What Is A Business Plan For?
You always hear that you need a business plan, but is it true? If you talk to ten experts, it’s likely that five will tell you “yes,” and five will tell you “no”. At the end of the day though, even if you don’t “need” a business plan, that is, a written document titled “Business Plan,” the exercise of putting one together will benefit you and your company in a wide variety of ways.
As you’re no doubt aware, business plans are typically associated with raising capital, particularly when they are discussed in the context of startups and other early-stage businesses. Once you move into the realm of more established companies, you’ll often hear business plan and “strategic plan” used interchangeably. The bottom line is, regardless of what you call the document, in order to create it, unless you’re going to sit in a back room and “business plan in a vacuum” on your own, you will work with your team to research and write the plan. In this work with your team, you will discuss the past, the present, and the anticipated future of your business. These discussions will force you to consider issues and scenarios that may otherwise not come to light in the absence of such a planning process. This alone has tremendous value.
So, if it’s a good idea to develop a business plan, what should the plan contain and what will be the collateral benefits of developing each section of the plan?
The contents of a business plan are somewhat subjective and what is considered essential will vary based on the expected audience for your plan. Even so, there are some elements of a business plan that are required, regardless of whom the audience will be. Those essential components include the following:
Executive Summary: all plans should have a brief executive summary at the beginning. Creating the executive summary will force you to boil your business down to its most important elements, offerings and benefits. This is always a useful exercise.
Problem Description: this section must make very clear the problem that your products and services will solve. It is very useful to push yourself and your team to think about your business and your offerings in terms of the problems you are solving for your customers. This forces you to move away from an inward-focused perspective that can be very dangerous.
Overall Market Description: here you will want to provide as much pertinent information as you can about the market. In addition to forcing you to get a good handle on the demographics of your market, this section will push you to assess the size and growth of your market. You should describe your market in terms of number of customers and total sales, as well as how you anticipate these figures to look in the future. No one can predict the future, at least not consistently, however making an effort to anticipate your market’s growth, based on all available sales data and other relevant metrics, will help you to develop a better understanding of the true opportunity and how to take advantage of it.
Market Niche(s): Now that you’ve provided an overview of the market, it’s time to talk about the various segments or niches in the market and those you expect to target. Again, going through this exercise will require analysis and assessment of the attractiveness of the relevant segments in your market. As a small company, you don’t have the resources to go after the market as a whole, and even if you did, it wouldn’t likely be a good idea, so it’s very important to do this market segment analysis. In the absence of a business planning process, it may be tempting not to do adequate analysis of the segments in your market and instead, take a “wait and see attitude,” likely biting off more than you could chew in the beginning.
Products/Services: It’s critical that, based on the market research you do, particularly the analysis of the niches you will go after, you develop your products and services in a way that will have strong appeal to your target market. Doing the necessary research and analysis in the business planning process will force you to consider all key aspects of your offerings, from features and benefits, to pricing and distribution. Again, in the absence of a structured business plan and planning process, you may be tempted to just “wing it” unnecessarily on some of these issues.
Competition: The first key point to make regarding competition is that as you think through and develop this section, remember that there is always competition. In my experience, in the absence of a formal business plan and planning process, analysis of competition is the first thing to be overlooked. Many entrepreneurs like to think and say that there’s “no real competition,” when in reality, that is hardly ever the case. A structured planning process ensures that you will not just pay “lip service” to the existence of relevant competitors and substitutes.
Marketing Strategy/Tactics: What will be your marketing strategies and tactics for selling your products and services to your target market? It is very important to consider and budget for the marketing approach you will use in your business. As in other areas of your business, no one is expecting you to be a fortune-teller here, however it is useful to consider your strategic options, start testing your chosen approach, then make adjustments based on the results you are achieving. The alternative is to go in with no plan and just “shoot from the hip”. While this may work in some circumstances, typically you will see better results if you know where you are trying to go, get started, then course correct as necessary.
Management Team: It has been said many times that a potential investor cares more about having a good management team than about having the perfect product or service offering. It is considered a truism among most experienced entrepreneurs and investors I know. Yet this is an area where entrepreneurs in early stage and mature businesses alike don’t tend to spend much time thinking and strategizing. A lot of times, the entrepreneur has the mindset that they’ll take the lead on all important projects, so it doesn’t really matter who comprises the rest of their team. I’ve yet to see this mindset pay off in situations where a business achieves any real growth. Worse yet, it’s often the case that businesses are impeded from achieving their growth potential due to not having the right leadership team in place. A structured business plan and planning process will force you to at least consider the composition of the optimal management team for your business. In so doing, you likely will identify current and potential future management team deficiencies that you will need to address.
Financial Summary: This is the section of the plan that gives non-financial and non-quantitative people the most pause. In fact, in my observation, this is the section that causes many to not even bother starting the business plan. They don’t understand it and they realize that it will not be an easy road to understand it. That said, if you are starting a business or currently running a business, you must have a basic understanding of break-even, profitability, and financial statements if you want to increase your probability of having a successful business. It is very difficult to effectively run an enterprise, if you do not at least understand the basics of how to “keep score”.
The essential elements that you’ll want to include in your Financial Summary include the following:
Break-even Analysis: a calculation of the point at which the company covers all its fixed and variable costs. Although it may look and sound daunting, it is a very simple calculation, especially when you’re just “thumbnailing” it.
Key Assumptions: a description and quantification of those elements about which you don’t have certainty that will play a role in your financial model. Unless you possess supernatural powers to know the unknown and predict the future, you will not be certain about the values of all the variables that will go into your financial projections.
Projected Financials: here, based on your assumptions, you will project the three major financial statements: the Income Statement, the Balance Sheet, and the Cashflow Statement. The Income Statement provides the reader with a window into the expected revenues, costs and profitability of the company. The Balance Sheet provides a snapshot of the company’s assets, liabilities and equity at a particular point in time. The Cashflow Statement does exactly what its name implies – it provides the reader with a window into the cashflows based on the company’s operating, investing and financing activities. The three financial statements are inextricably linked and you’ll need to project all three to provide a full understanding of the expected financial performance of the venture.
Key Financial Indicators: Based on the projected financial statements, in this section you will provide the reader with financial ratios that can yield insights into the potential financial strengths and weaknesses of the venture. These ratios indicate such things as liquidity, profitability, return on equity and asset utilization, among others, and are important for gaining an understanding of the likely financial attractiveness of the venture.
Capital Requirements: One of the reasons you’re creating a business plan may be to raise money from equity investors or get a loan from a bank. Any potential investor will be very interested in the projected financial statements you created above. They will also want to see a more specific breakdown of the capital requirements you see for the venture, into the future. The relevant time horizon will vary, but you’ll want to project this for at least five years. These capital requirements can result from several potential factors, but the largest chunks are likely related to expenditures on equipment and facilities, startup costs, including the hiring of key senior and technical staff beyond the founders, and working capital.
At the end of the day, even if you don’t believe it’s important to create a document called “Business Plan” or “Strategic Plan,” hopefully I’ve convinced you that the business planning process almost always has value. The majority of that value usually derives from the insights you gain into the potential opportunities and pitfalls of growing your business. Further, the process of business planning allows you and your team to “get on the same page” and develop a common “language” and understanding of the issues of your particular business, its target markets, growth potential, and so on. Having your team aware of the same goals, risks and opportunities, is invaluable as you navigate your business toward achieving its full potential.
I look forward to your thoughts and questions. Please leave a comment (“response”) below or in the upper right corner of this post.
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