Drafting a business plan is a critical part of the start-up process for a new small business at it acts as the road map for your business, letting yourself, your employees and your backers know where you’re going and how you’re going to get there.
Your business plan has two main goals: providing yourself and your employees with a clear mission and goals, and providing potential lenders and investors with the information they need to determine whether they should back your business. A business plan isn’t something you should take likely or just use a template to create – drafting a business plan gives you the opportunity to examine all the angles for the new venture you’re proposing and plan for adverse and beneficial future developments.
A well-drafted business plan will prod owners into researching markets, think about potential problems that may arise and their solutions and evaluate the competition, making the business plan writing process a very valuable tool for business owners.
Most business plans typically have six basic parts:
1. The business description. In this part of the business plan, the owner writes a mission statement for the venture and also defines the type of business he or she is starting. For example, if you were starting a grocery store with a home delivery business you would explain the purpose of your business, differentiating how the business goes beyond traditional grocery stores.
This segment of the business plan will also describe the legal structure of your business (corporation, partnership, sole proprietorship) and also describe how your company will differ from possible competitors in your market.
2. Management. This part of the plan describes the management team of your business and their education and experience. It’s essentially a resume that lenders can look at to see if they have confidence in your business’ management.
3. Marketing plan. The marketing plan describes how you intend to sell your products or services and gives an overview of the industry you’re competing in, and identify your business’ opportunities in that industry. Potential customers are identified in this portion of the plan and other information such as your distribution logistics, the benefits of your product or service to customers, your advertising strategy and your pricing targets are also described.
4. Operations. This segment of your business plan outlines the nuts and bolts of your operation. The plan will describe the type of labor you will need at your business and how you intend to recruit, train and retain them, the compensation for yourself and employees, what outside vendors you will use for materials and equipment and how you intend to form relationships with these vendors and how you intend to handle the accounting and bookkeeping needs of your new business.
5. Risks. This portion of the business plan allows you to analyze and explain what could go wrong with your business and how you intend to mitigate the risks and handle adverse circumstances if they occur. When presenting your business plan to lenders and investors, it does not pay to downplay or ignore potential risks, as its likely your lenders or investors may spot them and think less of your ability for not having addressed them in the plan.
6. Financial management plan. This part of the business plan will show projections of your business’ short and long-term profitability. The financial management plan will include an income statement that explains how your business will generate cash and make estimates concerning revenue, expenses, capital and costs. The income statement typically includes an estimated monthly income statement for the business first year of operations, quarterly statements for its second year and yearly statements up to year five of operation. The cash-flow statement will discuss how money will flow in and out of your business for its first few years and let investors know how long it will be before your business starts showing a profit. The final piece of the financial management plan is the balance sheet, which will list your business’ assets, liabilities and equity, typically for five years.
7 Business Plan Tips
Now that you know the basic parts of a small business plan, here are a few tips on how to write an effective one:
- Clearly define the solution your business intends to offer to customers, and how your solution differs or is better than competitors’ solutions.
- Honestly and completely evaluate the risks involved in starting your business. Lenders and investors won’t be impressed by a business plan that doesn’t take account of potential risks, and if you fail to plan for the risks to your business, they may take you by surprise.
- Seek second opinions. Talk to trusted associates about your business plan and let them see if they can point out any potential holes in your plan or areas where more planning may be necessary.
- While it’s good to seek an extra set of eyes for your plan, make sure they’re not your competitor’s eyes. Keep your business plan safe from potential competitors by only allowing trusted friends and mentors to view it.
- Remember that your business plan is a living document. Your business plan is not etched in stone tablets. As circumstances change or new opportunities arise, or as you gain experience, you may need to change aspects of your business plan to reflect these shifts and your planning for them. Don’t write a new draft of the plan every month, but don’t be afraid to tweak the plan when circumstances demand it. It’s probably a good idea to review your business plan once a year and make revisions as needed. At the very least, a business plan review will help keep you thinking about new challenges and opportunities and how best to plan for them.
- Spell out to investors exactly what their money will be used for. Equipment purchases, operations costs during the start-up period, etc.; investors want to know where their money is going.
- Understand the competition and the industry. Do your homework before drawing up your plan. Find out what your competitors’ costs and profit margins are, who their customers are and anything else you can find out about them. The better you understand your industry and your competition, the better that you’ll be able to offer a comprehensive and realistic business plan to lenders and investors.
