While there are varying approaches to writing a business plan, a proven approach that has been a staple for years is laid out below. The subjects described in this document are necessary to complete in order to have a well thought-out plan. Skipping key sections won’t spell failure, but your chances of success increase greatly when you fully develop the key subject areas below.
So what’s in a business plan? Well, here it is!
Title Page and Contents
Presentation is important so consider presenting your plan in a nice-looking binder or assembled packet. Don’t staple all of the pages together and expect it to look good. Spend a few dollars on a nice binder or pay to have it assembled so that it looks professional. Also make sure to have a cover page that lists key information about you and your business. This should include:
- Business Name
- Company Logo (if one exists)
- Names of the owner(s)/principal(s)
- Contact information including address, phone number, e-mail and website
The executive summary should clearly describe your reason for writing your business plan. Make sure to communicate early in the plan what you are asking for. Are you looking for investors? Are you applying for a loan? Are you seeking a line of credit? Are you trying to sell an idea or patent? In any of these scenarios, spell out what you are looking for and be specific. If it’s a loan of $50,000 you seek, say as much. Make sure to address these issues in your summary but do it in a direct way that doesn’t require pages and pages of explanation. Remember, this is a summary section so you don’t need to spell out the details just yet.
- It’s recommended that your executive summary be approximately a half page to no more than one page in length and include the following:
- Describe the business/product, the target market and the advantages you expect to have over potential competition
- Financial projections
- Company structure such as key employees, type of business (LLC, corporation, non-profit or other)
- Information such as patents, prototypes, important contracts regarding product development and test market results
- Financing and other capital needs
For people to understand your business you must provide background information and an overall industry overview. It’s important to give a broad overview of your industry and include data such as:
- Current state of the industry – is it growing, mature or in decline? If it is in decline, be well-prepared to discuss why you think you will be successful in an industry that is going backwards.
- Expected future of the industry – what’s the potential size of the industry and its overall future outlook?
- Sources of information that don’t rely on your “gut.” The message here is “don’t think it - prove it!”
- Business structure - do you have any partners, investors or other owners?
When describing your business, you’ll have to make decisions about how to best describe what your business will be. It’s extremely important to explain your business in a way that leaves little uncertainty as to what you are trying to accomplish. If this takes five pages to explain, take five pages. If it takes 10 pages to explain, take 10 pages. If you can do it in one page, do it one page. The key is to clearly describe your product/service while leaving little room for interpretation. Don’t assume people will know things that you know about your business or industry. Key points to address in your description include:
- How is your product/service different from others in the marketplace?
- How does it work?
- How does your product/service influence people’s buying decisions?
- How will investment dollars/capital help your product/service be profitable?
Knowledge of your market is critical to long-term success. Start your research at a high level and drill down into the details after you’ve gathered the data you need. Key areas to focus on in your research include:
- Market Size - Is it a billion-dollar industry or a niche industry with a $100 million cap?
- Key Demographics - This could include sex, age group, education, income and location.
- Purchase Frequency - Is your product disposable and purchased repeatedly, such as razor blades? Is it something used once a year such as tax preparation services? Is it an infrequent purchase such as a new car?
- Market Share - How much of the total market can you attain? It’s important to be realistic with your projections. If it’s an established billion-dollar market, it’s unlikely that you’ll obtain 10% market share ($100 million) in the first few years. On the other hand, if you’re opening a landscape fertilization service and you only have five area competitors, for example, it’s quite possible to have 10% of the market in short order if your business is doing well. The important thing is to be able to put a figure on what amount of business you realistically can obtain.
Pricing and Distribution
Pricing a new product or service is extremely challenging and can have business owners tossing and turning. While pricing needs to be reasonable when compared to your competition, you also don’t want to leave money on the table. Such is the dilemma in making pricing decisions. If your product is brand new and there is no apparent competition, pricing can be difficult as no general market pricing has been established. The good news is that pricing decisions aren’t final! Pricing in many industries is adjusted regularly as market forces and costs to produce a product or service change. So what pricing methods should you consider? Here are two:
Competitive Pricing Option
If your product or service is just like your competitors but you feel you can service the customer better, a generally accepted market price has usually been established. This price can be used as a guide but be sure it allows you to turn a true profit. Competitors that have long established businesses many times have the advantage of economies of scale, buying power, vendor relationships or improved efficiencies. In these cases, competitors may be able to offer a price lower than what you can in the early stages of your business.
