Some Generalizations about Business Plans Critical Questions Your Business Should Answer I. Non-Disclosure Agreement II. Control Numbering III. The Executive Summary IV. Table of Contents V. The Company VI. The Market VII. Marketing Strategy / Implementation VIII. Product(s) or Service(es) IX. Manufacturing and Operations X. Management and Organization XI. Schedule of Activities XII. Critical Risks and Problems XIII. Financial Information It is important to remember that this outline should be treated as a guide, and not as a rigid, all-encompassing format: each business is unique and its plan should reflect as much. It is also important to understand that no reasonable investor or lender will look at the plan as indelibly etched in stone. As market conditions change, as company strategies evolve, as projections are surpassed or not reached, the plan should be updated to reflect revised scenarios. Developing a business plan is the first step to a successful business. This guide will provide an outline in organizing your effort to gather and evaluate information about your business. By planning your business’s needs, you will develop an essential part of the business-it’s strategy! Starting and managing a business takes motivation, desire and talent. It also takes research and planning. The process of developing a business plan will help you think through some important issues that you will need to consider. Your plan will become a valuable tool as you set out to raise money for your business. It should also provide milestones to gauge your success. A business plan precisely defines your business, identifies your goals and serves as your firm's resume. Its basic components include a market study, marketing/promotional strategy, current balance sheet, an income statement and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make the right 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 package. Additionally, it can tell your sales personnel, suppliers and others about your operations and goals. The business plan brings several legal issues to light including licenses, permits, zoning laws that may vary business-to-business and state-to-state. You also must decide about your form of organization (corporation, partnership or sole proprietorship). The following is a suggested outline of the material that should be included in your business plan.
Some Generalizations about Business Plans: The Executive Summary is critical:
This two or three page summary of the plan is where most lenders and investors turn first; it is where they decide to read on or to decline the opportunity. Focus:
The plan should be clear as to products to be developed and markets to be addressed by the business. Do not state the company will develop a widget and sell it to General Motors and a regional retail chain without explaining how its done. Avoid unsubstantiated superlatives:
The "trust me" school of thought doesn't work in business plans -- if your product is going to be the best in the market, thoroughly describe why. Quantity does not equal quality:
The well written plan is succinct and to the point. The typical plan should be able to state its total message in 30 to 50 pages. First impressions are lasting impressions:
Incorrect spelling, grammar, punctuation, numbers that do not total, a poorly organized plan, all can add up to sink a proposal that might otherwise float. Take the time to have the plan proofread by at least three other members of the management team or consultants. "Slick" plans can be a turnoff:
Expensively prepared plans are often perceived as form over substance and frivolous spending. Do not waste scarce financial resources on an over prepared document. Avoid the use of non-assertive language:
Qualifying words such as "might," "probably," "maybe," "perhaps," and the like can have a subtly negative effect on readers; be positive or do not state it at all.
Critical Questions Your Business Should Answer To be totally effective, your business plan should answers the following questions. Doing this will make your lender or investor more comfortable and at ease with your business objectives and financial needs. What is unique about this company or project?
The investor or lender is not necessarily looking for a unique product, but one with growth potential that sets it apart from other industry members or from other proposals received. What does the company do?
The reader wants to be able to understand the company’s product and services and the operations of the company. How does or will the company attain profitability?
This area entails discussion of the market and competition as well an analysis of areas such as revenue and profit margins. What benefit will be derived from a capital infusion?
In other words how will the proceeds of the financing be utilized and what results benefiting the investor will be achieved. This should translate into increased revenues and profits and an excellent return on investment. Is management capable of implementing the business plan?
Many investors consider this the most important element of a business plan. An investor must be comfortable with the experience and abilities of the management team. An outstanding management team can, many times overcome other plan deficiencies. Do the financial projections make sense?
Over optimistic projections reflects on management’s judgment. Projections can be aggressive, but must be within the realm of the real business world. Is there an exit strategy for the investor
Does this business have the potential to merge, be acquired, go public or buy out the investor ? This is important, since the most popular venture capital vehicle is the convertible debenture. The investor must be confident that either the debt payments can be sustained or that their stock conversion rights have home run potential.
The Business Plan Outline
I. Non-Disclosure Agreement
Usually the first page of the document, the Non-Disclosure Agreement states that the information in the plan is proprietary and is not to be shared, copied, disclosed, or otherwise compromised. The agreement can be verbal or can take the form of signed documentation. Many investors and venture capitalists will balk st such agreements.
II. Control Numbering
Also usually on the first page of the plan, the control number is cross-referenced to a journal kept by the entrepreneur. Control numbering is not critical, but does help keep track of issued plans.
III. The Executive Summary
Many consider this the most important part of the plan because it is what lenders or investors will read first. It is the "tickler" through which an investor will be convinced to spend more time on the plan itself.
The Executive Summary should be as short as possible, but is any event, should not exceed three pages. It should be a concise and clear highlight of what the company is all about and what's in it for the lender/investor. It should include descriptions of the following, while at the same time remaining to the point:
IV. Table of Contents
Suggested sections might include the following:
V. The Company
In this section, a more thorough description of the company is given, but it is essentially an expansion of the details in the Executive Summary. Generally, this section will run two to five pages in length and will serve to highlight details covered in greater depth is later sections.
