A business plan describes your idea in detail, incorporating all your planning and research. You can organize your thoughts and ideas into one place, and plan out your finances into one document that will be used to communcate your idea to others.
It is also a benefit for you to put your ideas down on paper, as you will often see adjustments you need to make prior to commencing. By writing out your plan you may uncover deficiencies in your business model. You can organize your thoughts and ideas into one place, and plan out your finances.
Remember, your business plan is by no means a finished product. It is a living document. It can be changed and adapted as much as you need to in order to tailor it to your business appropriately. If you want to look a more reasons why you need a business plan, here are 15 more reasons you need a business plan.
Often the process of writing the plan is more important than the finished product, as it helps you as the entrepreneur understand every aspect of the business in more detail, which helps you become a better business owner.
There are a few tips to writing a good business plan.
To start, keep an eye on the spelling and grammar in your plan. There is no excuse for a poorly edited plan. Have someone else proofread the plan to make sure it is free of simple errors. Investors will not take you seriously if you have a plan full of distracting mistakes.
Second the tone or style of the document is also important. Try to aim for a plan that is written in a voice that is confident, crisp, and relatively formal. Investors will be turned off right away if you plan comes off as sloppy, arrogant, or confusing.
Third investors will see right though plans that seems too optimistic or simplistic . Try to be as realistic as you can with your writing, and disclose any assumptions you have used and try to base the plan on relevant facts not hopes. The last thing you want to do is disappoint investors, and pleasantly surprising them is better.
You must also strive to find a balance between a plan that is too vague, and one that is too detailed. Write the plan so that it provides enough information so that the reader knows enough to want to invest, but not too much information so that the plan is too long or boring. Make sure that you are explaining the important points properly. You need to include enough information in the plan that someone who is seeing it for the first time can comprehend your ideas. A good range for length would be a 2-3 page executive summary, with 10-20 pages for the rest of the plan. You can, and should, include important appendices, such as charts or graphs, which are not included in the page limits. Always make sure that the appendices that you include are relevant.
Furthermore, make sure you have done the appropriate research. Too little research, or using incorrect information can be a deal breaker for investors upon reading your plan. You need to have a thorough understanding of your competitors, industry, consumers, and market. Investors and bankers are not experts in every industry, and it your job to provide them with information that convinces them that they should invest. It is critical that you can answer questions that investors may ask you during your presentation. Not only are they investing in your business, but they are also investing in you. They need to know that you are knowledgeable about your business in all aspects.
Another common mistake is to leave out weaknesses to make your plan seem better. Not only will investors see right though this façade, but it makes you seem that you haven’t done the proper research. Don’t try to be dishonest and shady with the plan, it won’t get you anywhere.
The financial section of your business plan is very important and needs to be accurate. Do not try to gloss over the fact that you may have extensive start up costs, after all, you want money from these investors. Do your proper research and find out how much you really need to start, and write in these figures accordingly. Stay away from having unrealistic profit projections. This boils down to having an accurate sales forecast, which will be outlined in the financial forecasts part of this explanation.
The components of a business plan usually include sections for an executive summary, business strategy, marketing strategy, operational plan, SWOT analysis, human resources plan, social responsibility strategy, and financial forecasts.
EXECUTIVE SUMMARY
This is by far the most important part of the entire plan. It is the first thing that investors, bankers, or venture capitalists will see. These first 2-3 pages will create an initial interest in your business. 80% of your efforts should be put into the executive summary. It outlines all of the important points about your business that make it a great investment opportunity. Include highlights from each of the sections to explain the basis of your business in a concentrated way. Although this section appears first in the plan, it should be written last by taking the best parts of each section to prepare the executive summary. Make sure the executive summary is interesting to read, well edited, and intriguing. Be sure that this section does not exceed 3 pages! Brevity and importance is key to having a great executive summary.
