A good business plan will help you communicate your ideas to investors and lenders.
Now that you have decided to start your own business, I will say congratulations to you! But I like to mention at this early stage that passion alone is not a guarantee for success in business. It is statistically gathered that many businesses could not survive their first five years. And the common denominator for the business failure is the lack of adequate planning. Hear what Chris Corrigan said about planning: You can’t overestimate the need to plan and prepare. In most of the mistakes I’ve made, there has been this common theme of inadequate planning beforehand. You really can’t over-prepare in business! No one ever plans to fail in any endeavour. There is a saying that he who fails to plan has already planned to fail. The rate of business failure can drastically be reduced if attention is paid to adequate planning. Failing to plan is a sure way to failure. Many young entrepreneurs usually make the mistake of just jumping into business in their excitement without putting a strong foundation in place. You cannot afford to get started without thinking through what you are going to do– how you are going to do it, how you will finance it, how you will make money doing it. Skills, expertise or capital can never be a substitute to planning. Many people believe that capital is all that is needed to start a business but this is not true. Capital without a good plan on how it can be productively applied will not bring desired returns.
As an entrepreneur, you must have heard about business plan. So, what is this business plan all about? Do I need it for my business? Is it just a formality? Of what importance is it to my business? Can’t I adopt somebody’s business plan for my own business? These are some of the questions many entrepreneurs usually ask in their minds when it comes to the issue relating to business plan. This chapter is dedicated to providing answers to these questions.
What is Business Plan?
A business plan is a document that lays out all of the important components of a business and serves as a road map to success. It is a tool which helps entrepreneurs plan their businesses. Having said that; it is very important to know that business plan on its own will not ensure success. It can only be a pathway to success if you maintain a correct assessment of the changing economics of your business. But if the preparation is based on miscalculated assumptions, it can become a roadmap leading to failure. That is why it is not advisable to adopt someone’s business plan because no two situations will exactly be the same. I repeat, no two situations will exactly be the same! Therefore, be guided. Investors are more attracted to people who understand their business and can write about it.
Some people believe that business plan is only needed when they want to apply for bank loan. I guess this is why many business owners do not deem it necessary to prepare one for their businesses. Business plan can be used for other purposes as enumerated below.
- To describe a new business. You cannot claim to have good understanding of your business, if you have not documented it. As a new business, you need business plan to describe and give detailed analysis of what your business is out to achieve. Business plan will help you define the objectives of your business and describe programs and strategies to achieve those objectives.
- To woo investors for equity funding. Whether you need equity capital to start a new business or to finance expansion programme, potential investors will like to see your business plan. You cannot just convince them with the word of mouth. Among other things, they will like to see the financial information about your business showing historical performance (for existing business) and future projection.
- To assess a new product line or expansion. Planning is an ongoing event. It is not that you forget about business plan after you must have prepared one at the start of your business. Business is in phases. As your business starts to grow, there may be a need to introduce a new product line or you want to expand your current level of operation, you need business plan to evaluate the feasibility of the project.
- To review and correct business performance: Your business plan creates a benchmark through which you can review your performance. By this comparison, you can determine whether things are going as initially planned. If not, you can investigate the causes and quickly take remedial actions.
- To determine the valuation of business. A need may arise whereby you need to carry out the valuation of your business either for sale or other legal purposes. You need business plan to support the valuation.
Importance of Business Plan
The importance of preparing a business plan cannot be over-emphasized.
- It prevents you from making costly mistakes.
- By carrying out your SWOT analysis as part of your business plan, you are able to identify your strengths and weaknesses/challenges.
- You can easily spot and correct errors on paper before they occur.
- Having a business plan helps you communicate your ideas to investors and lenders.
- You will be able to clarify the marketability and profitability of your product or service.
- You can easily establish the breakeven point of the business and prepare cash flow forecasts.
- It builds the entrepreneur’s confidence to forge ahead and not to give up.
- You can easily identify management gap or needs such as training and finance.
