How To Write a Business Plan
So now that you have that one-of-a-kind product or that brilliant and saleable service, it's time to buckle down and do the Business Plan. Would-be entrepreneurs who willy-nilly plow ahead and start to take orders, lease space or buy inventory without writing a Business Plan may encounter disinterested investors and eventually lose focus. Consider the Business Plan to be your blueprint and selling statement. It should help the business work towards long and short-term goals and help you map out your personal strategies for success. Since it's the articulation of your ideas and hopes for your business, no "expert" can write it for you.
Who's the Business Plan for? The very process of drafting a Business Plan will help you look at your ideas more closely and more realistically before operations begin. If consistently updated with current information, it can also serve as a financial management tool and keep your goals in perspective.
The Business Plan can also form the basis of proposals to potential lenders and investors. Take care not to make any misrepresentations or misleading statements. Banks will take you seriously if the Plan is not only persuasive but realistic.
Implementing the Plan: Since the Business Plan is a course of action, each element of your Plan should be accompanied by a list of all relevant tasks, including phone calls, trips, inquiries and meetings. This will clarify the necessary steps and sometimes illuminate hidden complexities of the venture. For example, a budding jewelry salesperson might have some notions of placing ads in magazines appealing to an affluent customer base. However, after actually going through some of the steps mapped out in a thorough Business Plan, he or she will realize that higher than expected outlays may be necessary to reach such a consumer by the more expensive publications.
After every section of your Business Plan, include a discussion of the risks and problems that may arise and your alternate plan of action in each instance. Your Plan should not be an idealistic recitation but a working document with worst case scenarios considered and accounted for. The jewelry seller's Plan should direct him or her to financing sources to fund an expensive ad campaign or prompt him to rethink the selling strategy.
Outline: The following is a broad outline of the typical points that a thorough Business Plan should include and the questions that each section should answer:
1. Cover Page. Include the company name, address, phone, fax, e-mail address and website. You may want to consult with your attorney to include language about confidentiality, i.e. that the Plan may not be copied and that the reader pledges to keep the contents confidential.
2. Mission Statement/Statement of Purpose. Often the most difficult part of the Business Plan, this section should distill what your intentions are and how you plan to accomplish them. Since it is the first section that a reader sees, it should be enticing enough to encourage further reading. This is probably the best section in which you should try to convey your enthusiasm and vision. Include a summary or at least touch on all of the major elements of the Plan.
3. Description of the Business. In addition to addressing the following questions, this section should also include a summary of the risks and problems that you foresee in each area, and how you plan to overcome or prepare for them.
About the business:
This is an important decision since the legal form of the business determines the tax, accounting and legal consequences. Since there is no single ideal form, a business owner should carefully consider which form is most advantageous to his or her plans.
For example, an entrepreneur would be ill-advised to use a subchapter S corporation for a venture that is anticipated to have many equityholders in foreign countries, since an S corporation cannot have more than 35 stockholders or any foreign stockholders. On the other hand, that same entrepreneur may value the tax treatment that a shareholder of an S corporation is entitled to over those foreign equityholders. However with more research, he or she will discover that limited liability companies, like S corporations, may also avoid "double" corporate taxation, i.e. income is not taxed when earned and only when income is paid out.
Similarly, a sole proprietorship may be attractive to an independent business person for its record-keeping simplicity. However, if that business person has substantial personal assets, he or she may be assuming the undue risk of personal liability for all business debts.
These types of considerations will determine the most appropriate legal form for your business. You should consult your accountant, attorney or other qualified professional to see which form best fits your plan.
- What type of business is it?
- What is your product or service? If you think that your idea should be patented, consult a patent attorney. Consider whether the name of the business itself should be protected as intellectual property. Evidence of a patent, license, copyright or trademark will convince lenders and investors that your Plan is based on a unique and different idea.
- What is the ownership history of the business? Is it a new business, takeover or purchase? If the business is not new, include the history of the business under the previous owner.
- What is the legal form of the business? (Note that the legal forms available and the fees charged to an entrepreneur vary from state to state).
- Have you obtained your federal identification number? This number is like a social security number for your business and is required to set up a business checking account. It may be obtained from the Internal Revenue Service with Form SS4 (call the IRS at 800/829-3676 or 800/829-1040 to obtain the form).
- What are the licenses and permits you will need? Do not underestimate the interests of our regulatory authorities. The safest approach is to contact every federal, state, city and county agency in the phone book that may be interested in your busine ss. The penalties and fines for overlooking a simple registration or filing can add up over months and years. Include a list of all of such licenses and permits and their effective dates.
- Is your business seasonal? If so, how will you compensate for the varying cash flow?
- What have you learned about your business so far? For loan proposals, evidence of consumer acceptance of your products or services will go a long way in convincing lenders. Attach orders or letters of intent to show that the Plan is not just an idea .
