Business Plan

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BUSINESS PLAN

A business plan is a document written by an individual or group of individuals interested in launching a new business. Along with helping to determine whether or not an idea can be transformed into a functional company, a business plan is also used to secure capital and recruit executives. During the dot-com mania of the late 1990s, several analysts began to criticize the many Internet-based ventures operating without a formal business plan, as well as the business investors pouring funding into these upstarts.

A March 2000 study of 300 e-commerce businesses in California revealed that most had launched operations with no business plan in place. Those who did develop e-business plans tended to produce documents much less exhaustive than their traditional counterparts. This lack of planning began to backfire for a variety of reasons. When the Internet revolution took off, many existing brick and mortar businesses built World Wide Web sites without figuring out who it was they were targeting; as a result, traffic remained minimal and those who did visit such sites complained of poor design and limited customer service. In some cases, companies that began selling directly to consumers via the Web alienated their traditional retailers. For example, Macy's and J.C. Penney threatened to stop selling Levi brand clothing in their stores after Levi Strauss began selling its merchandise via the Web; as a result, Levi Strauss abandoned its e-commerce efforts.

In 2000, the highly publicized bursting of the dot-com bubble prompted venture capitalists to begin scrutinizing business plans, particularly those for Internet-related ventures, more closely. As a result, the business plans developed for Internet-based businesses began to resemble those created for more traditional ventures, in terms of both length and level of detail. Rather than favoring condensed 15-page plans, lenders began paying attention to more thorough documents, which numbered 25 pages or more. Although business plans continue to vary in format and style, they typically include the following information, regardless of industry.

TARGET MARKET

Most business plans cover both the existing size and the anticipated growth rate of the market they are targeting. For example, a business plan for an online discount travel service might point out that travel is the most successful segment of the online industry, and that despite the rapid demise of many dot-com businesses, analysts continue to forecast substantial growth in online travel bookings, particularly as a weak North American economy prompts travelers to search for discounted options. Business plans also quite often include descriptions of potential customers, including their gender, age, level of education, marital status, how they make purchases, and the reasons behind those purchases. When clothing retailer Lands' End began creating a business plan for Land-send.com, the firm knew that a large portion of its customer base owned a personal computer and was twice as likely to have online access than the rest of the population. A typical Lands' End shopper was between the ages of 35 and 54, with an average household income of $60,000. Nearly 88 percent had earned a college degree, and two-thirds were employed in a professional or managerial position.

Discussions of target market also provide information on the history of the market, as well as various trends within the market. While e-commerce entrepreneurs planning to target an emerging market might be unable to produce historical data, they might be able to make comparisons with related markets. Although Amazon.com founder Jeff Bezos was unable to analyze the online consumer book industry—which for all practical purposes did not exist prior to Amazon's launch—while creating his business plan, he was able to examine the traditional book industry. In fact, it was only after researching 20 different products that he believed could be sold via the Internet—including magazines, CDs, and computer software—that Bezos settled on books, guessing that this sizable market, with its wide range of purchase choices, would be well served by the electronic searching and organizing capabilities of the Web.

PRODUCTS AND SERVICES OFFERED

Along with describing exactly what it is a company will sell, business plans also explain why these products or services are more likely to sell than similar offerings by competitors. For example, travel discounter Hotwire.com could have justified in its business plan the superiority of its services to those offered by rival Priceline.com, a name-your-own-price travel service, by pointing out key differences. Online shoppers who purchase airline tickets on Hotwire.com know their dates of travel, their estimated number of layovers, and the exact purchase price before they actually complete a transaction. They also know they are getting the lowest fare possible among those listed on Hotwire. In comparison, shoppers on Priceline.com are required to commit to a purchase—if the price they request is available—before knowing the exact travel dates or approximate number of layovers. Priceline also does not alert the consumer if a price lower than the one requested is available.

MARKETING TACTICS

An explanation of how customers will be made aware of your products and services is another key feature of most business plans. Often discussed are advertising mediums—including print, television, and the Internet—as well as pricing strategies, major promotions, and any guarantees or warranties that might be used to attract customers. Priceline.com could have included in its business plan mention of its intent to use celebrity William Shattner in a flurry of television advertisements designed make Priceline a household name. Similarly, America Online's decision to give its software away for free in an effort to attract a wide base of customers is an example of the type of activity that might be included in this section of a business plan.

