What’s Included in a Business Plan?
A business plan serves several purposes:
- Identifies the company and key personnel
- Explains the products or services
- Outlines the business operations and organizations
- Examines the marketplace and other competitive businesses thereto
- Identifies the marketing and sales strategies
- Conducts a financial analysis and provides financial statements
- Outlines the funding requirements
- Identifies goals, and the ability to repay debt or offer return on investment (ROI)
A business plan requires the business to be analyzed in depth. This means that the business owner(s) must have (or come to) an objective understanding of their financial situation and realistic prospects for profitability. Additionally, and more importantly, if the owner(s) are considering any outside financing or funding, he/she must detail coherent plans for future profit and/or financial needs. A secondary purpose of a business plan is to provide the business’s personnel with the overall goals and intended operations of the company. Last, as an ancillary function, the business plan can serve as a tool for selling the business.
Introduction and Executive Summary
A business plan needs an introductory section or sections. The executive summary is a standard introduction and is arguably one of the most important because it sets the expectations of the reader and allows someone with limited time to quickly determine the gist of the plan. Some entrepreneurs like to include a mission statement in this section (a few sentences describing the goal and underlying philosophy of the business). If one of the purposes of the plan is to seek funding, it is a good idea to put the basic funding goals in the executive summary, this is especially helpful when approaching professional investors or investment companies/firms. If the funding goals are too complex to sufficiently cover in the executive summary, they can be outlined in a cover letter, which also serves as an introduction to the plan.
A description of the business must be included in the plan. Simple factual matters such as the legal form of the business and its principal office and locations should be provided. The type/purpose of the business should be described, as should owners, stakeholders, and key personnel. The description section may flow into or be combined with a business history section, if applicable.
If there are special considerations involving the business, such as manufacturing processes or special relationships with vendors or other parties, it is appropriate to describe them. Factors worth specific note are those that set the business apart from other in a factual way, such as if the business utilizes specific materials / supplies that are sometimes unavailable or difficult to acquire, if the business relies on a limited number of suppliers, if there is specialized equipment needed, or if there are special environmental / space requirements. These requirements are appropriately noted both in the business description section and in the “Risks” section.
Products or Services
The basic products or services of the business must be described clearly. Often, business owners have tremendous passion for their product or service. They are tempted to articulate in every way possible what differentiates their product or service from others available in the market place. While outside financiers will want some assurance that the business’s product or service can gain market ground / market share, most experienced entrepreneurs would agree that the product or service offered is only a part of the totality of the requirements for success, and a disproportionate amount of time shouldn’t be spent describing how wonderful the product or service is in an attempt to prove that the product or service will reach its costumers based on it’s own virtues and merits.
If you have already developed collateral, product brochures and/or sketches may be attached to the plan as an exhibit referenced in this section.
Product or service pricing is generally considered a function of marketing and would likely be included in that section. One exceptions might be if the products sold are commodities of some nature.
Market and Competition
A business plan must contain a description of the industry and market in which the business will be operating. To the extent possible, the client should obtain and present all relevant data available concerning gross profits, sales growth potential, and obstacles. An intelligent, realistic overview of competition should be provided. When evaluating competition, it’s not enough to look towards current competition (if any). The business owner must take a realistic look towards the barrier(s) to entry (for instance, it’s much easier to open a coffee shop than a steel factory). By having a realistic view of the barriers to entry, the business owner is more able to determine the business’s ability to capitalize on a market deficiency before competition enters the market causing a correction.
One of the most important sections of a business plan is the marketing strategy section. A marketing strategy plan must demonstrate that the client has a firm grasp on who its potential clients / customers are. Additionally, it must show that it has (or can realistically acquire) an effective method of reaching those people. The more specific, and the more fact based you are in this section the more likely you are to be convincing. If the business doesn’t have an effective approach to reaching its customers, its prospects of success are dramatically decreased. Most marketing professionals as well as seasoned entrepreneurs would argue that marketing is the most important element of a successful business because without reaching the potential customer, the other departments of the business are irrelevant.
The development of a marketing plan is probably the most time-consuming task when developing a business plan, and the part that will likely be the subject of multiple reevaluations. Getting reliable market research can be a project on its own – knowing how to analyze the research in order to form a comprehensible plan requires an entirely different skill set. When gathering market research, the business owner should focus on information that identifies the potential customers in various ways, and that makes clear what characteristics they exhibit. Marketing research can focus on any relevant characteristic such as: age, gender, income bracket, and leisure-time activities. In addition to empirical characteristics of the individual customer, physical demographics such as location and size of market must be considered.
