The business plan is a detailed roadmap for your business. It is a non-static, living, breathing document that should be updated regularly to reflect the course and strategy of the business. The business plan provides context and gives a holistic view of the entire business activity.
The business plan is both a planning tool for the entrepreneur and a tool for interacting with outside parties (particularly financiers and investors). There is no single model for a business plan. In truth, the true value of the business plan is unique to the individual entrepreneur. It allows for constant reflection on the big picture, which can become obfuscated in the daily grind of building the business.
A good business plan does not happen over night and is never complete. Remember, this is a living, breathing document that should provide a guiding light for the business at its current stage of development. As the business grows and develops, so should the business plan.
Having all of the components of your business in one place will allow you to make assessments about the process of building the business and ascertain the overall value proposition. Continue to re-think your concepts, assumptions, projections, etc. It will only help to solidify your business going forward.
Business Plan Components
The business plan will generally contain a detailed explanation of the product, service, or concept, the market, the organizational and management plan, the management team, financial position, financial projections for 3-5 years out, a marketing plan, and any other elements that would serve to adequately explain your business. Below we provide an overview of the individual components of the business plan.
Business Plan The Table of Contents
This should include the major sections of the business plan. The key is that (like a resume) you want all of the components to fit in an organized manner on one page. We use the resume analogy because the table of contents is a snapshot-style outline of the business plan. A well-planned table of contents goes a long way in showing the depth and development of the business components.
Business Plan The Executive Summary
This section summarizes the entirety of the business plan. It presents a concise recitation of the core function and attributes of your business. It should possess the same voice or the same tone as the body of the business plan. Often the executive summary is the only portion of a business plan that a potential investor will be willing to read. If this portion does not sufficiently explain the business objective, the value proposition to customers, and the potential for the business within the current market, the investor will discard the plan without reading any further.
General Description of Your Product, Service, Idea or Concept
As with any good plan, the strength of the plan depends entirely on how well the planner understands the initial concept. Here you will describe your product or service and the need or want that it satisfies for customers. Your product, service, or idea must create some type of value for customers. What hurt, pain, need, or want does the product or service solve. Even if the value proposition is intuitive, this section of the business plan should articulate it very well. Remember, at this point all we know is what the product, service, or idea is. In some cases a single product, service, or idea could be complex and have multiple value propositions that are not obvious or apparent from a general understanding of the business concept. Make sure your value proposition is stated in a manner that a CEO and your grandmother will understand.
⁃ Note: The General description of the product, service, or idea should encapsulate the first 20 seconds of your “elevator pitch”. If you are unfamiliar with the elevator pitch, We encourage you to research the topic on YouTube.com.
A Market Analysis and Approach to Reach Customers
Now we move to the planning portion of the business plan. This section should outline your market analysis. This section is very broad. You can (and generally should) spend a lot of time developing this section. It includes the factors that helped you to decide to push forward with this venture or to revisit your product concept. Components in this section include: market size, segments, product or service pricing, demand, etc. We recommend doing some preliminary reading about the market analysis (visit wikipedia.com) to give you a background understanding of this process prior to beginning.
Competitive (Strategic) Analysis
The competitive analysis is often mixed with the market analysis; however, we recommend keeping it as a separate section. The purpose of the strategic analysis is to determine your competitive position in the market (SWOT analysis, Porter’s Five, or other strategic market analysis) and whether you will be able to compete. You will need to identify your primary competitors (both direct and indirect competitors) and explain how you will be successful in light of their presence in the market.
Business Marketing & Sales Plan
This section outlines the methods you will use to make customers aware of your product or service. It also includes how you go about reaching and consummating sales with customers or clients. Businesses providing great products or services often fail due to a lack of sales. Marketing drives sales, but it can be extremely difficult and expensive. You will want to explain in detail the methods you will use to both spread information about your business and acquire customers or clients. This should include methods (and justifications for those methods) that are best suited to your business and within the business’s budget.
Business Plan Operations (A Description of How Your Business Will Carry on Activity)
This is the “how to” section of the business plan that will explain how you are going to do what it is you do. You should give a step-by-step description of the activities that your business will undertake to deliver value to the customer. You should be detailed about your production efforts and requirements, inputs, outputs, logistics, suppliers, etc. This section can be very detailed and complicated. We definitely recommend maintaining this section as a separate, stand-alone document.
A Plan for how the Company will be Organized and the Management Structure
One of the main concerns for business owners and investors is, how will the business be structured? In this section you need to explain the following: Who will be in charge of different aspects of the business and how the different functions of the business will be organized? Will there be different teams or groups that carry on certain functions? You will need to explain anything that involves the owners, directors, and officers, including: who will be involved in the business, what role they will play, their responsibility, their authority, the ownership rights, etc. If you plan on using outside contractors (manufacturers, consultants, programmers, accountants, attorneys, etc.) explain where their services will fit into the organization.
The Financial Projections
This portion lays out the anticipated financial projections of the business moving forward. The financial projections generally consist of assumptions (revenues and expenses), income statement, cash flow statement, and balance sheet. Each of these documents demonstrates a different amount of information. The most important function of the financials, however, is to demonstrate the revenues and expenses (i.e., the income statement), and the flow of cash in and out of the business (i.e., the cash flow statement). Early in the business the financials will be very speculative and tenuous. A good practice is to prepare a worst case, conservative, and optimistic set of financials (particularly the income statement). You will continue to update these plans as the business develops and with every significant financial milestone.
Startup Expenses and Capitalization
Generally, the breakdown of startup expenses and use of working capital is designated in the financial assumptions. This information is then employed in the income and cash flow statements. In the event you are using the plan as a tool for acquiring outside equity (Angel Investment or Venture Capital) you will need to show the proposed ownership breakdown at the anticipated capital investment rounds. Investors will be concerned about how you are going to use their money and what their return on revenue will be. This will necessarily include the projected ownership interest of all involved parties at different points in the life of the business.
While the Financial plan is often the very last thing in the business plan, you may need to append other documents for reference. We caution against appending too many things that detract from the planning function of the overall business plan.
Read this section multiple times before proceeding. The overview and components of the business plan provide a snapshot of what goes into a completed business plan. You should have a holistic understanding of all plan components and the importance of each in order to fully internalize the specifics of each section. Also, understanding each section will help you identify the information that needs to be in each section and eliminate repetitive information.
Executive Summary – Defined
An executive summary is an important part of business plan. It summarizes the key points and gives an overview of the whole business idea. The main theme of executive summary is to summarize main points of the document for the reader.
What should I know about drafting a business plan executive summary?
Include the main points of the business plan in a voice consistent with that of the language in the body of the plan. The executive summary is a summation of your entire business plan. Many instructional guides will recommend taking the first and last sentences of each paragraph to develop the body of the summary. While this may be an effective techniques for including the components of the business plan, it misses a fundamental purpose of the executive summary – creating a voice for the business.
The business plan has to capture the essence of the business and project the same level of exuberance, confidence, and ambition as the entrepreneur. Below is a overview of what you should include and aim to achieve within your business plan.
Overview Executive Summary
The executive summary should tell all of the main points of the business plan in a concise format. However, there is more to writing the executive summary than simply being able to synthesize large amounts of material into a couple of short paragraphs.
You are attempting to translate the larger body of the business plan into a concise summary that adequately demonstrates the venture’s value proposals. An effective executive summary maintains the same voice as the body of the business plan. For example, if you use an exuberant and excited tone in describing your product, your executive summary should mirror this voice. Try to create anticipation for the body of the business plan that will follow.
Your objective should be to explain the product, service, or idea, the core business model, and the value creation process to the reader. Hopefully, after reading the executive summary, the reader will approach each section of the business plan with a basic understanding of what the section includes and will explain in further detail.
Contents of the Executive Summary
It depends on your business whether you are going to launch a new business or you already have an established business.
- Startup Business – Describe what your business is and how it can be an opportunity for investors as well as customers.
- Taking advantage of the opportunity – Explain how your business will serve the market and fulfill their needs.
- The target market – Describe and clarify who will be your target customers?
