Advice for small businesses on what it takes to create a solid business plan, including forming an outline, integrating financial specifics, and spelling out your marketing strategy.
By Elizabeth Wasserman | Feb 1, 2010
A great business plan is a living, breathing blueprint for your business that can help you navigate and manage your company while also helping potential investors, partners, lenders, and others understand your business strategy and your chances at success. A business plan is never quite finished because you're always revising it, reviewing it, and building upon it. In fact, more important to your business' future than having a written, 30-page, coil-bound plan to distribute is the business planning process that you undertake on a regular basis to hopefully keep your ship headed in the right direction without losing sight of your long-term destination.
"In my company, we’ve been working on the same plan for more than 20 years -- we review it every month and revise it every year. We’ve printed it out a dozen times and shined and polished it. We share it with the team constantly, but it is never done," says Tim Berry, president and founder of Palo Alto Software, maker of Business Plan Pro software, who blogs at bplans.com. "When your business plan is finished, your company is finished."
The following pages will help you understand why you should write a business plan, components to include in a business plan, and how to use the plan internally to meet your business goals.
Dig Deeper: Setting Company Goals
How to Write a Great Business Plan: Reasons to Write a Business Plan
For those of you just starting a business, writing a business plan is a crucial first step. It can help you describe your product or service, detail your marketing strategy, and lay out your sales and operational forecasts -- including the ever important cash-flow projection so as to keep your business on track for profits. Putting these plans in writing can hopefully start a healthy business planning process that your business revisits on a regular basis, updates, and revises.
If outside investment or loans are sought, whether from venture capitalists or bankers or others, a business plan is essential. It's one of the first documents that a loan officer will want to see. In addition, an angel or venture capital investor will want to not only see and read the plan before providing funding, but they'll try to poke holes in your business plan and quiz you about things you should have addressed. For the purpose of financing, you may add certain sections to your business plan, including background and historical information about the business and a description of the management team leading the organization.
"Show investors how they are going to make money," Berry says. "Don’t confuse the health of your company with money for the investors, because they don’t make a dime if your company is healthy and growing. To get money back to the investors they have to be able to sell their shares in your company, either because you’ve sold shares on the public stock markets (called going public, or initial public offering) or because you’ve been acquired by another company. This is the exit strategy."
If you’re developing a plan involving a business loan, then your lenders are going to want something slightly different. They will want to see a section detailing collateral -- assets to pledge against the loan. Collateral includes funds to support loan payments, interest expenses, and debt repayment, Berry says. Banks aren’t allowed to make speculative loans, so you need to include information in your plan to make the banker feel safe.
A business plan may also be required if you plan to do business overseas. "If you do business interna tionally, a business plan provides a standard means of evaluating your products’ business potential in a foreign marketplace," says Linda Pinson, author of Automate Your Business Plan for Windows® and Anatomy of a Business Plan, who runs a publishing and software business Out of Your Mind and Into the Marketplace. Pinson also was selected by the U.S. Small Business Administration to write its government business plan publication.
But a business plan is not only for start-ups or businesses seeking investment or loans. A business plan can also be used by any business -- no matter what industry, location, or size -- to formalize a set of business goals and outline the operational and financial strategy for meeting those goals. A formal business plan can be a vital tool for running a business, setting out sales forecasts, marketing plans, and cash flow statements that can be revisited and updated every month.
"It helps provide coordination. It's a way that different people can work together on a team," Berry says. "There is a magic to metrics. Humans like to have a way to measure themselves and track their own progress toward goals rather than being completely subject to someone's guess later as to how they've done."
Dig Deeper: Setting Realistic Sales Projections
How to Write a Great Business Plan: Components of a Business Plan
There are scores of websites these days on the Internet that offer to sell business plans for $20 or more, designed to let you enter your company name and specifics and generate a plan. These are about as valuable as the paper they're printed on, says Berry. The reason is that each business is unique and, therefore, each business plan should be a unique document to be truly worthwhile to the business. A business owner should also be fully invested and fully aware of every aspect of the plan. That said, there are some general guidelines and structures that most business plans should follow.
Lay out the text simply using an easy-to-read font, in an obvious outline, with a table of contents and topic headers. Include charts where appropriate, and appendices for monthly projections at the end of the business plan document in a “landscape” layout.
"Your business plan should look professional, but the potential lender or investor needs to know that it was done by you," Pinson says. "A business plan will be the best indicator that can be used to judge your potential for success. It should be no more than 30 to 40 pages in length, excluding supporting documents."
Dig Deeper: Why You Can't Afford to Skip Out on a Business Plan
How to Write a Great Business Plan: The Business Plan Outline
Pinson recommends starting a business plan with a cover sheet stating the principles of the business, the name of the business, and the address of the business. She also suggests following with a table of contents to provide a quick reference guide to the topics covered in your plan.
The following are recommended components of your business plan, although the order in which you write and present these sections can be subject to change:
Executive Summary -- This is the abstract of your business plan, a summary of everything you will say in greater detail in the ensuing pages. It spells out the content and goals of your plan, hitting all the highlights. This section is key if you are seeking outside funding as it introduces possible investors to your business. Be sure to include background about your company, the market opportunity, your capital requirements, a mission statement, an overview of management, competitors, your business' competitive advantages, and a summary of your financial projections over the next three years. "Some people write the executive summary first, but I would never do that," Pinson says. "I would go through and write my plan first and come back to the executive summary." Keep this to no greater than three or four pages.