BUSINESS STRATEGY
Clearly, but concisely, describe what you business is all about. Include the following segments:
MARKETING STRATEGY
Describe the way you plan to promote and sell your products and services. There are 4 p’s when it comes to marketing—product, price, place, and promotion. Think about each pertaining to your company and describe your plans. For product, explain how your product or service meets a need for consumers. Why do they want it? How does it differ form competing products? How are you going to convey this message to your buyers?
Your pricing strategy will set out how much you plan to charge for your product or service. Keep in mind that price is an important part of the message to buyers: how much do you value this? Priced too cheaply, it seems lower quality. Priced too highly, buyers may be disappointed with the product or not be willing to pay that much for it.
The next component is place.. How are you going to get your product to the buyer? What will be your mode of sale? For example, does your product require a lot of thought and comparison to other products before a customer will buy it? In that case, it is wise to position your product where it can be compared to others, for example, toothpaste. All of the different kinds of toothpaste are positioned in the same section of the drugstore, right next to one another. On the other hand, is your product an impulse good? In other words, buyers don’t know they need it until they see it. In this case, you’d want to have lots of advertising and promotion, and place the item right at the checkout so they decide to buy it right before they leave. Examples of impulse goods include candy, novelties, and magazines.
Lastly, you need to think about promotion. This is how you will connect with your customers by conveying your message about the benefit of your product and it ultimate value. How will you advertise? There are many ways such as Internet, Bus stops, Flyers, Door to door,TV and Radio just to name a few. You need to decide which ones will best make contact with your target market of buyers. In this section you will determine how much money you will to allocate to advertising in your budget. Be sure to do your research into how much advertising costs and try to make informed predictions.
Construct a profile of your ideal customer in order to tailor your marketing plan to appeal to the interests of your target market. Consider demographic traits like age, location, income level, etc.
Solid market research is what will ultimately enable you to write an effective marketing section of your business plan. Take the time to property analyze your market so that you can properly plan in order to achieve the most success. Marketing basics and market research information are included in these two sections of the Chamber website both for Marketing Tips and Social Media Tutorial Videos.
OPERATIONAL STRATEGY
This is the section that will explain the day-to-day operation of the business. Include your hours of operation, your suppliers, etc. If you can, describe the process of how you will serve your customers from start to finish. Also include any quality control measures you plan to take. You will also need to describe your current facility, or if you aren’t operational yet, your ideal facility, including location, size, and special requirements. You can include any documents pertaining to day-to-day operations, such as a lease agreement for a space or supplier quotations that you have obtained. If you are able to present some concrete aspects of research you’ve completed or achievements you have obtained, it demonstrates to investors that you are working hard to get this going, especially if the business is not yet in operation. This section is also the place to highlight your plans for management. Goals for managers, how you plan to control inventory, manage accounts, and track customers. You will also describe your IT requirements for the business by describing what technological systems you will be using, such as computer software, to enhance your operational success.
SWOT ANALYSIS
SWOT stands for strengths, weaknesses, opportunities and threats. This is such an important part of business planning as it demonstrates that you are taking a realistic and careful review of the business. This is a good sign to banks and investors. Any investor knows that you are bound to have threats and weaknesses, no matter what you business is. It’s a huge mistake to sugar coat your weaknesses or gloss over them, because it undermines your credibility as an entrepreneur. It is far better to recognize risks and weaknesses, and be able to plan for them and explain your ideas for avoidance. This creates a solid plan that you can refer to when you are having operational challenges. Similarly, try not to overestimate your strengths is the plan. This is a red flag for investors, and they will have a real knowledge of business and operations and are bound to interpret you as somewhat of a dreamer, and possibly not realistic enough to invest in.
Conducting a SWOT analysis will allow you to make sound plans for the future of your business. Anticipating problems and having the information to deal with them can get you through the first challenging stages of business operation.