- Business Model – Describe your sales forecast, revenue, expenses and target market to convince and make it more appealing.
- Marketing Strategy – Give an outline how the product will be marketed and promoted in the market.
- Competition – Define all characteristics of your business that make it more appealing and give you competitive edge to capture market share.
- Financial analysis – Summarize your forecasted financial budget, revenues, expenses etc.
- Implementation plan – Describe all details of how you are going to implement your business idea and strategy in the real world.
For established firms an executive summary usually includes the following details.
- Mission statement – It describes what does your business do and what it serves.
- Company Information – This section gives an overview of the company. It includes formation date, location, number of employees, statistics etc.
- Business Highlights – It consists of details how your sales, revenues and market share grew over the time.
- Financial Summary – It includes financial summary of the company such as revenue, expenses, assets, liabilities etc. if a company want to expand its business then it may include the financing needed for expansion.
Tips on Drafting the Executive Summary
Wait until the rest of your business plan is substantially complete before beginning work on the executive summary. You can’t adequately summarize the parts of the plan until you’ve thought through and have begun to develop the different sections. Like the body of your plan, the executive summary will necessarily change and evolve as the business plan evolves.
As you know you may use the business plan as either a planning tool or as a manner to obtain a loan or equity financing. You will likely modify the executive summary slightly depending on its intended purpose.
Length of the Executive Summary
Opinions vary as to the appropriate length of the executive summary. In truth there is no magic length for the summary; rather, you should edit the summary to fit the intended use and expectations of the reader. An executive summary for a bank will generally be a bit longer than the executive summary being presented to a venture capitalist. The reason is more a matter of time and attention to detail.
A venture capitalist will want to a see a summary that concisely explains the concept – similar to the elevator pitch (business pitch). A bank lender, on the other hand, will review the plan more thoroughly as part of the business loan application. A well crafted and thorough business plan can lay out a more complete understanding upfront that maximizes comprehension of the body of the business plan. In either case, you will continue to mold and scope the business plan to present the most accurate and effective presentation of your business’ value proposition and how you intend to carry it out.
Final Points on the Executive Summary
In my humble opinion, the executive summary is the most valuable portion for planning purposes. This section causes you to think about the business holistically. You are tasked with summarizing everything you do or plan to do into a few concise paragraphs that will appeal to intended recipient. This is where you will be able to compare the strength and fit between the portions of the business plan.
References for Business Plan Executive Summary
What should I consider in drafting the General Company Description?
This is where you tell about the company you plan to be. In this section you describe what your company does. You can go into detail about your product service or idea. But, this is just the beginning. You have to describe what your business will be. What do you hope to accomplish or where do you hope take your business? What problem do you plan to solve? What need or want do you hope to satisfy? You can weave your product, service or idea into your intended markets or customer segments? In short, tell about about your value proposition and to who it pertains. Then move on to the goals you set ahead of your business and the principles that will guide you in reaching those goals.
Overview of the General Business Description
Start by laying out in simple terms what you do. That is, tell what problem you will solve, need you will satisfy, or want you will fulfill. Before you can begin to explain your product or service and how it works, you have to lay out the value you intend to create. Imagine describing a stapler for the first time without first stating that you have created a revolutionary manner to clasp individual papers together without the use of bindings. You have to understand what it will do before you can go about describing the apparatus.
This is a great litmus test for how well you understand your product or service and the value that it creates. If you have to hesitate and think about exactly the specific need or want that it fulfills, then you don’t have a sufficient understanding of your business. This is equally a problem if your hesitation comes from the fact that your product or service could solve multiple problems or address multiple needs and wants.
Bottom line, you must be able to concisely state what your business does and for whom.
Tell About YourProducts and Service
Now you can tell about how the product you have designed or how the service you have developed is going to address the customer’s problems, needs, or wants. Start by giving a general description of the product or service and the individual components. You will gradually add more detail or build upon how your product or service process works.
After writing a thorough description of your product or service, you can move on to introducing a technical descriptions of your product or a detailed statement of how you will deliver your service. If your product involves patents or technical diagrams you may want to make reference to them in this section and append them to the end of the business plan. If you process is complicated, this is where you can integrate diagrams, flow charts, or process matrices.
You may wish to include specific information about how the business will be organized and managed. This can include the business structure and ownership arrangements. The explanation may include the reasons for organizing in a certain manner or choosing a specific type of business entity.
Basic Strategic Position of the Business
You can now begin to explain how your product or service will be able to compete or address the problem, need, or want better than the alternatives that exist. You will address the full strategic analysis later in the business plan. In this section, you want to lend support to your value proposition by expressing what your product or service does and how it does it better than those already in the industry. Later, in a more detailed competitive analysis, you will address the major players and competitors who control parts of the market.
Incorporate Your Company Goals and Missions Statement
The best way to understand where you are in your business is to compare it to where you want to be. When you are a business intended on growing you must have a clear path of where you want to go. Most businesses identify their objective in a mission statement. The mission statement should be a concise statement of the company’s goals and the principles that will guide it’s growth. Many people see the business’ mission statement as more symbolic than practical. However, the mission statement can serve a very practical purpose in providing a path for a growing and evolving business.
You may wish to expand this section further to include a business philosophy. Is your business guided by principle or belief? If so, without incorporating the business’ philosophy directly into the planning documents it may become difficult to incorporate maintain those principles as the business grows and evolves.
Conclusion: In this section you have laid the foundation for what the company does and how it will create and transmit value to the client or customer. The parts of the business plan that follow will add greater explanation to how this value creation is possible, will be carried out, and what the results of the venture will be.
What should I include in the Market Analysis portion of the business plan?
Market Analysis plans your approach to understanding the entire market. The market analysis is the back-bone of the business plan The market analysis gives the entrepreneur all of the information necessary to determine whether a product, service, or idea is a valid business opportunity. The market analysis will be in-depth and include lots of primary and secondary research. The article below outlines the information from the market analysis that you should include in the business plan. This information will allow you to build the subsequent sections of the business plan, such as your marketing efforts and financial projections. See our Market Analysis Section for more information on how to conduct market analysis.
How are you going to find out about your potential market?
Start with a plan for conducting Market Research. Research is generally split into primary and secondary research. Secondary research involves using material prepared by third parties that is not specifically oriented to your market. You may looks to population and demographic data taken by the government, consumer surveys, targeted articles or surveys, or data derived from other studies.
Primary research involves direct research of your intended customers. This could include observational research, such as monitoring potential customers. Direct research of customers generally involves some form of informational gathering about the customer’s preferences, such as questionnaires or surveys. You will need to have a strong handle on statistical analysis to make sense out of the many characteristics you identify in your customers.
In the case of primary and secondary research, you are attempting to obtain both qualitative and quantitative data about your potential customers. This information will be instrumental in evaluating the business opportunity and scoping your approach to conducting business.
Begin by Outlining Your Understanding of Your Product (Features and Benefits)
What are the features and attributes of your products? How will your customer perceive your product? The idea is that you are investigating how your customers will see your product. As the entrepreneur you naturally have a bias or preconceived notion as to how your product will be received. You will have to consciously be objective and unbiased in describing your product’s 1) attributes and 2) benefits as the potential customer would perceive them.
If you discover or determine that some of the attributes or benefits are not intuitive in the product or service, you will want to begin scoping a plan on how you will make your potential customer aware of these attributes or benefits.
Now Describe Who You Believe Your Customers Are
You understand you product and how the general population will see your product or service. Now you have to identify the individuals or businesses who will be interested in becoming customers. Remember, your product or service will necessarily solve a problem or satisfy a need or want. Importantly, your product or service may serve different needs or wants for different segments of customers. As such you will want to identify the characteristics of your potential customer segments and prioritize the amount of demand (how urgent is the need or want?)
You will want to document every identifiable characteristic of your potential customers (i.e., customer demographics). For example, for individual consumers you will want to identify: Age, Race, Sex, Ethnicity, Geography, Income Level and Social-Economic Class, Family Background, Organizations, Education
You may have to identify any other unique or identifiable characteristics of businesses, such as: Size, Revenue, Ownership Structure, Capitalization, Competitive Status in Market, Geography, Growth Rate, Strategic Plans, and any other potentially relevant information that identifies or quantifies the level of demand (want or need).
