One of the most important things you will do at the beginning of your business is develop a business plan. A few years ago, during the Internet bubble, many would-be entrepreneurs and their somewhat blinded investors joked that their business plans were written on the back of a napkin in some bar. There just wasn’t time to develop a thorough understanding of the business and strategy for executing the opportunity! Well, the joke was on them. After many business closures and significant losses of investor money, we have returned to the discipline and rigor of business due diligence and the business plan.
There are three main reasons for an entrepreneur to develop a business plan and continue to update it and expand it as the business evolves:
First, it is a planning tool. The business plan helps an entrepreneur plan out the business, define his/her need for resources, understand the marketplace and customer needs and evaluate the best strategies for accomplishing the plan objectives.
Second, it is a sales document for raising capital or attracting management talent or advisors to the company. Whenever you approach a potential investor or even a bank, you will be asked to send them a business plan or at least the executive summary of the business plan. Similarly as you build a management team or seek advisors for your business, the business plan will be an easy, concise way of sharing your vision and strategy for the business.
Third, the business plan is a monitoring tool. Once your business is up and running, the plan serves as a way to measure and monitor your performance against your original objectives. As you modify the objectives it will also be important to update the business plan so it becomes a living document, not something relegated to a shelf.
So what are the key elements of the business plan? There have been many articles and books written about business plans and how to write them so I do not intend to go into that level of detail. However I will focus on some of the critical elements of the business plan, some of the topics that must be covered and some common do’s and don’ts of writing business plans.
All business plans are expected to cover information that answers the following questions:
What is the product or service being sold?
What is the problem being solved?
Who are the customers for the product; why are they going to buy it and how much are they willing to pay?
How large is the market for this product or service?
Who else is trying to solve this same need (e.g. competitors) and how are you going to compete against them? What might be their reaction to your product or service?
Do you have any particular proprietary advantage to your product or service (patents, trademarks, strategic alliances)? Are there any barriers to entry?
What is the cost of your product/service and how are you going to make money?
How are you going to market and distribute the product? Are there any specific distribution channels you need to develop for this product/service?
Who is the management team and why can they make this happen?
What are the risks to this business?
What are your key milestones?
If you have outside investors or employee owners, how will they make money? What is the exit strategy?
All of these questions should be addressed in formal sections of the business plan. A sample table of contents for these sections might look like this:
- Business Mission
- Company Background/Description
- Market Overview
- Revenue Model
- Competitive Landscape
- Technology (if relevant)
- Operations Strategy
- Management team/advisors/partners
- Timetable/Milestones
- Business Risks
- Financial Forecasts for three to five years including first and second year by month or by quarter
- Detailed sales projections and assumptions
- Income Statement
- Balance Sheet
- Cash Flow Statement
- Capitalization required including sources and uses of capital
Appendices (which might include resumes of management team, customer testimonials, market research, patent information, copies of relevant articles or marketing materials)
Once the above detailed sections of the business plan are developed, you will need to synthesize all this information into an executive summary, which is the introduction to the business plan.