HUMAN RESOURCES PLAN
This deals with the management of employees, regarding training and retention. Include short term as well as long term plans. Try to write brief job descriptions for each position available, outlining who does what. Identify and describe the essential skills and requirements the person who fills each position must have. Give information about your employee-training program. Training is an important part of business operations. You want your employees to be ready to do their jobs properly as soon as possible. Making sure employees are trained properly can keep your business running smoothly. As the business owner, there is a lot to handle when running your own business, and if you are able to rely on your employees, you’ll have less to worry about. You can also have some peace of mind that your employees can take care of most of the daily operational aspects of the business, and you can focus on the financial aspects, dealing with suppliers, growth of the business, marketing and advertising, etc.
SOCIAL RESPONSIBILITY STRATEGY
Social responsibility is a growing trend in business, and it is important to keep in mind. Implementing good social and environmental plans is just doing good business, now and for the future. It can build a bad reputation for your business if you don’t act in a responsible way. There are a lot of consumers who value not only the quality of the products they buy, but also the ethics of the company they buy it from. This includes using recycled materials when possible, not doing unnecessary damage to the environment, not testing on animals, not utilizing child labor in impoverished countries, etc. discuss in this section ways your business honors ethical values and respects consumers, the environment, and your community. This can also be a source for competitive advantage, to be more ethically driven. Given the choice between two comparable products, buyers are likely to choose the product that comes from a responsible company. Also include any relevant certifications, such as fair trade certification, organic certification, etc.
FINANCIAL FORECASTS
This is the part where you put your plan into numbers. It is especially important in this section to be as accurate as possible. Don’t attempt to scale down your predicted costs just to make it look like a better idea on paper. All new businesses have startup costs. Furthermore, if you find yourself trying to mask all the costs and trying to cover up problems in the financials, maybe it’s not a financially viable idea. This might be a warning sign for you to look for ways to cut back costs or rework your business model.
Financial predictions should cover the next 2-5 years. You especially want to show when your company becomes profitable. Don’t worry if it takes some time in your plans before you reach this point, it is normal to not make a profit for the first 6 months to a year of operations. If it is taking 2+ years before your business becomes profitable, consider making some budgeting decisions that will allow you to achieve this sooner. The first year of your plans should be displayed in more detail, such as on a month-to-month basis. For the years following, it is acceptable to have quarterly forecasts. Include assumptions for both costs and revenues in order to give an accurate picture of your business.
Make sure you do your research as to how much your costs will be, the last thing you want to happen is to be without an answer when an investor has questions about your cash budget. Also, the more realistic your plan is, the more useful it is to you. Your plan can help you to spend cash accordingly, avoiding any unnecessary debt.
SALES FORECAST
You will need a sales forecast. This allows you to compare actual figures with your projected figures, to see how well you are operating compared to how you think you should be operating. Having this information can help you to tweak your business model to achieve the sales you wanted. Keeping track of sales information is also important as the business grows. This can help you to spot trends so that you can embrace them or make proactive decisions to change them in your favor. The key to calculating an accurate sales forecast is to break it down and do a bottom up forecast, as opposed to a top down forecast. A top down forecast is looking at the absolute maximum number of units that you could sell in a perfect world, and setting a percentage goal for your business. This method is inaccurate because you don’t take into consideration your capacity for sales. For example, a top down forecast for a lawnmower company would be that if there are over 34 million people in Canada, and if ¼ of them are homeowners, our market is 8.5 million people.
If we can capture 5% of our market and sell lawnmowers for 100$ each, we will make 42.5 million dollars. The inaccuracy in this method is obvious, however this is often the approach most business owners instinctively use. This method does not factor in the fact that not all of these houses have lawns, those people who have recently bought a new lawnmower and don’t need a new one, and most importantly the fact that the business likely does not have the capacity to sell that many lawnmowers, period. A bottom up forecast is much more realistic and accurate. An example of this method, using the lawnmower company, would be that the company could open 2 stores in the first year, each forecasted to sell 10 lawnmowers per day, each at 100 dollars. Forecasted yearly sales for this model is 720,000. There are some things to question in this model as well, such as how long are the stores open, how many days per year, are they seasonal, etc. The more you break down your sales forecast and the more details that you consider, the more realistic your forecast will be.