Company Overview -- The company overview is designed to provide more information about your business, why and when it was formed, its mission, business model, strategy, and any existing strategic relationships. Pinson recommends including this section as part of an Organizational Plan that also covers administrative issues, such as intellectual property you may own, costs associated with your location, the legal structure of your company, management, personnel, and how you address accounting, legal, insurance, and security matters.
Business Offering -- Here's where you talk about why you're in business and what you're selling, whether it's products and/or services. If you sell products, state whether you are the manufacturer, distributor, and/or retailer or a product and tell about your manufacturing process, availability of materials, how you handle inventory and fulfillment, etc. If you provide services, describe those services. Make sure to address any new product lines or service lines that you expect to enter into in the future.
Marketing Plan and Analysis -- In this section, you spell out your marketing strategy, addressing details of your market analysis, sales, customer service, advertising, and public relations. Many businesses use this space to showcase their vision of why their business will be successful, backing that up with market research that identifies their target market and industry and customer trends. But sometimes small and mid-sized businesses don't have the deep pockets to hire outside firms to undertake exhaustive market research. "A sizeable majority of smaller entrepreneurial companies are going to bet the company on their own sense of the market without the validation of outside research," Berry says. In lieu of research, Berry, who sits on a panel of angel investors, the Willamette Angel Conference, says companies can provide testimonials from existing customers.
Strategy and Implementation -- Every business plan needs details. This section is where many should go. "This is where I'm going to be looking as an investor for dates and deadlines," Berry says. "I'll be looking for things we'll be able to track. When you're going to be able to do the first release, how many visitors are you going to get on the Web, etc." Make sure to include the details in a table called "Milestones." That table should lay out the dates and deadlines. This is also a section in which to include your sales forecasts, Berry says.
Management Team -- If writing the business plan for investors or bankers, you want to explain the background of your company executives and managers and explain how that will help you meet business goals. "For investors, it's an important element to include who these people are and what their experience is," Berry says. "Investors need to evaluate risk, and the general assumption is that management team experience greatly affects risk. The more seasoned the management team, the less the risk." If writing this solely for internal purposes, you may want to explain how managers expect to grow the staff of the business in the future to meet business objectives.
Financial Projections -- In the financial section, you provide "the quantitative interpretation" of everything you stated in your organizational and marketing sections, Pinson says. She also advises not to write the financial section until those other sections are complete. This is where you include your projected profit and loss statements, your balance sheet, and your cash flow statements for the next three years. "Those are forward-looking projections," Berry points out. "It's not your accounting." That's often a source of confusion. The order of the numbers will be very much like they appear in accounting statements but they will be forecasts for the future. "Accounting I today backwards into the past," Berry says. "Planning is today forward into the future."
You may want to include supporting documents to back up statements or decisions you've made. These should be included in a separate section. These supplemental materials might include resumes of your managers, credit reports, copies of leases or contracts, or letters of reference from people who can attest that you are a reputable and reliable business person.
Dig Deeper: The Executive Summary as a Guiding Light
How to Write a Great Business Plan: Use Your Business Plan Internally
Build in metrics to your business plan so that you can use the document internally to help manage your business going forward. Berry recommends that business executives review the business plan regularly to see if they are on track with expectations or to revise those expectations going forward. "One of the great mistakes people make is to view the business plan as something you do once a year and then follow it blindly," Berry says. "That’s a damaging myth. Planning is a continuous process."
Berry advises that executives revisit the plan once a month. "On the third Thursday of every month, for example, you could go to a conference room and order in lunch and take an hour or two to look at how your assumptions have changed, look at your progress," Berry says.
Specifics are vital. A business plan should not be solely about strategy; include specifics including who’s responsible for what, when it happens, how much your products or services cost, the sales your business will generate, etc. Business planning is about what’s going to happen. Fill your plan with metrics, measurements and information you can later review. One good test of this part of the plan is whether or not you’ve actually implemented it.
Always include cash flow projections, Berry says. "Businesses live with cash and die without it. Profits are nice, but you spend cash, not profits." Profitable companies go bankrupt all the time because they don’t have money. It isn’t intuitive, but the math and financial principles involved are not that hard when you lay out your cash in logical order. "Look at the difference between making a sale and getting paid for the sale, which is an issue for just about every business-to-business sale you make," Berry says. "Look at the cash flow impacted by inventory, which can have you paying for things you buy long before you get paid for things you sell."
Lastly, if you don’t have somebody outside the company reading your plan, then you might not need to put it out onto paper. "The business plan is the content, the strategy and the specifics of what is going to happen to your business," Berry says, "not the document."
Dig Deeper: Planning for an Economic Rebound
Related Links:
Business Plan Outline
An outline of a complete business plan.
The Basics of Business Plans: Sell, Sell, Sell
A business plan convincingly demonstrates that your business can sell enough of its product or service to make a satisfactory profit and be attractive to potential backers.
The Bulletproof Business Plan
How to bulletproof your business plan during a slumping economy.
Top 10 Mistakes Entrepreneurs Make When Writing a Business Plan
Top 10 mistakes entrepreneurs make.
Will Your Business Plan Attract VCs?
How to write a business plan that will woo investors.
Recommended Resources:
Bplans.com
More than 100 free sample business plans plus articles, tips, and tools for developing your plan.
Hurdle: The Book on Business Planning
A book by Tim Berry, which you can read online or order from Amazon.com and Palo Alto Software.
Out of Your Mind and Into the Marketplace
Linda Pinson's business selling books and software for business planning.
Palo Alto Software
Business planning tools and information from the maker of the Business Plan Pro software.
U.S. Small Business Administration
Government-sponsored website for writing a business plan for small and mid-sized businesses.
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