How To Write A Business Plan
This page is intended to help anyone to write their business plan.
A business plan for the starting or the purchase or the expansion of an existing business.
What Is a Business Plan?
A business plan is a recognized management tool used by successful and/or prospective businesses of all sizes to document business objectives and to propose how these objectives will be attained within a specific period of time. It is a written document which describes who you are, what you plan to achieve, where your business will be located, when you expect to get under way, and how you will overcome the risks involved and provide the returns anticipated.
Why Do You Need a Business Plan?
A business plan will provide information of your proposed venture to lenders, investors, and suppliers to demonstrate how you plan to use their money, and to establish a basis for credibility of your project.
When Should a Business Plan Be Prepared?
The sooner, the better. You will find that your final copy of your business plan may differ from the original draft, as you will be updating, revising and refining it as you go. It is important that you examine all the relevant factors now. You won't appreciate any surprises after your business has opened its doors.
Who Should Prepare a Business Plan?
The business plan should be prepared by those persons who will be implementing it.
Outside assistance from consultants, accountants, bookkeepers, and experienced business people can definitely help, but you must draft the initial plan. After all, you are the one that is going to run the business once it is open.
Think through each element of your business plan thoroughly so you have a good understanding of the overall picture and all of the details.
Present your plan to others for constructive criticism and advice, and try to profit from their experience. Modify your plan if necessary.
What's in this for Me?
If you have never drawn up a business plan before, you may be curious as to what the benefits are for you. First and most important, your plan gives you a guide to follow. Second, it gives your lending agency insight into your business opportunity therefore, positively affects your loan application. Finally, your plan will help you develop as a manager, giving you practice in thinking about competitive conditions, promotional opportunities, sources of finance, etc. Your goal is to put the plan into action.
Table of Contents
A well-designed table of contents ensures that you as well as other readers of your business plan don't waste time searching through your plan for the information they are most interested in. For example very few, if any, investors will read your plan from front to back. Instead, they will normally jump around looking for the details they need to make an informed investment decision. Keep this in mind when you create your table of contents, and organize it to make it as easy as possible for readers to find their way around your plan.
We advise that by setting out your executive summary first your readers will start with the summary, and then they can locate specific information that they want to address first.
Your table of contents should list all the major sections within your business plan, and can also be broken down into important or clarifying sub-sections. Be sure to include a page number for each section and subsection.
The table of contents should be completed after the rest of your business plan is finalized. Make sure your table of contents page is organized, clear, neat, and properly numbered. Mistakes, sloppiness, or misspellings in the table of contents give your reader the impression that you are unorganized and careless.
Mistakes to Avoid
Your table of contents must be clean, well organized, and free of mistakes. A sloppy table of contents, or even worse, no table of contents at all may destroy any hopes you have of getting anyone to review your plan.
These mistakes should be avoided:
1. Important sections and / or subsections missing
2. Page numbers do not match up correctly with the content of the plan
3. The table of contents on more than one page
4. The table of contents provides too much detail and is cluttered
5. The text layout is not uniformly aligned and looks sloppy
6. It appears that little or no thought went into its design and creation
7. To avoid a poor initial impression, double check the layout and pagination before you send out your business plan.
The following is a list of the major sections and subsections that you may wish to include in your table of contents. This list can be used two ways: First, before you begin writing a major section of your business plan, consult this list to help you organize your thoughts and ideas into general categories. Second, the list can be used as a reference to select acceptable headings when you create your final table of contents page.
Every business plan is different, and therefore every table of contents should be customized for that particular plan. Use only those headings from this list that make sense for your plan, and that will help your readers get the most from your table of contents.
Business History and Description
Product / Service Description
Description of Product/Service
Advantages of Product/Service
Product Development Activities
Industry Trends and Growth Patterns
Target Market Demographics (Customer Description)
Target Market Trends and Growth Patterns
Market Size and Potential
Pricing Strategy and Positioning
Public Relations and Promotions
Comparison of Strengths and Weaknesses
Competitive Market Niche
Market Share Analysis
Barriers to Entry
Sales Process Description
Service and Warranty Policies
Property Ownership/Lease Terms
Manufacturing Process and Operations
Quality Control Measures
Administrative Procedures and Controls
Staffing and Training
Management Control Systems
Board of Directors
Board of Advisors
3 Year Historical Financials (if applicable)
3 Year Projected Financial Statements
Current Ownership Summary
Funding Request / Terms of Investment
Sources and Uses of Funds
Major Obstacles to Success
Business Location Site Information
Other Important Data
Executive Summary / Business Description
• if this is a new business venture, expansion of an existing business or the purchase of an existing business;
• the type of business activity in which you are engaged (manufacturing, wholesale, retail, food processing, service, high technology, etc.);
• your product or service and its uniqueness;
• the market to be served;
• your advantage over the competition;
• the main objectives of your organization;
• your management background;
• the project time frames involved.
(This should be a short summary of your business plan.)
In addition, briefly describe what form of business structure you have chosen:
• sole proprietorship;
• partnership (enclose agreement);
• corporation (enclose shareholders agreement).
• date the business was registered/incorporated;
• the business name and address;
• the business phone number;
• the principal(s) name(s) and telephone number(s);
• the percentage of business or number of shares held by each (in partnership or corporation).
The executive summary is potentially the most important section of your business plan. It is normally the first section of your business plan that investors will read, and could be the last if it is poorly written. An executive summary should briefly describe the company, the product or service, and the unique opportunity your company is offering. It should also provide a short description of your key management team members and an outline of the investment you are seeking. Don't forget to tell the reader why you need the money and how and when they can expect to be paid back!
A good executive summary is essentially a condensed but powerful summary of your entire business plan. It creates a first impression in your reader's mind of both you and your business. Use clear and concise language - although this applies to your entire business plan, it is especially important in your executive summary. Use words that command attention, and that get your reader excited about the opportunity you are presenting.
Certainly the most significant part of any business plan is its executive summary. What is an executive summary? Probably the best way to begin defining it is to explain what it isn't.
• The executive summary is not an abstract of the business plan.
• The executive summary is not an introduction to the business plan.
• The executive summary is not a preface.
• The executive summary is not a random collection of highlights.
Rather, the executive summary is the business plan in miniature. The executive summary should stand alone, almost as a kind of business plan within the business plan. It should be logical, clear, interesting - and exciting. A reader should be able to read through it in four or five minutes and understand what makes your business tick. After reading your executive summary, a reader should be prompted to say, "So that's what those people are up to."
Limit the length of your executive summary to no more than 2 to 3 pages and stick to the facts. Investors are searching for evidence that justifies the soundness of your opportunity, and that gets them excited about what you intend to achieve. If your executive summary is clear and concise, you are one step closer to impressing your reader, and on your way to a terrific business plan.
Executive Summary: Common Mistakes to Avoid
The following are several common mistakes that lessen the effectiveness of your executive summary:
• Lacking a specific focus
• Too long and wordy, and failing to get to the point
• Trying to be all inclusive (it should be a powerful summary)
• Failing to demonstrate a special or unique opportunity
• Failing to outline the terms of the investment sought
• Failing to generate enthusiasm in the reader
Some suggestions to combat these problems:
• Limit your executive summary to a maximum of 3 pages (at the very most).
• If possible, attempt to present your executive summary on a single page.
• Focus on the opportunity you are presenting your investor and explain why it is special.
• Make certain that the opinions and claims in your executive summary are fully supported in the other sections of your business plan.
• Attempt to use only concrete facts and figures that explain your business concept, market niche and financial projections.
