[by Glen Greene - freelance writer]
WHAT TO EXPECT
For any business to be successful, it must be started and operated with a clear understanding of its customers, its internal strengths, its competitive environment, and a vision of how it will evolve to compete in the future. A business also needs money to start, to operate, and to grow. By expending the effort to develop a comprehensive business plan, you will have a powerful tool. Your business plan is the roadmap for your company. It clearly states where you are, how you got there, and how you plan to proceed.
This module steps you through the process of developing a comprehensive business plan. Although businesses may vary with regard to the products or services they offer, there are specific elements that a potential investor will look for in any business plan. Therefore, every well thought-out business plan includes a description of products and services, a competitive analysis, a marketing plan, a management plan, and a financial plan. Your business plan will provide you--and potential investors or lenders--with a clear understanding of your objectives, strategies, and financial viability.
I. What You Should Know Before Getting Started.
A. Why Write A Business Plan?
B. Tips For Creating A Good Business Plan
C. Who Should Write Your Business Plan?
D. What Lenders Look For
II. Process For Developing Your Business Plan
1. Begin The Plan With A Summary
2. Describe Your Company
3. Analyze Your Market And Determine Your Strategy
4. Describe Your Product/Service And How They Are Produced
5. Describe Your Management Organization
6. Describe Your Operations
7. Develop Your Financial Forecast
8. Determine Your Proposed Financing
9. Outline Your Plan(s) For The Future
10. Other Considerations
III. Your Finished Plan
IV. Your Plan As A Roadmap
A. WHY WRITE A BUSINESS PLAN?
Business plans are prepared as a necessary part of raising capital from potential investors, bankers and other lenders. It is an essential document when taking your business public or selling all or part of a company. In fact, without one, soliciting a bank for funds is pointless. To lenders or potential investors, it not only provides information and reveals an evaluation of your venture's feasibility, but also reflects your management abilities. An analytical, objective business plan convinces lenders that you are capable, organized and prepared. One that is poorly researched, or makes unsupported assumptions shows that you are inexperienced and in their eyes...reckless. Lenders receive an enormous amount of proposals and usually don't spend much time with them. That means your plan has only a few minutes to make a good impression, and must stand alone as an initial sales tool. Do the best job you can, and let it favorably represent you as the capable, competent business owner that you are.
Preparing a business plan will take time, but it is well worth your investment in the long run. Not only will this document provide valuable information to outside investors and lenders, it will lay out your game plan from which to operate your firm. This is, by far, the most important use for your business plan. It will become your blueprint and direct you towards achieving your overall business goals. A typical entrepreneur has a good business idea but is rarely qualified in all areas of running a business. Good business plans are comprehensive, well thought-out documents that provide the basis for entrepreneurs to make sound business decisions. Whatever the intended use of your business plan, make sure it's thorough, accurate, and backs up all your claims with facts.
B. TIPS FOR CREATING A GOOD BUSINESS PLAN
The following are some pointers to consider before creating your business plan:
C. WHO SHOULD WRITE YOUR BUSINESS PLAN?
The only right answer is--YOU! You may be persuaded by professional advisors that you need their services or maybe the software they peddle to produce an effective business plan. However, the truth is you will be doing most of the work with or without their help. A business plan is 75% research and 25% format. They can help you with your format, putting your information into a readable plan, but you will have to provide the research that makes up the bulk of the plan. The same is true with this module--it'll show you what needs to go into a comprehensive business plan and how the plan should be organized for maximum readability, but you will need to do the majority of the work. It's a lot of work to be sure, but is an important investment towards your business success.
D. WHAT LENDERS LOOK FOR
Following are some key questions that investors and lenders will be looking to answer. Keep them in mind when writing your business plan.
Following, you will find a thorough discussion on what can be included in a business plan, but understand ALL OF THIS INFORMATION DOES NOT NEED TO BE IN YOUR PLAN. What goes into your plan depends upon your specific business and the information required by your lenders and investors. If you can, you may want to check with your lender or potential investors beforehand to determine their specific requirements.