Now – What Facts About Your Market Do You Need To Know?
Ok, we have analyzed our product objectively and figured out what features and benefits will interest certain customers. We have divided those customer groups into segments based on their characteristics. This will allow us to directly focus our marketing and sales efforts on the individual segments.
Now the question is – “Will it be worth my time (or profitable) to market my product to any particular segment”. You will need to know a lot about each segment in order to determine whether you should even move forward with the venture. Remember, your whole objective is to make money. If the market isn’t sufficiently large to make the sale of your product, service, or idea profitable, then you will need to revisit something about your product, service, idea, or business model.
In some cases it may be too difficult or too expensive to adequately capitalize on a particular market. There could be marketing, sales, logistics, operational, or strategic costs that make reaching a certain market segment unrealistic or unprofitable. For this reason you will want to have a firm handle on the feasibility of certain market segments. When determining your market size you will want to include only the relevant market segments that can validly reach.
Below are some of the questions you will want to ask in determining your target market?
– Which market segments can I feasibly or profitably reach?
– What is the size of each feasible market segment?
– Is one existing market segment prone to more growth than another? (I.e., Is one market segment growing?)
– Is demand within the market segment created by a need or a want? (Be cautious is assuming that your product, service, or idea will create demand that previously did not exist. Few businesses offer something that is creates a previously non-existent demand.)
– What is the strength of demand within each market segment?
– What is the urgency of demand within each market segment?
– What percentage of each market segment can I realistically capture? (Remember to be conservative in your assessment. Sometime capturing even 1% of a market share is not realistic).
– What is the price point for each market segment? (i.e., How much will each market segment pay for the product?)
– What price point should I set that captures the highest percentage or the most profitable combination of each market segment. (E.g., if you price your product to appeal to a smaller segment of high-end users because of the higher profit margin, you may alienate a large percentage of another market segment. The trick is to determine at what price point you will reach the most profitable mix of potential customers.)
– Given the feasibility and urgency and price point, how should I prioritize my marketing efforts? (You will undoubtedly have to prioritize your marketing efforts. Understanding the profitability factors will help you understand where to focus these efforts.)
Conclusion: Your primary and secondary research will give you the information need to determine whether creating a business around your product, service or idea is a profitable business opportunity. It will also supply you with the information necessary to continue planning your business, such as conducting a competitive analysis and creating the financial projections for the business.
What should I include in the competitive analysis portion of my business plan?
Barriers to entry, competitors, and how you will beat them. In this section you are trying to identify all of the aspects of market that could keep you out. Many business plans simply identify the competitors and products that will compete with their intended products/services ; however, this is only one-half of the story.
If there are a certain number of competitors or competitive product/services, why is that? There has to be some factor that keeps others producer/providers from entering the market. These are commonly known as “barriers to entry”. In the market analysis you made the determination that the market is sufficiently big that you could be successful by grabbing even a conservative percentage. So, now:
- Tell why others aren’t entering the market;
- Tell why you will be able to enter the market;
- List those who are going to attempt to keep you from taking their market share or will try to take your market share;
- List how how you will be successful in taking their share, making the pie bigger, or fighting off their attempts.
If there is market potential, why are others NOT in this awesome market?
What are your barries to entry? Assuming that you are not yet in the market, what is it going to take to get there? This will generally be the same explanation as to why others are not in the market. Remember, the chances are not good that you are the first person or business to come up with an idea for a product or service. There has to be something that is keeping others out. This may not be obvious at first, but identifying these early will allow you to make adjustments to meet these hurdles.
Identify the barriers to entry and explain how they may effect your business or industry. Common barriers to entry include:
- Funding or Capital Concerns – How much capital is required up front? Will it require some level of revolving capital needs? Where are you going to get this capital?
- Legal Barriers (Licensing, Regulatory approval) – Is there a required state or federal license? Does the product or service require inspection and approval by a state or federal regulatory agency? Is the business subject to some state or federal regulation that is subject to change? (ex. Labor laws, foreign embargos, etc.)
- Costs of Production – Is there a cost of production that is inhibitive in starting out? (Ex. Many older companies avoid the high cost of production due to production methods established when costs were lower.)
- Cost of Sales and Marketing – Suppose you have the perfect product. How are you going to let people know about it? (Remember, the Apple operating system was superior that of Microsoft in the early days of each company. Nonetheless, Microsoft dominated the market with a largely inferior product.) Can you market and pitch sales sufficiently to create customer awareness and drive sales of your product. Often you will have to market far more than the established brands in order to convert existing customers to your product.
- Logistical Concerns – How are you going get your raw material or other supplies for conducting business. How are you going to deliver your goods or services to your customers? Will it involve outsourcing or international shipping? Will this require strategic presence or distribution centers in various locations? All of these go into logistical concerns. Basically, you need to brainstorm of how every aspect of the business that requires the movement of product or material from one place to another will take place. Much of this information can be gleaned from competitors or businesses with similar business models. Understanding the logistical concerns will allow you to estimate costs and budgeting. Further, you may uncover a logistical aspect that supplies a competitive advantage to another business or, potentially, your planned business.
- Required Skills and Knowledge – Who are you going to need to involve in order to carry out your business? It’s a common mistake for the entrepreneur to believe that he or she can carry on too many of the actual business functions. If you haven’t realized, you will be preoccupied with countless tasks and will not be able to carry on many of the tasks that you now assume will be your responsibility. You need to have an understanding of what you don’t know have the time or ability to do. Again, look to competitors or similar businesses to determine the skills or market knowledge necessary to carry on your planned business operations.
- Employee Concerns – Employee concerns are countless and daunting. There is no way to project for the types of employee troubles that you may face in starting you business. Types of employee issues include: hiring, training, employee benefits (healthcare, retirement), union negotiations, lawsuits (discrimination or hostile environment), and firing. The employee concerns for which you can plan include hiring, training, and employee benefits. All of these issues can entail considerable costs that were not previously anticipated. Planning and buying insurance for unplanned legal events can help to minimize these issues.
- Intellectual Property – How are you going to protect your process or product? Does your product or service involve or potentially infringe on the intellectual property rights of others. Generally, the only way to protect your intellectual property is through patent, trademark, copyright, or trade secret. Some businesses develop around a product or service with the idea that they can start up under the radar of competitors and then grow quickly before competitors can catch up. This is commonly referred to as, “running faster” than the competition. In general, this is a last resort strategy as outrunning a competitor with superior funding is very difficult. Start by looking at the nature of your product or service and try to determine that best way to protect or establish defendable ownership or intellectual property rights.
- Taxation – Every business is going to pay taxes on identifiable profit. The question is how much tax you will have to pay. Are there any tax advantages that exist for carrying on your business? Importantly, what tax advantages are your competitors employing that allow them to carry on business in an otherwise unprofitable venture. For example, there may be economic development or energy savings associated with your business venture. Another example is the effect or choosing a particular business entity above another. If you are going to need to use Net Operating Losses from the current year to offset personal income tax then an LLC may be a better option than a S-Corporation. Again, a percentage of tax savings can make a considerable difference in profit margin or overall profitability of your business.
- Strong Competitors – How strong are the competitors? What tactics are they likely to employ to defeat your product or service or to keep you from stealing market share? A large, well-capitalized competitor may be able to engage in a price war that you cannot withstand. This will require both primary and secondary research of your actual and potential competitors. (This concept is developed further below.)
Now, address each of the above-listed competitive barriers and explain how you will deal with the current situation, the situation that will arise along your projected growth path, and any contingent changes in these factors that could affect these businesses.
Competitive Analysis – Who Will You Have to Compete with in This Market Space?
Who will be your competitors? Here you should prepare an exhaustive lists of the players who will compete against you in your immediately relevant and prospective markets.
- List each competitor name, location, and give a brief profile of their product or service.