When founded and by whom? What markets to be pursued?
Is the company creating demand or is it responding to
existing demand? What will the products do for buyers? Reduce costs;
improve efficiency; etc. Who are the buyers? (For example, disk drive
manufacturers, semiconductor mfgs.) How many people in the company now; how many expected
in the future? What technologies are being used in production?
VI. The Market
More often than not, this section proves to be one of the major obstacles to entrepreneurs in writing business plans. The section should provide an in-depth view of how the company perceives the market into which it will be selling.
Market size:
Recent past Current Project (5 to 10 years)
Market Trends: Where is the market going and why? What are the economic trends? Maturity of the market - growth stage or level?
Products in the market: What is available? How many suppliers?
Market players: Who is buying? OEMs, resellers, end users? Why are they buying? What are they looking for? On what factors are buying decisions made?
Market segments: Natural splits -- geographic, industries,
volume vs. unit buyers, etc. Growth prospects within each segment
Market distribution: Competition:
The better the entrepreneur knows the competition, the better he will be able to plan around them and possibly impress the potential lender or investor. The sources for intelligence gathering in any market are several:
Existing competitors (for example, product brochures) Interviews with marketing people in the field Trade publications (Ulrich's periodical listing is an
excellent source; call editors for further suggestions on
sources) Analysts' reports: available from many securities
brokers Users of existing products: Purchasing & Manufacturing
directors Catalog of Completed Research Studies published by the
S.B.A. Potential Customers (This is imperative and an absolute
must)
VII. Marketing Strategy / Implementation
After the thorough description of the market, this section should cover, in depth, how the company plans to distribute products to its buyers and what strategies it will use to help accomplish this task.
Here, the specific market niche will be identified and described. What is it about the segment that makes it right for the company? Is it a niche ignored or ill-served by competitors? If the firm is successful in exploiting this market segment, why won't a larger competitor enter it
also? (example: sales volume in niche too low, buyers in market are unit buyers)
Credibility: company and product, why should customers
buy a new product from an unproven company? Pricing strategy: high, medium, or low relative to
market? Why? Allows for profit? Warranty policies: standard or non-standard Image: quality, reliability, service, response time --
all are key components in developing a professional image
and should fit neatly with other strategies. Advertising, Promotion and Public elations: these
strategies should match with others. Distribution channels (physical means of getting product
delivered): Servicing: Sales: Direct Sales Reps Distributors Hybrid
The sales section should describe how the firm will sell the product. If it uses reps, what kind of incentives will be used to entice them to know and push the firm's products? Is it a highly technical product requiring skilled sales people? At what level iin the buyers' organizations will sales be made? Should senior management participate directly in the sales effort to establish company and product credibility? How will you compensate salespeople -- commissions (payable on order or on receipt of payment?), bonus, salary?
VIII. Product(s) or Service(es)
Provide a detailed description of existing products and plans for future products. Are products market-ready and, if not, how long until they will be?
Description (illustration, if appropriated,) Bill of materials (major components, not too detailed) Proprietary protection (trademark, copyright, patent) Research & development, if work must still be performed
before the product is placed on the market; also indicate
time and costs involved. Advantages / disadvantages to competing products Price and cost Differentiation from competition -- Here, a high level
matrix comparing your product's capabilities, strengths,
and characteristics to your competitors' is useful. Future products:
IX. Manufacturing and Operations
In this section, the plans for producing the product or performing the service, including how and where it will be carried out, physical space and equipment needs, and the labor requirements. The following information should be included:
Location -- Advantages and disadvantages of the site
with respect to labor and material costs and availability,
proximity to customers, access to transportation, state
and local laws (including zoning), and utility costs. Physical space and equipment -- To be leased, purchased,
or built, costs and timing of acquisitions. Future
facilities and equipment requirements based on sales
projections, including the cost of additional capacity
and its timing. Production processes -- Description and method of
production, critical processes, procedures for quality,
production, and inventory control, raw materials required
(including sources, costs, etc.), organization and control
of purchasing, breakdown of fixed costs, and breakdown of
variable unit costs by product/service. Labor -- For other than management, describe to what
extent the local labor force is adequate in terms of
quality and quantity. If applicable, training and its
cost, skilled vs. unskilled, full time vs. part time. Any financial resources to be committed to Research and
Development Seasonality affecting the production cycles.
X. Management and Organization
Highlight the past experiences, training, and talent of the management team. This section is very important, especially with start-up organizations. This section of the business plan should describe the following:
Organization -- How is the management team organized
and what is the primary role for each team member. If
appropriate, include an organizational chart. How do each
team member's skills complement each other? A balance of financial, production, and marketing skills, as well as
experience with the product are needed. Key Management -- A brief summary of each key member
of the management team including: duties and
responsibilities, career highlights and significant
accomplishments (resumes may be included in the appendix).
