Business Plan
Business Plan
A business plan is a written document used to describe a proposed venture or idea. It typically includes the current state of a business, future vision for the business, target market analysis and challenges, sales and marketing strategies, and funding requirements to reach stated goals. Many business plans are designed with the intention of securing funding and investors to support a proposed idea; others are designed to assist with reorganization, takeovers, or to serve as an internal planning document. On its Web site, the U.S. Small Business Administration (SBA) describes it this way:
A business plan precisely defines your business, identifies your goals, and serves as your firm's resume. It helps you allocate resources properly, handle unforeseen complications, and make good business decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Additionally, it informs sales personnel, suppliers, and others about your operations and goals.
In addition to these continuing benefits, a business plan can also offer clear, immediate advantages to struggling companies, or to those intending to sell their business concepts. Mike McKeever gives several of these advantages in his book, How to Write a Business Plan (2007):
- A business plan will help the business find financial backers. Since investors require a business plan before giving a company any significant backing, it is a good idea to plan and write one before looking for aid. After creating a plan, leaders of the business will understand more clearly where their money goes and what it is spent on—information the investors will want to know.
- A business plan will help a starting company decide whether to proceed or stop. Creating a plan for a new business allows leaders to examine potential strengths and weaknesses of the business, giving them the confidence to move forward or possibly the knowledge to reassess the functionality of their ideas.
- A business plan allows leaders to improve the business concept. In making the plan, leaders may realize parts of the organization they need to change or reevaluate. Writing the plan gives a chance to change the goals of the business for the better.
- A business plan helps keep the business on track. With the straightforward rules, goals, and parameters of the plan written down, a business has more focus.
GETTING STARTED
The article “Write the Right Business Plan” lists ten things to consider before tackling the document:
- Decide why you're writing your plan—what is your motivation?
- Do your homework—read some books, explore web resources.
- Compile your information—locate articles and financial statements.
- Start typing—write down all your ideas, notes, and questions in outline form.
- Write a rough draft—flesh out the outline with full sentences and paragraphs.
- Do more research—support your case with data via small business association contacts, annual reports, and competitors in the chosen industry.
- Think about the numbers—develop pro forma financial statements.
- Write a final draft—demonstrate attention to detail with accuracy and clarity.
- Get feedback—have someone else read over your plan and offer advice.
- Polish your plan to perfection—include a cover page, table of contents, nondisclosure form, and an executive summary containing highlights.
Employees with the right skill set and expertise can collaborate to create the business plan. Alternatively, a consultant can be hired to assist with the process. A consultant can bring expertise and professionalism to the appearance and tone of your business plan, provide informed market analysis and research assistance, and supply educated projections for a market that the entrepreneur might be unfamiliar with or have little experience analyzing.
After determining who will be working on the plan, it is useful to decide on the scope of the plan and timeframe for completion of the plan. Once the team or consultant is in place, research and analysis can begin. Internal and external assessments should be conducted and then examined. The interpretations of these assessments will be the framework of the plan and will guide goal setting and strategies for the company. Once goals and strategies are determined, a solid business plan can be formed toward fulfilling these goals.
From a management perspective, a business plan allows managers to set priorities and allocate resources effectively. It brings order and direction to an organization and provides a vision of the future that employees throughout the company can put energy into and get excited about. This shared vision and focus will benefit the company at every level and ensure that all constituents are working cooperatively and cohesively. Ideally, all employees will utilize the information from the business plan to assist in goal setting, and guide in decision making and performance assessments.
A 2005 guide by Covello and Hazegren on beginning business plans reports that a strong plan will take approximately fifty to one hundred hours to complete. From an entrepreneur's stand, that is about six months of review, study, analysis, and research. This time devoted to making the business plan is useful, since by the end, the entrepreneur is aware of most of the positive and negative aspects of the business, and has a clear idea how to market it to outsiders.
ELEMENTS OF A BUSINESS PLAN
The U.S. Small Business Administration recommends that a business plan describe four main elements of the proposed venture: an overview of the business, a marketing analysis, a financial plan, and a management plan. An executive summary and other supporting documents should also accompany the plan. These elements provide a solid starting point for a general plan, but there is no single formula to a business plan and a multitude of factors will impact the amount of content needed in a good business plan.
The executive summary is a synopsis of the entire business plan. It is critical that this summary be carefully crafted and compelling. This is the first and possibly the only information that a potential investor will read; if it is not informative enough or if it is lacking crucial data, the investor might not read beyond this summary component.