- Create sub-categories and groupings for the competitors who are your most direct competitors.
- Classify the extent to why the subcategorized competitors are the greatest threat. (You will list aspects such as location, percentage of market held – customer base, type of product or service lines, competitive or innovative nature of firm, etc.)
- Expand on the secondary or indirect competitors. (Give and explanation of why you believe their product or service is a competitor to yours. This could explain how their product or service is a substitute product. Explain the situation in which these secondary or indirect competitors would be the greatest threat to your projected business, e.g., if they offer an inferior good (product or service) then a downturn in the economy may drive customers away from your more economically elastic product.
- Explain how your product or service is superior (or competitively advantaged) against each competitor’s product service. The most difficult part of this component is identifying all of the characteristics that customers covet in the product or service, such as: design, speed, ease of use, dependability, price, customer service, etc. It may be useful to use a table listing the attributes of the products side-by-side. This allows for quick assessment by third-parties, as well as provides a framework for you to conceptualize the market position of your product or service. You can create multiple tables comparing your product or service to each category or individual competitor. You will need to customer the lists of competitive factors for that competitor or competitor’s product. Note: These individual tables may not fit within the body of the business plan. You can always append or attach them to the end of the business plan.
Conclusion: Developing a Competitive Analysis section requires a great deal of research and knowledge about other business’ product or service; however, the most difficult portion is assessing your product or service strength and weaknesses. In developing this section it is important to as honest and objective as possible in analyzing your value proposition. It may be useful to enlist third parties who are unbiased or unrelated to your business to provide their opinion on your product. This will help avoid the cognitive bias that nearly all entrepreneurs have when assessing the competitive strengths of their own product or service. Remember, even if you can explain away any fears or negative perceptions that customers have about your product, the customer’s input are extremely valuable. You will not be there to explain away these fears or concerns at the point in which the customer learns of the product. These will be the perception issues that you have to address in marketing your product or service.
How do I begin putting together a marketing plan?
Begin by understanding your market, then arrange the tools to reach that market.
A marketing plan involves how you will make potential customers aware of your product or service. However, a marketing plan is more than simply determining what methods you will use to advertise your product or service. It involves an in-depth understanding of the market and how your product or service fits in that market. Below are some initial considerations in drafting your marketing plan.
Place in the Market
How do you see your product/service? That is, how do you see your product/service being used by customers? Who do you see as your primary customers? Do you have any secondary customers? What function is your product/service serving for customers. Ask yourself, “why is this customer using my product/service, as apposed to another product/service?” All of these questions should help you understand what makes your product/service unique in the eyes of your prospective customer. This understanding is essential to developing a marketing strategy.
In order to avoid your own perception biases, it’s recommended that you seek the opinion of third parties. Do not focus solely on the individuals who you see as your target market. Get feedback from non-targer-market individuals as well. This will help you to expand your understanding of how your product is perceived by a variety of individuals in the market.
Once you feel that you fully understand your market (primary customer base, secondary customer base, how the customer will use your product, why the customer will use your product), you can begin outlining a marketing strategy.
Marketing strategy, by definition, regards how you will employ certain tools and tactics to reach your customers. It is more than simply identifying your marketing tools or techniques for reaching customers. It involves a holistic approach regarding how you will address the market.
Think of your product/service image and the brand that you want to build for your product/service. Do you want to be seen as the most innovative, the most affordable, the highest quality, the fastest or best service, the easiest to use, etc? Unfortunately, your product cannot be all things to all people. Concentrate on the primary and secondary customers that you hope to reach. You will develop a general strategy that has necessary modification for reach each potential type of customer.
Your strategy will involve the message (the value proposition) that you hope to transmit to your customers. If you understand your product and your customer, you will craft your product message(s) to support your product/service to those individuals. For example, you may use an environmentally-friendly, product message to reach young environmentally conscious customers. On the other hand, you may use product quality and ease of use to reach older, affluent customers.
Be careful in developing multiple product messages. This can dilute your message and make your desired brand seem manufactured or disingenuous. Remember, there is no single guide for who is your customer and what that customer wants from your product. This is something you will figure out by fully understanding your product and your market. Once you have this understanding, you can employ the available tools and tactics to deliver that message.
Promotion involves how you reach your customers with your product/service message. Restated, promotion involves your advertising plan. What channels will you use?
- Traditional Marketing Tools: Will you employ traditional means, such as placing your messages and advertisements in trade shows, catalogs, television, radio, newspaper, yellow pages, signs/billboards, direct mail, brochure distribution, etc? Other traditional methods include using word-of-mouth, sales representatives or agents, placing your product with retailers, etc.
- Emerging Marketing Tools: Will you use new media based sources, such as pay-per-click advertising (Google’s paid advertising), website development and search engine optimization, sales sites (amazon or professional service listing sites), social media marketing (Twitter, Facebook, etc.), etc?
The answer to the above questions should depend on how your customers be more likely to find you via tradition or new advertising methods. Perhaps you will use a hybrid of these approaches in order to maximize your reach given your available marketing budget. Remember, there will different costs associated with each type of advertising. You have to understand each of these
How much money are you setting aside for marketing? This question depends on the funds available in your budget after completing other essential activities in starting the business. Marketing and sales efforts are the life-blood of your business. When allocating funds for marketing, remember that great products/service business can fail without adequate sales. Even a mediocre business activity will be successful if it can generate sales.
You have to understand your marketing activities well in order to understand the costs associated with each. Traditional marketing methods tend to be more expensive, but can have better results for given customer markets. Emerging marketing methods can be far less expensive, but fail to reach large portions of the target or available markets. In either case, it is difficult to make adequate calculations. It is advisable to allocate more money that you initially believe will be required. You will use these numbers in creating your startup budget and initial financial projection.
Conclusion: There is no single way to develop a marketing plan. I recommend that you begin by answering the above questions. These questions allow you to understand your product, develop an idea or concept of your product brand, craft a message to convey your brand message, and employ tools and tactics for delivering that brand message to your potential customers.
What else should you consider in forming a marketing plan?
You will also need to consider pricing and sales tactics. Remember, you have to understand the customer and the product in order to put together a marketing plan. Previously we discussed strategy and marketing medium. In this section, we discuss some additional considerations that accompany your intended marketing strategy.
What price will your charge for your product? As part of your marketing strategy, you will determine whether you are the highest quality, lowest price, easiest to use, etc. Whichever of these competitive advantages that you hope to achieve and promote, you will need to price the product accordingly. Your first step in determining the price is to determine what customers are willing to pay for the product. Consistent with principles of supply and demand, customers have a given level of demand for a product at a given price. Your role is to determine the price that will maximize the your profit. This could mean serving less customers or producing less product.
Now that you understand this concept, you will have to figure out what your customers are willing to pay. This will involves some direct and secondary research. Secondary research will involve looking up the prices of similar products or services already in the market. Primary research will involve using questionnaires and surveys among potential or target customers to determine what they believe the price of the product would or should be.
When drafting the marketing portion of the business plan, you will want to explain how you arrived at your product price. Further, you will want to explain how this price fits in your overall marketing strategy. Using the hard statistics from your primary and secondary research will help to satisfy the inquiries of future equity investors who question your pricing.
Sales Distribution Channels
How are you going to physically transfer value between you and the customers? That is, what channel will you use and providing your product or service to the customer? This decision will have to be consistent with your marketing strategy. Whoever your target customer, you will try to deliver the value through the means that is most likely to encourage the sale.
Common methods of delivery include: internal sales force, outside sales agents or representatives, placement in retail stores, establish sales facilities in strategic locations, catalog, website, or telephone ordering, etc.
Your distribution plan may involve multiple channels. As with your marketing efforts, you will want to employ a sales plan that maximizes the sales you achieve per dollar spent. As your revenue goes, you will begin employing less efficient/profitable sales channels in order to reach additional customers.
Now that you have a marketing plan, complete with intended price, you can begin projecting your sales. Revenue depends upon your volume of sales at a given price. As you business grows you will be able to expand to additional markets and reach other customer segments. As such you will be able to use a sales forecast to project your rate of growth and expected future revenue.