• Don't forget to include the details of your investment (the amount you need, what you will spend it on, and the return you offer your investor).
• Also consider who your reader is most likely to be, why they are reading your business plan, and the response you hope to generate.
The company description section of your business plan should outline your company's basic background information and business concept. Explain in general terms who you are and what you do. It should also cover the history of your company, how you reached this point, and where you intend to go in the future.
Consider covering the following in your company description section:
Include details about where and when the company was formed, where and when it was incorporated, a one line description of what business you are in, and a brief overview of what your company offers. If the location of your company is important, explain the advantages and benefits to your reader.
History of the Company
Provide a general overview of the history of your business. Organize details of your company into a timeline or narrative format, and include your achievements and significant milestones. Explain why you started the company, the driving force behind its inception, and how your product/service mix has changed over time. Include historical data on sales, profits, units sold, number of employees, and other important facts to build a case for your business.
Provide a snapshot of where your company is today. Are you in one location, what do you sell now, how many employees do you have, and how successful are you? Point out your current strengths, but also honestly and frankly address your weaknesses. Investors know all businesses have weak points, and you demonstrate business maturity by acknowledging your weaknesses and outlining steps to combat them.
This section gives your reader an idea of where your company is heading. What are looking to accomplish over the next 1, 3, 5 and 10 years? Relate these goals to the investment you seek so an investor understands why you need their money and what you intend to do with it. Explain the overall approach for reaching growth and profit goals in optimistic language, but make sure it's realistic. It's easy to make rosy projections about the future of your company, but it's harder to make them believable.
Company Description: Common Mistakes to Avoid
The company description should clearly explain your company and the product or services you offer. This section could be considered the who, what, why, where, when and how of your company, with the focus on significant highlights of your business. Here are some of the most common mistakes that we find in the company section:
1. Including far too much detailed information about your business
2. Providing information that an investor would consider your "personal opinion"
3. Appearing as though you have no business history or business purpose
4. Leaving out important business and legal particulars
5. Writing the section in an unorganized or confusing manner
Mission/Vision: Business Plan Basics
The mission and vision statements set the tone for not only your business plan, but also for your company. They define the path your company will follow and act as a guiding principle by which your company functions.
Your mission and vision statements tell your reader what you and your business are all about - what your company stands for, what you believe in, and what you intend to achieve.
Economy of words is critical. This doesn't necessarily mean that they should be short at the expense of effectiveness, but that each word should be powerful and meaningful. Be clear and concise and make it obvious what your company is attempting to do.
Is there a difference between a mission and vision statement? Yes, the differences are:
• Your VISION defines your long-term dream. It should not be achievable. That may sound ridiculous, but the objective is for your vision to always be just slightly out of your reach. It's what you constantly strive to attain, and it becomes your reason for being.
• Your MISSION is what you intend to become or accomplish. It should be challenging but achievable. A well-written mission statement demonstrates that you understand your business, have defined your unique focus, and can articulate your objectives concisely to yourself and others.
Mission/Vision: Common Mistakes to Avoid
Here are some of the "don'ts" to avoid when writing your Mission Statement or Vision Statement:
1. Don't regurgitate a description of your business.
2. Don't make it boring.
3. Don't make it the length of a Ph.D. thesis.
4. Don't fake emotion. If you don't believe it, don't include it.
5. Don't lie. Intend to do exactly what you say you are going to do.
6. Don't forget to write it down.
7. Don't forget to get the input of as many people in your organization as you can.
8. Don't forget incorporate it into the rest of your business
Say It With Passion
Let's assume that your Executive Summary clearly outlines your idea, business concept, opportunity, market, management team, and investment opportunity. Let's also assume that it's grabbed the attention of your reader/investor and has inspired them to read on. Moving forward, your reader quickly flips past your Table of Contents and glances at your company's Mission Statement.
What will they read? Is it compelling? Exciting? Does it give them the impression that your company and you are more than just business oriented, but also passionate? What does it tell your reader about you, your company, and your chances of future success? And will it stick in their mind as they read through the other sections of your business plan? If you can answer yes to these questions, then your mission statement has done its job.
Keep in mind that you don't want to put the carriage before the horse in regards to the relationship between your mission statement and your business plan. In many ways, your business plan (i.e. your business) should develop BECAUSE you have a mission, not because The Company Mission is a section in your business plan. A great mission statement will not make up for a poor business plan in the eyes of investors, but an undefined and uninspired mission statement may lead an investor to think twice about the quality of your business and it's goals.
A mission statement isn't just for the readers of your business plan. Instead it should be viewed as the guiding principle for your entire business. It tells you, your company, your employees, your vendors, your customers, your investors, and your lenders what your goal is, what you stand for, and where you're headed. Essentially, your mission statement defines your company's values and outlines your organizational purpose and "reason for being".
A solid business plan is organized to convey information to outsiders about the nature and intentions of your business. A clear mission statement serves as the "guiding light" of your business plan, powerfully condensing the message you want to send to the reader.
A good mission statement is compelling, passionate, and energizing. It should be risky and challenging, but also achievable. If it falls between "we can't do it", but "we will do it anyway" then you're on the right track. Also remember that a mission statement isn't written in stone, and is likely to change over time as a business grows and market conditions change. Think of your mission statement like a race; give it a clearly defined finish line and determine a time period when it will be achieved.
Writing a mission statement can be a difficult and challenging task. If you don't know what you stand for and what your company believes in, then it's impossible. If you don't know what principles you operate from and how you will treat those who come in contact with your company, then it's impossible. If you're not excited about what you are doing and lack a passion for your product or service, then it's impossible. Instead of trying to just "write it" or "get it done", devote some serious thought and soul searching to your mission statement. It must boldly state what you, your company, and it's future are all about - and it's worth the effort.
A mission statement should require little or no explanation, and its length is less important than it's power. One of Nike's now famous mission statements was:
It requires no explanation, but it motivates everyone associated with Nike, and the objective is unmistakable. Instead, Nike could have stated their mission as, "to be the best shoe company with the best customer service", but that would have done little to inspire the troops. Don't make that mistake with your own mission statement - make it passionate and inspiring, not bland and boring.
Consider two other famous examples:
• PEPSI - "Beat Coke"
• HONDA - "We will crush, squash, and slaughter Yamaha"
Attempt to keep your mission statement simple, but this doesn't necessarily mean it should be short. Try limiting it to one paragraph, although it could vary anywhere from one sentence to a full page.
Every mission statement should be different. So don't try to use one of the examples above or one that resembles the flavor of your closest competitor. Instead write a mission statement that reflects your individuality, creativity, and uniqueness.
Use a tone that best reflects the culture of your company, and get as many people as possible involved in its construction. If everyone doesn't buy into your mission statement, then it will not effectively shape your company and its actions, and thus it will lose its effectiveness. So if someone reads your mission statement and comments "great, but who cares" consider rewriting it and adding some passion. The passion and excitement you demonstrate in your mission statement will carry over not only to the rest of your business plan, but also into the day to day operations of your company.
Project Costs and Project Funding
Identify the costs to get into the proposed business venture and the sources of the project funding.
Project Cost Summary
Land and Buildings
Leasehold Improvements (renovations) ______________________
Other Assets (goodwill, franchise, etc.) ______________________
Vehicles (if used in the business) ______________________
Inventory (opening cost) ______________________
Other Start Up Expenses as per Cash Flow (accounting, taxes and licenses, insurance, rent, supplies, etc.) ______________________
Working Capital ______________________
Total Project Cost ______________________
- cash ______________________
- contributed assets ______________________
Land and Building Mortgage ______________________
Equipment Loan ______________________
Other Loan ______________________
Line of Credit (L/C) ______________________
Total Project Funding ______________________
*Total project costs and project funding must be equal
There are three types of finance for small business:
All businesses require some funding in order to commence trading. This section examines ways of effectively and successfully financing a business.
