BUSINESS PLAN



A business plan is a written document used to describe a proposed venture or idea. It typically includes the current state of a business, future vision for the business, target market analysis and challenges, sales and marketing strategies, and funding requirements to reach stated goals. Many business plans are designed with the intention of securing funding and investors to support a proposed idea; others are designed to assist with reorganization, takeovers, or to serve as an internal planning document. On its website, the U.S. Small Business Administration (SBA)( http://www.sba.gov ) describes it this way:

A business plan precisely defines your business, identifies your goals, and serves as your firm's resume… It helps you allocate resources properly, handle unforeseen complications, and make good business decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Additionally, it informs sales personnel, suppliers, and others about your operations and goals.

GETTING STARTED

The article "Write the Right Business Plan," lists ten things to consider before tackling the document:

  1. Decide why you're writing your plan—what is your motivation?
  2. Do your homework—read some books, explore web resources.
  3. Compile your information—locate articles, financial statements.
  4. Start typing—write down all your ideas, notes and questions in outline form.
  5. Write a rough draft—Flesh out the outline with full sentences and paragraphs.
  6. Do more research—support your case with data via Small Business Association contacts, annual reports, and competitors in the chosen industry.
  7. Think about the numbers—develop pro forma financial statements.
  8. Write a final draft—demonstrate attention to detail with accuracy and clarity.
  9. Get feedback—have someone else read over your plan and offer advice.
  10. Polish your plan to perfection—include a cover page, table of contents, nondisclosure form and an executive summary containing highlights.

Employees with the right skill set and expertise can collaborate to create the business plan. Alternatively, a consultant can be hired to assist with the process. A consultant can bring expertise and professionalism to the appearance and tone of your business plan, provide informed market analysis and research assistance, and supply educated projections for a market that the entrepreneur might be unfamiliar with or have little experience analyzing.

After determining who will be working on the plan, it is useful to decide on the scope of the plan and timeframe for completion of the plan. Once the team or consultant is in place, research and analysis can begin. Internal and external assessments should be conducted and then examined. The interpretations of these assessments will be the framework of the plan- and will guide goal setting and strategies for the company. Once goals and strategies are determined, a solid business plan can be formed toward fulfilling these goals.

From a management perspective, a business plan allows managers to set priorities and allocate resources effectively. It brings order and direction to an organization and provides a vision of the future that employees throughout the company can put energy into and get excited about. This shared vision and focus will benefit the company at every level and ensure that all constituents are working cooperatively and cohesively. Ideally, all employees will utilize the information from the business plan to assist in goal setting, and guide in decision making and performance assessments.

ELEMENTS OF A BUSINESS PLAN

The U.S. Small Business Administration recommends that a business plan describe four main elements of the proposed venture: an overview of the business, a marketing analysis, a financial plan, and a management plan. An executive summary and other supporting documents should also accompany the plan. These elements provide a solid starting point for a general plan, but there is no single formula to a business plan and a multitude of factors will impact the amount of content needed in a good business plan.

The executive summary is a synopsis of the entire business plan. It is critical that this summary be carefully crafted and compelling. This is the first and possibly the only information that a potential investor will read; if it is not informative enough or if it is lacking crucial data, the investor might not read beyond this summary component.

The business overview segment is a profile of the company and its primary industry. Projections, trends, and industry outlooks should be included. In this section the company describes the unique elements that make it a prime candidate for its proposed venture.

A market analysis details how the company will handle its sales and marketing strategies. This analysis includes information on the company's products or services and intended customers, and how customers will be made aware of the product or service. This section should also include a competitive analysis with a break-down identifying Strengths, Weaknesses, Opportunities, and Threats (SWOT) to the company and the business proposed. A plan of action should explain how the company will address, exploit, or withstand each of these eventualities.

The financial section discusses the current financial state of the company and what types of financing will be required for the proposed venture. In this area, it is appropriate to discuss the specific dollar amounts required for the business venture, the cost to maintain and sustain the venture, and projections of income, balance sheets, and cash flow. Statistics, facts, and research should support any financial projections listed.

The management plan section should discuss the strengths, experience, achievements, and expertise of the person or team undertaking the business venture. Investors want to know that they are offering their support to a person or team qualified and capable of handling the business proposed and the funds loaned.

A complete business plan will provide evidence to the lender that the entrepreneur has performed a thorough investigation of this new business venture, because it details how the business will generate cash flow, pay for operating expenses, and service debt repayment.

The accompanying table offers several elements for inclusion in designing a business plan.

CUSTOMIZING FOR INVESTOR-TYPE

Bankers, venture capital fund managers, and business angels each look at different features of a business plan when assessing it for investment. Bankers tend to focus on the financial aspects of the plan, and give little emphasis to marketing and management issues. Venture capital fund managers are typically most interested in both the marketing and the financial aspects of the plan. Business angels focus on entrepreneurial elements and "investor fit" considerations. Thus business plan writers should customize their proposals based on the audience they are trying to reach.

Bankers are interested in businesses that will be successful over the long term and entrepreneurs who will remain committed to the project as described in the business plan. When making their lending decisions, they are interested in collateral as security for the loan, and tend to support projects that are less risky. A banker's main interest is the repayment of the loan.

