Creating a Business Plan

Creating a Business Plan

So you have an idea for the “next big thing”, and now all you need to do is get it down on paper. You have just one teensy tiny problem; you don’t know where to start.
Don’t worry, I’m here to help! Let’s review everything that you need to start creating your business plan.

Wait! Why do I even need a Business Plan?

Whether you’re starting a small business or you’re expanding your existing one, you can’t maximize your efficiency without a business plan.

A business plan forces you to understand all aspects of your business, and helps you make predictions about the future of your business. When you know where your business is going, achieving your goals becomes just so much easier.

A solid Business Plan will help you to:

  1. Discover and create new ideas
  2. Devise an action plan
  3. Help you in decision making
  4. Help you in presenting your business to investors
  5. Help you in generating capital for your business

Studies conducted on the efficiency of Business Plans have even claimed that having written a formal plan can double the chances of success for a business.

What do I do to Create my Business Plan?

Before you start working, have a look at the following infographic by Washington State University that presents guidelines for aspiring entrepreneurs to impress their potential investors. This will give you a basic idea of what you’re up against.

10 Keys to a Successful Business Plan

Now that you have an idea of the importance of creating a business plan, let’s look into the process in detail.

7 Essentials of a Business Plan

A traditional business plan is usually comprised of 7 main elements:

  1. Executive Summary
  2. Business Description
  3. Market Strategies
  4. Competitive Analysis
  5. Design and Development Plan
  6. Operations and Management Plan
  7. Financial Factors

Executive Summary

Your formal business plan is going to start from the executive summary. The executive summary highlights what you want from your business. It is one of the most important parts of your business plan, and it needs to be on the first page following your title.

In the Executive Summary, clearly state what you’re asking for. After reading it, the reader should fully understand what your business is all about.

An Executive Summary needs to be clear, concise and professional. For this statement, half a page is enough. You can make it longer too depending upon how complicated your plan may be, but as a general rule the executive summary of a business plan is kept short, just like a loan application.

The executive summary is a synopsis of the business plan. The key elements it includes are:

Business Concept

In this section, summarize the whole concept of your business. What are you trying to sell? Why do you want to sell those particular products or services? Who will you be selling it to, and what is going to be the competitive advantage of your business?

Financial Features

This is going to be the financial summary of your business. Include all important financial points here such as revenues, profits, ROI, and cash flows.

Financial Requirements

This is important for acquiring capital to start your business. Clearly state how much capital is going to be required for starting or expanding your business. Define further how you are going to use the capital (and equity if any) that will be invested in your business.

If you want to obtain a loan on security rather than on equity, then the source of the collateral also needs to be specified.

Current Business Position

All relevant information about the company should be stated here. Include information like the legal form of operation of your business, when was it started, who are the key personnel and principal owners.

Remember to keep it compact and concise. If your executive summary is 8 pages long then nobody is going to want to read it. No matter how good your idea may be, if it takes you 8 pages to simply write its executive summary, then it is clear that you are indecisive and this will likely scare away potential investors. Make it as short, and as meaningful as possible.

Try to construct your executive summary in such a way that your investors need nothing but a glance at it to know your goals, needs, and capabilities.

Business Description

Industry Description

The business description usually starts from a brief description of the industry. When you describe the industry, be sure to describe the present scenario and the future prospects. Discuss any new developments in the industry that may impact your business. All data mentioned here should be supported by facts collected from reliable sources.

Be sure to include footnote references so that your investors can verify the information if they want to. Sources are important for your credibility; if you seek to borrow funds, the investors will want to know how reliable your data is. They won’t risk their money on opinions and assumptions.

Business Structure

When you’re describing your business, start from the nature of operations of your business i.e. retail, wholesale, manufacturing, or service oriented. You also need to state whether your business is new or already established.

Legal Form

Next you need to reiterate your legal form once again. Declare whether your business is a corporation, a partnership, or sole proprietorship. Who are the principles and what will they bring to the business?

Market Description

In the market description, you need to define your target market, and your distribution process. Who are you going to be selling to, and how will your product be distributed? You also need to describe how you will be promoting your product to your target market.

Product or Service Description

Once you have described the market, now it’s time to shift the spotlight towards your product.

Write a detailed product description. Your product description should give a complete idea of your intentions to the readers. It should focus upon the unique points of your product that make it different from other products in the market. Define the competitive edge that you’ll have over others in the market by making this product.

How will your business generate profit?

This is the part where you turn into the traditional capitalist and ask yourself how you’re going to profit from your business. Ask yourself how you can make profit from your idea, and convey the answer you get to your potential investors through your business plan.

Explain factors that you think are going to make your business profitable such as market demand, great location, state-of-the-art technology, and elite workforce.

If you’re planning to use your business plan for receiving funding, then explain why the added debt or equity is going to make your business more profitable. Will that money be used to develop something new? Will it be used for expansion? You need to provide a detailed explanation to your investors. You need to show them why your business will be profitable.

Potential investors or lenders are going to want to know how successful your business can be. Mention factors that may contribute to your success here briefly, as they’ll be explained in detail later. Also talk about the key people that you have talked to in this regard, and what they had to say on the subject. If you have reputable people vouching for you or your idea, that can definitely help sway lenders and investors.

If your business plan isn’t too complex, then describe the industry and the product in one paragraph each, followed by three to four paragraphs on the business idea and success factors.

I recommend using a short business description because the potential lender is going to have a lot of documents to read. He’ll have a short attention span. If your business description is too long then he may get bored and drop your project altogether.

