A business plan is a formal written document that outlines a series of business goals, strategies, and financial forecasts. It is where you write down what you are going to achieve and how you will go about it.
It is essentially a decision-making tool that can go a long way toward reducing the risk of failure. Nobody should set up a business without a business plan.
Business plans can help measure your progress and usually identify any potential problems that may emerge over the first 2 to 5 years.
For start-ups, a well designed business plan significantly increases your likelihood of securing investment from venture capitalists or being approved for a bank loan.
A business plan “serves as the means of communication with potential sources of funding, describing both the business and the entrepreneur’s ability to organize and conceptualize the details,” according to the Stanford Graduate School of Business.
What should you include in a business plan?
According to the U.S. Small Business Administration, the following should be included in a business plan.
1. Executive summary – this is a quick summary of your business plan highlighting your main goals.
2. Company description – what does your business do? How is it different to others?
3. Market analysis – what competition is there? Research and describe your business industry.
4. Organization and management – how will your business be organized or managed?
5. Product line – what does your business sell or provide?
6. Marketing and sales – how do you plan on marketing your business?
7. Financial projections – if you are asking for a loan or investment, it is essential to make financial projections to back up your request.
How to make a business plan
Below is a guide on how to approach each of the different elements of a business plan:
The Executive summary
For a start-up there is not much (if any) background information that you can include in the executive summary of your business. However, this is your opportunity to demonstrate that you have the experience to start this particular business. If there is a gap in your target market, make sure you mention it!
An established business should include the following in their executive summary:
- A Mission Statement – what is your business and what is its purpose? Try and condense this information to a paragraph.
- Company Information – when was your business founded? How many employees work for your business, and where is the business located?
- Growth Information – include financial information highlighting your company’s growth, such as profit margins (try and include graphs).
- Products – explain what products or services your business is selling/providing.
- Future plans – include all the future plans you have for your business, and where you think you see it a few years down the road.
The Company Description
Think of this part of your business plan as your “pitch” to help investors or banks rapidly understand the concept of your business and its uniqueness. It is a review of all the different elements in your business.
Your Company Description should include:
- The marketplace needs that your business is trying to fill
- The products that will meet these needs
- What organizations or consumers will your business serve?
- The competitive advantages that your business has (expert personnel? location?)
Typically, the market analysis section comes after the company description. This is a chance to show much you know about the market – include as much research as you can find to support your plan.
You should include the following in the market analysis section:
- General industry description and outlook
- Your target market
- The size of your market
- Competitive analysis and the amount of market share you can gain
- Any regulatory restrictions
Organization and Management
How is your business structured? This section of your business plan should include details about the ownership of the business and the management team. Explain who’s who in the business and what their purposes are.
Describe each department or division of your business. If you have an advisory board, be sure to include who is in it and whether you plan on keeping them there.
An effective approach for this section is to make a simple organizational chart with a narrative description – this will show there is someone in charge of each different function of your company.
In addition, it is important to include the legal structure of the business and all ownership information. Is your business a partnership? A corporation? Or are you the sole proprietor (sometimes referred to as a sole trader)?
Include the following:
- Names of the owners of the business and their percentage and form of ownership
- Outstanding equity equivalents
- Resumes (CVs) of the most important people in your company
Describe what the benefits of your products or services are for potential customers. Mention every single advantage that your product has over the competition’s. Include details about your product’s life cycle and list any pending or existing copyright or patent filings.
Marketing and Sales
Your business plan should include all the details on marketing and sales strategies that your enterprise will be executing.
An overall marketing strategy should include:
- A growth strategy
- Channels of distribution strategy
- Communication strategy
- A market penetration strategy
An overall sales strategy should include:
- The business’ sales activities
- A sales force strategy
Established businesses should detail all historical data about the company’s performance – typically for the last two to five years.
Financial data should include:
- Income statements
- Cash flow statements
- Balance sheets
New and established businesses should provide prospective financial data. How do you expect your company to perform during the next five years? Include forecast income statements, cash flow statements, balance sheets, and budgets.
What do investors want to know?
A Harvard Business School article asked venture capitalists: “what makes the ideal entrepreneurial opportunity?”
Sonja L. Hoel (MBA ’93), Managing Director, Menlo Ventures, responded with the following:
“We track four things and relate them to the success of our investments: market size, the team, unique technology, and whether the product is developed at the time we invest. We found proprietary technology is important but doesn’t make much of a difference as a unique differentiator for significant returns.
Market size and a developed product matter most. We have much better luck if the product is in beta or shipping, although we do invest in start-ups without a developed product. Often someone has a great new technology, but hasn’t looked at the market the technology is going to serve.”
According to Cayenne Consulting, there are ten major questions that investors are interested in:
1. What’s the problem?
2. What is your solution, and what makes it special?
3. How big / severe is the problem?
4. How will you make money?
5. Who will buy it, and how will you sell it to them?
6. Why are YOU the best team to do this?
7. What are the alternative solutions, and what makes yours the best?
8. What have you done, and what will you do?
9. What are the economics?
10. How much do you need, and what will you do with my money?
Business plan vs. business case
People often confuse the term business case with business plan – they are not the same. A business plan covers the whole company, while a business case is about one single action or decision.
For example, a business plan may talk about how to make the company overall more profitable over the next three years. This might include reducing staff, not producing some products any more, and rearranging its middle management structure.
A business case, on the other hand, would look at just one thing, such as closing down one of the factories.
Video – Writing a Business Plan
This video guide, by Business Wales, will show you how to prepare a high-quality business plan using a number of easy-to-follow steps.