You will want to develop a sales worksheet where you outline your monthly, projected sales. Like your price, your sales estimates can be derived from primary and secondary research. Primary research involves sampling customer pools in an attempt to estimate the level of demand in given areas and among specific customer groups. Secondary research involves identifying the past sales figures and growth rates of similar or competitive products. You will want to document this research thoroughly in order to justify your projections to potential investors.
You will want to develop three sets of sales forecasts: conservative, expected, and optimistic. While you will focus on the expected sales figures, your potential investors will focus on the conservative figures. This is an important strategic aspect to consider when preparing your business plan for presentation to investors.
On a side note, any increase in sales will have to be accompanies by adjustment to other variables, such as cost of production, marketing costs, sales costs, etc. All of these calculations will go into projected revenue and costs that put in your business financials.
What goes into developing an operational Plan?
All of the components that allow your business to create value.
The operations portion of the business plan serves two purposes:
- Allow you to take a holistic approach to your business, and
- Provide interested third parties with a description of your business.
The operational plan outlines the particular components that allow your business to create value. Below, we discuss the primary components of the business operations plan, including: a description of the product produced, the business location, personnel, inventory, suppliers, payment processing (credit policies and accounts receivable/payable).
You will describe each of these sections in detail to the extent that it is relevant or applicable to your business. You will need to outline where are you in the creation of your business. Specifically, what steps have you taken to put your business in motion? Now, what do you have left to accomplish?
Product or Service Development
How do you plan to make your product or carry out your service? Start with an outline of the process for delivering value to your customers. You will need to account for the necessary production activity act each stage. Outline the day-to-day activity necessary to carry out your business.
- Production Process/How Services Carried Out: Here you should outline the process of manufacturing your product. If you provide a service, you should outline all of the moving parts and individuals necessary to carry out the service. Provide a generally checklist or flowchart for delivering value.
- Production Timeline: Explain how long it takes to produce a unit, and when you’ll be able to start producing your product or service. Include factors that may affect the time frame of production and how you’ll deal with potential problems, such as rush orders.
- Production Feasibility: You will want to give an overview of any research or testing you have done to prove the feasibility of producing your product in accordance with your operational plans. This could include Market Research, Questionnaires, Competitor Process Analysis, Beta Testing, etc.
- Vulnerability: You should identify any potential problems that could arise in the production process. How will you handle any such issues? What would be the affect on the business?
- Quality Control: How will you maintain oversight of the production or service provision process? Develop a plan for supervision of the process.
- Customer Service: What is your plan for customer service? This includes sales communication, return products, and customer follow-up.
Equipment and Other Assets
- Necessary Equipment: What equipment do you need to carry out the basic operations?
- Current Assets: You may already have some of the necessary equipment to carry out operations. Identify these assets and explain what asset requirements they fulfill.
- Equipment Priority: Some equipment is may be desirable but not a necessity. Ascribe a level of priority to obtaining it. The priority should be higher depending upon the likelihood of the equipment to increase production or efficiency. It may also be helpful to outline the equipment output, required maintenance/repair, and expected life.
- Equipment Pricing: Outline a projected cost for purchasing (new or used) and renting the necessary equipment. You need to explain your rational for your decision.
- Equipment Financing: Explain any financing arrangements. Make a list of your assets, such as land, buildings, inventory, furniture, equipment and vehicles. Include legal descriptions and the worth of each asset.
Are there any special requirements or situational factors necessary for carrying on your business? In this section you will list any requirements that are unique to your business and would fall outside general expect ions. This could include special assets, economic conditions, legal conditions, etc.
What qualities do you need in a location?
- Physical Buildings: Describe the type of location you’ll have. You may have multiple locations or locations designed with specific purposes, such as manufacturing, administrative office, and sales locations. If it’s applicable, your plan should include:
- Drawings of the building, copies of lease agreements, and/or recent real estate appraisals.
- What is the expected value of the land or buildings required for your business operations.
- Explain the significance of each physical location to your business.
- Physical Building Requirements: Give specifics, such as a breakdown of cost per square-foot, materials, design, interior layout, parking, etc.
- Amount of Space: Explain the use of space. Have a plan for space demands with the expected growth.
- Type of Building: Justify your decision to rent vs. buy, and class of facility.
- Zoning: Make certain the anticipated activity meets the applicable zoning requirements. If not, explain a plan to request a variance or petition the municipality for re-zoning.
- Power and other utilities: What will be your specific power needs. Have estimates for the cost of power and the resources/regulatory approvals necessary to obtain such funding. A strong plan will discuss preliminary data and on-going discussions with the available utility providers.
- Access: What type of access do you need to your location? Detail how customers, employees, logistics personnel, etc., will access your business. Ex. Do you need easy walk‐in access? Is it convenient for customers and suppliers?
- Construction: Will you build or rent a building? You should explain the benefits of one over the other. This justification should include a cost/benefit analysis of each option.
- Costs: Determine a preliminary figure for costs associated with building/occupying the intended location. Examples of expenses include: rent/mortgage, maintenance, utilities, property taxes, insurance, construction/remodeling, etc. These numbers will become part of your financial plan.
- Hours of Operation: Indicate and give a justification for your intended hours of operation. Does your location support these hours of operation? Does it conflict with other local or resident businesses?
In this section you provide an overview of the key personnel involved in the business and the types of positions that will be necessary. Basically, you are going to tell who will do what. Describe whether you intend to hire new personnel or contract with independent contractors to carry out business functions. You will need to account for the personnel requirements as the business grows.
- Startup Team: Who is part of your startup team? What will be their primary area of responsibility? Describe what you understand their role and duties to be and explain how they are qualified or competent for these duties.
- Types of Personnel: Give a general description of the main employees or positions that you will need to fill. This includes skilled, unskilled, and professionals. As part of this process your will outline who performs the specific tasks at each stage of operations. Some of these positions may be filled by independent contractors who render services on a fee basis. If so, document the nature of these anticipated relationships. At first there will only be a few positions. Try to determine the types of personnel that will be needed as the business grows.
- Number of employees: Construct a timeline depicting the growth in number of personnel in accordance with the projected business growth.
- Procedural Protocol: Begin by describing the procedures necessary to effectively carry out each position or function of the business. This is necessary to maintain operational stability as well as consistency in operations. This could include procedural steps or written manuals for carrying out individual stages of the operations.
- Methods for Recruiting Employees: This is most important for professional service or high-tech companies. You will need to have a plan for recruiting new service providers and skilled professionals. This will first require establishing job descriptions and desired employee skills. Note: A good place to start is documented any established relationship with local universities with technical programs and professional schools.
- Personnel Training: How will you conduct training? What will be your plan for preparing new employees? Do you have a continuation plan in the event you lose a key employee? Be careful not to place too much operational importance on any single individual without developing a training plan for replacements.
- Compensation: Along with the description of personnel and timeline for employment, you will want to associate an estimated cost at each period in time. As such, you will need to devise a projected compensation structure for employees. It is important to develop a realistic plan that fits the companies revenue projections and incentivizes the employee to perform and remain with the business. The startup team or key leadership compensation (including benefits and equity options) is often the most difficult to structure.
Inventory & Materials
In this section you explain where you are going to receive your inventory or the materials necessary to produce your product or carry out your service. You should indicate your suppliers or manufacturers and outline the nature or terms of your agreement.
- Inventory: What type of inventory (finished product, supplies, raw materials, etc.) will you keep on hand and where will you get it?
- Cost/Value of Inventory: You will need to use the projections for cost of inventory in your financial projections. A key provision in the pre-money valuation (pre-equity funding) of your business will be an accurate assessment of the value of assets, including inventory.
- Inventory Turn-Over: At what rate will you need to restock your inventory? This is an important figure used in assessing the sales strength of the business. You will want to make a special note about how the inventory turn-over compares to industry averages.
- Special Inventory Requirements: You will also want to outline a plan for dealing with inventory requirements seasonally. This includes a plan for lead-time ordering.
