Business Plan 101
How many times have you thought, after a long hard day of working for someone else, “I wish I had my own business?” We’ve probably all done it. Many of us are afraid of this prospect mainly because we don’t know how to go about getting started. The truth is there is a specific mechanism that is universal in the start-up of this endeavor. This mechanism is called a “Business Plan”. Let’s face it, unless you are independently wealthy, which most of us are not, in order to start a business the first thing you will need is capital or cold hard CASH!!! To obtain this cash, you will need to apply for a bank loan or find investors who you can convince that your idea for a business is a sound investment. Your Business Plan is vital in accomplishing this goal.
So, what goes into a Business Plan? Business Plans should be designed very specifically to your business. BP’s (Business Plans), however must contain these elements, although the way they are presented may vary. They are:
- Executive Summary
- Business Description
- Marketing Strategy
- Financial Information
- Operations and Management
Executive Summary
Following your title page, the Executive Summary is just what you might think. It is a brief summary describing what product or service you are providing, telling the potential investor what funds you need from them, who will be doing the work, from what locations and most importantly, explaining how you will turn their investment into profit. Bottom line, that is the primary concern of the investor so it is important to make this clear initially. This will allow the investor to at a glance, obtain relevant information about your business. It is best to keep this section short and concise. It should be no more than one page. You want to keep the investor’s interest, so don’t make it too long.
Business Description
Start this section with a brief description of the industry your business is in. Briefly touch upon how this industry is currently doing (i.e. available customer pool, competition, etc…) also future growth potential as well as adverse scenarios in the industry that may exist (i.e. new products developed that enhance what you sell, or new products that compete with what you sell, both can impact the industry). Do real research on the industry and make sure to footnote your sources. Investors feel more comfortable with data from real sources.
This section is also where you would describe in detail the type of business you have. Whether it is product or service-oriented (i.e. food service, wholesale, retail etc…).Also you want to detail here the items or services you will be providing. You want to be detailed in your description to demonstrate that you have put thought into the product or service you are providing. For example, it is better to describe that you plan to provide “Southern Style Down-Home Cuisine for dinners, parties and special events” as opposed to just stating you will provide “catering services”. This section is also where you will need to provide whether your business will be a sole proprietorship, a partnership or a corporation. If this is a new start up and it’s just you, then your business will likely be a sole proprietorship. Partnerships and corporations have specific criteria from a legal standpoint that will usually not be applicable to small start-up ventures. Also you want to mention in this section, who you will be targeting your product/services to. Briefly demonstrate any specific ways you plan to target this market and make your business stand out over competitors. Finally, you want to demonstrate in this section how the company will turn a profit. Cite any specifics that may enhance the probable success of your business. You will be more specific with the profit dollars as you get to the financial section of the BP.
Marketing Strategy
In the marketing strategy, you will need to do research. All marketing strategies will differ based on the line of business or services you are providing. However, some things are going to be consistent across the board. You will need to be able to show that there is a need for your product or service by identifying your Target market. The Target market is who makes up your customer base. You can determine this Target market by analyzing the demographics of your area. Demographics are basically identifying aspects of the population where your prospective business will be located. Identifying which aspects of the population are greater, such as elderly vs. youths, male vs. female, etc. Predominate ethnic makeup of the area and things of this nature can aid you in determining if the demographics of the area are conducive to the need of your product or service. The census bureau is an excellent source for obtaining this type of data.
Once you have identified your Target market, you will need to show what you project your Market share of the Target market will be. For example, If you know that there are three competitors in the area, you can gather their sales information (this is a matter of public record and should be easily obtained on line), and develop a basis for what Target market is out there. Let’s say that last year those three competitors had combined sales of $1.5 million. Let’s say company one had sales of $750k (50% of the Target market) company two had sales of $350k (23% of the Target market) and company three had sales of $400K (27% of the Target market). You can then project what you feel you could legitimately take from your competition out of that Target market. Maybe you project getting 12% of the Target market from company one because you can sell certain products at a discounted price. You may project getting 9% of the Target market from company three because your location will be closer to a certain demographic that uses the product or service. This is where you demonstrate specifics that make you stand out and will allow you to get your portion of this existing market share from your competitors.