- Describe the businesses and services that you will be dependent on for the success of your own business. This is a good section in which to demonstrate creative and offensive strategies by describing alternate plans in the case of a change in your relations with those suppliers or a supply interruption.
About the product or service:
- Why is your product or service desirable?
- How long will it last or be effective?
- How long does it take to make the product or deliver the service?
- Will there be follow-up services or products?
About the location:
- Why did you choose the business location? Confirm that you will not run afoul of any zoning regulations.
- How will changing demographics or trends affect your business location?
- Will there be plant facilities, warehouses or other locations?
- Who is your customer? Describe the business's image.
- Is your customer base growing?
- How will you attract and keep your customers?
- Are there any trends beneficial or detrimental to your business?
- Who are your competitors and how is their business?
- Are your competitors weak or vulnerable? If so, how do you plan on capitalizing on these deficiencies?
- What will the reaction of your competitors be upon your entry into the market?
- What is your advertising or sales promotion strategy? Include information about your advertising budget and schedule. Don't forget to discuss store displays and selling techniques, if applicable.
- What media outlets will you be using?
- How will the product be distributed?
- What is your customer service policy?
- Will you have a partner or be dependent on key managers or employees? If so, consider solidifying their commitment with employment agreements or an investment in the business. Note also that if your product or service is worthy of being patented, you should consider requiring employees to enter into non-compete and confidentiality agreements.
- What is your relevant experience and that of any key managers or employees? In particular, describe your talents and why you think that you will succeed.
- What are your weaknesses and how will they be overcome?
- What are the duties of all of the employees and consultants?
- Do you have control or monitoring policies in place?
- How will personnel accommodate changes in sales or growth?
- What is the compensation or benefits that you will offer?
- What is the labor supply in your area?
6. Pricing and Financial Information.
- How will you price your product or service?
- How do your prices compare to your competitors?
- What is the sales potential? Analyze this information in terms of the company's revenues and as a percentage of the industry.
- At what point of sales in a given time period, will you recover your expenses, and at what point would the business show profit? The "break-even" point is calculated by figuring out all of the expenses in a certain time period. For example, if all o f the monthly expenses total $10,000 (including overhead and the cost of any debt, e.g., interest payments), then weekly sales of $2,500 is the break-even point. It is useful to show this calculation in chart format.
- How will expenses be controlled?
- What are the tax considerations?
How will profits be managed? Will you use it for working capital, to reward employees or for dividends and profit taking by the owners?
Keep in mind that two of the primary reasons most businesses fail are because of mismanagement and undercapitalization. By planning the financial record-keeping and funding sources early, you will have alternate plans ready if problems arise.
Include in this section the following items:
- description of accounting and inventory system. Will you be using an in-house bookkeeper or an outside company?
- start-up budget. This should not only include the obvious items, e.g., inventory and advertisement costs, but also the smaller items that can add up, e.g., deposits for rent and utilities, registration fees and incorporation costs.
- operating budget covering the first six months of the business. Use cash flow statements as a basis. Remember to have a realistic view of the length of a cash collection cycle.
- sources of capital and debt and equity financing, including the terms. With debt financing (loans), include how the money will be repaid; with equity financing, include a discussion of how and the extent to which the investor's stake will become more valuable.
- balance sheet. This document is a snapshot of the cash and equity at a given point in time.
- income statement or profit and loss statement (3 year projections). This document shows how the business is doing after expenses. Remember that all assumptions should be explained in projections.
- cash flow (3 year projections, based on 3 different growth potentials, i.e., expected, better than expected and less than expected). This document shows how much cash the business has by subtracting actual cash outlays from cash received.
A business can grow very quickly, showing positive income statements at the expense of cash flow. Even with spectacular profits, an illiquid business will fail, whereas a business showing loss may continue. The business owner should always be examining the cash flow and confirming that there is enough cash to cover ongoing expenses.
7. Long-Term Plans. Include a discussion of what you would like to gain from the business in the short and long term, financially and otherwise. Envision what the company should be in 5 and 10 years, in terms of new products, expanded services and growth.
8. Supporting Documents.
- Marketing materials.
- Resumes. Remember that lenders consider the experience of the business owner carefully. Since they look to decrease the risk of a loan by favoring those with past results, try to include information about yourself and your management team that subst antiates past success.
- Personal, financial and customer references
- If the Business Plan is presented to a lender, they may require your personal financial statement.
- Industry data
- Schedule showing deadlines for filings, registrations, employee hires, orders, deliveries and any other events described in the Plan.
Outside Review: Your attorney and accountant should review the Business Plan even if they contributed to it during the drafting process. Other reviewers may include business consultants, successful business owners and corporate executives with financial responsibility.
For further assistance on writing business plans, visit the SBA website: https://www.sba.gov/tools/business-plan/1