This section presents the steps for developing your business plan. This is the basic information that you will be required to provide to lenders and investors and is the minimum you'll need to operate your business effectively. Read each step, and complete the tasks outlined in each. Then, depending upon the nature of your business, you may want to add further information that may prove valuable to potential investors and lenders. Where possible, examples will be included to provide you with further clarification on what you should supply. Following is a ten step process you can use to develop your business plan.
Step 1. Begin the Plan with a Summary
Step 2. Describe Your Company--Its Business, Goals and Objectives
Step 3. Analyze Your Market and Determine Your Marketing Strategy
Step 4. Describe Your Product/Service and How They Are Produced
Step 5. Describe Your Management Organization
Step 6. Describe Your Operations
Step 7. Summarize Your Financial Needs
Step 8. Determine Your Proposed Financing
Step 9. Outline Your Plan(s) for the Future
Step 10. Other Considerations
These steps are presented in a logical order for discussion. Use your judgment on how you work through the process. You may be able to perform many of the steps simultaneously. Use the checklists provided in each step to ensure that your information is complete.
Most investors and lenders are inundated with potential opportunities, so provide a focused and brief summary--about one or two pages in length. Your summary will give them a first impression of whether your business is worth further scrutiny. A business plan is unique to your company and, accordingly, the approach used and structure of plans vary considerably. Regardless of form, however, certain basic questions should be addressed considering your plan. They are:
____ Cover Sheet: including your company name, owner's name(s), business address, phone number
____ Business Description: Briefly describe the business that you are in. For instance, is your business in high tech computer imaging, or are you a developer of shopping malls? If you have an existing company, describe your company's history, highlighting your successes/achievements that might be pertinent. Also, include your major short-term and long-term goals and objectives with the strategy and tactics that will enable you to achieve them.
____ Describe the purpose of your business plan. Are you seeking financing from lenders and investors or are you using it to attract potential managers for your business?
____ Describe your product/service sufficiently so that someone reasonably familiar with the technology or the industry can determine whether it is viable and what stage of development it's in--concept, prototype, or market-ready. Discuss the extent of invention or development required for successful commercialization of the product/service. Highlight the track record of key personnel who have completed similar developments. Explain why your product/service is better than what exists. Don't forget to include proprietary or any other sustainable competitive advantage that you may have. For instance, do you own any patents? Does your location restrict entry of additional competitors?
____ Describe the five or six critical factors that will make a difference in your success. Also, discuss your most vulnerable spot, what would happen if it were exposed, and what you will do to guard against it. For example, if you are a high tech firm in the computer imaging business, potential factors might be key R&D personnel, a highly trained workforce, state-of-the art imaging equipment, and a strategic alliance with a reputable technical school.
____ Customers: List your present major customers and describe your market potential. You'll want to highlight the results of your market analysis here.
____ Financial Picture: Describe your financial forecasts and explain how they were determined. Include relevant assumptions such as projected market share, market potential, market penetration, etc. State your desired financing and show how the funds will be allocated. Show when and how the money will be paid back.
It is critical that you present a thorough picture of your company --a description of your business with your key goals and objectives.
____ Describe your business. Include an explanation of the business that you are in. While this may sound obvious, it really isn't. For instance, if you manufacture catalytic converters, are you in the pollution control business or the auto supply business? Different answers to that question can mean different businesses altogether. When you decide on the type of business that you're in, you'll know the types of product and services you need to provide, the market that you should target, the competitors that you are up against.
Also include your company history, current business conditions, industry trends, and what makes you unique. To help you with your business description, ask yourself the following questions:
An example of a business description is:
Pets with Pizzazz, Inc. was established in 1989 to supply specialty collars for the pet supply industry. The premium pet supply market experienced strong growth over the past five years due, in part, to the trend that couples are delaying starting families and are opting for pets instead. Many of these are dual income couples and are choosing to spend significant amounts on their pets. Their pets are their children. Pets with Pizzazz has experienced an average annual growth rate of 30% over the past five years, maintaining its competitive edge through customer service excellence, an innovative supply system, and a patented fastener for its premium collars. The company is currently located in a 10,000 square foot building which houses its collar assembly operation.