Where a business requires finance in the form of a loan, this will need to be repaid with interest. When borrowing money to finance a business it may be necessary to provide personal assets as security in order for the lender to accept the proposal. For smaller businesses loans provide the simplest and most readily available option for gain the required finance to start trading.
This type of finance provides short term finance to meet the fluctuating cash needs of a business. Usually provided by a bank this provides a simple method of gaining short term finance which is immediately repaid when the business gains a surplus of cash. However in theory an overdraft is repayable on demand although this rarely happens unless there is clear evidence of mismanagement and financial instability within the business.
These loans may be raised for short periods from as little as 2 years. These are similar to personal loans although security is almost always a requirement.
Other types of finance...
The following sources of finance are not suitable for new or small businesses, however it may help to understand these options as they may be of use as the business grows.
Leasing and Hire Purchase
Business equipment and motor vehicles are often available on hire purchase. Hire purchase agreements enable equipment to be obtained immediately without having to pay the full purchase price. On entering the agreement the equipment is delivered and phased payments are usually payable on a monthly basis with interest. At the end of the period on the agreement the equipment becomes the property of the purchaser. The interest on HP payments is allowable against tax which may prove make this a tax efficient option for large purchases.
Late payment is often a problem for smaller business. The business still incurs normal operational costs however late payment may result in the business facing problems. Factoring provides a solution allowing a business to sell its trade debts to specialist companies to provide advances on the strength of the debts. This can be up to 80% of the value of the debts depending on the business and the client involved. The remainder of the debt is received when the customer finally pays excluding the costs taken by the company providing the factoring service.
Trade credits are available from suppliers allowing businesses to purchase stock and raw materials on credit – usually between 30 and 90 days. This can give the business sufficient time to sell on the products to pay the supplier instead of having to pay for the stock up front.
Turning loss into Profit
Try to understand as to why some businesses fail. This will prevent you from making the same mistakes as others, who have failed in businesses.
Some of the reasons for business failures are:
• running out of capital
• over-estimating sales and under-estimating costs
• losing control over cash,
• carrying too much stock,
• lack of proper credit control procedures.
• prompt payment to suppliers
• not identifying markets
• failure to do market research,
• failing to adapt product to meet customer needs
• lack skills in - selling and marketing,
• poor quality staff
• Under pricing or over pricing.
If you do not have the skills to run a business, try to acquire them by obtaining training or professional advice.
When you start a business try to sell a product or a service which is in demand. Trying to sell a completely new product may take time, money and effort. Avoid competing with established players head-on as they can retaliate you with price cuts, special offers etc.
If you are starting business without a fixed idea, try to draw up a short-list of a few ideas, do research on them and select the best one. Try to select a product or a service which differs from competitors. Your knowledge and products may give you the best chance of success in identifying a market where your business could thrive.
Product / Service
• Describe the products to be produced or the services/good to be provided.
• What makes your product/service unique, or, how is your business different from others in the industry?
• What are the features/advantages that will entice customers to buy from you (i.e.., convenience, service, performance)?
• Will you offer any product or service guarantees/warranties?
• Provide information on any patents, trade secrets, or other technical advantages over the competition.
The product/service section is one of the most important parts of your business plan. It's your chance to clearly explain you products/services, identify their features and benefits, and discuss what needs or problems they address in the market.
If you are selling a product, your reader will want to know what it is, what it does, and its features and benefits. Consider including pictures if they would help your reader get a better understanding of your product.
• technological life-span and
• patent protection.
You may also wish to explain how it is produced, the materials required, and the type of labor needed.
If you offer your customers a service, explain what that service(s) are, how they work, and what need they address in the marketplace.
• Where will you operate?
• What makes your service different?
• What materials or equipment is needed?
• What are your days and hours of operation?
Explain the steps in your service process and the benefits you offer your clients. Write this section with enough information to satisfy an outsider's need to understand your service without boring them with trivial details.
Product / Service: Common Mistakes to Avoid
The following are the some of the most common mistakes we find in the product/service section:
1. Failing to identify the benefits of the product or service, focusing instead on the features
2. Describing the product/service in language that is too technical, containing too many industry specific words or phrases
3. Assuming an improved product/service will "sell itself"
4. Describing the product/service in terms that are too broad
5. Presenting weak plans for the future, leaving your company susceptible to competitors
6. Failing to include a third-party evaluation or analysis of your product
7. Underestimating the importance of legally protecting your product/service
8. Omitting the specific problem the product/service addresses and how it solves that problem
• Identify the total market for your product or service.
• To whom are you targeting your product or service?
• Identify your competition detailing the strengths and weaknesses and your advantages relative to them.
• How will your competition react to you entering the market?
• What are your past sales (if applicable) and future projections?
• What price (manufacture, wholesale, retail, etc.) do you intend to charge for you product/service and how does it compare to the competition?
• What are your selling terms (cash or credit)?
The target market section of your business plan must clearly identify the current and prospective buyers of your Company's products and/or services. Your goal in preparing the target market section is to demonstrate to readers that you clearly understand who your customers are and how your products/services directly meet the needs of the marketplace. Properly identifying your potential customer base also helps to drive overall marketing and sales strategies that you will include within other sections of your business plan.
Although your product or service may meet the needs of a large constituency of potential customers, the goal is to define your customer base as specifically as possible – both quantitatively and qualitatively. Consider the follow types of characteristics for inclusion in the target market section of your business plan:
How large is your target market? Are there 1,000 business buyers? 10 million potential consumers ready to purchase your product? Or a small handful of very large target customers?
The demographic traits of your customers often vary based on whether you are focused on serving the consumer or business markets:
Consumer - Income, Occupation, Gender, Single/Married, Ethnic Group, Education
Business – Industry, Product/Service, Years in Business, Revenue, Employee Size, Private/Public
Where are your customers located? While technology has made location less of an issue for many companies, it doesn't mean you should overlook the importance of defining the geographic location of your customers. Clarifying these issues also helps to ensure that your marketing and sales strategies/budgets properly match your goals to capture market share.
What are some of the more subjective traits that define your customers? This might include things such as current buying motivations, perceived shortcomings of other solutions in the market, and trends/purchasing shifts likely to occur within your target market.
Naturally, the more you understand your customers, the better your chances of success. Many times the best approach to answer the target market question: "Who is our customer?" is to invest time and resources in primary market research. Conduct simple surveys or focus groups. And if feasible, work with a reputable market research firm to guide you through the process.
At the very least, use the Internet and industry groups to locate market research studies and statistics for your business plan. These resources can range from free information available on websites to expensive professional market research studies prepared by experts in the field.
Performing primary research enables you to gather and document the quantitative and qualitative information needed to prepare a solid target market section for your business plan.
Target Market: Common Mistakes to Avoid
Here are some of the "don'ts" to avoid when writing the Target Market section of your business plan:
1. Don't assume that everyone is a buyer of your product/service.
2. Don't be unclear about the characteristics that define who your target customers are.
3. Don't assume you must have a "huge" target market - a large and well-defined target market that your company can serve is far better.
