Preparing a business plan is an essential step for every aspiring entrepreneur. It defines and focuses the objective of the business and lays out a plan for how the owner intends to succeed.
A business plan is a useful selling tool for investors, creditors and banks. They all want to know what the business is about and why they should be willing to invest or lend money to finance its operations.
Owners should be prepared to spend several weeks or months assembling an effective business plan. It takes a considerable amount of work, investigation and research, but it's worth the effort. Not only is a business plan helpful and informative to outside parties, but it also forces the entrepreneur to make a serious appraisal of the business idea and come to a judgment about its feasibility and likelihood of success.
Let's take an example of starting new business called Guilty Delights Cupcakes (GDC).
What Is a Business Plan?
A business plan is an outline that evaluates all aspects of a proposed business venture. It includes a description and analysis of the prospects and expectations for the business and is a road map that lays out how and why the entrepreneur expects the venture to thrive and grow.
A business plan reviews the financial and operational objectives of the business. It includes detailed budgets and plans that show how the objectives will be accomplished.
Identify the Management Team
Ideally, entrepreneurs should have some experience in the business they intend to start. A management summary details the background, education and years of experience of the management team and any investors that might be involved in setting policy and making decisions in the company.
Example: The sole owner and president of GDC, Ben Sweets, graduated from The Art Institutes Baking & Pastry School and worked for 12 years as the head pastry chef at Le Bouchon in Houston, Texas.
Each position in the company should have a description that defines the job's responsibilities and level of authority for making decisions. Who are the people that will fill these positions and what are their qualifications?
If the staff doesn't have the background needed, what are the plans to provide the necessary training?
If the owners lack certain skills, such as not having a marketing background, they should make plans to hire people who have those talents. Not everyone has all the skills needed to run a business, and owners must be honest with themselves about their weaknesses and find others to fill in the gaps.
Emphasize the strengths of the principals and the talents and skills they bring to the business.
Define the Vision of the Owners
A vision statement is a clear outline of the purpose of the business and what type of company it will eventually become. Where do the owners see this company in five years? How many employees will it have? How much in sales? Will it remain local or will it have an international presence?
These are all questions that exist in the minds of the owners. What type of company do they want to create?
For GDC, Ben intends to open the first retail store in Austin, Texas. He expects the business to grow by adding new stores in Houston, Dallas and Galveston within five years.
Describe the Purpose of the Business
Talk about the purpose of the business, the products or services that the company intends to sell, where they'll be sold and who will be the typical customer.
Ideally, the new business will specialize in products or services that it can do better than the competition and not have to compete solely on the basis of price. What are the characteristics of the services or products that make them distinct and set them apart from the competition?
What's the competitive advantage of the new company? Will it be on quality or some unique and proprietary features?
GDC will offer over 30 different kinds of cupcakes. All of the products will be baked daily and contain no preservatives. No other bakery in the area offers such an extensive choice of cupcakes. Creativity will be the key to product differentiation.
Consider the Industry Characteristics
Discuss the characteristics of the industry. Does it have many competitors or just a few that dominate the market? What are the strengths and weaknesses of the competition?
Describe the overall nature of the market. What is its size, and is it strong and growing or is it a mature market? What short- and long-term changes are expected in the industry and how will the company be positioned to take advantage of them?
Identify the tactics the new business will use to compete and differentiate itself from the competition.
Discuss the Economic Environment
Include analysis and assessment of the economic environment and how it will impact your business. Is the economy growing, stagnant or in a downturn?
A business plan should explain how the management intends to deal with all economic climates, good and bad.
Example: The economy around Austin is strong and stable since it is the home of the University of Texas.
Decide on the Type of Legal Structure
Start-up businesses have several choices for a legal structure. It could be a general partnership with several partners pooling their money and talents to start the company or a corporate form.
In a general partnership, all the partners share in the profits, assets, financial obligations and legal liabilities. All partners have unlimited liability, which means all of their personal assets are at risk to the obligations of the business.
A more defined structure is to form a corporation. While it requires more legal documentation, the liability of an investor in a corporation is limited solely to the amount of the investment.
Another popular legal structure is a limited liability corporation. An LLC combines some of the advantages of a partnership with the advantages of a corporation. It offers limited personal liability and requires less paperwork than a corporation.
Identify the Owners
Who are the owners of the business and what percentages do they own? Is everyone a voting partner or are there limitations to their input?
Discuss the Financing Needs
How much capital are the founders of the business putting into the company? Are they making a substantial financial commitment themselves or are they looking for outsiders to put up most of the capital?
Example: Ben will be investing $100,000 from personal savings and is seeking $380,000 from outside investors to pay for leasehold improvements, equipment and initial working capital.