Pets with Pizzazz will be THE premium pet supply company. In the next 1-2 years, we plan to double market share from 16% to 32% for our premium collars. By the year 2000 we plan to offer a broader product line for the premium market including specialty dishes, bowls, beds, and houses. We plan to do that by....
It is critical that you understand your market. A good product is not enough to guarantee marketing success. For example, you may make the best buggy whips in the world, but this doesn't matter if there aren't customers to buy your product. This is one of the most important sections of your business plan. It will be scrutinized carefully, therefore, your market analysis should be as specific as possible, focusing on believable, reliable, achievable projections. You may want to refer other modules to help you with this step:
You may want to introduce this section with a one page summary highlighting the key elements of your marketing plan. Follow your summary with the information that will support this page. Finally, include additional information and evidence that you feel is necessary in the appendix.
____ Potential Market: This is where you present a picture of your customers. Convey your broad understanding by describing relevant characteristics such as their demographic breakdown, their buying habits, their interests, their special needs, and their geographic location. Explain how you did your market research--the resources you used, the types of studies you conducted, the focus groups you led. Most of the information that you need here can be found at your library, from the U.S. Small Business Administration, U.S. Department of Commerce, and the Census Bureau. See the resources section for information on how to contact these groups.
Questions you should consider in describing your potential market are:
____ Sales: Include your forecasted sales volume. What do you expect to achieve in the next three years? Make sure you specify sales in dollars. If you want to include units, that's fine, but don't forget to translate units into sales dollars. Do you experience any seasonality effects? Do any of your customers account for a significant portion of sales? Are there any other unique considerations you should include?
Since cost of sales is usually a company's largest expenditure, it's important to forecast it realistically. Costs should be divided among materials, labor and overhead with special attention provided to the most significant cost components. For instance, in high tech companies specialty materials and high-priced labor are frequently significant costs.
____ Competitive Analysis: Now consider your competitors, how they market their products, and why people buy from them. Determine their strengths and weaknesses, their position in the marketplace, and their status (growing, maintaining, scaling back). Investors sense danger when an entrepreneur suggests there is no competition for his product/service. In fact, there are two kinds of competition of which you should be aware--direct and indirect. Direct competition offers the same product/service to the same market; indirect competition offers similar products/services, only to a different market. You'll need to include a discussion on both. As you evaluate your competition, you'll want to include:
____ Market Feasibility: State why the market will support your business. Include trends in your industry, an economic analysis, and "optimistic-pessimistic-realistic" scenarios. Again, you can find this information at your library. Start with The Encyclopedia of Business Information Sources published by Gale Research Company for manuals, publications, trade associations, and directories on more than 1200 industries and businesses. Also include any anticipated impact that laws and regulations may have on the market.
____ Marketing Strategy: Explain how you will sell your product(s), and how you will move into new markets. Identify the specific marketing techniques you plan to use. For instance:
Describe your product/service in layman's terms. Explain any niche you may have. Discuss your competitive advantage--why people will choose your product over your competitors', the benefits of your product/service, and how you will sustain your edge.
____ Product Lines: Detail the features and benefits of your product/service. Remember, features are the characteristics of a product or service that automatically comes with it. The benefit is the result your customer enjoys--in other words, what he gets from it. For instance, a telephone company may offer an automatic switching line to re-route calls to another location in the case of a power failure. That's the feature. The benefit to the customer is that potential sales will not be lost.
Explain how you acquire, produce or develop your offerings. Do you manufacture all of your products or do you purchase some from other vendors? Do you utilize contract manufacturers? Is your service provided internally or do contract employees perform a portion of them? If your business is manufacturing or retail, list your suppliers, average inventory costs, and timing of deliveries.
____ Unique Features: Explain your competitive advantage. What makes your product/service better, faster, more durable, etc.? Include any proprietary features. Do you have any patents, copyrights, trademarks? Include evidence of these in your appendix. Also, describe how you are going to sustain your competitive advantage.