4. Don't jump to conclusions about why your target market needs you - instead explain how you meet their needs.
5. Don't underestimate the value of focus - sell a specific product/service to a specific group.
6. Don't try to attack too many markets at once - particularly if you are a start-up.
A popular and critical question posed to business owners and entrepreneurs by lenders and investors is "Who is your customer?" It's such a simple question, yet the inability to answer it has possibly caused more ‘going out of business' sales than any other.
Why can failing to answer such a simple question have such a devastating impact on your business? Unfortunately, because many business owners place too much emphasis on their products and services, and too little on what the customer truly wants and needs. You may have a great product, with more neat gadgets, features, and benefits that your competition offers, but does your customer care? And how do you know they care?
The first place to start is by defining exactly who would be interested in buying your product or service. This is your target market, defined as the group of the population sharing a common set of traits, which distinguish them from everyone else.
For example, a children's clothing store located in the mall might have a customer profile like this: Children between the ages of 3 to 8 years old, 65% female and 35% male, located within 10 miles of the mall, and whose parents earn over $40,000 a year. These characteristics define a target market - and a central set of characteristics for potential customers for children's clothing. If you're in the start-up phase, your target market may be less tangible than the target market for a company with years of operational history and customer files. But as you gain experience running your business, and you maintain accurate records of who actually purchases your product or service, your understanding of your ideal customer will improve.
So why focus on your target customer?
First, if you don't understand who they are, how can you tailor your product or service to best meet their needs? One key to business success is the ability to provide products and services that meet the needs and wants of your customers. If your customers want to purchase red shoes, and all you sell are blue shoes, how many do you suspect you will sell? If your customer believes that the speed of your service is more important than its quality, isn't that information you need to know?
Second, when you understand who your customers is, you can determine with more accuracy which marketing mediums and channels will be most effective in reaching them. If your potential customer only listens to FM stations, and you advertise on an AM station, your marketing efforts will be unsuccessful. The more narrowly you can define your customer, the more focused your marketing efforts become, and the more your marketing dollars will work for you.
For example, if you want to sell print shop owners a product, then advertising in a print industry magazine is a far more effective use of marketing dollars than placing an ad in USA Today or Time. This doesn't mean that your customer won't read USA Today or TIME, just that you won't be advertising to all the millions of people who clearly have no interest in your product.
Here are suggestions on how to breakdown your customer profile, on both the business and consumer level.
Demographic characteristics are specific, objective, and observable characteristics that your target customers share. Most marketing mediums, such as newspapers, magazines, radio stations and television stations can provide excellent demographic characteristics on their audience. General demographic characteristics include:
• Income Level
• Family Life Cycle
• Race/Ethnic Group
• Social Class
• Product/Service Sold
• SIC Code
• Years in Business
• Number of Employees
Geographic characteristics are based on the location(s) where your target customer can be reached. Are they in the urban areas or do they reside in the rural areas? Are they in Montana or New York? Correctly deciding whether to run an advertisement in the New York Times or the Los Angeles Times, will save you money, and help you generate more effective marketing results. Try to identify your customer based on the following geographic characteristics:
• Country / Region
• City / Town
• Size of Population
• Population Density
Psychographic characteristics, though less tangible, are still important to identify and understand. These traits have more to do with a person's psychological characteristics such as attitudes, beliefs, hopes, fears, prejudices, needs or desires, and are highly dependent on your customers' self-image and their perceptions of your industry or product. Psychographic traits include such things as:
• Social Class
• Leader / Follower
• Extrovert / Introvert
• Independent / Dependent
• Conservative / Liberal
• Traditional / Experimental
• Socially conscious / Self-centered
Consumer / Behavioral characteristics are those relating to the purchasing and usage traits of your customers. Do they use similar products such as yours, and how often do they use them? What are the benefits people desire in your service, and how does this translate into sales? Consider these consumer / behavioral traits for your target customer:
• Usage Ratio
• Benefits Sought
• Method of Usage
• Frequency of Usage
• Frequency of Purchase
Once you determine who your customer is, it's important to identify the size of your customer base. Is it large or is it small? If it's too large, consider narrowing it down and focusing on a particular niche. Trying to reach and sell a large target market is difficult and costly, especially if it's populated by well-financed competitors who will force you to incur significant costs to achieve a sizable market share. If too small, will you be able to capture enough customers to make a sufficient profit?
Once you define your customer, and determine their total numbers in the population, it's a good idea to research the trends of your market. Over the next few years, what growth rate can be expected for your target market? What changes are taking place in the makeup of your market, and how will they change in the future? How are, and how will, customers change their use of your product or service?
So you ask, "How do I find all this information?"
First, talk to as many of the people in your target market as possible. Seriously - just talk to them and ask questions. Conduct surveys. Discover what they like and dislike, and what they want and need. What is the most important factor in their purchase decision? Facilitate a focus group, or if you have the money, consider working with a market research firm.
Second, don't forget the local library. It's rich with books, magazines, research journals, reference guides, and computer databases to help you find the information you need. Ask the librarian for help, we always find them extremely helpful in locating specific sources quickly.
Lastly, use your own eyes and ears to discover valuable details about your target market and their buying habits. Visit your competitors disguised as a consumer. Hang out in a store related to the product or service you sell and take it all in. Request annual reports and marketing information to find out about the financial, operational, and marketing factors that are important in your industry. Essentially, look around, collect information, get organized, and figure out who your target customer is, and how you will reach them effectively.
Every business operates within the larger classification of an industry. Your business plan must address the forces at work in your industry, the basic trends and growth over time, and where your company fits in. Demonstrating to outsiders that you understand and have anticipated the important factors of your industry builds a case for your company's success.
Think of your industry as those companies providing products and services similar to yours. This includes those companies selling similar products and services, as well as complementary or supplementary products or services. Any business that falls between the supplier of raw materials to the end of the distribution channel for your type of product or service are part of your industry.
In the industry section of your business plan, provide answers to the following types of questions. Organize your facts, thoughts, and insights into a well-written and succinct summary.
• What is the size of your industry by both revenue and number of firms?
• Discuss the characteristics of this industry such as growth trends, units sold, or employment.
• What factors are influencing growth or decline in your industry?
• What have been the trends in previous years?
• What trends are expected in the coming years? (include supporting research)
• What are the barriers of entry for your industry?
• How many companies are expected to enter your industry in the future?
• What government regulations effect your industry and your business?
• Is your industry highly regulated or does it fall below the government's radar?
• Provide a general explanation of the distribution system for products and services in your industry.
• Is it difficult to gain distribution access to your industry? Explain.
• What role does technology play in the growth and future of your industry?
Industry Analysis: Common Mistakes to Avoid
The following are the some of the most common mistakes found in the industry analysis section:
1. Not demonstrating a solid understanding of how your industry functions.
2. Appearing unaware about the companies that form your industry.
3. Lacking understanding as to where your business fits into the distribution channel of your industry.
4. Omitting growth trends, revenue size, and significant statistics for your industry
No Company Operates in a Vacuum
No company operates in a vacuum. Every business is part of a larger, overall industry; the forces that affect your industry as a whole will inevitably affect your business as well. Evaluating your industry increases your own knowledge of the factors that contribute to your company's success and shows potential investors that you understand external business conditions.
An industry consists of all companies supplying a similar product or service, other businesses closely related to that product or service, and supply and distribution systems supporting such companies. For example, the apparel industry comprises companies making finished clothing, including the fabric suppliers, independent sales representatives and clothing marts, trade publications, and retail outlets
The competitive analysis section of your business plan is an objective overview and comparison between your company and your competitors. Begin by identifying your direct and indirect competitors, what and how much they sell (in units and sales dollars), the number of years they have been in business, and their specific market niche. Outline the strengths and weaknesses of each of your competitors from an unbiased perspective.
