Why Prepare a Business Plan?
The process of putting a business plan together forces an objective, critical and unemotional look at the business project in its entirety.
The business plan assists in determining the feasibility of the new business and its prospects for success.
The completed business plan is an operating tool which, when used properly, will help in managing the business and work toward its success.
A business plan clearly indicates the steps necessary to start the business.
The plan is a means for communicating ideas to others and provides the basis for the financing proposal.
The importance of planning cannot be overemphasized; by taking an objective look at the business, areas of weakness and strength can be identified, needs can be pinpointed that might otherwise have been overlooked, problems can be stopped before they arise. A business plan assists in determining how the business goals can best be achieved. As an operation tool, the business plan helps to establish reasonable objectives and how to accomplish them. It also helps to detect problems as they arise, identifies their causes and may present ways to solve them. It may even help avoid some problems altogether.
It is important that the business plan is prepared individually since a professionally prepared business plan will not be of help if every aspect is not familiar to the people starting a new business endeavor. This understanding comes from being involved with the development of the business plan from beginning to end.
Over half of all new businesses fail within the first two years of operation-a major reason for failure is a lack of planning. The best way to enhance chances of success is to create a plan and to follow through with appropriate actions.
Once completed, the business plan should be used as a management tool and not put in a bottom drawer of the desk and forgotten about. Business plans can help to avoid going into a venture that is doomed to failure. If the proposed venture is marginal at best, the business plan will reveal its weak points, and may help avoid paying the high tuition of business failure.
Finally, the business plan provides the information needed by others to evaluate the proposed venture, especially if outside financing is needed. A thorough business plan automatically becomes a complete financing proposal which will meet the requirements of most lenders.
Twelve Steps to Preparing a Successful Plan
- Keep the business plan as short as possible without compromising the description of your venture and its potential. Cover the key issues of interest to potential investors and leave secondary details for a meeting with investors. Remember that venture capital investors are not patient readers.
- Don't over diversify your venture. Focus your attention on one or two specific services or product lines and markets. A new or young business does not have the management depth to pursue too many opportunities.
- Don't have unnamed, mysterious people on your management team, such as the Mr. G. who will join you later as a financial vice-president. The investor will want to know early on exactly who Mr. G. is and what his commitment to your venture is.
- Don't describe technical products or manufacturing processes in terms that only an expert can understand. Most venture capitalists don't-and won't-invest in what they don't understand or think you don't understand.
- Don't estimate your sales on the basis of plant capacity. Estimate your potential sales carefully on the basis of your marketing study and from these estimates determine the production facility you need. Keep in mind that pricing reflects a total package of product, service, agents and expenses.
- Consider credit aspects carefully, for example: Will you offer credit to your customers? Can you afford to do this? Do you have to extend credit? Can you evaluate credit risk? Can you afford to write off bad debts?
- Don't make ambiguous, vague, or unsubstantiated statements. They make you look like a shallow and fuzzy thinker. For example, don't merely say your markets are growing rapidly. Analyze past, present and projected future growth rates and market size and be able to substantiate your data.
- Disclose and discuss any current or potential problems in your venture. If you fail to do this and the venture capitalist discovers them, your credibility will be badly damaged.
- Roughly 98 pecent of business failures are the result of managerial weakness. There is no known cure for incompetence-but there are very direct cures for inexperience: a) get the necessary experience yourself, or b) find a partner or employee who has the requisite experience.
- Involve all of your management team, as well as any special legal, accounting, or financial help, in the preparation of the business plan.
- Don't overstate or inflate revenue and accomplishments; be rigorously realistic and objective in making estimates and discussing risks.
- Effective advertising can determine the success or failure of a business. This is one way a small business may compete with the larger, established companies. Advertising is a means of providing customers with convincing reasons why they should patronize a particular business. The advertising message should include a description of the particular advantages (relating to price, quality of products, convenience and accessibility of location, or quality of service) offered to customers.
Effective Advertising.
To be effective, an advertisement must:
- Attract attention-of the reader or audience.
- Offer visual and verbal persuasion-show how the product will benefit the customer.
- Outline a need-show why the product is necessary and why it should be purchased at this time.
- Invite purchasers-give reasons for buying, particularly from the business doing the advertising.
