Writing A Business Plan

Before embarking on writing a business plan, a definition of a business plan is in order. A business plan is a document to identify an opportunity, research why this opportunity is profitable and the steps needed to capitalize on the opportunity. The business plan can be a formal document or it can be written on the back of a napkin but the mere act of writing the idea down forces you to get the idea out of your head and on paper which helps find hidden business flaws and makes you think carefully about each phase of your business.

Writing a business plan is something anyone can do, even if you don't know anything about business or finances. Even though the business plan is critical to getting the idea off of the ground, many entrepreneurs procrastinate when it comes to preparing a written plan. If you don't know anything about business or finances, now is the best time to begin learning as the chances of your business being successful will be limited without this knowledge. Just as a builder won't begin construction without a blueprint, entrepreneurs shouldn't rush into new ventures without a plan. The old saying that "those who fail to plan, plan to fail" is very relevant when talking about starting a business. SBA's statistics claim over half of new businesses fail in the first three years and the common factor is poor planning or under-capitalization (which is also poor planning).

Getting Started
The first step in creating a business plan for your business is just getting started. Writing the business plan may seem overwhelming at first, but if you break the plan down to bite sized pieces and work on one section at a time won't seem as daunting. Begin with what you know first and describe your business and your product or services. Work towards the more difficult subjects such as marketing, operations and financials. Don't worry about it being perfect now, just get the concepts on paper - expand and refine later. If you get stuck on a section in the plan, skip it for now and come back later when you have more details. Free resources to help with your plan are available from your local Small Business Development Center www.asbdc-us.org and the Service Corps of Retired Executives www.score.org.

Who is your audience?
When writing your business plan, you need to keep in mind who your intended audience is and why you are writing the plan. Why? A plan for the bank will be less interested in the exit strategy and return on investment than one for equity investors. Additionally, a plan for written for internal use will be different than one looking for financing as a bank is not necessarily interested in detailed operations of the business.

Structure
Business plans tend to have a lot of elements in common. While there is not a format that all business plans follow, there are generally accepted guidelines that most follow as the order in which the subjects flow are not random. The Business Description of a business plan is aimed at painting a picture of your business and why this business will be successful. The Marketing and Management sections are researched and a strategy of how your business will compete and operate is developed. Last financial projections show in numbers what you explained in the business plan for the sales and expenses.
Breaking these three major sections down even further, a business plan consists of six key components:

• Executive Summary
• Business Description
• Marketing
• Managers & Employees
• Financial Projections

In addition to these sections, a business plan should also have a cover, title page and table of contents.

How Long Should Your Business Plan Be?
The answer that nobody liked in school applies to a business plan which is, "as long as it needs to be". The more complex a business or the more sophisticated investors or funds requested will increase the length of a plan. Most business plan narratives should be 4-15 pages plus financials and appendix items.

Business Plan Outline

• Executive Summary
  The executive summary is the first part of the business plan but is the last to be written. It gives the reader a quick glance of what your business proposal is about and what you are asking for. This part is critical as most readers will scan this section before deciding whether to read further.
  
  The executive summary should typically be about one-half of a page in length and include what you would cover in an elevator pitch such as:
  
• Explain the condensed version of the business concept
  
• Product description or service proposition
  This section should emphasize any unique features or benefits that what is currently in the industry or area, aka why would someone buy your product over the competition.
• The demographics of your market
• The Management team
• When the anticipated start date is
• Your equity position
• How much and what are you asking for

Concise is the key in the executive summary. You will go into more detail later in the business plan.

Business Description
The purpose of the business description is to objectively describe and justify what the business concept is and will often include:

• Mission
  
• What the business does
• Description of services and/or products
• Industry information
• Business Organization
• Status of the business (start-up, expansion or purchasing)
• Current and future goals

Any facts or figures should be noted and sources included in the business plan. This information is important should you need to defend your data and assumptions. The business description is where you are trying to paint a picture of the potential of your business along with the facts of why you believe you will succeed.