It is advisable to include a chart or pie-graph showing what share of the market each of your competitors commands, the trends and changes over time. Explain the percentage of the market you intend to capture, and from whom or how you will achieve this market penetration.
More than anything else, it is important to be straightforward and honest about your competitors and their strengths and weaknesses. Many first time business plan writers don't realize that investors want to see that other businesses are profitable and successful in your chosen market. If you fail to present your competitors, or claim you have no competition, why should investors assume that a market even exists from your product or service. Instead, present comprehensive information and point out how your unique strengths and tight market niche will result in your success.
Competition: Common Mistakes to Avoid
The following are several common mistakes that can decrease the effectiveness of your executive summary:
1. ASSUMING YOU HAVE NO COMPETITION! – Demonstrates inexperience and minimal understanding of your business.
2. Failing to identify both direct and indirect competitors.
3. Underestimating the power and strength of competitors.
4. Omitting the specific competitive advantages you hold over your competition.
5. Demonstrating a lack of knowledge or strategy to combat changing competitive conditions.
6. Failing to define and clarify your position, strength, and market niche focus.
There might be a planet somewhere in the universe where products and services have no competition. However, on this planet, that's not the case. Many entrepreneurs make a critical mistake in their business plans - they claim they have no competitors. A plan stating that no competition exists, quickly loses credibility with bankers, investors, and experienced business people. Don't make this mistake yourself. Unless you're a government entity, public utility, or communist country - you have competition. And even these monstrous organizations are realizing that competition exists for everyone.
But competition isn't necessarily bad. Coke has Pepsi. Nike has Reebok. Wal-Mart has K-Mart. And the list goes on. The value of competition is that it forces you to analyze who you're up against and what it takes to achieve success in your industry, market, and business. Competitors actually help you clarify your selling position and determine how to best distinguish yourself from the crowd.
Nike makes billions and so does Reebok. But, everyday they wake up with the desire to compete against each other and win. At one point in time, Nike even adopted the mission statement, "Crush Reebok", signifying how a competitive rivalry can drive companies to greater heights.
Investors will read your business plan and expect to see your competitors identified - don't disappoint them. Keep in mind that most investors ARE investors because they successfully dealt with business competition in the past. With that in mind, never even imply the following ideas in the competition section of your plan: "XYZ Corp has no competition", "XYZ Corp's product is so superior that we have no competitors", or "XYZ Corp's service is so different and unique that we have no competition". Your reader will disagree, wonder why you can't see that you operate in a competitive environment, and assume you're a business dunce. This is clearly not the goal of your business plan.
Instead, your business plan should honestly and intelligently outline how your business fits into the big picture of your area, market, and industry. If you do this concisely but thoroughly, and pinpoint factors that separate you from your competition, it will go a long way in the eyes of the investors reading your plan.
So exactly how do you identify your competitors? Sometimes it's easy to determine and sometimes it is not. If you intend to open a donut shop, then all the other donut shops within perhaps a 10 mile radius would be considered competition. But what about supermarkets that serve donuts? And what about bakeries that sell donuts and other baked goods? These are pretty obvious, and most people would consider them when starting a company and writing a business plan.
But, what about Bagel shops? They don't serve donuts, but they still compete for the same breakfast dollar. And what about the coffee shops and the Starbucks of the world? Your potential customers might decide to spend their money on a morning cup of coffee instead of a donut from your shop.
Consider including these topics in the competition section of your plan:
This section should outline the basic characteristics of your competition. Discuss the key features of competitors' products or services such as: purchase price, peripheral costs, quality, durability, and maintenance needs. What is the perceived value of their product? Is the image or name brand a factor? Where are they located? What are their credit policies and delivery terms? How does their customer service stack up?
Also consider the financial strength, marketing savvy, and technological advantages of your competitors. How solid is their access to suppliers, wholesalers, distributors and retailers? Do they have any strategic partnerships or patents, which could cause problems for your company? Do they have economies of scale in place that make it difficult for your company and others to compete.
In this section, provide a breakdown of your competitors by percentage of market. If possible, try to analyze and present this information from both a revenue and units sold perspective. This gives you insight into your market, who the big players are, and where you can fit in and begin to take market share from. Consider preparing a five year analysis showing how market share has changed and shifted over time.
Your company's ability to focus on a market niche can help you gain market share. Pick a niche and make it yours. It can establish your products and reputation, and will help you gain loyal customers and market share as your company grows.
Comparison of strengths and weaknesses:
Clearly present and compare your strengths with that of your competitors in this section. Don't forget to present your weaknesses. Every company has them. Be honest and logical about the comparisons you make. Consider product superiority, price advantages, market advantages, management strengths and weaknesses, and more.
Barriers to entry:
Think about the factors that make it difficult for you to enter and compete against established companies - these are called barriers to entry. The following list of barriers should be addressed in your business plan, considering both the positive and negative issues related to your business and your industry.
Patents/Proprietary product differences:
• High-start-up costs/Capital requirements
• Substantial expertise required
• Manufacturing or engineering difficulties
• Market saturation – no room within market for new competitors
• Economies of Scale
• Brand Identity
• Access to distribution
• Government policy
Sources of competitor information
So where can you learn about your competitors? The more information you collect the better you will be able to position your company to compete successfully. Try investigating the following sources, and come up with some creative ways to dig up information on your own.
Directory of Corporate Affiliations:
• Dun and Bradstreet's Million Dollar Directory
• Focus Groups
• Licensing – If your industry requires licenses, these are often of public record
• Moody Manuals
• Annual Reports
• Standard & Poor's Register of Corporations
• Standard Rate and Data Services
• Thomas Register of Manufacturers
• Trade Associations
• U.S. Industrial Outlook
• Ward's Business Directories
• Yellow pages
Every good marketing plan should include two major parts - a definition of your target market, and a specific outline to market, promote, and sell your product or service.
It's critical to clearly define your target market in your business plan - investors expect it. Tell your business plan reader about your customers and describe their defining characteristics in detail. Include information such as age, gender, geographic location, income bracket, buying similarities, and more.
The goal of this section is to build a demographic profile of your typical customer. The more clearly you pinpoint the defining traits of your customer, the easier it is to construct a marketing program to reach them effectively.
The information and research included in your target market section should originate from primary and secondary sources. Primary sources includes information that you discover or conclude from personal observation and research, such as personal studies, results of questionnaires, site visits, and conversations with experts in your industry. Secondary sources include such sources as journals, books, published reports, government statistics, or internet findings.
After you define your target market, you need to determine specifically how you will reach them. Outline the details and steps necessary to reach potential customers and convert them from prospects to paying customers. It is important to demonstrate to investors that you have identified specific marketing avenues and procedures to effectively sell your product or service.
Answer questions such as the following in your marketing program section:
• What specific marketing mediums will you use to reach your customer?
• How often will each be used?
• What will each cost?
• Why did you choose these marketing avenues over others?
• What marketing materials will you need? (business cards, brochures, website, etc)
• Who will design your marketing materials? What will they cost?
• Who will write the text for your marketing materials?
• Why did you decide to employ these materials and not others?
• What is the cost of marketing materials per prospect or client? (You may choose to include marketing pieces in the appendix of your business plan)
• Will your company be able to attract free PR? Explain how you plan to gain PR.
• Which publications and mediums will you target? Why will they run your story?
• Who will write your press releases, manage the process, and maintain relationships with editors?
• What makes your business worthy of PR attention? What's the "angle"?