Also, any weaknesses should be addressed and how they will
be overcome (training, outside advisors, etc.). Compensation of Ownership -- How each member of
management team will be compensated (salary, profit
sharing, incentive bonus, stock options, etc.) and what
investment each has in the company. Include a list of key
stockholders, with the number of shares and percentage of
company each owns. Board of Directors -- Identify the board of directors,
how they will benefit the firm and list their investment
in the company, if any. Professional Services -- Legal, accounting, banking, and
any other service organization that will advise your
company or help fill gaps in the organization.
XI. Schedule of Activities
A realistic schedule that show the timing of activities for the major events of the business plan is critical to the company's success. It also indicates the ability of management to plan the company's development. A schedule should be prepared outlining steps to be taken in the company's development and the completion date of each step for a period of three to five years. Entrepreneurs tend to underestimate the amount of time needed to complete various tasks. Be realistic.
XII. Critical Risks and Problems
The development and operation of any business involves risks and problems, and it is best to identify these potentially negative factors and explore their implications. To determine the risks and problems that require discussion, the owner should identify the assumptions or potential problems that are most critical in terms of the success of the venture. Then discuss them and outline possible ways for dealing with them or minimizing their impact.
XIII. Financial Information
The amount of financial information needed will depend on the stage of financing, the amount of money needed, and the nature of financing being sought. Generally, the amount of information required will increase as the amount of financing requested increases, as it will when equity (versus a fully collateralized loan) is requested.
The business plan should describe, in general terms, the type and amount of funding that is being sought. Also, information of the firm's present financial status (including current financial statements if already in operation) and financial projections must be included.
Here is what financial information should be included: The funding request -- This part of the Financial
Information section should cover the following: Desired Funding -- How much money is needed and
how it will be used. You can show detail here by
using our Cash Budget to Calculate Loan Needs
(Excel). Also see the Business Start-up Budget Proposal
form below. Use of Funds -- How will the funds be utilized? The
use should be consistent with the financial
projections. Briefly explain how much of the money
will be used for R&D, production, equipment, etc.
You can use our Financial Need Statement
(Excel) to document the Use of Funds. Capitalization -- What is the capital structure of
the company and what effect funding will have on it.
You can use our Financial Growth Capacity (Excel)
tool to show your capitalization projections.
Future Financing -- Clearly outline the future
funding needs, when it will be required, and what
the milestones are for reaching this point. Current Financial Statements -- If a track record
exists, provide financial statements for the last three
years of from inception. This includes the Balance Sheet (Excel),
Income (Profit and Loss) Statement (Excel), and Cash Flow
Statement (Excel). Financial Projections -- Three to five year projections
for: Cash Flow Statement, Income (Profit and Loss)
Statements, and Balance Sheets. If already in business,
the financial projections could be on a quarterly basis
for the first year and annually thereafter. Otherwise, the
projections could be on a monthly basis for the first
year, a quarterly basis for the second, and third year,
and annually thereafter. Here are spreadsheets for 12
Month Income Statement and Balance Sheet Forecast
and 12 Month Cash Flow Forecast. Projections of Key Ratios and Measures -- If available,
include these in the plan. An excel spreadsheet and
web page tool are available for you to do this. Just
make the 'Right Column' the projected (next) year,
and the 'Left Column' the current year.
Notes should be included as supporting documentation to the financial projections. These explain assumptions, payment policies, receivable policies, depreciation method used, and any other information used in generating the figures.
The financial projections and funding request must be keyed to the market expectations. The projections should begin with a sales forecast. Sometimes, the mistake is made of starting at the production cost level, assuming that everything produced can be marketed for a profit. Starting with a sales forecast will also help define how much cash will be coming from operations and when it will be coming in. This is essential to forecasting cash flow and determining how much equity and debt capital will be required until the company generates a positive cash flow.
Business Start-up Budget Proposal ____________________________________ _________________________________________________ Business Start-Up Estimated Costs PROJECT COSTS Purchase of Real Estate $_____________________ Closing Costs _____________________ Remodeling Costs _____________________ Machinery & Equipment _____________________ Furniture & Fixtures _____________________ Supplies _____________________ Inventory _____________________ Other _______________________ _____________________ Other _______________________ _____________________ Other _______________________ _____________________ TOTAL $____________________ START-UP EXPENSES Advertising & Promotion ______________________ Public Relations Activities ______________________ Professional Fees ______________________ Licenses & Permits ______________________ Insurance ______________________ Utilities Deposits ______________________ Rental Deposits ______________________ Other _______________________ ______________________ Other _______________________ ______________________ Other _______________________ ______________________ TOTAL $_____________________ WORKING CAPITAL $_____________________ TOTAL PROJECT START-UP COSTS $_____________________ Sources of Funds Owner’s Cash Contribution $____________________ TOTAL LOANS $____________________ Bank Loan(s) ______________________ ___________________ Other ___________________________ ___________________ Other ___________________________ ___________________ TOTAL ASSISTANCE PROGRAMS $____________________ State Financial Assistance ______________ ___________________ Federal Financial Assistance ____________ ___________________ OTHER SOURCES __________________________ $___________________ TOTAL SOURCES FOR FUNDS $___________________ Back to Business Financing and Planning |