Try to inject energy and excitement to get the reader enthusiastic about why your business is going to be great, without going overboard of course.

After describing what your business does, it is time to describe the products and services your business is selling. Keep in mind that it is important to show how your products and services are better than the competition (which you will illustrate in detail later). If you don't have a good answer than you should rethink your strategy. What is it about your business that is going to get the customer to change doing business with the competition? Will you offer a premium product, offer a better atmosphere or better delivery?

Marketing
A very important part of your business plan is the marketing section. Regardless of the quality of your product or service, your business will be lost in the clutter of advertising. If you don't know your customers, how will they ever find you? All of this begins with doing some research.

Customers: Who Is Your Market
The first step is to determine who you are going to sell to by identifying common characteristics of your market such as age, income, race, religion, education, interests and/or geographic locations. While everyone will need your product/service how are you going to effectively advertise to everyone and still make a profit? What you need to do instead is determine the group or groups of people who are most likely to come to your store and market to them by catering to their needs. After all you are trying to generate a positive return on your marketing dollars, so use them wisely.

Competition
In today's ultracompetitive marketplace, there is going to be competition, no matter how creative your business concept is. Attempting to run a portion of your business better than the competition may be a difficult challenge so it is often better to focus on planning on being different and competing with them less directly. Can you position your services differently? Can you serve a particular market niche that isn't being looked at? Can you add more value than the competition? Even if you are lucky enough to not have direct competition in your area meaning someone with a similar business, you will have indirect competition from many different types of businesses. Money that could go to purchase your product is going to some other item. How will you get people to change their habits? If you indicate in your plan there is no competition it will be viewed that there is either no market for your product or you have not done your research.

Optimally you will want information on at least three but no more than five competitors. List information about who they are, how long they have been in business, location, services offered, perception on pricing, quality, etc. and compare your advantages and disadvantages. If the information you are looking for is not available online, you may need to pretend you are a customer to get some of this information.

Promotional Strategy
With the above steps researched, the promotional strategy follows. The promotional strategy is where most entrepreneurs fail as they use the blanket statement that they are going to advertise in the newspaper, radio and/or television without thinking through the process or the customer. The promotional strategy provides you a map of how you are going to reach your market in the most efficient manner possible. Advertising is expensive and sometimes difficult to tell if it is bringing people to the door so use it wisely.

Sales Projections
One of the more difficult areas of the business plan is coming up with sales projections. This number is probably going to be wrong and that's ok. What you want is a figure backed up with justifiable data. Just grabbing a number out of the air saying you will make $300,000 won't work. There are many sources to help come up with this number including:

• Industry journals
• Trade groups
• Industry experts
• Average household spending
• Census data

Seasonality
The effects of seasonality are significant in some businesses. Seasonality is important because you need to see if you made enough money during the busy months to cover your overhead and personal expenses in slow months. If you find after doing the projections that you wont have enough left over you need to start with more money, get more sales, reduce expenses or do something different.

Pricing
The effects of pricing play a large role on how your product is perceived in the marketplace. Price too low compared to the competition and your product could be perceived as cheap and unreliable. Price too high with the features and benefits of your service and few customers come through the door. While this is a complex issue, here are a few things to keep in mind.

• Make sure you can make a profit at whatever price you are selling at.
  
• If you want to have lower costs and "get your foot in the door it may be better to offer discounts or coupons initially until your business is better known.
  
• Don't be afraid to charge more for your product than the competition if you have something more or better to offer.

Pricing is the easiest of the marketing mix to change. You may find that a large competitor will under price you to ensure you can't make a profit and go out of business.

Management & Operations
In this section you would describe who is going to manage the business on a daily basis as well as provide strategic direction (if these positions are separate). Each of these people need to have a brief biography included as well as a resume in the appendix.