Describe your business structure. Also, include a discussion of your management team in this section. List officers and/or principal owner/managers, and detail your management team's responsibilities and qualifications. Referring to the module on How to...Determine The Legal Structure Of Your Business may help you with this step. Make sure you include:
____ Legal Structure: If you are an existing business, describe your business structure. If you're just starting out, your options include sole proprietorship, general partnership and joint venture, limited partnership, corporation, S corporation and limited liability corporation. Consult with your accountant and lawyer to determine the best approach for structuring your business.
____ Management team: Show that you have the talent in place to develop your product/service, sell it, and manage the financials. Explain your hiring criteria, training plan, salary and benefits structure, and your system for performance evaluation. Financiers invest in people especially people who have run or are likely to run successful operations. Potential investors and lenders will look closely at the members of your management team. Your team should have experience and talents in the most important functions of your business, whether it's research and development, sales and marketing, manufacturing or finance. You may want to include an organizational chart to demonstrate functional interactions.
____ Resumes: Attach detailed resumes for all key personnel in an appendix.
____ Board of Directors: If you have a board, include their names and place of employment. If you have an advisory board, include them, too.
Describe how you plan to operate your business. Go into detail about location, facilities, equipment, raw materials and suppliers, workforce, hours of operation, and methods of record keeping. Make sure you include:
____ Manufacturing or Service Operations: List your basic process for producing your product or service. You may want to use a flowchart to explain it.
____ Location and Facilities: Describe the advantages and disadvantages. Location and facilities may be crucial to projecting your business image. They can provide you with a competitive advantage (e.g., modern, state-of-the-art facility, a strategic location). Provide plans of the exterior and interior if your customers will visit your facilities, or if you plan to manufacture your products.
____ Equipment: List the equipment necessary for producing your product. Include leasing arrangements, service agreements, and warranties.
____ Raw Materials and Suppliers: List the materials that go into producing you product and who will provide them to you. The reputation of your suppliers may be important to potential investors and lenders. Are any special considerations necessary for storage?
____ Staffing analysis: Your workforce projections should represent a head count by function or department for a specified time period. This analysis not only will allow you to better plan your hiring, but will also demonstrate to potential investors the sensitivity of your plans to the hiring of key personnel. Include job descriptions for all functions in your appendix.
Most forms of business financing require forecasts. These forecasts serve to demonstrate not only the need for funds but also the potential future value of equity investments or debt repayment. Developing the proper financial forecasts is, therefore, a critical factor in obtaining capital for your business. It may be the most crucial task in determining the viability of your business. You will need to:
Your forecast should cover a minimum of three years--a period in which realistic assumptions can be made without much speculation. Your forecast should be broken out monthly, at least until you achieve positive cash flow. This is important because an overall annual cash flow total could hide some cyclical problems that you have and should provide for in your financial plan.
Referring to other modules may help you with this step:
How to...Prepare A Cash Budget
How to...Prepare A Cash Flow Statement
How to...Prepare A Profit And Loss Statement
How to...Analyze Profitability
How to...Prepare And Analyze A Balance Sheet
How to...Analyze Your Business Using Financial Ratios
Be sure to include:
____ Operating Profit and Loss Statements: Project revenues and expenses out on a month-to-month basis for the first year, and on a yearly basis for the next three years of operation. All expense categories should be reflected in your financial forecasts. Although they are frequently subjective determinations, revenues and expenses should be tied to historical numbers and expected projections. Key financial ratios should be compared to industry norms.
____ Cash Flow Statements: Project all cash receipts and disbursements out on a month-to-month basis for each of the next three years. Cash flow analysis is critical to any capital investment and the overall survival of the enterprise.
____ Balance Sheets: Project your assets, liabilities, and retained earnings (capital) at the end of the first, second and third years. Because your balance sheet performance has an impact on your cash flow (current assets and current liabilities), it will be a key concern to potential investors. The balance sheet must be utilized the same assumptions as the profit and loss (or income) statement. Again, you may want to compare some financial ratios to industry norms.
____ Break-even Analysis: A break-even analysis will provide you the information on how much you need to sell to cover costs. This will be done to determine the level of sales in which a new product/service will start paying for itself. The formula for determining your break-even is:
Break-even =total fixed costs/(selling price - variable cost per unit)
For instance, if Pets with Pizzazz has a fixed cost base of $110,000, its variable costs per collar sold is $5, and each collar sells for an average of $25, then its break even point is 5,500 collars.