The lack of a significant personal financial investment could be a warning sign that the owners may have some doubts about the success of the business.
As the business grows, it will need more funds to finance increasing amounts of inventory and receivables. Where will the money come from to finance this increase in working capital? Bank loans or more equity contributions from the owners?
Companies can rarely finance rapid growth with profits for one simple reason: Suppliers need to receive payments before customers pay the company. This cash flow deficit from timing has to be financed somehow.
Prepare a SWOT Analysis
A SWOT analysis is an important and powerful part of a business plan. It means strengths, weaknesses, opportunities and threats.
Strengths and weaknesses refer to the internal characteristics of your company. They're things that you can control and change. You should capitalize on the strengths and find ways to bolster and improve the weaknesses.
Opportunities and threats are issues that exist in the market outside the company. Entrepreneurs gain by identifying and taking advantage of opportunities. Threats are things you can't change, but you have to find ways to protect against them.
Define the Customer Demographics
Defining the demographic profile of the target customers is particularly crucial.
A business owner must thoroughly understand the customer. What does the customer want or need and why? How will the new business satisfy those needs? What are the conditions that will cause the customer to make a purchase?
Identify such factors as age, gender, education, location of residence and income level.
Example: In addition to walk-in traffic, Ben plans to market to surrounding corporations for office parties. Advertising will also focus on events, such as weddings and birthday parties.
Evaluate the Competition
Identify the competitors. They could be small operations or even large manufacturers and big-box stores. Determine the markets and demographics of the customers served by each of these competitors.
Find out why their customers buy from them. What are the benefits that they provide to their customers? Analyze this information and determine how this new business will be able to compete with them.
Is there a segment of the market that the competition has missed? Is there a product or service the customers want that isn't supplied by these competitors?
Discuss how the new business will be able to gain an advantage and compete successfully.
Example: The bakery industry around Austin is highly fragmented with numerous small stores and none that specialize in cupcakes.
Plan for Profits
Profit plans should have a careful and detailed analysis of each expense that's expected in the operation of the business. This includes items like rent, insurance, utility costs, labor wages, office salaries, legal fees, advertising expenses and so forth. Each expense must be determined and incorporated into the profit plan.
Make Sales Projections
Projecting sales is always a moving target. Every entrepreneur who starts a business expects sales to go through the roof. The reality is often much harsher.
A practical approach to projecting sales is to make three assumptions: excellent sales if everything goes as expected, moderate sales for something less than rosy and, finally, a sales level that's about half of the most optimistic projections.
The third option is the sales level that's most likely to occur. Cash flow projections based on this reduced sales volume is prudent and will better ensure the survival of the business.
Construct a Cash Flow Plan
Projections are essential parts of a business plan. They include the expectations for sales and profits and a cash flow plan.
A detailed cash flow plan is especially important. A month-by-month first-year cash flow plan should include all the initial capital investments, beginning working capital needs and the sources of funds. A cash flow plan must show how you plan on funding possible deficits in the early months of a beginning venture.
Moreover, projections should include contingency plans on what do to when things go wrong or not as planned.
Create a Marketing Plan
A marketing plan focuses on the product's unique features and details how you plan to promote these products and services. Explain how the products and services are different from the competition and will benefit the customer.
Should you set up a budget for advertising? What media will be used? What about an online presence? Will the business make sales through its website?
What is the pricing strategy? The selling price must be competitive but enough to allow the business to make a reasonable profit.
Example: Since the cupcakes from GDC will be unique and not available at other local bakeries, Ben believes that he will be able to charge slightly higher prices because of the quality, taste and creativity of his products.
Will the selling price be lower, the same or higher than the competition? Explain the rationale for choosing one of these strategies. If selecting the higher-price strategy, for example, explain why the customer should be willing to pay more for your products. What are the "extra" benefits that justify the higher price?
How will the product be distributed? Is it through the company's retail stores or through wholesalers? Will there be a sales force hired by the company or will the business use outside sales representatives? What incentives will be offered to the sales staff?
Discuss the costs involved with the method of distribution. How will the product be packaged and labeled to meet any regulatory requirements?
A thorough business proposal outline presents a realistic expectation about the probability of success of the business. It avoids unrealistic optimism. A positive attitude is essential, and success will come to those who start businesses with great economics and work hard.
- University of Minnesota: Creating a Business Plan
- Santa Clara University: The Business Plan
- University of North Carolina: What is a Business Plan?
- University of Nebraska: Six Key Components of a Farm or Ranch Business Plan
- North Dakota Small Business Development Center: Fill in the Blank Business Plan
- Entrepreneur: Business Plans: A Step-by-Step Guide
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for National Funding, PocketSense, Bizfluent.com, FastCapital360, Kapitus, Smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.