- It guides you on the start up, timing and location of business.
- It helps you in setting both qualitative and qualitative objectives.
- You can easily evaluate the progress of the business.
- It provides opportunity for entrepreneurs to discover new and/or better ideas
- It provides a platform for identifying potential customers and developing strategies to communicate with them.
Contents of Business Plan
The contents and complexity of your business plan will depend on the nature of business you want to do and the objectives you are trying to achieve. The way you prepare your business plan may vary depending on your audience. That is, since business plan is used for different purposes, it should be prepared to suit the specific audience at any given time. Following this argument, it means that if you are sourcing for funds, attention should be focused on financials. That is, you should be able to prove that you can generate enough revenue to cover the expenses and that you will have positive cash flow. A well prepared business plan should be able to appeal to its audience such as investors, bankers, suppliers etc. Therefore, before you can write a good business plan, you first need to define clearly what your objectives are. It is your set objectives that will set a pace for the preparation of your business plan. Business plans differ widely in their length, appearance, content, and the emphasis placed on different aspects of the business. Depending on your business and your intended use, you may need a very different type of Business Plan. Types of Business Plan include:
- Mini-plan: In Mini plan, less emphasis is laid on critical details. You use this type to test your assumptions, concept, and measure the interest of potential investors.
- Working Plan: This is a comprehensive Business Plan as it almost total emphasis is laid on details. This type is used to continuously review business operations and progress.
- Presentation Plan: Emphasis here is on the marketability of the business concept. It is used to give information about the business to bankers, investors, and other external resources.
Since the contents of a business plan usually vary, discussing about the format a good business plan should be more relevant to you so that you can be able to prepare or develop one by yourself. The important thing is that your business plan should be easy to understand and can be easily updated. The format below can be adopted by new and existing businesses.
Format of Business Plan
A good business plan should contain the following information:
This is the first page of your business plan but it will be the last section to write. As it is called, it contains the snapshot of the entire business plan. This page should motivate the reader of your business plan to want to know more about your business. The contents of this section will largely depend on whether you are a new or an existing business: But it usually contains the following:
- Brief description of business indicating your business name and location.
- A brief explanation of customer needs and your products or services.
- The ways that the product or service meets or exceeds the customer needs.
- An introduction of the team that will execute the Business Plan.
- Keys to success.
- Highlight of your financial data. This includes projected gross sales and profit in the first year and the capital requirement especially if you are applying for a loan. The use of chart here can be appealing.
Description of business
This section should tell your audience what the business is and what it stands for. The content of this section is summarized below:
- Description of the development of the business
- The goals and objectives of the business
- The mission of the business
- Legal establishment and ownership of the business. Is it Sole proprietor, Partnership or Limited Liability Company?
- For existing companies, make mention of past history. For new businesses, you should state your start-up plans.
- Company locations and its facilities.
- Present market condition
- Describe your company strengths and competencies
Product and Services
You should be able to enlighten your audience about why you are in business, your products and services and how much they sell for. This section contains the following:
- Description of your products and services in term of technical specifications, drawings, photos and sales brochures. Other bulky items can be attached as appendixes.
- Description of how the products or services complement one another or are sold together.
- Important features and competitive comparison of products and services. State your products competitive advantages or disadvantages.
- Customer service or follow up service and your guarantee policy
- Pricing of your product and services.
- Future products and services
The quality of your products or services notwithstanding; you need to create awareness before customers can start to patronize you. Your marketing effort begins with market research. Basically, there are two types of market research: primary and secondary. Primary research involves gathering your own data that you consider useful in determining the marketability of your products or services. Secondary research involves the use of publicly made available information. This type of information can be sourced from newspapers, trade magazines, internet and census data. If you use secondary research, ensure you remember the source of your data as you might need to make reference to them later. Marketing plan will cover:
- The total size of your market
- The estimated percentage of the market share you will have
- Demography of target market by age, gender, location, income level, social class and occupation and level of education
- Current demand and trends in your target market
- Growth potential and opportunity for your business.
