The usual reason most people write a business plan is because the bank won’t even consider lending them money until they have one. While getting the loan is a major milestone in starting a business, the business plan can be much more valuable than just getting the loan.
A business plan is a roadmap that helps to research an opportunity, see if that opportunity is profitable and then identify the steps needed to capitalize on the opportunity. It is an entrepreneur’s roadmap for taking them from where they are today and where they want to be. The business plan can be a formal document if you need financing or it can be written on the back of a napkin but the mere act of writing the idea down forces the idea out of the entrepreneur’s head and putting it on paper which helps find hidden business flaws and opportunities.
Writing a business plan is something anyone can do, even if you don’t know anything about business or finances. Once upon a time, if an entrepreneur was looking for financing, business plans needed to be 50 + page documents full of fluff and useless information. Today, unless your business is in a complicated industry, short and to the point is what bankers are looking for. Many entrepreneurs procrastinate when it comes to preparing a written plan, but is imperative to start now as it will take time to prepare the plan and being successful will be limited without it. Just as a builder won’t begin construction without a blueprint, entrepreneurs shouldn’t rush into new ventures without a plan. The old saying that “those who fail to plan, plan to fail” is very relevant when talking about starting a business. SBA’s statistics claim over half of new businesses fail in the first three years and common factors are poor planning or under-capitalization (which is also poor planning).
We highly recommend the entrepreneur writing their own plan. Why? Because the entrepreneur has to meet with the bank to go over the business plan. If the lender has questions that can’t be answered, the lender won’t have the confidence to make a loan. We have worked with many entrepreneurs that discount their education or time in an industry as reasons as to why they can’t write a business plan and the fact is nobody can write this better than them. All that’s needed is some direction as the process is new.
To help with writing a business plan, here are some free business plan templates to help get started.
If more guidance is needed, there are a few software programs that will help through the process. These give step by step guides and also have access to industry information to make the job a bit easier and include 500 templates to cover most industries.
The first step in creating a business plan is just getting started. Writing the business plan may seem overwhelming at first, but by breaking the plan’s sections into bite sized pieces and work on one section at a time it won’t seem as daunting. Begin with what you know first and write about the opportunity and product & services. Work towards the more difficult subjects such as marketing, operations and financials later. Don’t worry about it being perfect now, just get the concepts on paper – expand and refine later. If you get stuck on a section in the plan, skip it for now and come back later when you have more details.
Who is your audience?
A business plan should be tailored to the audience it is intended for. Why? A plan for the bank will be less interested in the exit strategy and return on investment than one for equity investors. Additionally, a plan for written for internal use will be different than one looking for financing as a bank is not necessarily interested in detailed operations of the business.
Business Plan Structure
While there is not a format that all business plans follow, there are generally accepted guidelines that most follow as the order in which the subjects flow are not random. The Business Description of a business plan is aimed at painting a picture of the business and why this business will be successful. The Marketing and Management sections are researched and a strategy of how the business will compete and operate is developed. Last Financial Projections show in numbers what were explained in the business plan.
In addition to these sections, a business plan should also have a title page, table of contents and appendix.
How Long Should a Business Plan Be?
The answer that nobody liked in school applies to a business plan which is, “as long as it needs to be”. The more complex a business or the more sophisticated investors or funds requested will increase the length of a plan. Most business plan narratives tend to be around 4-10 pages plus financials and appendix items.
Business Plan Outline
The executive summary is the first part of the business plan but is the last to be written. It gives the reader a quick glance of what the business proposal is about and what is being asked for. This part is critical for lenders as they will scan this section and quickly decide whether it is a project they can lend to.
The executive summary should typically be about one-half of a page in length and include what would be included in an elevator pitch such as:
- A condensed version of the business concept
- Product description or service proposition
- Industry trends
- Customer demographics
- Management team
- Anticipated start date
- Owner’s equity position
- How much in funds are being requested and how they will be used
Concise is the key in the executive summary. More detail will be included in later sections.
The purpose of the business description is to objectively describe and justify what the business concept is and will often include:
- What the business does
- Description of services and/or products
- Industry information & trends
- Business Structure
- Status of the business (start-up, expansion or purchasing)
- Current and future goals
Any facts or figures should be noted and sources included in the business plan. This information is important in order to back up assumptions in the plan.
Think of the business description as being the section to paint a picture of the potential along with any facts of why it will succeed.
Try to inject energy and excitement to get the reader enthusiastic about why this business is going to be great, without going overboard of course.
After describing what the business does, it is time to describe the products and services. Keep in mind that it is important to show how these products and services are better than the competition (which will be covered later). If you don’t have an answer as to why your business will be better than the competition, this is a good time to rethink the reasons for going into business. Being cheaper shouldn’t be one of them as competition can easily reduce price. What is it about your business that is better or different from the competition? Will you offer a premium product, offer a better atmosphere, better delivery, …?