The business overview segment is a profile of the company and its primary industry. Projections, trends, and industry outlooks should be included. In this section the company describes the unique elements that make it a prime candidate for its proposed venture.
A market analysis details how the company will handle its sales and marketing strategies. This analysis includes information on the company's products or services and intended customers, and how customers will be made aware of the product or service. This section should also include a competitive analysis with a breakdown identifying Strengths, Weaknesses, Opportunities, and Threats
(SWOT) to the company and the business proposed. A plan of action should explain how the company will address, exploit, or withstand each of these eventualities.
The financial section discusses the current financial state of the company and what types of financing will be required for the proposed venture. In this area, it is appropriate to discuss the specific dollar amounts required for the business venture, the cost to maintain and sustain the venture, and projections of income, balance sheets, and cash flow. Statistics, facts, and research should support any financial projections listed. In a 2008 article, “Successful Business Plan,” Amy Tailor details the SMART model of financial analysis, which many experts watch for. According to the SMART system, the business should be able to list and explain how its goals are Specific, Measurable, Achievable, Realistic, and Timed. Specific goals should be natural to a strong business plan. Measurable goals should include current and expected data, along with systems of analysis to track changes. Achievable and realistic goals can be met within the framework of the business's assets and skills, and timed goals are set forth at the proper moment in the organization's evolution.
The management plan section should discuss the strengths, experience, achievements, and expertise of the person or team undertaking the business venture. Investors want to know that they are offering their support to a person or team qualified and capable of handling the business proposed and the funds loaned.
A complete business plan will provide evidence to the lender that the entrepreneur has performed a thorough investigation of this new business venture, because it details how the business will generate cash flow, pay for operating expenses, and service debt repayment.
The accompanying table offers several elements for inclusion in designing a business plan.
In addition to these structures, Edward Rogoff gives six main strengths every business plan should convey in his 2007 book Bankable Business Plans: Second Edition. These strengths Rogoff calls the six immutable points, the goal being to prove these points to any reader of the business plan.
Elements of a Business Plan
- Cover sheet
- Statement of purpose
- Table of contents
- The Business
- Description of business
- Marketing
- Competition
- Operating procedures
- Personnel
- Business insurance
- Financial Data
- Loan applications
- Capital equipment and supply list
- Balance sheet
- Breakeven analysis
- Pro-forma income projections (profit and loss statements)
- Three-year summary
- Detail by month, first year
- Detail by quarters, second and third years
- Assumptions upon which projections were based
- Pro-forma cash flow
- Supporting Documents
- Tax returns of principals for the last three years
- Personal financial statement (all banks have these forms)
- For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchisor
- Copy of proposed lease or purchase agreement for building space
- Copy of licenses and other legal documents
- Copy of resumes of all principals
- Copies of letters of intent from suppliers, etc.
- The Business
- You are profit-oriented.
- You are honest.
- You are qualified.
- You are thorough.
- You are committed to meeting everyone's needs.
- You are flexible.
CUSTOMIZING FOR INVESTOR TYPE
Bankers, venture capital fund managers, and business angels each look at different features of a business plan when assessing it for investment. Bankers tend to focus on the financial aspects of the plan and give little emphasis to marketing and management issues. Venture capital fund managers are typically most interested in both the marketing and the financial aspects of the plan. Business angels focus on entrepreneurial elements and “investor fit” considerations. Thus business plan writers should customize their proposals based on the audience they are trying to reach.
Bankers are interested in businesses that will be successful over the long term and entrepreneurs who will remain committed to the project as described in the business plan. When making their lending decisions, they are interested in collateral as security for the loan, and tend to support projects that are less risky. A banker's main interest is the repayment of the loan.
Venture capital fund managers invest for capital gain, and when a venture is successful, they also benefit. Likewise, if a business fails, venture capital fund managers stand to lose significantly and at much cost to the outside investors whose funds they are managing. Therefore, venture capital fund managers focus on the uniqueness of the product or service, the status of the market, and the management team's potential for success. Venture capital fund managers' main interest is growth potential and potential returns.
Business angels' interests align more closely with venture capital fund managers than with bankers. Business angels focus on how their interests match up with the entrepreneur's and how well they are able to work with the entrepreneur over the length of the project. They seek out entrepreneurs who have strong, positive qualities, such as integrity and responsibility, and with whom they feel a connection. Because the investment is personal for the business angel, he or she is interested in financial gains, but also enjoys the opportunity to participate in the venture itself. A business angel's main interest is potential returns, camaraderie with the entrepreneur(s), and personal involvement.