Try to show how the experience and education of these people will be able to successfully execute the strategy in the business plan and succeed. Many times the owner may not have the specific experience for this business, so it is very important to pull their other professional experience in and explain how it will make for a successful operation.

• Next, a brief explanation of the employees is in order including:
  
• What positions need to be filled
• When they need to be filled (This is important in developing financial projections as you may have some employees come on after you start)
• How much they get paid (Be sure to calculate payroll taxes as well, estimate 15% if not sure)

Financial Projections
Financial projections are placed at the end of your business plan, before the appendix but it a very critical piece to the plan. The three must-have financial statements are a cash flow statement, a profit and loss statement and a balance sheet. The information already provided in the narrative portion of the business plan must match the financial projections.

Most financial projections are three years in length. It is a good idea to include a Notes & Assumptions to Financial Projections page to both help make sure all of your numbers come through and provide an itemized list to provide clarity for the reader.

Notes & Assumptions to Financial Projections
oLoans
o Break out each loan (building, equipment, inventory)
o Amount
o Interest rate
o Length
oAny monthly costs not discussed in business plan narrative
o Cost of goods/inventory
o Advertising
o Employee wages
o Insurance
o License & fees
o Miscellaneous
o Professional fees
o Rent/property taxes
o Repairs & maintenance
o Supplies
o Telephone
o Utilities
o Vehicle expense
o Etc.
oAnything else that needs to be explained in the financials that is not in the narrative

Financial Projection Sections
Startup Expenses - These are all expenses you will incur prior to opening your business. It is recommended to have quotes available or in the appendix for the larger items (above $500). It is also recommended that you have a miscellaneous line (at least 10% of the total project) available as there are always unexpected expenses that were not accounted for.

Sources and Uses of Funds - This section details how the loan money will be used (inventory, equipment, machines, repairs and improvements, working capital, etc) and who is providing it (bank, investor or owner). You will likely need to be injecting 20% of your own money and maybe more depending on the risk assessment of the business and your personal finances.

Cash Flows - The cash-flow statement is one of the most important pieces of your business plan. It shows a schedule of the money coming into the business and expenses that need to be paid and whether you have enough cash to sustain the business based on your assumptions. Every part of your business plan is important, but none of it means a thing if you run out of cash. Should this number be negative, you either need to raise sales, reduce expenses or have more starting cash. Your cash flow statement will typically be three years in length with the first year analyzing the monthly figures and later years by quarter. Don't be intimidated with the cash flow statement as it is merely a future look into your checking account.

Profit & Loss - This statement, while similar to the cash flow statement but illustrated annually and adds the effects of non-cash charges such as depreciation and amortization to get an accounting overview of the operations of your business.

Balance Sheet - The balance sheet is a summary of the value of all assets, liabilities and equity for an organization at the end of each year. A balance sheet is often described as a "snapshot" of a company's financial condition and will show the value of the business over time.

Personal Financial Statement - If you are looking at bank financing, every person who will have a 20% or more ownership position will need to provide a personal financial statement to show how effective they are at managing your money. This statement will show your assets (checking & savings accounts, cd's ira, 401K, valuables, home, vehicle, etc) as well as assets (mortgages, credit card bills, installment accounts, etc).

• Appendices
  Appendix items are various pieces of information that help make your case. Include details and studies used in your business plan; for example:
  
• Quotes for items over $500
• Resumes of the management team
• Industry research
• Demographic data and trends
• Maps/floorplans/blueprints of location
  
• Leases and contracts
• Letters of support

There is a lot to writing a business plan but will definitely make your business stronger. While it may seem easier to have someone else write your plan, there is no substitute to writing it yourself. This is your business and by writing it yourself you will have a better understanding of your business and strategies for success.

About the author: Spencer Gregory is a consultant advising business owners on business planning and financing. For assistance with developing business plans and business plan reviews visit www.TheBusinessPlanFactory.com.

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