- Inventory Control: You will have to establish a plan for monitoring and controlling inventory. This should be incorporated into a employee/personnel description.
All of the above information will be combined as an estimate of production costs to include in your financials. You may want to maintain separate figures regarding the cost of goods and the cost of labor. You may also want to create a third category of production costs for non-recurring, incidental costs associated with operations.
Now is the place to provide detailed information about the companies/individuals who will supply you with the inventory/materials outlined above.
- Supplier Background: You should include background information on the supplier. This lends credibility to the stability/dependability of their service.
- Inventory Details: Attribute the type, amount, and cost of inventory supplied by each supplier. This should include a description of any anticipated fluctuations in the requirements or costs of the inventory. For example, you will want to outline the spikes in seasonal cost.
- Payment Terms: Outline the terms of performance of the supplier-purchaser relationship. What are the terms of payment? What are the terms of delivery?
- Back-Up Plan: It is important to have a back-up plan in the event you lose a supplier or the supplier is unable to meet for operational needs. This could include options of alternative suppliers. This avoids placing too much operational importance on third parties.
In this section you will outline how you will be compensated for the goods you sell or services you provide.
- Issuing Credit: Are you planning on accepting in-house credit? You will want to look at industry standards the the payment policies of your competitors. Don’t forget, your payment policies can be a point of differentiation between you and those competitors. What will be the terms of payment for customers who purchase on account?
- Determining Who Can Purchase on Credit: You will have to have some established policies in place to determine who can purchase on credit and under what terms. Remember, you will have to comply with applicable laws prior to carrying out a background check. Also, extending credit could implicate fairness or anti-discrimination in lending laws.
- Terms of Credit: What will be the term of payment? If you extend credit you will need to decide on the terms of repayment and the interest, if any, attributable to giving the credit. What will be the rate of interest charged and penalties for late payment? Will there be a discount for early payment?
- Security Interests: Will you take a security interest in the goods sold? If so, do you have a standard documenting these transactions?
- Slow-Paying or Non-Paying Customers: You will need a policy for dealing with slow‐paying customers. What process will you establish for reminding, urging, and possibly threatening customers to render payment? You should outline an escalating plan for requesting payment, such as making a phone call, sending a letter, using a collection agency, and hiring a collection attorney.
- Credit Cards: If you accept commercial credit, do you have a service provider to process the payment?
- Costs of Extending Credit: Any time that you extend credit there will be a cost involved. The cost could be the risk of the purchaser not paying or it could be cost of capital over the credit period. Regardless, you will need to build these costs into your financials. For example, there always needs to be some allowance for bad accounts.
Managing Your Accounts Payable
As part of the operations process, you may be in the role of creditor to a servicer or supplier. You should develop a plan for payment of accounts owed. The key considerations in developing a payment plan include: maintaining positive relations with the supplier/servicer, optimizing the use of available cash.
If the supplier/servicer offers a discount for early payment then you should consider whether this option is in your best interest. If your business would greatly benefit from making payment toward the end of the available period, then it may be worth extending the payment obligation out.
Establishing and maintaining operations will require the crossing of numerous legal hurdles. You should describe the anticipated legal issues in advance and outline a plan for addressing them. Below are some sample, but common, legal issues.
- Entity Selection and Formation: Outline your justification for choosing a given entity structure. Explanations should include: taxation, equity funding, and ownership and control.
- Business License, Professional Licenses, Inspections, and Zoning Requirements: Identify all of the licensing requirements for carrying on your business. This includes the licensing of your business, personnel, property, etc.
- Insurance and Bonding Requirements: Outline the requirement for bonding of professional insurance. You should indicated the plan for obtaining coverage, as well as the cost of such coverage.
- Permits: Certain business activities in specific places require special permits. You must conduct the necessary background research on the legal requirements and provide a synopsis of how you will handle those requirements.
- Workplace and Environmental Regulations: Outline a plan for the necessary workplace inspections and standards. These standards can drastically affect your construction plans and applicable costs. Environmental regulations include proper documentation and accountability for waste, waste and environmental surveys of the location, etc.
- Employment Laws: Develop a plan for legal compliance with all employment laws. This includes hiring/firing procedures, employee benefits (Health Insurance, etc.), worker’s compensation, affirmative action (if accept federal contracts), etc.
- Taxation: Federal tax registration, state tax registration, estimated tax payments, employee payroll withholdings, sales tax registration and withholding, property tax, etc.
- Protecting Intellectual Property: You will need to develop a plan for protecting and maintaining all applicable forms of intellectual property, including: trade secrets, trademarks, copyrights, and patents. In some cases, protecting your intellectual property can be very costly (such as patent filings). Account for these costs within the financials.
Conclusion: After working through this business plan section you will have a detailed operating plan and a comprehensive outline of what actions need to be taken next in developing the business.
What goes into the Management and Organization section of the Business Plan?
Outline your organizational structure and then tell about your primaries. How your business will be managed and who will be involved is an important consideration in your choice of business entity. For example, in a partnership it is assumed that partners have equal control in managing the business. In an LLC you make the choice of whether it will be managed my members of the LLC or by hired managers. In a corporation, the owners/shareholders may or may not be a part of the management team.
In any of the above situations, you will want to develop a plan for the roles of individual members. While individual member roles and responsibilities often change rapidly, you want to have a formalized chain of authority within the business. Remember, too many decision-makers and no single person with authority can be a major challenge to the success of a business.
This section should include the names, positions, and general biography of the key business personnel. This section will be incredibly import to outsider investors (angels or venture capitalists) who are assessing your business. Within the Business Management section you should include answers to the following questions:
- Name: Who are the key individuals involved in the management of your business?
- Title: What will be that person’s title?
- Responsibilities: What primary responsibilities does that position entail?
- Qualifications: What is their background and qualifications for carrying out their intended responsibilities? (This will include work experience, educational degrees, and prior experience in startup ventures.)
I recommend that you create a formalized flow-chart demonstrating the hierarchy of authority within the business. This organizational chart should be cross-laid with the key core operational responsibilities of the business. For example, you may split the business responsibilities into: Operations, Sales & Marketing, and Administration & Governance. Outlining the business in this fashion will give individuals a clear sense of their responsibilities. Further, it will establish formal chains of authority that will become increasingly important as the business grows.
As you add new employees you will want to integrate them within the organizational chart. Make clear the chain of authority and reporting. Outline both the responsibilities of each individual and their authority to represent the interests of the business. As the business grows you will gradually become more and more specific about the roles and responsibilities of individual members. You may also consider developing a plan for cross-training individuals for specific tasks? You don’t want your business to hinge or become dependent solely on the presence of a single individual.
This chart will also serve as credentials for business when approaching outside investors. These investors will want to see that the business is stable and that there is ample talent to perform all of the functions necessary to carry out the business’ functions and grow goals.
Professional and Advisory Support
When forming your business you will begin to forge relationships with outside parties who can provide advice and services to your business. Depending on your business organization, you may have professional advisors, such as a board of directors or you may have a less formal advisory board. Below is a list and explanation of some of the more common professional and advisory support for a startup business.
- Accountant – An accountant can be extremely valuable in 3 areas: Entity formation, business compliance and tax strategy. An accountant will be able to help you understand the tax considerations that go into choosing an entity type. They can also help you understand the rules for business compliance state and federal income tax, tax deductions, tax credits, sales & use, transfer, deductions, capital gain loss, employee withholding, estimated tax payments, financial statements, auditing, etc.
- Small Business Attorney – A small business attorney is useful in a number of important areas. Entity selection and formation, contracts, intellectual property, employment law, securities regulation, business compliance & governance, collection efforts, etc.
- Insurance Agent – Depending on the nature of business, you may require various types of insurance coverage. Common type of insurance include casualty & damage on property, personal injury protection, professional liability, life insurance, health insurance in employee benefit plans, etc.
- Banker – I cannot express the importance of having a relationship with your bank representative. Many small businesses make the mistake of banking with large financial institutions, rather than choosing smaller, more intimate, local banks. When you are seeking loans to operate your business you will have a much easier time working with a banker who knows you personally and understands your business.