Element of a Business Plan

  1. Cover sheet
  2. Statement of purpose
  3. Table of contents
    1. The Business
      1. Description of business
      2. Marketing
      3. Competition
      4. Operating procedures
      5. Personnel
      6. Business insurance
    2. Financial Data
      1. Loan applications
      2. Capital equipment and supply list
      3. Balance sheet
      4. Breakeven analysis
      5. Pro-forma income projections (profit & loss statements)
        • Three-year summary
        • Detail by month, first year
        • Detail by quarters, second and third years
        • Assumptions upon which projections were based
      6. Pro-forma cash flow
    3. Supporting Documents
      • Tax returns of principals for the last three years Personal financial statement (all banks have these forms)
      • For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchisor
      • Copy of proposed lease or purchase agreement for building space
      • Copy of licenses and other legal documents
      • Copy of resumes of all principals
      • Copies of letters of intent from suppliers, etc.

Venture capital fund managers invest for capital gain, and when a venture is successful, they also benefit. Likewise, if a business fails, venture capital fund managers stand to lose significantly-and at much cost to the outside investors whose funds they are managing. Therefore, venture capital fund managers focus on the uniqueness of the product or service, the status of the market, and the management team's potential for success. Venture capital fund managers' main interest is growth potential and potential returns.

Business angels interests align more closely with venture capital fund managers than with bankers. Business angels focus on how their interests match up with the entrepreneur's and how well they are able to work with the entrepreneur over the length of the project. They seek out entrepreneurs who have strong, positive qualities, such as integrity and responsibility, and with whom they feel a connection. Because the investment is personal for the business angel, he or she is interested in financial gains, but also enjoys the opportunity to participate in the venture itself. A business angel's main interest is potential returns, camaraderie with the entrepreneur(s), and personal involvement.

RECENT TRENDS

An article by A. Gome investigates a growing trend among certain entrepreneurs to move away from the old-style business plan that contains an extended, long-term outlook. They are opting instead to use an abbreviated, shorter-term document that better fits their business strategy.

Long-range planning documents don't work as well for some entrepreneurs because of the fast-changing markets they are entering into, which renders the business plan irrelevant within months. And, the short-term nature of some ventures preclude the need for a long-term plan. It is unnecessary to have a five-year plan if the entrepreneur expects to conclude his venture within a shorter time frame.

LIVING DOCUMENTS

Replacing the traditional business plan is what is called a "living document," typically one page in length and with a forward-looking range of one year. Goal-setting may be projected on three- to six-month timeframes, which are more easily monitored and attainable. The living document contains similar elements of a typical business plan-vision, values, objectives, methods toward reaching objectives-but abbreviated to fit on a single page. This document needs constant updating and adjusting, with ample flexibility to respond to customer and market fluctuations. Highly-tailored documents may also need to be prepared for each type of stakeholder, whether bankers, venture capital fund managers, or business angels.

RESOURCES

There are many resources for the entrepreneur looking to write a business plan. Local business organizations, public libraries, colleges and universities may offer useful workshops, seminars, or courses.

Local Small Business Administration (SBA) offices or websites (< http://www.sba.gov >) also offer resources. The SBA has sponsored more than 200,000 loans worth more than $45 billion, making it the largest single financial backer of U.S. businesses in the country. The SBA provides free online courses, e-mail guidance, print materials, and face-to-face consultations to small business owners.

The SBA also administers the Small Business Development Center Program to provide management assistance to current and prospective small business owners. This program provides a broad-based system of assistance for the small business community by linking the resources of federal, state and local governments with the resources of the educational community and the private sector.

There are also several books and software programs that assist with creating a business plan.

Business plans are useful documents for garnering funds for entrepreneurial ventures and evaluating progress in a business start-up. They are also useful for evaluating success in established companies, establishing steps for reorganizations or acquisitions, and for guiding the overall strategy of a company. Customizing the business plan for the intended investor type ensures that the proposal will mesh with the investor's interests and key considerations.

SEE ALSO: Entrepreneurship ; Venture Capital

Monica C. Turner

FURTHER READING:

Bunderson, Gaye. "Have Your Business Plan in Hand Before Seeking $$$." Idaho Business Review, 31 January 2005.

Business Plans Handbook. Farmington Hills, MI: Gale Group, Inc., 2004.

Delmar, F. and Shane, S. "Does Business Planning Facilitate the Development of New Ventures?" Strategic Management Journal 24 (December 2004): 1165–1185.

Gome, A. "Plan Not to Plan." BRW 27 (February 2005): 72–73.

Lasher, William. The Perfect Business Plan Made Simple. New York, NY: Broadway Books, 2005.

Mason, Colin and Matthew Stark. "What Do Investors Look for in a Business Plan?" International Small Business Journal 22 (June 2005): 227–248.

McKeever, Mike P. How to Write a Business Plan. Berkeley, CA: Nolo, 2005.

Office of Small Business Development Centers. U.S. Small Business Administration. Available from http://www.sba.gov/sbdc/aboutus.html .

Pinson, Linda. Anatomy of a Business Plan: A Step-By-Step Guide to Building a Business and Securing Your Company's Future. Chicago, IL: Dearborn Trade Publishing, 2005.

U.S. Small Business Administration. "Elements of a Business Plan." Available from < http://www.sba.gov/starting_business/planning/writingplan.html >.



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