A very important, but often overlooked section of the business plan is the marketing. Regardless of the quality of the product or service, a business will be lost in the clutter of advertising without knowing who the customers are. If you don’t know your customers, how will they ever find you? All of this begins with doing some research.
Several entrepreneurs don’t spend enough time in this section and then wonder why they have no customers when they open. We recommend spending the most time in this section because, without customers, there will be no business.
Check out this article for some low-cost marketing tips for a new business.
Customers: Who Is Your Market
The first step is to determine who the core groups of people that the business wants to sell to and what common characteristics they share. Characteristics can include things like age, income, race, religion, education, hobbies, interests and/or geographic locations. While everyone may, in fact, need a particular product or service, the question is how to market to get the best return on the advertising investment. By determining the group or groups of people who are most likely to come buy, advertising dollars can be strategically spent. While ads can be placed in every type of media to reach an entire geographical market, can it be done and still make a profit? Even though everybody likes to eat and restaurants are a popular (but difficult) business to make money at, advertising at the groups MOST likely to shop will improve the likelihood the advertising dollars are well spent.
What a new businesses shouldn’t want is opening their doors without a marketing plan as once those doors are opened, every advertising rep from television, radio, newspaper, etc will come selling. Without knowing who the intended market is, a lot of advertising dollars may be wasted.
This section will also help determine how many of these core customers there are and later we can use this information to see if there are enough of them to support a business. A free tool to help gather demographic data – https://gallery.alteryx.com/demographics/
In today’s ultracompetitive marketplace, there is going to be competition, no matter how creative a business concept is. Attempting to run a business more efficiently than the competition may be a difficult challenge as a startup, so it may be better to focus on planning on being different and competing with them less directly. Can you market differently? Is there particular market niche that isn’t being looked at? Is there a way to add more value? Even without direct competition in your area, meaning a business selling a similar product or service, there will be indirect competition from many different types of businesses. For example, while there may be no artisanal, organic, pasture raised hamburger restaurants in your town, there is likely a McDonalds down the street. While this is an extreme example and there isn’t a direct competitor, all businesses at least face indirect competition. Business plan tip: don’t indicate there is no competition in the plan as it will be viewed that there is either no market for that product or service or the business owner has not done their research.
Don’t underestimate the difficulty of changing the habits of where people currently shop. If there aren’t clear benefits to the customer to change where they currently shop, it may be difficult to capture those customers.
At least three but no more than five direct competitors should be evaluated. List information about who they are, how long they have been in business, location, services offered, perception on pricing, quality, etc. and compare the advantages and disadvantages of your business. If the information you are looking for is not available online, be a secret shopper and ask questions of the competition.
With the above steps researched, the promotional strategy should fall into place. Knowing who the core group(s) of customers are, research needs to be done on what types of media they are likely to spend time with. While it’s not always this obvious, you probably wouldn’t want to market to college students in the newspaper or the elderly on Facebook. While there usually isn’t the best way to market in a particular industry, knowing your customers will be the first step. There will likely need to be refinement of the promotional strategy over time.
Something to consider when developing a promotional strategy is that advertising is expensive and is sometimes difficult to tell if it is bringing people in the door. Any method to track the advertising, whether it is a coupon or asking customers at checkout about how they heard about the business, provide data whether a marketing channel is worth discontinuing or investing more into.
One of the more difficult areas of the business plan is coming up with sales projections. This number is probably going to be wrong and that’s ok. What is needed are figures backed up with reasonable and justifiable data. Just grabbing a number out of the air saying sales will be $300,000 in the first year won’t work. There are many sources to help come up with this number including:
- Industry journals
- Trade groups
- Industry experts
- Average household spending
- Census data
While this number will likely be wrong, it is important to do this research. Later in the plan when preparing the financial projections, this number can help determine the feasibility of a business. One example of what we don’t want to see is that in a given area, maybe there are 10,000 potential core customers for a particular product or service and that it would take a large percentage of them to make a business worthwhile. The entrepreneurs comfort with this percentage is going to vary between competition, industry and other factors, but gives a data point to confirm whether a business is worth investing in.
The effects of seasonality are significant in some businesses and not so much in others but is important to estimate because it will show if additional investment is needed. Take landscapers for instance. Spring and fall are typically great months in most areas because of the weather. Estimating seasonality will give information whether enough money was made in those good months to keep the business open the rest of the year. Starting out, cash is very critical and what we don’t want to see is a business that opens and is underfunded because it may be doomed to fail from the start. A business plan may have provided this information and better planning could have been done.
To come up with seasonality, estimate the percentage of sales by month. These percentages will eventually go to the cash flow statement. Reach out to industry associations, forums, business owners in other states (where you won’t be a competitor) to get some estimates. Negative numbers in the cash flow statement of the financial projections will indicate the need for additional investment.
The effects of pricing play a large role on how a product or service is perceived in the marketplace. Price too low compared to the competition and a product could be perceived as cheap and unreliable. Price too high without having the premium features and benefits the market wants and few customers will come through the door. While this is a complex issue, here are a few things to keep in mind.