Other elements that the Marketing Strategy should include are:
- Pricing
- Distribution
- Promotion
Pricing is obviously a key element in determining your success in this endeavor. You want to maximize your profit but at the same time you want to have competitive pricing in order to beat out your competition. Make sure to account for every dime it takes to get your product/service to completion. When I say completion, I mean once goods or services are in the customer’s hand. Often, we may not realize all the elements necessary to do this without a step by step detailing of what is involved. It is important to capture each cost element to get the best indication of what you can truly price your goods or services for to be profitable.
Distribution is where you would detail how you will get your end product to your customer. Will you mail the product? Will you send a tech out to the site to provide the service? This is just where you show the investors how you will distribute. You need to detail the cost for distribution when you get to the financial section of your BP.
Promotion is where you would detail how you will advertise your business. Will you use a website, a newspaper ad, or a TV ad? Also, here is where you will discuss packaging for your product. Is it in bottles, boxes, or bags? What’s on the label of your product? For goods and services, are you providing flyers? What about your business cards? Do you show any of your work on your flyers or cards? These are all things that can promote your business. Once again you want to detail the cost of all these elements when you get to the financial section of your BP.
Financial Data
All BP’s should include a basic financial statement that is GAAP compliant. GAAP stands for Generally Accepted Accounting Principles. Basically this means that all financial statements must have these components:
Balance Sheet- Lists company’s Assets, Liabilities and Capital or Retained Earnings.
Income Statement – Lists Sales/Revenue, Cost of Sales, Expenses and Taxes. Taxes may sometimes show up as a separate line with another line showing your Gross Profit /Loss before taxes first, and then it’s affect after taxes… but it doesn’t always have to.
If you know little about accounting, you may need to seek outside help from a professional to devise your financial statement. You want to demonstrate how you plan to make a profit with all cost elements considered. It is best to prepare financial statements to project 3 to 5 years out and demonstrate an increase in profit from year to year. In other words, if your profit at the end of year one is $25k, then year two should be more than that (perhaps $28k ) and year three should be more than both prior years (perhaps $31K) and so on. Make sure to consider all elements of your industry that could aid in your potential profit growth. Investor’s will expect you to defend this growth as well, so be sure it is based on real data and real specifics that will lead to this growth. The more specific and detailed data you can provide to substantiate the growth, the better.
Operations and Management
Finally, this section will explain the structure, staffing, and operation of your business. You will need to have a clear picture of your staffing needs as well as having ideas of how these staffing needs will change as your company grows. Even if it’s only you in the beginning, as your business grows (and you probably won’t get the loan if you don’t show growth), you will need to consider the increase in your staff. Specifics of the cost of staffing should be detailed as part of your financial statement. Also, the Operations and Management section is where you will give a description of how your business will be run in terms of how you plan to distribute the work efforts, when work objectives/milestones will be met, and when/how the final products/services will reach the customer. Basically, all things that describe the running of your business need to be included here.
As you can see the Business Plan is a very detailed mechanism. It is vital that when preparing it, all information be as accurate as you can possibly make it. Be sure that the goals and objectives you put forward are realistic. Think hard about your ability and resource pool to accomplish them. Realistically speaking, no one is going to gamble away thousands of dollars unless you can demonstrate to them that it will pay off in the long run.
If this whole thing seems overwhelming to you, there are many sites you can visit online that give a wealth of information on preparing a Business Plan for both businesses and individuals. Look for one that is best tailored to your specific needs. Once you obtain the loan, it will then be time to roll up your sleeves and start the real work of making it all happen. GOOD LUCK!!!
By Johnny Lewis