- Mentors – Find someone who you know and respect to serve as your mentor. Preferably, this is someone who has experience with startup ventures. Starting a venture can be nerve racking. It helps to have someone close who has gone through this process before. This personal will provide moral support more than expertise in a particular industry.
- Board of Advisors – A board of advisors is like a semi-formal group of mentors. Rather than providing moral support, these individuals help to guide you through the process of starting, managing and growing your business. You should try to assemble a diverse group with a variety of professional experience. Preferably, these individuals will be a mix of knowledgeable entrepreneurs and industry experts.
- Board of Directors – If you choose the corporate form to do business, you will have a board of directors. Many closely held corporations don’t have outside members on the board of directors; rather, the board consists of the owners and key members. As the business begins to grow, you may have directors who are either equity investors or experts who you compensate with equity ownership. In either case, you should seek investors and experts who can provide the greatest degree of guidance and support to your business.
You will want to detail the names, experience, and qualifications of these individuals within the business plan. The primary purpose is to demonstrate to outside investors that you have adequate support to handle your operations and intended growth path.
What should be included within the Financials portion of the business plan?
It depends upon the intended use of the business plan. The financials portion of the business plan may be surprisingly unique depending on the business. As previously discussed, the business plan serves two primary functions:
- Use by owners/managers in planning the business, and
- Obtaining business financing (loans and investors).
Developing the financials section will give the business founder/managers a plan for budgeting, estimating future expenses and revenues, and business projections. Likewise, a lender or outside investor will depend greatly upon the financials in evaluating the appeal/risk of investing in the business.
Below we go through multiple sections of the business plan that meet the above purposes. Note: Depending on the use of the business plan, it may be advisable to remove certain sections for a specific purpose. For example, when presenting the business plan to equity investors, it may be advisable to remove the portion regarding the financial status of the founders. Likewise, as the business develops the financial condition of the owners may be less relevant than the corporate fiscal health.
Personal Finances of Founders
Disclose the personal net worth, assets, obligations, outside investments, and sources of income of each individual. This information can be rather personal, but it serves multiple purposes. Demonstrating the financial status of the founders, owners, or major stockholders gives an indication of the ability of these individuals to supply necessary capital to the business. The partners, members, shareholders, etc., will have more confidence if the other owners have the financial ability to meet the capital needs of the business.
This information serves the dual purpose of satisfying the requirements of lenders and investors. Potential investors will want assurance about the owner’s ability to meet the financial needs of the business. Likewise, lenders will take the resources of these individuals into consideration when making the determination of whether to extend credit. Unless the company has considerable assets to post as collateral, lenders will require founders/owners to sign personal guarantees for the debts of the business.
Seed Capital and Startup Funds
Every business begins with a combination of effort and assets. The initial funds to obtain the assets or services necessary to start a business are known as seed funds. This initial amount of capital generally comes from personal assets of the owner(s), family members, or friends. It may be the case that the owners use person debt, such as credit cards, home loans, etc., to fund the startup. In other cases friends and family members either invest the necessary cash or make a loan to the entrepreneur.
Regardless of the source, seed capital is essential to starting the business. Many entrepreneurs depend too much on their own time and efforts to carry out business functions. While this may be necessary, it pulls the entrepreneur from his/her primary tasks – planning and organizing resources to develop the business. For this reason, I recommend that you invest considerable time in mapping out the potential startup costs.
When preparing a the list of startup expenses, it is best to overestimate the amount. You should conduct secondary and primary research to determine the costs associated with startup. Secondary research would be to read material from secondary sources on cost of assets or services. Primary research includes contacting providers of venders of the necessary assets/services. Overestimating the stated costs will give you some room for accommodating unforeseen costs. Another approach would be to allocate a set additional amount of money entitled contingencies. This should generally be 15-25 percent of the total startup expenses.
You will need to itemize your expenses in a readily usable and modifiable format. I recommend using excel in the beginning and later moving to a customized accounting system (like intuit or quickbooks). You will need to explain all of your expenses, the amounts, the necessity of the expense, etc. This will be important in obtaining a business loan or justifying the required capital contribution and ownership interest of each owner.
The Financial Plan (Financials)
The financial plan lays out the entirety of revenue, expenses, profit or loss for the company. All of the figures estimated in prior portions of the business plan come together here. The financials are so comprehensive, most potential investors read the business summary, the founder bios, and the financials to determine whether they are interested in the business. These statements constitute the projected financial future of your business.
The financial plan consists of a 12‐month profit and loss projection, Three‐year profit and loss projections, a cash‐flow projection, a projected balance sheet, and a break‐even calculation. If you are approach investors you will want to include a projection for internal rate of return and pay-back.
12 – Month Financial Projections
The first part of the financials is a detailed 12-month profit and loss projection. The profit and loss projection includes all sources of revenue (including the capital contributions of owners) and all costs/expenses associated with the business.
- The top portion should show all sources of revenue and contributed capital, including the injection of cash from owner’s capital, loans or lines of credit, and any equity investment. Your estimation of revenue from sales should be illustrated within your sales projections. You will draw from you marketing research to estimate sales and average price of goods or services sold.
- The middle portion should give a breakdown of all costs and expenses of startup and operations, including the cost of capital (i.e., interest on loans). You should allocate a percentage of any contingency funds to miscellaneous expenses of the 12-month period. Your sales cost should include the costs of goods sold, service related expenses. Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses.
- Profit/Loss projections should be laid out month-by-month for the twelve month period. The 12-month projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses. You will want to carefully document your presumptions for use in future planning.
The 12-month projections should be as detailed as possible. While the revenue portion will generally be very simple in comparison to the expenses portion. The important point about the revenue portion is to make certain that your revenue projections are realistic. Too many business plans over-estimate revenue from sales early in the Startup’s life. Remember, the number one reason why business fail is a lack of sales. This lead to inevitable cash flow problems.
Three-Year Financial Projections
Now that you have a 12-month plan, you should start working on your 3-year Financial Projections. The 3-Year projections should contain all of the same elements as the 12-month projections. There should also be additional elements to the Revenue section (to account for increased sales, new infusions of equity, or additional debt). The expenses section must account for the projected growth in COGS, personnel expenses, cost of capital, etc.
The 3-year Financial Projections serves two purposes:
- A strategic and financial planning tool for the founders, and
- The business proposal to potential investors.
At this point, it is important to remember the difference between a small business and a startup venture. The small business hopes to exist, grow, and provide a continued livelihood or employment for the owners. Startup ventures a growth-based projects. The entrepreneur, along with any investors, look to capitalize upon sale or exit of the business venture. Investors in the business will want to see a detail 3-5 year projection showing the intended growth path of the business. The growth of the business (i.e., the increased revenue) will be the metric by which the sale price is determined. The sale price gives the investor a target rate of return on their investment.
Projected Cash Flow
Cash flow is generally considered the absolute most important component of business operations. As stated above, the number one reason businesses fail is a lack of sales. Failing to meet the intended sales projections often gives rise to a cash flow problems. The cash flow projections allow you to visualize the movement of money in and out of your business. This is critical in planning the use in the budgeting process.
You can think of the cash flow statement as your check book. You start out with an amount in your bank account. The amount each month is based off of your budget projections. This amount will be adjusted each month, based up the actual result of cash flow for the prior month. You will subject from the budget amount for every expense paid and add to the amount for every dollar received.
Basically, the cash flow statement breaks down the revenue and expense component of the financial projections into individual transactions over a stated time period. You will define individual sources and amount of revenue on a week-by-week or month-by-month basis. Remember, the cash flow projections deals with the period in which money comes in and goes out. Just because goods are bought or sold in a given month, that does not mean that cash changes hands.
You should record every transaction based on the actual receipt or amount paid at the time of payment. These projections should be updated weekly as the amount of payments made may vary throughout the week or month. Further, your expenses projection should be based on the same time period as the revenue projection, so that you can easily compare the two.