• What dollar value will you invest to obtain and maintain PR results?
• How will your marketing and PR efforts change as your business grows?
Marketing Plan: Common Mistakes to Avoid
The following are the some of the most common mistakes found in the marketing plan section:
1. Defining your target market too widely, and assuming success will result from simply capturing a "small portion" of this enormous market.
2. Unclear definition of your target market.
3. Attempting to attack an entire market instead of a narrow niche.
4. Making assumptions about your target market without research or concrete support.
5. Not specifically identifying the mediums you will use to advertise and promote your product.
6. Omitting details such as when, where, why and how you will reach your target customer - along with costs.
7. Making the assumption that simply lowering the price of your product will lead to increased sales.
8. Underestimating the importance of packaging, brand name, and reputation.
9. Attempting to immediately fill several lucrative but unrelated markets.
10. Lacking clarity about how future changes might effect your market.
Identify your facility requirements as to the size, location, and type of premises. Include drawings of the proposed building layout. Attach the most recent real estate appraisal, offers to purchase or lease agreement, supplier quotations, etc.
Indicate why you have selected this location.
Provide details relating to special requirements as to water, power, compressed air, ventilation, heat, air conditioning, drainage, disposal, Department of Health requirements, etc. Attach approvals from Public Health, Liquor Licensing, City zoning, etc.
Provide a detailed listing (including legal descriptions) of the land and buildings, leasehold improvements, equipment and furniture, vehicles, inventory and other assets. The listing should include the proposed purchase price of each asset.
Provide a general description of the day to day operations of the business (include hours of business, days open, seasonality of business, suppliers and their credit terms).
Provide product/manufactured cost estimates (if applicable).
The operation plan deals specifically with the internal operations and equipment necessary to produce your product or service. The following are selected areas that need to be addressed in this section:
• Where will your business be located?
• What square footage is needed, in how many locations?
• What type of space is it?
• Office, warehouse, manufacturing, or a combination?
• What is the advantage, if any, of your location?
• At what point will the goals of the business exceed the above mentioned facilities?
Provide a layout of your facility in the appendices of your business plan.
• Outline and describe the significant equipment needed, including cost.
• What does the equipment do, how do the pieces function together, and how much can be produced?
• Will you purchase or lease your equipment?
• Why and from whom?
• Be sure to include manufacturing equipment, vehicles, computers, and office equipment.
• How many employees will you need?
• Break them out by function, number of hours worked, and hourly pay.
• Describe the skill sets needed.
• What are the salaries of those in management, production, distribution, sales and administration?
• Will you run multiple shifts?
• What are your hours of operation?
• What criteria is used to locate and hire quality employees?
Manufacturing and Service Process:
Walk the reader through your manufacturing and service process from raw material through finished product.
• Where will you obtain and store raw materials?
• Outline your key suppliers, the purchasing process, and unique purchasing requirements.
• Where will finished goods be stored, and what is the associated space and cost?
• How will finished goods (or services) be distributed?
• What is the lead time for the entire process?
• How will quality be measured, controlled, and improved?
• Explain the technology requirements for your manufacturing process.
Other questions to consider:
• How will you keep track of inventory? Provide specific procedures and equipment used.
• How will you maintain quality control? What are the procedures to ensure that you are providing the top quality product or service?
• What type of insurance does your business need? Discuss the legal liability issues of your business.
Consider including a start-up schedule, or if you are currently in business provide a schedule as to how your future plans will progress over the next 12 to 18 months. You may wish to include a chart in your business plan that outlines the time frame associated with specific operational steps and goals.
Operations Plan: Common Mistakes to Avoid
The following are among the most common mistakes found in the operations plan:
1. Failing to clearly outline the process by which you manufacture, distribute and sell your product or service.
2. Failing to account for all production costs (direct and indirect).
3. Failing to assess the manufacturing process in terms of manufacturing costs, taxes, shipping, installation, maintenance, serviceability, etc.
4. Failing to develop adequate inventory control and quality assurance guidelines.
5. Failing to identify all machinery and equipment needed.
6. Failing to properly plan the layout of the plant, the workflow process, and the material handling procedures.
7. Failing to properly outline personnel management, scheduling, and hiring practices.
8. Failing to properly plan for contingencies to meet production and staffing challenges.
9. Failing to plan for long term facility and equipment changes.
What is the proposed organization chart of the company (who does what)? Include a brief job description for each position. Provide brief management biographies of the key personnel (include their ages and backgrounds in this type of business). State the compensation package (salary, bonus, profit sharing, etc.) for each member of management.
Many investors base their entire investment decision on the management team behind a venture. Investors expect a well-rounded team of professionals with experience in every function critical to the business. Your management section should clearly demonstrate who each person is, why he or she is on your team, and what each person will do.
Try and limit your management team to 3 to 5 people - and to those individuals involved in the day to day operations that have the greatest impact on the future success of your business. Everyone else is considered either an employee, or if not involved in day to day operations should be included as a member of the Board of Advisors, Board of Directors or consultants. A discussion of your employees should be included in the operations section.
The basic components of the management section include:
Specific Team Members
Construct a narrative description for each team member, clarifying his or her background and intended contribution. This should include:
• Title of this position
• Duties and responsibilities of this position - what will they be doing, which functions will they be overseeing, who do they supervise, who do they report to, etc.
• Previous industry and related experience -should be those that relate directly to this new position. Who have they worked for, what were they doing, for how long did they do it, etc.
• Previous Successes – what did they accomplish, what successful teams or projects did they spearhead, did they grow a company or a division, were they responsible for a turnaround or some new breakthrough idea.
• Education – keep educational descriptions brief
Board of Directors
Briefly describe who is on your Board and what role they play within your company. Briefly list the names, backgrounds, and contributions that will be made by each board member.
Board of Advisors
Your board of advisors should consist of individuals with valuable industry expertise and insight, and they help and consult with you on your business. A solid and experienced board of advisors goes a long way towards building credibility in the eyes of investors. Briefly list the names, backgrounds, and contributions that will be made by each of your board members.
The last part of your management section should include a brief mention of the outside consultants you will work with as your company grows. A typical list of consultants would include accountants, attorneys, bankers, insurance agents, and experts such as technology advisors, web developers, and payroll specialists, for example.
Explain the background of the founder(s) of the company at some length. However, limit this background information to under ½ a page. Stick to the facts on all your management team bios, making it evident why each person is experienced, why they hold their position, and the benefits they provide your company.
One last note: Always keep in mind that given the choice between an excellent business concept with second-rate managers and a mediocre business concept with top-notch managers, investors prefer the latter.
Management Plan: Common Mistakes to Avoid
The following are several common mistakes that decrease the effectiveness of your management plan:
1. Depending on unqualified friends or family in key management positions.
2. Assuming that previous success in other industries applies to your current industry.
3. Presenting a "one-man-team" management philosophy. Investors know it's difficult to wear every hat and successfully run and grow a company.
4. Attempting to attract top managers without sharing ownership.
5. Lacking non-compete agreements for critical management staff.
6. Failing to attract and assemble a knowledgeable board of advisors.
Imagine this scenario: You are a private investor searching for that next exciting investment opportunity. A business plan lands on your desk, right next to the sixteen others you have received recently and are in the process of reviewing. Half of the plans present solid business concepts. Some of the plans seem to offer exceptional long-term growth possibilities. But in your opinion, only two of the plans present management teams capable of turning ideas into reality. As you consider your investment options, you eventually eliminate all the business plans except for those with the strong management teams.