If advertising is to be profitable, three goals must be achieved:
- Sell goods and services.
- Create a good business image.
- Allow the advertiser to compete successfully.
- Often the amount spent on advertising and the amount that can be afforded are not the same. Funds should be allocated on a planned basis, typically over an extended period of around six months.
Timely Advertising.
The effectiveness of a limited advertising budget can be greatly strengthened if advertising goals are planned in relation to the total merchandising and selling program.
Timing is of utmost importance. A promotional advertisement that is not backed up by adequate merchandise stock can do more harm than good.
In short, a carefully prepared business plan can aid substantially in planning a new venture, screening would-be partners, evolving winning strategies and joining with a sound investment source, before actually launching the venture. In other words, it can mean the difference between success and failure.
Excerpted from:
- Meador, "Guidelines for Preparing Proposals." A manual on how to organize winning proposals for grants.
- "Venture Capital, R&D Projects and Other Proposals," Lewis Publishers Inc. 1985: 89-92.
- "Small Ventures: Tactics and Strategies," Harvard Business Review 1980.
Useful Questions to Help You Write Your Plan
An effective business plan should answer most of the questions listed below. Some questions might not be relevant to your business, technology or market sector.
Description of Business
- What is (or will be) the business? Include:
- What type of business do you have? Is your business primarily merchandising, manufacturing or service?
- How are you going to run it?
- Why do you think your business will be successful?
- What is the date you plan to start the business?
- What are the hours your business will be open?
- If yours is a seasonal business, how the hours will be adjusted seasonally?
- Is your business new? If so:
- Why will you be successful in this business?
- What is your experience in this business?
- What will be special about your business?
- What managerial and/or technical help will prospective trade suppliers provide?
- If you will be doing any contractual work, what are the specific terms of the contract? (Reference any firm contract or letter of intent, and include it as a supporting document.)
- How will you offset the slow payment by the customers? (Note: if you are contemplating contractual work, find out how and when you will be paid. A slow paying customer can put you out of business if you aren't prepared.)
Description of Market
- What is the market you intend to service, the size of the market and your expected share of it? Include:
- How large is your market?
- What is the present size of the market?
- Has your product ever been marketed or considered for marketing in the past? If so, explain what was marketed (or considered) and the results.
- If the results were not satisfactory in item c. above, what alternative measures will ensure the success of the marketing strategy this time?
- Have there been any independent marketing studies performed which conclude a demand for your product? If yes, describe the study, briefly relate the results and indicate the name of the market research group.
- What percent of the market will your business have?
- What is the market's growth potential?
- As the market grows, does your share increase or decrease?
- How are you going to satisfy your market?
- How are you going to price your service, product or merchandise to make a fair profit and, at the same time, be competitive?
- Why will someone pay your price?
- How did you arrive at the price? Is it profitable?
- What special advantages do you offer that may justify a higher price?
- In marketing terminology, define your target market:
- Who needs your service?
- Who needs your product?
- Who buys the kind of merchandise you stock?
- How will you attract and keep this market?
- What is the geographic location of your market?
- How can you expand your market?
- What form of customer service do you intend to provide for each product? Who will provide this service (e.g., distributor, sales representative, field service engineer, outside service agency, etc.)?
- Why can your company service the market better than your competition?
- Who are your five nearest competitors?
- How will your operation be better than theirs?
- How is their business: Steady? Increasing? Decreasing? Why?
- How are their operations similar and dissimilar to yours?
- What are their strengths and/or weaknesses? Include price, customer service, market share, geographic penetration, distribution channel, product quality and financial position.
- What have you learned from watching their operations?
- What are the strengths and weaknesses of the marketing strategy for your product. Include price, customer service, market share, geographic penetration, distribution channel, product quality and expected annual revenue.
Risk Factors
- What are the risk factors your company will experience? Include:
- Economic risks;
- Financial risks (obtaining and payment of financing);
- Legal risks;
- Technological risks;
- Marketing risks;
- Product development risks;
- Manufacturing risks;
- Expertise of management team;
- Other risks. Unless stated above, include critical success factors and the risks involved with not achieving them.
Product Description
- What is the stage of development of your product? When will it be completed?