Break-even = $110,000/($25 - $5) = 5,500 collars
____ Notes describing all assumptions made in the forecast. Provide a summary of all significant assumptions used in forecasts including changes in customer base, price increases, margin improvements, cost reductions, capital expenditures, etc.
When properly prepared, financial forecasts can increase the probability of obtaining capital and can act as a tool to measure and evaluate actual performance. Prepared improperly, they seriously deteriorate your chances of obtaining financing and increase your risk of not managing the business properly from a financial perspective.
Financial Forecast or Operating Budget? There is a distinction between a budget and a financial forecast. A budget is a company's planned course of operating during a period and generally is structured to motivate performance as well as communicate planning strategy. Budgets may or may not factor in the negative effects of all significant contingencies and uncertainties. The budget is prepared as part of the planning process, but normally is not an item for external distribution.
A financial forecast, on the other hand, is management's best estimate of the company's most likely results of operations and financial position in the forecast period. A good financial forecast is realistic, considers achievable opportunities and recognizes all cost factors and contingencies. More importantly, the financial forecast covers a much broader financial perspective--the impact assets, liabilities, income, expenses, and cash sources and uses. It is this comprehensive, realistic forecast that is used in a business plan, not the budget.
If you are looking for funds, you'll need to include this section. If the purpose of your business plan is not to secure funds, you can omit this altogether. Based on your financial forecast, determine how much money you require, when you need the money, how you will use the money, and how you will pay it back. You should distinguish your capital request in either of three ways--working capital financing, growth capital financing, and equity capital financing. Working capital financing is generally a short-term loan for normal business expenses to be paid back within a year through cash generated by the business. Growth capital financing is needed to finance the growth of your business, usually requiring longer term financing, and must be paid utilizing the profits of the growth it financed. Finally, equity capital financing is obtained from investors for permanent needs and paid back through dividends, capital gains, or a share of the business.
When seeking financing, make sure you include:
____ Summary of Financial Needs: State why you are seeking funds, how much you need to borrow, and how much you, or others, have to invest. For example, a summary of financial needs could look something like this:
I. Pets with Pizzazz is seeking a loan to increase growth capital for the following:
A. Additional equipment to meet the increased market
demand for premium collars.
B. Hiring of personnel to assemble additional collars.
II. Funds needed are $50,000. Please see "Loan Fund Dispersal Statement" for distribution of funds and supporting information.
____ Loan Fund Dispersal Statement: First, you'll need to explain how you will use the funds, then back up your need with specifics. An example might be:
I. Dispersal of Loan Funds
Pets with Pizzazz will use loan funds of $50,000 to add resources needed for its doubling of revenues due to market share growth. This will include purchasing one piece of equipment and the hiring and training of two additional people to run that piece of equipment.
II. Back-up Statement
a. The piece of equipment needed is the Super Duper
Collar Assembler ($27,000).
b. Training will be provided by the manufacturer on his premises in Chicago, IL (2 @ $3,000 for $6,000).
d. The remaining $17,000 will be used to pay the salaries for the two new employees during the quarter that they become trained and skilled at running the new machine.
e. Purchase of the equipment and the hiring of the two people will increase production by 100% and decrease unit cost by 25%. This will yield a profit sufficient to repay the loan plus interest over the next three years. Please see pages 15 and 23 for back-up of these numbers.
____ Collateral: Describe what you will offer as security such as accounts receivable, inventory, marketable securities and fixed assets.
____ Repayment Terms: Describe your requested payment terms.
An important point to remember--whether you're planning a new business or expanding an existing business--is that you must show that you have the potential for continued profitability. Be sure to include:
____ Start-up Plan: Present the tasks involved, their priorities, how long each task will take, and who is responsible for each task. Also, include any "deliverables" for each task. Extend your plan through at least the first year.
____ Three Year Plan: Again, provide the detail listed above in the start-up plan. Project how your business will compete in years three to five. Much of this work has been done in the financial forecast, but you will want to support it with a clear explanation.