Revenue of the organization tends to vary more than expenses. Revenue is based upon sales projections, which are subject to the whim of the consumers. Many of the organization’s expenses are fixed – such as payroll expenses. These payments will remain constant each week or month. Variable expenses, such as materials associated with sales or other incidentals will vary. Try to use any prior historical references you can to estimate these amounts.
Your underlying purpose of the cash flow projections is to actively plan for the allocation of resources throughout the year. You certainly don’t want to have a cash deficit, but you equally do not want to have a surplus of unused cash. A deficit can ruin the business, while a surplus indicates inefficient use of funds.
The Balance Sheet
The balance sheet is a statement of your business’ assets, liabilities, and equity invested in the business. Owner’s equity is simply the assets (or asset value) minus the total liabilities of the business. This statement is important because it gives an overview of company’s overall solvency.
You will begin your balance sheet by accounting for all of the assets of the business. You will categorize these assets into broad categories for accounting purposes, such as cash, equipment, real estate, inventory, investment assets, prepaid expenses (such as insurance or rent), etc. You will want to break these assets into current assets (i.e., assets that are easily converted to cash) and long-term assets (which are far less liquid). It’s not likely that you will have too many categories of assets at the very beginning.
On the liabilities side, you will outline all of the obligations of the business. You can look back on your expenses calculations to re-check all of your existing liabilities. Like the assets, you should categorize the liability and group them into short-term liabilities and long-term liabilities. For example, the accounts payable would be a short-term liability, where the mortgage obligation would be a long-term liability.
You may want to develop an end-of-year projected balance sheet. You will draw these projections from your expected growth path. If you plan to reinvest cash flow to purchase additional equipment, then you would adjust your assets and owner’s equity accordingly. Likewise, if you growth path calls for increasing your debt or accounts payable, then you can project this in your accounts payable.
A break even analysis is a projection demonstrating the level of sales at which you break even. This statement takes into account the total expenses of the business for a given time period (week, month, year). There are a number of ways to arrange the formula to calculate the break even point. Here is a basic formula:
- Your Total Costs (TC) have to equal your Total Revenue (TR); TC =TR
- Your Total Costs (TC) equals your Fixed Costs (FC) plus Variable Costs (VC): TC = FC + VC
- Total Revenue (TR) equals Avg. Price (P) times the Number of items Sold (N); TR = P x N
Calculate the fixed cost associated with doing business during this time. When the TR from sales equals the Total Cost of operations for that period, that is your break even point. You know what your fixed costs are. These do not vary each period unless you purchase more equipment or hire more people. Your variable costs change depending on the amount of resources used to produce and sell the product or service. These calculations are taken from your original expense calculations. Now, given the Price of goods/service (or average price of a combination of goods/service) what is the volume of sales (N) that you will need to achieve this revenue break-even point.
Calculations for Investors
Remember, one of the key purposes of the business plan is to attract investors. Two calculations that an investor will want to see is the Rate of Return on money invested and the PayBack period for money invested.
Calculating the Internal Rate of Return and PayBack period is explained in a separate section.
Should I include and appendix to my business plan?
Material that add to the business plan, but doesn’t belong in the body. The appendices allows you to include valuable information to your business plan that does not fit neatly within the body of the plan. Generally, it is used to include exemplars of material of information that is referenced within the business plan but does not need to be included in the body. You can include material that will serve a functional purpose in the business or that evidence key relationships. Generally, you can include any outside information necessary to support the propositions or assumptions within the business plan.
Consider including the following information or materials in the appendix of the business plan.
- Marketing Material (Advertising) – The ability to drive sales is a critical part of the business plan. Providing samples of marketing material can provide an understanding of the brand that you are attempting to build around your product or service.
- Primary and Secondary Research – In order to effectively market your product (and establish a brand) you have to understand your target market. Further, you will need market estimates in order to accurately evaluate the market potential and potential profit from pursuing the venture. This material should support the figures that you introduce within the business plan.
- Designs or Property Layout Material – Perhaps you have designs, artwork, facility plans, etc., that provide a picture of your intended venture location, buildings, image. This can help third parties to understand your vision.
- Important Contracts – Providing proof of key contracts (such as leases, supplier contracts, etc.) add substance to otherwise seemingly hypothetical plans. Again, this will provide comfort to potential their-party investors.
- List of Key Assets – Providing a list of key assets within the business plan would be too large and cumbersome. While you will include the collective value of the assets within the plan, it may be a good idea to attach an itemized index for review. This can help in the budget planning.
- Organization Chart and Employee Backgrounds – Within the business plan you provide a concise background of your employees and an organizational chart. Here, can provide a more in-depth background on your key employees and their curriculum vitae. If you have many other employees, you may want to provide their backgrounds, key roles, and responsibilities.
- Customer or Expert Endorsements – Customer or expert endorsements can serve as excellent credibility for your product/service. While you will mention these or provide brief quotations within the business plan body, you may wish to include the entirety of the endorsement or letter within the appendix.
What should I do to finalize my plans?
You will scope versions of your plan for specific purposes.
Continue to focus on the purpose of your business plan and use it as a planning device. You should continually update the plan as your business progresses. Also you will make modifications to the plan to meet the immediate purpose. Below are discussions of specific purposes of the business plan.
Obtain a Loan
Any lender will want to understand the risk of their loan. Besides making the borrower sign a personal guarantee for the loan, the lender will review the business plan in detail. The lender will focus on the estimates for revenue and expenses in order to determine the potential of your idea to become a stable and operating business. Further, the lender will focus on the hard assets of the business to serve as collateral for the loan. Below are some aspects of the business plan to show additional attention for this purpose:
- Loan Amount: How is the amount borrowed explained in the business plan? You will need to be specific and provide a line-item summary of the intended purposes of the funds. The loan officer will look closely at the financials to determine whether the projected capital needs are consistent with the loan amount.
- Priority of Funds: What is the spending priority for the funds? How will each intended expenditure relate to the key purposes of the business? The loan officer will want to see how will these funds strengthen the business.
- Re-Payment Terms: You will need to have an understanding of how a similar business loan is structured. What interest rate do you expect and what is your proposed plan for repaying the loan? Of course, the lender will structure any approved loan, but you should understand the key provisions of the type of loan you are requesting. This will help your ability to negotiate the payment schedule or length of repayment.
- Security Interest: The lender will look to understand the level of security in the loan. Aside from the success of the business, the primary consideration of the lender will be the available collateral to secure the loan. You will have to provide assurance that the lender will have a security interest with priority in the collateral or after-acquired property.
An investor is looking for the opportunity in the project. Investors seek to invest in acquire an interest in a high-growth company that will provide a high return-on-investment at the exit event. The investor will seek a rate of return commensurate with the level of perceived risk that the business will fail or not meet its intended growth. Below are some aspects of the business plan to show additional attention for this purpose:
- Use of Funds: The investor will do a close inspection of the financials to determine the intended use of funds. He/she will focus closely on: the amount needed up front; the rate of expected spending; and the ability of the funds to meet the immediate business needs.
- Sufficiency of Funds: Will the funds by sufficient to meet the expected growth of the business? Is the investor intending to provide multiple rounds of funding? If no, will the investor’s equity be diluted with future equity rounds? If the investor will not make future investments, do you have a plan for future equity rounds?
- Financial Calculation: You will want to make certain that your financial projections meet the intended interest of the investor. Explain the percentage of equity offered and the offered price. The intended equity price to meet the investor’s desired rate of return. Further, you will want to explain the intended rights and provisions. For example, account for the anti-diluation rights of the investor or the right to participate in future equity offerings. There are numerous conditions that you will have to consider in the financing arrangement. Do your research and address these issues in the proposed equity offering.
- Exit Strategy: What is the intended exit strategy? (Ex. Sale to strategic purchaser; sale to private equity firm; owner buyback, Initial Public Offering). How long until you reach the exit strategy? Is there a backup strategy? This should be constructed as a worst-case scenario to quantify risk.
- Investor Involvement: What level of involvement or control will the investor exert? Will the investor seek a role in management, on the board, serve as a strategic advisor, or be completely hands off? You will want to account for the investor’s expectations and your willingness to allow investor involvement.