The marketing plan will work in tandem with pricing pricing decisions, targeted marketing decisions, and sales techniques.
Besides identifying the target market, the marketing portion must establish not only how the business is to reach customers but how it’s going to measure its effectiveness in reaching those customers. As an example, a business owner can’t have an acquisition cost of $10 dollars per customer if the customer’s lifetime value to the company is only $10. Conversely, a business can easily afford to spend tens of thousands of dollars acquiring a customer if the lifetime value to the company is worth millions. After you determine what the likely lifetime value of a customer is, then you can determine what your customer acquisition cost can be. Once you know what acceptable customer acquisition costs are, you can explore the different variations of advertising available to you. Depending on the nature of your business, as well as the other subtopics discussed in this Marketing section, your methods of reaching customers will vary wildly.
Marketing is to be distinguished from sales. The plan must certainly include a discussion of sales techniques and methods. It should offer detailed sales projections as part of the financial summaries and forecasts segment.
The business structure should be outlined with a description of both the work force and the key personnel. Especially in the case of new ventures seeking venture capital funding, the backgrounds and qualifications of the key personnel are important. The owner should plan to provide detailed information on his or her education, business experience, and financial situation. Such material may sometimes be placed in the company history section.
Risks of Doing Business
The risks of doing business will vary with the type of endeavor contemplated in addition to all other factors including but not limited to the financing scheme, the novelty of the venture, the conduciveness of the market place, and the history of the owner as a business person. Some risks are inherent to many different kinds of business including: potential loss of key personnel, economic downturns, or increased competition. It is important to consider the potential of foreseeable government regulations, as an example, someone opening a bar which caters to smokers just prior to a city ban on smoking in bars would probably force the business owner to pivot their business model extensively. The risks of litigation are also of significance. For instance, if your product hinges on a specific proprietary function that is legally patentable, and there are other businesses who own patents which are very similar to your proposed piece of intellectual property, successful or not, you need to anticipate lawsuits and account for the costs of defending them. As a side note, it is worthwhile to pre-vet law firms to handle your legal needs before they arise. By being proactive, you are in a better position to negotiate legal rates and fees, and to allow the firm to become familiar with your situation so they are more able to quickly respond to any potential action.
If the business plan is designed for obtaining specific financing, it must detail the request for funds as well as the terms on which it hopes to obtain the funds. What the funds are to be used for is the logical first question that any potential financier will have and the use of the funds should be clearly outlined. The terms on which the funds are obtained will often dictate how the financier will receive the benefit of financially supporting the business. Typically in small business situations, the business is financed by a bank loan guaranteed by the owner or by some piece of collateral that the owner possesses. In situations like this, it’s clear that the financier receives its benefit in the form of interest. However, in other common small business situations, the financier is a family member or a friend, and the business and the financier enter into some kind of partnership – the terms and conditions of which are left widely open to the arrangements between the two parties with no universally accepted arrangement as to the details. In the event that the business is taking multiple investments from unrelated parties, it is important that the business owner seek the guidance of a qualified attorney because these arrangements can become very complex with the possibility of violating securities laws, the violation of which can leave the business owner personally liable.
Financial Statements and Forecasts
Detailed descriptions of the financial history of the business and realistic forecasts are essential if available. In the case of a new business, the documents will be pro forma statements or projections but should be as realistic as possible. Most people who rely on business plans to understand that financial forecasts are essentially estimates. However, if you are able to find benchmarks in similar businesses that exist in comparable markets, you will be able to add some historical data to these financial forecasts in order to support the estimate.
Basic financial documents consist of the balance sheet, the income statement (sometimes referred to as the profit and loss statement), the statement of retained earnings, and the statement of cash flow.
Legal Impact of Business Plan
A business plan may have a legal as well as practical impact, as indicated in the Financial Proposal section above. Inaccuracies may provide a basis for later rescission of agreements and/or of promises for funding. Many businesses fail, and failure is ok so long as there were no blatant fraudulent issues when presenting the business plan to any potential partners or financiers. Truth and accuracy in business dealings is always the best policy.