Lots of people want to start their own business. One of the first things that stops these would-be entrepreneurs from realizing their ambitions is the seemingly daunting task of writing a business plan. Writing a business plan, though, is a rather easy task if you understand your business, so let’s take a look at what a business plan entails.
Before we jump into drafting our business plan, we should think about why we are writing a business plan in the first place. Most business plans are used to secure financing for a business — whether it be a start-up or an existing company looking for additional capital. This financing could come from a bank, an equity or venture capital fund, friends, family or just about any other potential investor you could think of.
Another reason to write a business plan is to organize yourself, make sure you have thought through all the components of your business and make sure that it makes sense. A great idea for a product or service may not amount to a great business unless you can turn a profit through effective marketing, management of expenses, management of accounting and information systems, etc.
Things to Keep in Mind
As you write your business plan, keep in mind that your audience — whether you’re currently looking for financing or not — is likely to be a potential investor. You need to communicate to investors that your company understands its business and has thought through all the risks, challenges and opportunities involved in its industry.
To communicate this understanding to investors, you should try to provide sufficient detail about your business to demonstrate your knowledge. For example, you could write something like this: “According to the ABC Trade Association, profit margins for our industry average around 25%. With the procedures we have put in place, our business can achieve 30% margins due to the increase in our operational efficiency.”
There is no hard and fast rule for where or how you should add these kind of details, but using them will improve your credibility as a company.
You should also pay attention to your writing style. There is nothing to be gained by using fancy vocabulary or flowery language. In fact, such writing may cause your audience to lose sight of your business. Instead, you should write clearly and to the point so potential investors have a clear understanding of how you run your business.
So with these ideas in mind, how should we structure our business plan? Below is one example of how a business plan can be structured. This outline contains the most commonly-used sections of a business plan but is by no means exhaustive of the areas that a particular business might need to cover.
Management & Personnel
The executive summary of your business plan should be a two to four page summary of your business plan. It should touch briefly on each area that is contained in the rest of plan and give the reader a good sense of your business even if they don’t have time to read the rest of the document. You may also want to touch briefly on the history of your company and its mission and values in this section.
Hitting the Highlights
Next it’s good to jump into the business highlights section. This section discusses what sets your business apart and what will lead to its success. You may want to highlight the experience of your management team, discuss the strength of your position in the market or any other factors that make your business competitive.
You may want to follow this section with a discussion of risk factors coupled with how your business mitigates or addresses these risks. Discussing risks is another opportunity to demonstrate that you understand the business and industry that you’re in.
Getting Down to Business
The next section is a discussion of the operations of your company. The operational overview is usually the longest section of a business plan and usually covers the business strategy, marketing strategy, the product or service offering, management and information systems and any other components that are important to the operations of the business.
An industry or market overview is also a helpful section to have. It will give potential investors who are not familiar with your particular industry or market a better sense of the environment in which you operate.
This section may include demographic information for the market where you sell your products or services. It may include a discussion of the regulatory or legal environment for your industry. You can also include some general statistics on the industry from a credible source such as a trade association. This will lend credibility to some of the assumptions in your financial projections in the next section.
The Bottom Line
One of the last sections in a business plan is usually the financial projections. Ironically, this section might be the section you want to start with when writing your business plan. Building a financial model for your business is one of the best ways to make sure that you’ve thought through all the basic components of your business and that it will eventually make money.
You’ll have to ask yourself several questions in the process: What are my start-up costs? How will my marketing strategy translate into revenue growth? What are my gross margins? What are my fixed costs and overhead? When will I break even? How much money will I need to raise to get started? What will my interest expenses be?
Your financial projects should consist of income statements and balance sheets. A good rule of thumb for a start-up is to show monthly income statements and balance sheets for the first two years of operations and then full-year projections for at least the first five years of operations. Depending on how long it takes your business to reach a break-even point, you may want to go out to ten years.
In addition to these financial projections, your financial section should include a discussion of your assumptions, an estimate of when your business will begin to turn a profit, key margins that you believe your business will achieve, etc. If your business is already up and running, you should include the past three years of financials instead of projections. If you have less than three years of data, you may want to forecast a few years out as well.
Finally, you may want to include an appendix where you can share additional data. You may want to add a few news articles here that highlight how quickly the economy in your market is growing. You may have some news articles on your business itself. Perhaps you have financial statements for multiple business locations that would provide more detail about your business.
How Long Should It Be?
The length of a business plan may vary depending on the type of business that it is, whether or not the business is already operating and what the business plan is to be used for. Some businesses may need a lot of technical description in order to effectively communicate how they will operate — and others are more simple.
Businesses that are already operating will be expected to provide a lot more details about their business such as the kind of accounting software they use, where their company is physically located, pictures of products or facilities, actual financial results, etc.
If a company is simply trying to organize its business and is not looking for investors, they may be able to get away with less details in their plan — although they may seek to dive into greater detail than investors might need.
A typical start-up business plan should probably run about 15-20 pages, though depending on the circumstances mentioned above, it could run a little shorter or quite a bit longer.
Setting Yourself Apart
On a final note, if you’re going to start your own business, you are going pro — and you should act like it. By all means, make your business plan looks professional. It should go without saying, but carefully read and edit your plan several times before sharing it with outside parties.
You may want to consider developing a logo for your company if you don’t have one already. Use pictures of your company or the products that it sells to break up the text of the document and engage the reader.
Again, these may seem like minor details, but sometimes a business plan may be the primary document a bank underwriter might have to go on as he or she is evaluating the credit quality of a loan application.
Having these details in place helps to communicate that you are serious about your business and that your business plan was not just something that you threw together a few days before because you needed it for a loan application. Know your business (or research it well), be as detailed as possible and present your company professionally, and you will have a solid business plan.
For a business plan template, visit Finance Ocean.
Or try taking a finance quiz!