- What are the remaining milestones required to successfully complete your product? When will these milestones be achieved?
- Personnel
- Who are the personnel responsible for product development and what experience do they have in developing any similar products? Include their names and a description of their technical background unless previously provided.
- What management and other personnel are available and required for the operation? Include:
- Personal history of key managers;
- Related work experience;
- Duties and responsibilities;
- Salaries;
- Resources available to the business.
- What is the personal history of owner(s)? Include:
- What is the their business background?
- What management experience do they have?
- What education (including both formal and informal learning experiences) have the owner(s) had which have bearing on managerial abilities?
- Personal data: age, where the owner(s) live and have lived, special abilities and interests, reasons for going into business.
- Include personal financial statements as supporting documents.
- What kinds of related work experience does the owner(s) have? Include:
- Direct operational experience in this type of business;
- Managerial experience in this type of business;
- Managerial experience acquired elsewhere, even in totally different kinds of business.
- What are the salaries of management and all employees? Include any benefits such as medical, pension, insurance coverage.
- What are the company's personnel needs?
- What are your current personnel needs? In the near future? In five years?
- What skills must employees have?
- Are the people you need available?
- Full or part time?
- Salaries or hourly wages?
- Fringe benefits?
- Overtime?
- Will you have to train people? If so, at what cost to the business?
- Who will be the individuals for your company's daily operation? Include resumes of the individuals as supporting documents.
- What are the stages of your business (from product development to full operation) over a five year period? Include:
- Staff positions required-number of employees for each position;
- Subcontractor work required and the number of subcontractors;
- Facilities required-office and manufacturing space (in meters squared);
- Capital expenditures.
- If you intend to use external services, what are the names and types of services you will enlist to assist your management team (e.g., accounting, legal, etc.)?
- Who will serve on your company's board of directors? Include name, position on board, job title and experience.
Finance
- What kind of financing does the business require? Include:
- What amount of funds will you be seeking?
- How do you intend to use the funds?
- In what form do you want to receive the funds?
- From whom do you intend to receive the funds (e.g., owners, venture capitalists, banks, small business associations, government programs, etc.)?
- How do you plan to pay back the financing received?
- What amount of return on investment will you be required to pay to the providers of the financing?
- Over what period of time do you intend to repay the finances? Include the time period over which you will pay the finances, the installment period and the breakdown for principal and interest payment, if applicable.
- What is the company's current and past financial situation? Include a balance sheet, income statement, and cash flow statement over the following time periods:
- Historical data for the past three years, if applicable;
- Monthly financial statements beginning with the month of the company's inception through six months consecutive positive cash flow;
- Quarterly financial statements for the first three years of the company's operations;
- Annual financial statements for the first five years of the company's operations.
Financial Statements. Clearly document and submit with your business plan the basis of the assumptions/calculations you have used in the preparation of the financial statements. The assumptions should be developed from, and be consistent with the information contained in this plan.
Consider the following factors in formulating your financial statement assumptions:
Balance Sheet
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Inventory-Consider the levels of inventory in relation to the expected availability of products and service levels you plan to provide to your customers.
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Capital Equipment-Estimate the equipment necessary to support your operation. Identify types of equipment required in the manufacturing, engineering, sales and administrative processes. Factor assumptions for waste, shrinkage, obsolescence and slow-moving inventory.
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Receivables-Forecast buildup of receivable levels based on sales and account receivable average collection period.
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Accounts Payable-Consider maintaining a fairly current account balance in order to keep sources of financial resources a possibility.
Income Statement
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Sales-Consider, based on specific sales and marketing plans and studies, what the forecasted sales for the period will be, while keeping in mind price changes and seasonal fluctuations, if applicable.
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Cost of Sales-Estimate the lead time necessary to build inventory to forecasted sales levels and the cost components (materials, labor, overhead) of cost of sales.
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Selling Expenses-Relate selling and commission expense to sales levels. Relate sells and marketing expenses to promotion plans.
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General, Administrative, and Other Expenses-Relate expenses to specific plans formulated with each development stage, including head counts, lease agreements and other planned commitments.
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Financing-Factor in assumptions concerning the draw-down fund taken as needed. Consider financing, related interest cost and/or divided requirements.