BREAKEVEN ANALYSIS
Calculating your breakeven point is important. How much money in sales do you need to achieve to cover your costs? The formula for the breakeven point is:
As an example, let’s say you are making lemonade. Your fixed costs are those costs that don’t change based on how many units you produce, like rent, insurance, salaries, etc. your fixed costs total 5,000. Lets assume that your price per glass of lemonade is 1.00. Your variable costs are the costs that change based on production, in this case lemons, sugar, water, cups, and ice. You work your variable cost per item out to be 0.50 per glass of lemonade. Therefore, your breakeven formula is 5,000/(1-0.5) = 10,000 dollars in sales to breakeven. Calculating the breakeven is important because it allows you to not only set a realistic sales goal to work toward, but also to see if this is a venture that you can afford. If your breakeven is too high, it will take too long to reach that level of sales.
This information can be displayed on a graph so that it is easy to interpret for investors. You can make your own with a program like excel, or you can use a website to generate one for you. Also highlight the volume of product you have to sell to breakeven, which is your breakeven sales figure divided by the price per item. Using the lemonade ecxample, the $20,000 in sales to breakeven works out to be 20,000 cups of lemonade. This figure may put a new perspective on your breakeven forecast and help you to see if this is achievable.
CASH FLOW STATEMENT
The next document that you need to prepare is a cash flow statement. It is important to note that this is very different from an income. A cash flow statement simply measures the cash coming into the business and cash going out of the business. Cash and profit are not the same thing. Your business can keep running even if you are not making a profit (for a certain period of time), however if you run out of cash, this is when you go bankrupt. Cash is the most liquid asset you can have, and you need it to pay bills and interest payments to keep your business running.
CASH FLOW STATEMENT
Without cash, your business can’t operate. This document shows the difference between cash in from sales and cash out that pays for wages, utilities and debt repayment. Analyzing this document will allow you to see if you are paying more than you are receiving, so that you are able to act appropriately to manage debt and pay your bills on time. Not only can you see how much cash you have on hand now, by using a cash flow statement you can predict cash flows in the future. When making predictions, avoid Projecting overly optimistic sales growth, as most businesses grow gradually. Keep in mind the seasonality of your business, and predict your sales accordingly throughout the year. If your business sells beach balls, you cant predict the same amount of sales in December as you do in June. Here’s an example of what a monthly cash flow statement looks like. Print it out and fill it in, or make your own using a program such as Microsoft Excel.
INCOME STATEMENT
An income statement provides a total of revenues and expenses. Subtract expenses from revenues to show a profit or loss for a certain period of time. Income statements tell you whether you are making money or not, and it is important that they are created frequently (quarterly or monthly) and accurately. To gain information as to what is helping and what is hurting you, break down the revenues/expenses into product/service categories to show you what makes money and what doesn’t. You can use bookkeeping software to help keep track of this information, or you can do it yourself to save money. Once your business grows and this takes up a lot of time, you may consider hiring a bookkeeper to help you. An accountant is a great resource to help you get started with income statements and other financial documents. Here is a sample income statement.
BALANCE SHEET
A balance sheet is a snapshot of the financial state of your business at a particular point in time. It outlines your assets, liabilities and equity and helps you know the net worth of your business. A balance sheet should list current assets such as accounts receivable, inventory you have on hand, and your cash balance. It should also list fixed assets such as property, equipment, furniture and fixtures, and vehicles. Current liabilities might include accounts payable and debts that you must pay within a year (suppliers & creditors). Long-term liabilities include long-term loans, like mortgages, equipment loans or loans you make to the business. Shareholder’s equity is made up of permanent funds put into the business yourself or from someone who invests in your business for a share of ownership (capital stock) and retained earnings. Here is an example of a balance sheet template.
