payables on time, the whole system can come crashing to a halt. After insufficient sales revenue, insufficient cash is the leading cause of failure.
Product Pricing Structure
The attached Product Pricing worksheet represents one method for determining whether a product or distribution channel is profitable. The assumptions you make can be critical to profitability. Freight policies, early payment policies, overhead costs, etc need to be weighed against their impact on pricing and sales.
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