- Competition/Competitive analysis.
- Market entry barriers and how you intend to overcome them.
- Business risk such as change in technology, government regulations, economy and polity.
- Pricing strategy explaining your method(s) of setting prices
- Promotion strategy which involves personal selling, public relations, sales promotion and advertising.
- Promotional Budget
- Proposed location and the ways it may affect your customers
- Distribution channels explaining how you intend to sell your products or services e.g. retail, wholesale, agents, independent representatives or through your own sales force.
- Sales forecast. It is recommended that you prepare two sales forecasts. The first one being your best guess which is what you really expect and the second; a worst case which is the low estimate that you are confident to achieve no matter the situation.
Operating procedures explain efficient and effective ways your products or services will be produced and this entails;
- Your production techniques and costs, quality control, customer service, inventory control and product development
- Detailed description of your location in term of physical requirements (amount of space, type of building, power and other utilities), accessibility and layout of your proposed facility if your are into manufacturing business.
- Legal environments such as licensing requirements, permits, health, workplace or environmental regulation, special regulation covering your industry, insurance, trademarks, copyrights and patents.
- Inventories: Types of inventories, average stock, rate of turnover and lead time.
- Your key suppliers and the type of inventory they supply
- Your credit policies and how you intend to manage your receivables
Management and Organizational Structure
- Organizational structure
- Name, position and background of management team
- Management team gap. Identify skills the team does not possess and discuss how the company plans to fill these needs.
- Personnel plan
- Compensation of employee
- Important Assumptions
- Breakeven Analysis
- Projected Profit and Loss
- Projected Balance Sheet
- Projected cash flow
- Financial ratios
Read Also: How to caluclate Breakeven Point
This will contain all the information which might be too bulky to form the contents of the business plan. These include detailed lists of equipment owned or to be purchased, brochures, copies of leases and contracts etc.
From my experience, I realise that the main reason people prepare business plan is to raise funds for their business. The funds may either be in form of loan or equity. Essentially, there are certain information which the prospective lenders or investors want to see in your business plan. If the information are not included, it may be difficult for your business plan to achieve the intended purpose for which it is prepared.
Firstly, let’s consider the information the lenders will like to see in your business plan. These include the following:
- The specific amount of loan required
- Application of the funds. Is it for assets acquisition or expansion programme?
- The impact on the business supported with projected cash flow
- The duration of the loan and how you intend to repay
- The available collateral. It is expected that the collateral should be free from liens.
The above apply when you are seeking for loan. But if you are seeking for equity funds, the things that are important here are quite different. The following are what your prospective investors will like to know:
- Funds needed categorised into one year and two to five years.
- Application of the funds. Is it for assets acquisition or expansion programme?
- The impact on the business supported with projected cash flow
- Estimated return on investment. If the return is not attractive, it is unlikely that investors will be ready to invest in such business.
- Possible exit strategies for investors.
- The proportion of investors’ ownership in the business
- Investors’ participation on the board or in management
- Communication on company’s performance in term of financial reporting
Quality of Good Business Plan
The quality of your business plan will determine whether it will be read or not. What is worth doing is worth doing well. Some of the qualities a good business plan must possess include the following:
- It should present a well thought out idea.
- It should contain clear and concise writing.
- It should be free of errors.
- It should follow a logical structure.
- It should illustrate management’s enthusiasm and ability to make the business a success.
- Your business plan is expected to show profitability.
- It should be realistic
Success Critical Factors
Regardless of the type of the business you engage in, there are some factors that are critical to the success of the business. Apart from the specific success factors which may be peculiar to your line of business, the following factors are considered critical for the success of any business:
- Good long-term company vision
- Clear goals and objectives
- Understanding of what customers want
- Understanding the competition
- Adequate financial planning
- Strong leadership
- Effective procedures and systems
- Possession of critical business skills
- Ability to change
- Ability to communicate the plan