Why? Products, marketing strategies, and operations are important, but it is the experience, knowledge, and ability of the management team that makes a business thrive. Many lenders, venture capitalists, and private investors stress that given the choice between a first-rate product with a second rate management team, and a mediocre product with a top-notch management team, they would prefer the latter. To some investors, the management team is THE critical investment factor. Bottom line - investors invest in people, not business plans, so make sure your management team is up to par.
Naturally, each business is different and requires a management team that matches the particular circumstance. Your industry, niche, and the loftiness of your goals lead investors to assumptions and expectations about the quality of management that you require. The experience and depth of your managers must meet or exceed these investor expectations, or must clearly explain how you intend to fill these positions in the future.
Two basic themes that readers of your business plan will look for throughout your entire management section include:
Team - Investors normally expect to see a minimum of three to six experienced executives on your management team (start-ups have some variations, see below.) When investors and venture capitalists state the importance of a top-notch management team, the word "team" should not be underestimated. They normally view one-person operations as limited in terms of time, experience, and core business skills necessary to launch and grow a serious business.
Balance - Although investors are looking for a group, they are not looking for a group of clones. They seek balance and a collection of skills that meet the needs for your particular venture. A diverse team increases the chance that each business function (marketing, sales, operations, finance, manufacturing, engineering, etc.) is tended to by an expert with experience. Avoid the tendency to staff your management team with people just like yourself. It might feel nice to work with friends, family, and others that share your background, but investors see a management team unprepared for the inevitable challenges that lie ahead.
But what if you are a START-UP company and you don't have a team?
Early-stage management teams are often limited to a lead entrepreneur or a small group of company founders. If this is the reality for your business, don't try to avoid it or claim that staff employees are actually "management". Instead, focus on the strengths of your current management team and outline specific (and realistic) plans for adding officers in the future.
OK, so let's assume that you have a balanced team, or plans to build one as you grow. In your business plan, only include those individuals in the management section with the greatest effect on sales, operations, net profit, and business development. Every employee is important, but this is not a section to outline the skills, hobbies, or backgrounds of your entire staff. Consider restricting your management section to individuals that fall into the following categories: founders, top decision makers, CEO, CFO, CIO, plant manager, lead engineer, marketing or sales director, and R&D manager.
How should your management section be organized and presented in your business plan? Generally, you should divide this section into four parts: Specific Team Members, Board of Directors, Board of Advisors, and Consultants. Let's explore each of the four sections and explain how to grab the attention of investors in your management section.
Specific team members -Don't just drop a resume under each officer's name and assume you have completed your management section. Instead, construct a narrative description for each team member, clarifying his or her backgrounds and intended contributions. Include a reference in your management section to the completed resumes located in the appendix. The length of each narrative will differ, but try and keep each to a reasonable length (normally under a half page). Briefly address the following topics for each manager with a focus on achievements, success, and results.
Position - Outline specific titles, duties, and responsibilities for each individual. Clarify what each manager does, what area of business development they focus on, and how they fit into the organization as a whole.
Experience - List past positions and responsibilities that directly relate to the current position. Outline the companies you worked for, the duties, the successes, the experience gained, and how these skills transfer to your current position. Industry experience is looked at favorably by investors as they size up your management team. Some investors consider industry experience an absolute must, but if you lack direct industry experience, build on related and successful experiences from other fields. Describe your abilities and experiences in previous management positions. The number of years you were in management roles? The number of people you supervised? For how long? The goal here is to present a track record that predicts future success.
Successes - Planning, managing, and organizing any business, even outside your current industry, demonstrates the ability to achieve results. If lenders and investors are familiar with your prior record of success, they are more likely to believe that you can repeat that success in your current venture. You may even wish to present past business failures, if you can demonstrate what you learned from the experience and how you will conduct yourself differently in the future. Some investors may actually view past business failures as "battle scars" and an indication of experience, persistence, and an understanding that first time entrepreneurs may lack.
Education - Keep educational descriptions brief unless they directly relate to your ability to succeed in a particular position (or if managers are recent graduates with little or no business experience). The older and more experienced you are, the less value an investor is likely to place on your educational credentials.
Strengths - What personal and business qualities do you possess that make you well suited for this position? What traits, abilities, personal characteristics, or experiences have you developed that can lead to success in this position? This might include industry expertise, the ability to motivate others, marketing competence, or interpersonal skills. Experience outside the business arena may also be relevant, such as club membership, civic involvement, or group leadership that can be directed towards your current position.
Board of directors
The board of directors can play an important role in the success of your business. In smaller companies and start-ups, the board of directors may be limited to the individuals running the company. In this case, they perform little more than the legal requirements needed to maintain corporate status. However, as a company grows and the stakes rise, outside members such as investors, advisors, and strategic partners are normally added to the board to guide the company successfully into the future.
To protect their investment, investors will often request a seat on your board. This provides the investor some control over management, influence on the direction of the company, and an ability to protect their investment. But it's not all about control, many times outside board members contribute significant business and industry expertise that should not be underestimated. Experienced board members provide a level of credibility that investor's desire in a start-up or early-stage company.
The board of directors portion of your management section is fairly simple to prepare after you identify the specific members. Briefly list the names, backgrounds, and contributions that will be made by each board member.
Board of advisors
While the board of directors is more legal in nature, the board of advisors is more functional. Your board of advisors should consist of individuals with valuable industry expertise and insight. Without the legal constraints required of your board of directors, these advisors are assembled to help and consult with you on your business.
Many small companies and start-ups assemble their board of advisors as a mere formality - don't make that mistake. A solid and experienced board of advisors goes a long way toward establishing credibility in the eyes of investors. Include advisors with past success in ventures similar to yours, or advisors with backgrounds you lack on your current management team.
As with the board of directors, the board of advisors is simple to present after you identify the individuals to include. Briefly list the names, backgrounds and contributions to be made by each person. Again, the members you attract to your board of advisors tells an investor a lot about the quality of your business.
The last part of your management section should include a brief mention of the outside consultants you will work with as your company grows. A typical list of consultants would include accountants, attorneys, bankers, insurance agents, and experts such as technology advisors, web developers, and payroll specialists, for example.
Outside consultants provide expertise that a company lacks during its earlier years. If carefully selected, consultants provide your business an additional level of credibility and enhance your image in the eyes of your reader.
Briefly describe the services each consultant provides your company, and their qualifications as experts. The earlier you start to build relationships with consultants, the more beneficial they become as your company grows.
List employees (not owner or manager) using the following headings:
• position: full-time, part-time, seasonal; and
• method of payment: hourly, monthly, commission, etc.
Provide a job description for each position, identifying the responsibilities and duties involved. Include what skill level is needed.
If job training is required, identify the duration and the cost of the training.
Name Phone Number
Accountant __________________ _________________
Banker __________________ __________________
Consultant __________________ __________________
Insurance Company __________________ __________________
Lawyer __________________ __________________
Provide a projected (pro-forma) Three Year Cash Flow, Balance Sheet and Profit and Loss Statement.
Your financial plan will be highly scrutinized by your business plan reader. All the ideas, concepts and strategies discussed throughout your entire business plan form the basis for, and should flow into, your financial statements and projections in some manner. When it gets down to it, your reader wants to know if and when you will make money and become profitable.
Financial statements and projections should follow Generally Accepted Accounting Standards and must (at a minimum) include properly prepared balance sheets, income statements and cash flow statements. Bankers and investors are familiar with the correct content, organization and presentation of financial statements, and expect to see them in your business plan. Don't cut corners or attempt to devise your own method of financial and pro forma statement presentation.