DISTRIBUTION

Business plans describe the channels through which customers will obtain products and services, including retail stores, catalogs, and Web sites. In the case of Amazon.com, the ease of distribution was a key concern for Bezos, who believed the small size of most books would facilitate easy shipping. Another of his decisions related to distribution was location. Liking its proximity to the warehouse of Ingram, a leading U.S. book distributor, Bezos chose Seattle, Washington, as his base of operations. According to Bezos' plans, upon receipt of an order, he could request the title or titles be shipped to his home, where he would package the order and take it to the post office. Using this process, customers would receive their books within five days of placing an order, and Bezos could ship books to all 50 states and 45 countries throughout the world, an incredibly broad market for an upstart.

COMPETITION

Analysis of competition is an essential component of most business plans. This section tends to cover the strengths and weaknesses of rivals and includes information about their market share, profitability, and pricing strategies. Prior to choosing books as Amazon's initial focus, Bezos analyzed his competition and realized that market share was distributed among many leading book publishers. In fact, industry leader Barnes & Noble held less than 12 percent of the $25 billion book retailing market. This market fragmentation, Bezos believed, left room for upstarts. He also planned to gain a competitive advantage over traditional book retailers by offering a wider selection and undercutting prices by 10 to 30 percent. Successful brick and mortar firms drawing up business plans for new online ventures might also include a discussion of how their established customer base and distribution outlets affords them an advantage over rivals only operating online.

TRADEMARKS AND LICENSES

The steps a business has taken or will take to gain protections like trademarks and licenses are also relevant to many business plans. In the case of businesses engaged or planning to engage in e-commerce, domain name registration plans may also be included.

PRODUCTION

Information about how a business will obtain what it is selling, whether it be by manufacturing it or simply purchasing it wholesale, is also important to a business plan. A discussion of production processes can cover anything from the cost and construction of needed facilities to the availability of qualified labor. Quite often, the location of a company's headquarters is based on proximity to things like needed supplies and labor pools. Many Internet-based ventures landed in California, particularly Silicon Valley, because business owners planned to tap into the technologically savvy talent base there.

MANAGEMENT

According to a June 2000 article in BusinessWeek Online, a survey of venture capitalists completed by Centurion Consulting revealed common problems with business plans. "The No. 1 problem they identified was the lack of a management team,&rquo; stated Barbara Lewis, co-owner of the business plan consultancy. "Understandably, it's hard for a new entrepreneur without the contacts or the ability to get contacts to come up with a high-powered management team. But at least they should try to find an advisory board that will help them find management-team members." Resumes of any managers or board members recruited by the time the plan is completed can be included, as well as discussion of how it is they can help the business succeed. The section might also include a listing of the desired qualifications for positions that remain vacant, an explanation of how candidates will be recruited, and an organizational chart that details chain of command and the roles that will be played by various executives.

NECESSARY FINANCING

Most business plans also set forth how much capital is needed to sustain operations for five years. According to an April 2000 issue of Tampa Bay Business Journal, "Most new businesses stumble and fail somewhere during the first and fifth year. One of the biggest stumbling blocks is not having the cash when you need it to grow your business. The better you anticipate your need for capital the less it's likely to cost. That's why its important to have a business plan." Along with the dollar amount needed, most business plans detail plans for securing the needed funding, such as selling off a portion of the company to private investors or conducting an IPO.

FINANCIAL PROJECTIONS

Many analysts argue that this section is the most consequential portion of a business plan, particularly in terms of securing funding. In short, lenders and investors want to know what kind of revenues a business will generate and how soon it will be profitable. While many dot-com investors in the late 1990s appeared willing to wait several years for profitability, an October 2001 article in Inc. stated "the business plan that impresses investors today is a very different beast from the one that pulled in the dough two short years ago; the path to profitability has to be both clear and short—a year to 18 months." Detailed profit and loss statements, balance sheets, and cash flow projections for the first five years of operations are usually included in an appendix.

EXECUTIVE SUMMARY

Although it appears at the beginning of a business plan, most business plan experts recommend that entrepreneurs write the two-or three-page executive summary, perhaps an even more important business plan component than the financial projections, last. The executive summary gives readers a thumbnail sketch of the contents of the entire plan. It briefly describes the type of business detailed in the plan, as well as what need it is that the business is meeting. The more concise and compelling the executive summary, the more likely readers will be to continue examining the remainder of the plan.