- Table of Contents--Make sure you include a table of contents in your business plan, especially if its length exceeds more than ten pages. It should appear after your summary but before your company description. Although it is one of the first pages in your business plan, it will be one of the last that you create. Now it is fairly easy to create your table of contents if you are using a popular word-processing software package. It's worth the extra few minutes to create, especially when people, who are not as familiar with your business plan as you, must present it for consideration.
- Addendum of Supporting Documents--There are some documents that don't warrant inclusion in the body of the plan, but are important enough to offer as support. They are:
* Presentation--For internal purposes, bind your business plan in a three-ring notebook. Since it is your working copy and intended to be updated frequently, this format will make it easier to do so. For your business plan that will be circulated externally to lenders and investors, aim for a professional look. There are a variety of appropriate folders available from office supply stores or mail order houses that you can purchase. You can also take a computer disk with your business plan or a clean copy of your business plan to your local printer and have them copy and bind it for you. You don't need to spend a lot of money here. In fact, it could even leave an unfavorable impression on prospective lenders and investors if you do.
* Prospective reviewers--Your business plan should not be a mass mailing piece. You should be very selective with the people you choose to read your plan. Afterall, you've put a lot of sweat equity into the plan so you don't want it to fall into the wrong hands to be used by another aspiring entrepreneur. Keep track of all outstanding business plans, and request the return of those from lenders and investors that decide against you.
The business plan should be used to guide and evaluate the direction and actual operating results of the company. If, after completing the business plan, it is tossed in a drawer because it's out-of-date shortly after it was prepared, you've missed out on the real value of the business plan--its usefulness as a management tool. But to get the full value of all your hard work, you'll have to keep it updated. Changes do occur. You can count on it. Changes within your company, changes with your customers, changes in the business environment all can render your business plan ineffective if you don't constantly update it.
Entrepreneurs and other business owners who sit down to prepare an initial business plan are surprised to discover that the process is really a corporate self-appraisal and sometimes even a personal self-appraisal. It is not an easy task by any strength of the imagination. It is this assessment aspect of business planning that makes the process so important for any ongoing operation to perform on a regular basis, even when additional financing is not a factor.
The corporate self-appraisal may be performed in conjunction with establishing an operations budget for the coming year. In conducting your corporate self-appraisal, ask yourself the following questions:
As a result of your management assessment, the objectives of your company may be more clearly defined and stated. Also, the appraisal and planning process should put you in a position to better summarize strategies and tactics that will enable you to reach your objectives. In determining your operating strategies, consider the following with respect to your objectives:
1. Small Business Management: Planning and Operation,
by William D. Hailes, Jr., and Raymond T. Hubbard. New York: Van
Nostrand Reinhold, 1983.
2. Business Services Directory: Office of Business Liaison, U.S. Department of Commerce, Washington, D.C. 20230
3. Anatomy of a Business Plan, Linda Pinson and Jerry Jinnett, Dearborn Publishing Co., 1993.
4. Starting Up Your Own Business--Expert Advice from the U.S. Small Business Administration, compiled by Dr. G. Howard Poteet, Blue Ridge Summit, PA, The Liberty Hall Press, 1991.
* Professional Associations
1. American Marketing Association--250 S. Wacker Dr.,
Suite 200, Chicago, IL, 60606 (312)648-0536
2. National Federation of Independent Businesses--150 W. 20th Ave., San Mateo, CA 94403 (415)341-7441 or 600 Maryland Ave., SW, Suite 700, Washington, DC 20024 (202)554-9000.
3. National Association of Women Business Owners (NAWBO)--600 South Federal St., Suite 500, Chicago, IL 60605 (312)922-0465.
4. International Council for Small Business and the US Association for Small Business and Entrepreneurs--905 University Ave., Room 203, Madison, WI 53715 (608)262-9982.
* Other Resources
1. U.S. Department of Commerce--14th Street and
Constitution Ave, NW, Washington, DC 20230 (202)377-2000
2. U.S. Small Business Administration--1441 L Street NW, Washington, DC 20005 (800)368-5855.