- Basing pricing on the competition is not always the best method. There may be a competitor that has operated for many years and can operate at a lower cost since the equipment has been paid off. The flip side is that this equipment is old and new equipment that offers more benefits are what customers really want and are willing to pay for. Another trap is thinking that a competitor with a low price is making money when in reality they may not.
- New businesses wanting to start with lower costs to get their foot in the door is common, especially with construction-related businesses. It may be better to promote at full price and offer discounts or coupons until the business is better known. It’s harder to raise prices after customers are used to low ones.
- Entrepreneurs can be bad about appropriately valuing their time. Be sure when evaluating expenses to price your time doing the work. If the expansion of the business is a goal, your job as an entrepreneur is to set up processes for others to do the work and expand beyond yourself. If pricing isn’t factored as an expense to have others do the work, this may never be an option.
- Pricing is the easiest part of marketing to change. Business doesn’t work in a vacuum and a competitor may lower their price if a new business opens its doors in an attempt to make them go out of business. Another reason to be different than the competition.
While a lot of new businesses struggle with pricing, don’t be afraid to charge more for a product or service than the competition if you have something better to offer. Before doing so, be sure there are enough customers that want the premium offering.
Management & Operations
In this section, describe who is going to manage the business as well as fill the positions to deliver the product or service. These may initially be the entrepreneur, but have a plan for the staff needed in the future.
If looking for funding, include a bio and resume for key individuals and owners of the business. The resumes should be included in the appendix. Try to show how the experience and education of these people will be able to successfully operate the business. Many times the owner may not have the specific experience so it is very important to explain how the unrelated experience is a fit or to hire the right people. A very common example is someone who likes to cook and they want to open a restaurant. It turns out they may have never even worked in a restaurant. Restaurants are one of the most common types of businesses to fail (even though everyone likes to eat). Lenders place a large weight on the experience of the team when evaluating a business loan as there is a correlation between the owner’s experience and successful businesses.
A few things to include in this section:
- What positions need to be filled
- When these positions need to be filled (This is important in developing financial projections as employees may be hired after starting)
- How much they get paid (Be sure to add payroll taxes too, estimate 15% if not sure)
Financial projections are placed at the end of the business plan, but before the appendix. Projections are a very critical piece to the plan and the biggest area that entrepreneurs struggle with. This is what makes software like Live Plan or Business Plan Pro so attractive as they help generate these numbers.
There are three primary financial statements that a lender is going to look at: cash flow statement, a profit and loss statement and a balance sheet. The information provided previously in the narrative portion of the business plan must match the financial projections.
Cash Flow Statement – The cash-flow statement is one of the most important pieces of a business plan. Similar to a checkbook register, it shows a schedule of the money coming into the business and expenses that need to be paid and whether there is enough cash to sustain the business based on the assumptions. Every part of the business plan is important, but none of it means a thing if cash runs out. Should this number be negative, sales need to be increased, expenses reduced or have more starting cash.
Profit & Loss Statement – This statement, while similar to the cash flow statement, is displayed annually and takes an after-tax view of the businesses financial results.
Balance Sheet – The balance sheet is a summary of the value of all assets, liabilities and equity for an organization at the end of each year. A balance sheet is often described as a “snapshot” of a company’s financial condition and will show the value of the business over time.
Some other items that are needed with financial projections include:
Initial Expenses – These are all costs prior to opening or expanding a business. It is recommended to have quotes available or in the appendix for the larger items (above $500). Also include a miscellaneous line (around 10% of the total project costs) available as there are always unexpected expenses that were not accounted for. While additional funds may not be needed, it’s not a fun conversation to go back to the bank for money.
Sources and Uses of Funds – This section details how the loan money will be used (inventory, equipment, machines, repairs and improvements, working capital, etc) and who is providing it (bank, investor or owner). As a startup, prepare to inject 20% of personal money and maybe more into the project depending on the risk assessment of the business and personal credit.
Personal Financial Statement – If looking at bank financing, a personal financial statement will be needed for every person with a 20% or more ownership position. Here is a link to the SBA personal financial statement This statement will show your assets (checking & savings accounts, CD, IRA, 401K, valuables, home, vehicle, etc) as well as assets (mortgages, credit card bills, installment accounts, etc).
Appendix items are various pieces of information that help back up claims in the business plan but would take up too much room to do so in the narrative. Some examples:
- Quotes for items over $500
- Resumes of the management team
- Industry research
- Demographic data and trends
- Maps/floorplans/blueprints of location
- Leases and contracts
- Letters of support
There is a lot to writing a business plan but in addition to getting a loan will definitely make the business stronger (or even decide it’s not worth doing). While it may seem easier to have someone else write your plan, there is no substitute for writing it yourself. This is your business and by writing it yourself you will have a better understanding of your business and strategies for success.