Includes the variable costs associated with the goods in addition to a portion of the operating fixed costs.
For example: A manufacturer selling clock radios may have a variable cost of $6, a fixed cost of $4 and a markup desired at 60%. This would be calculated by:
($6 + $4) x (1 + 0.60) = $16
BE CAREFUL not to confuse markup percentage with margin percentage. In the example above, the percent markup is 60%. However, if you desire a product margin of 60% the calculation is different. To do this you must subtract your desired margin from 1. After subtracting these figures you have the “difference.” Take your total cost and divide it by the difference. Using the clock radio example above this would be calculated as such:
- 0.60 = 0.40 (this is the difference)
$10 (total cost) / .40 = $25 - This $25 represents a 60% margin.
Notice that the 60% margin price of $25 is very different than the 60% markup price of $16. Be aware of the difference in how these figures are calculated since many times people assume markup percentage and margin percentage are the same.
Pricing is one of the most critical decisions you will make. Depending on the nature of your business, pricing may change regularly. The important thing to remember is that no matter how you price, you should have a strategy behind it. Two methods were addressed above, but the theory of pricing and ways to use price to influence buying decisions is a discipline unto itself. Before determining your pricing structure, consider educating yourself further on pricing methodologies. Two good informational sources include:
The Strategy and Tactics of Pricing, 5th Edition, by Thomas Nagle, John Hogan and Joseph Zale
Predictably Irrational, by Dan Ariely
Competition and Analysis
There are several objectives when reviewing your potential competition. Your analysis should help you determine the following:
- Strengths of your potential competitors
- Weaknesses of your potential competitors
- Competitor market position
- Barriers to entry
- Opportunities to differentiate from your competition
Be sure to research competitors and try to categorize the type of competitor they are. Is it an immediate competitor? Is it a competitor that will only apply to your business as you grow and become more established? Do you have competitors that compete with only a few of your products and services but not everything you offer? Do your competitors have any vulnerabilities such as bad service, high pricing, poor reputation or poor marketing?
The bottom line is to make sure you know as much about your competitors as possible. If you have a full understanding of your competition it will give you opportunities to take advantage of their weaknesses. Otherwise, you risk being a “me-too” company that offers a product or service just like your competitors with no compelling reason for people to become a customer of yours.
Operations and Management
How will your business be run and who will do what within the company? If it’s just you, this is an easy question to answer in the early stages of your business. However, if you plan to grow and potentially add employees, describe how and when you anticipate making those hires. In general, you want to have a plan for how the company will run on a daily basis, even it’s only you in the beginning. Remember, you are projecting a plan, not committing to hire as laid out in your plan. However, it’s good to give thought to how your business will function as you grow and expand. It’s important to show this vision to potential investors, banks, family members or anyone you may ask to support your business.
No matter the type of business you’re in, there are key financial statements that garner the most attention. These statements are:
- Income Statement - The income statement measures a company's financial performance over a specific accounting period. This is assessed by summarizing how the business generates revenue and incurs expenses. The income statement also indicates whether the company posted a profit or loss over the time period being reviewed. Periods of review typically include monthly, quarterly and yearly time frames.
- Cash Flow Statement - Cash flow statements display a business's results and/or plans relative to cash coming in and going out of the business. Accrued revenues and expenses are not calculated in the cash flow statement. This statement simply shows the company’s overall cash position and does not indicate profitability of the business.
- Balance Sheet - Balance sheets are used to calculate the net worth of a business by measuring assets vs. liabilities. If you are writing a plan for a new business, be sure to make a projection based on your expected assets and liabilities relative to the length of your plan. This will help you determine the potential equity you may accumulate in the business.