Market Strategies

Market strategies are all about the marketing activities of your business. This section is basically a detailed explanation of the four basic Ps of marketing:

  1. Product
  2. Price
  3. Place
  4. Promotion

Before sitting down to write this part of your business plan, you’ll need to perform a detailed research of your market. You’ll need to do a comparative analysis of the market of your product, and then define your target market segment; select where you want to carry out promotional activities and launch your product.

In short, in this section you’ll be telling your lenders what your target market is, and how you will position and price your product to maximize your market share.

Competitive Analysis

At this stage you’ll be performing a complete analysis of the strengths and weaknesses of your competitors in the market. You’ll discuss how you can exploit their weaknesses, and devise strategies that are going to give you a distinct advantage.

You can also propose what kind of barriers you plan to impose in the market to prevent new competitors from entering.

By analyzing your competition, you have to create a marketing strategy that helps you generate a skill which your competitors lack. This will give your company an enduring and distinct competitive advantage that you may be able to use to get an investment.

Design and Development Plan

The purpose of this section is to provide a detailed description of the design and development plan to investors. You need to design a development plan for your product, set procedures, and assess costs for your plan.

Product Development

The product development section should focus on both the technical as well as the marketing aspect of the product. You need to create a focused outline on which your development team can work and achieve your desired outcome. For example, if you want to develop a low cost but fuel-efficient car, you product development goal can be “develop a car that consumes less fuel, but is manufactured using low cost raw material so it costs less than existing models”.

Set Procedures

Once you know what kind of product you want to develop, you need to develop procedures for your development plan. You’ll define who will perform what tasks, as well as how resources are going to be allocated. Also describe what task is going to be performed when and how it is going to be performed.

Scheduling and Costs

Scheduling defines all the stages that your product must pass through before customer delivery. It should be connected to your development budget so all expenses that are incurred during the process can be tracked. Its main purpose is to establish a time frame for all work assignments and place them side-by-side with all the stages through which a product must pass.

Development Budget

You will then need to create your development budget. In this budget you will be taking into account all the expenses that you will be incurring in bringing your product from a prototype through to production.

Assessing Risks

Finally, you should identify the risks involved in developing a product, and you should develop a plan to tackle each one of them

Operations and Management Plan

The Operations and Management Plan describes just how the business will function continuously in terms of management and operation. There are two main things that need to be determined at this stage.

  1. Organizational Structure
  2. Capital Requirement

Organizational Structure

Defining the organizational structure is one of the most important parts of the business plan. It will provide a basis for all your operating expenses that in turn impact all your financial statements, which are scrutinized by all potential investors before they decide to invest in your business.

Given the parameters of your business, your organizational structure needs to be well defined, and based on a realistic framework.

Although different companies have different organizational structures based on their operations, most of the companies have the following departments:

  • Research and Development
  • Marketing
  • Administration
  • Production

These are very broad classification, and not every company will have these departments. Every business is different and it builds its structure based on its own needs. You should be doing the same for your business. The following four points can be useful in defining the structure of a business:

  1. Define your tasks using the broadest spectrum possible
  2. Organize the tasks into different departments
  3. Determine the type of people required for each job
  4. Define jobs, and how different tasks will be performed within departments to maximize revenue

The operations will outline the logistics of how responsibilities will be divided, which department will be performing what task, and how much capital will be required for the successful running of business operations.

Capital Requirement

You’ll need to be good at accounting for this section. Here you’ll calculate all the basic financial data that you require for running your business. The statements you make here are going to form the basis of your financial statements in the next section.

You’ll be calculating all your operating expenses, and adding them up in the operating expenses table. You’ll be accumulating all your sales expenses in the Cost of Goods Sold (COGS) statement, and you’ll need a capital requirement table to summarize the amount of money you think you’ll require for financing your business.

Financial Factors

Here you’ll give them the detail of all the financial forecasts relative to your product. You’ll describe all your revenues and expenses in detail and predict the profitability of your business.

Astute investors look to your financial statements to see if your company is worth their time or not.

There are three main financial statements that you need to be focusing on:

  1. Balance Sheet
  2. Income Statement
  3. Cash Flow Statement

These three statements show you different aspects of your finances, and they are highly interrelated. Changes in one of these will definitely induce changes in other statements. While you can add other statements if you like, it’s recommended that you stick with these three. These statements are enough to show the potential of your business.

Balance Sheet

A balance sheet is usually generated annually for a business. It gives an overview of the assets, liabilities and equity of the business. As it separates current assets from fixed ones, it makes it very easy for investors to calculate the liquidity of a company.

Income Statement

An income statement measures a company’s financial performance over a specific period. In layman terms, it is used to show how much the company earned or lost during a financial year. This is done by subtracting all expenses incurred in a period by the sales done in that period.

Cash Flow Statement

As the name suggests, the cash flow statement is used to determine the flow of cash in an organization. It shows how changes in balance sheet and income statement affect the flow of cash in an organization.

These three statements combined together form the lifeblood of an organization. One look at them can be an indicator of how well an organization is doing.

Sample Business Plans

If you’re anything like me, you have trouble visualizing something without seeing an example first.  Well, you’re in luck.  Here’s some great sample business plans:

  1. http://www.bplans.com/sample_business_plans.php
  2. http://www.liveplan.com/features/samples_and_examples
  3. http://www.scotiabank.com/ca/en/0,,981,00.html

Now you’re ready to start working on your first plan. Things may seem intimidating at first, but once you get started, all obstacles will take care of themselves. Don’t hesitate, if you have an idea in mind then start working on your business plan as soon as possible, before someone else beats you to it 😉

Memuna Umber

Memuna is an MBA student who loves learning about business, entrepreneurship, and society. She brings a lot of business and finance experience to the StarterPad team.