Steingold, in his 2007 Complete Guide to Selling a Business, says that a good business plan will aid investors in several other, more intangible ways. The strength of a strong vision for business direction can inspire interested buyers, communicating the power of the idea as well as the financial prospects. Investors who believe in the organization's goals will be much more likely to understand business models and provide financial support for endeavors. Also, Steingold believes a strong business plan gives buyers a cushion, something to rely on when they get cold feet. Negotiations can go on for weeks, and when the time lends uncertainty to the buyer's decision, they can rely on the business plan as proof the sellers know what they are doing.
RECENT TRENDS
An article by A. Gome investigates a growing trend among certain entrepreneurs to move away from the old-style business plan that contains an extended, long-term outlook. They are opting instead to use an abbreviated, shorter-term document that better fits their business strategy.
Long-range planning documents don't work as well for some entrepreneurs because of the fast-changing markets they are entering into, which renders the business plan irrelevant within months. And, the short-term nature of some ventures precludes the need for a long-term plan. It is unnecessary to have a five-year plan if the entrepreneur expects to conclude his venture within a shorter time frame.
LIVING DOCUMENTS
Replacing the traditional business plan is what is called a “living document,” typically one page in length and with a forward-looking range of one year. Goal-setting may be projected on three- to six-month timeframes, which are more easily monitored and attainable. The living document contains similar elements of a typical business plan—vision, values, objectives, methods toward reaching objectives—but abbreviated to fit on a single page. This document needs constant updating and adjusting, with ample flexibility to respond to customer and market fluctuations. Highly-tailored documents may also need to be prepared for each type of stakeholder, whether bankers, venture capital fund managers, or business angels.
RESOURCES
There are many resources for the entrepreneur looking to write a business plan. Local business organizations, public libraries, colleges and universities may offer useful workshops, seminars, or courses.
Local SBA offices or Web sites (<http://www.sba.gov>) also offer resources. The SBA has sponsored more than 200,000 loans worth more than $45 billion, making it the largest single financial backer of U.S. businesses in the country. The SBA provides free online courses, e-mail guidance, print materials, and face-to-face consultations to small business owners.
The SBA also administers the Small Business Development Center Program to provide management assistance to current and prospective small business owners. This program provides a broad-based system of assistance for the small business community by linking the resources of federal, state and local governments with the resources of the educational community and the private sector.
There are also several books and software programs that assist with creating a business plan.
SEE ALSO Entrepreneurship; Venture Capital
BIBLIOGRAPHY
Bunderson, Gaye. “Have Your Business Plan in Hand Before Seeking $$$.” Idaho Business Review 31 January 2005.
Business Plans Handbook. Farmington Hills, MI: Gale Group, Inc., 2004.
Covello, Joseph A., and Brian Hazelgren. Your First Business Plan. Sourcebooks, Inc., 2005.
Delmar, F., and S. Shane. “Does Business Planning Facilitate the Development of New Ventures?” Strategic Management Journal 24 (December 2004): 1165–1185.
Gome, A. “Plan Not to Plan.” BRW 27 (February 2005): 72–73. Lasher, William. The Perfect Business Plan Made Simple. New York, NY: Broadway Books, 2005.
Mason, Colin, and Matthew Stark. “What Do Investors Look for in a Business Plan?” International Small Business Journal 22 (June 2005): 227–248.
McKeever, Mike P. How to Write a Business Plan. Berkeley, CA: Nolo, 2007.
Office of Small Business Development Centers. U.S. Small Business Administration. Available from: http://www.sba.gov/sbdc/aboutus.html.
Pinson, Linda. Anatomy of a Business Plan: A Step-By-Step Guide to Building a Business and Securing Your Company's Future. Chicago, IL: Dearborn Trade Publishing, 2005.
Rogoff, Edward G. Bankable Business Plans: Second Edition. New York: Rowhouse Publishing, 2007.
Steingold, Fred S.The Complete Guide to Selling a Business. Berkely, CA: Nolo, 2007.
Tailor, Amy. “Successful Business Plan.” Alternative Library of Stock Market. http://alternativestocklibrary.com, 2008.
U.S. Small Business Administration. “Elements of a Business Plan.” Available from: http://www.sba.gov/starting_business/planning/writingplan.html.