In most cases, capital sources expect financial projections for a three to five year period, and historical statements for the past three years (or since inception if operating period is less than three years).
Consider organizing your financial statements as follows:
Year 1 - monthly projections
Years 2 & 3 - quarterly projections
Existing businesses should provide income statements for the last 3 years if they are available.
Year 1 - quarterly projections
Years 2 & 3- yearly projections
Existing businesses should provide current balance sheet and balance sheets from the prior 2 years if they are available.
Year 1 - monthly projections
Years 2 & 3 - quarterly projections
Other information that you may consider including:
These are critical to properly convey the "reasons behind the numbers" for outsiders reviewing your financial projections. Explain how you calculated the numbers you used in your financial statements. For example, we will sell 1000 units per month at $5.00 per unit. This is projected to increase by 4% every month, etc.
These figures demonstrate the volume of sales, in units and dollars that must be generated to cover fixed and variable expenses. At the break-even point, you start becoming profitable. Normally this data is presented in a graph format with sales on the x axis and unit sold on the y axis.
Sources and uses of funds:
This tells your reader what sources you expect to secure capital from, and how you plan to spend it.
Sources of Funds Use of Funds
Founders $10,000 Equipment $45,000
Investors $70,000 Improvements $48,400
Bank Financing $70,000 Working Capital $56,600
Total $150,000 Total $150,000
Investment structure and objectives:
This section outlines the amount of capital needed, various investment structures, and the estimated return to your investor. It is critically important to tell your investor how they will recoup their money, when they can cash out, and what they will receive as a return.
Providing standard financial ratios helps your business plan reader to analyze how well your company will perform compared to other companies within your industry. For existing companies, show the trends over the last 3 to 5 years to outline any improvements in your performance.
Financial Plan: Common Mistakes to Avoid
The following are the some of the most common mistakes found in the financial plan:
1. Failing to include the "Big 3" statements and projections - income statement, balance sheet, cash flow.
2. Presenting sales and profit projections that are unrealistic and unfounded.
3. Omitting financial assumptions to explain where the "numbers" originated.
4. Presenting "creative" rather than "accepted" financial statements.
5. Underestimating expenses and not budgeting for unexpected costs.
6. Lack of financial investment on the part of the founders.
7. Including excessive salaries and office expenses at start-up.
8. Offering a lower percentage of ownership than the investment requirement demands.
9. Offering a return on investment that is out of line for your industry.
10. Absence of contingencies and projections for worst case scenarios.
11. Financial statements that are not prepared or reviewed by a reputable accountant.
it is common for a financial institution to request that the principal(s) submit, with a loan application, a statement of personal net worth. This form is usually provided by the financial institution. If applicable, historical financial statements on the business venture may also be requested. Other supplementary and supporting documents for your business plan should be included in an appendix.
The major sections of your business plan should only contain summarized findings and highlights for your business. Including every piece of information you have collected in the main sections of your business plan only results in information overload for your reader, and makes it difficult to determine if reading the entire plan is worth the effort. Instead, include detailed research, sources, and other related information about your business and your business plan in the appendix.
Consider including the following information in the appendix of your business plan:
• Management resumes
• Pictures of products, locations, etc.
• Copies of purchase orders
• Floor plans
• Marketing materials
• Details of the manufacturing process and machinery
• Market research surveys and results
• Any other supporting documents
From a legal point of view, there are four types of businesses:
1. Sole proprietorships;
3. Corporations; and
A brief description of each type is followed by a summary of their advantages and disadvantages. For specific information on how or where to register or incorporate a business, contact your local CBSC.
This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal. This is known as unlimited liability.
This type of business comes under provincial jurisdiction. If the proprietor chooses to carry on a business under a name other than his/her own, he/she must register with the province. Your business name registration, or renewal of registration, will be valid for a certain number of years. Call your local Business Service Centre to determine when business name registrations need to be renewed in your jurisdiction.
If a sole proprietor establishes a business in his/her own name, without adding any other words, it is not necessary to register the business.
A partnership is an agreement in which two or more persons combine their resources in a business. In order to establish the terms of the business and to protect partners/shareholders in the event of disagreement or dissolution of the business, a partnership/shareholders agreement should be drawn up with the assistance of a lawyer. Partners share in the profits according to the terms of their agreement.
All members share the management of the business and each is personally liable for all the debts and obligations of the business. This means that each partner is responsible for and must assume the consequences of the actions of the other partner(s).
Some members are general partners who control and manage the business and may be entitled to a greater share of the profits, while other partners are limited and contribute only capital, take no part in control or management and are liable for debts to a specified extent only. A legal document, setting out specific requirements, must be drawn up for a limited partnership.
A corporation is a legal entity that is separate from its owners, the shareholders. No shareholder of a corporation is personally liable for the debts, obligations or acts of the corporation. This type of business can be incorporated at either the federal or provincial level.
A corporation is identified by the terms "Limited", "Ltd.", "Incorporated", "Inc.", "Corporation", or "Corp.". Whatever the term, it must appear with the corporate name on all documents, stationery, and so on, as it appears on the incorporation document.
A co-operative is a corporation organized by people with similar needs to provide themselves with goods or services, or to make joint use of their available resource to improve their income. Their business structure ensures:
• all members have an equal say (one vote per member, regardless of the number of shares held);
• open and voluntary membership;
• limited interest on share capital;
• surplus is returned to members according to amount of patronage.
Co-operatives are placed in five separate categories when they are classified by function:
• Producer co-operatives combine members' skills and resources for mutual benefit. An example is an employment co-operative, which pools and markets the skills of the employee-members and provides them with an income.
• Consumer co-operatives buy commodities in bulk and sell them to the member-owners. Examples are retail co-operatives and direct-charge co-operatives.
• Marketing co-operatives sell their members' products. Typical products are dairy products, poultry, fish and handicrafts.
• Financial co-operatives provide a variety of financial services for their members including savings, investment and loans. Examples are credit unions, co-operative trust and insurance companies.
• Service co-operatives enable members to improve the quality, price and availability of needed services, such as health care, child care and transportation.
Advantages and disadvantages of each form of business organization
• low start-up costs;
• greatest freedom from regulation;
• owner in direct control of decision making;
• minimal working capital required;
• tax advantages to owner;
• all profits to owner.
• unlimited liability;
• lack of continuity in business organization in absence of owner;
• difficulty raising capital.
• ease of formation;
• low start-up costs;
• additional sources of investment capital;
• possible tax advantages;
• limited regulation;
• broader management base.
• unlimited liability;
• lack of continuity;
• divided authority;
• difficulty raising additional capital;
• hard to find suitable partners;
• possible development of conflict between partners.
• limited liability;
• specialized management;
• ownership is transferable;
• continuous existence;
• separate legal entity;
• possible tax advantage (i.e. lower small business tax);
• easier to raise capital.
• closely regulated;
• most expensive form to organize;
• charter restrictions;
• extensive record keeping necessary;
• double taxation of dividends.
• owned and controlled by members;
• democratic control by one member, one vote;
• limited liability;
• profit distribution (surplus earnings) to members in proportion to use of service; surplus may be allocated in shares or cash.
• possibility of development of conflict between members;
• longer decision-making process;
• participation of members required for success;
• extensive record keeping necessary;
• less incentive to invest additional capital.
Becoming Your Own Boss
Throughout the years, entrepreneurs have turned their ideas into goods and services. They have met the needs and wants of consumers and, at the same time, they have built rewarding careers for themselves.
Many people start a small business in order to enjoy the perceived rewards of freedom and independence. This is understandable as owning your own business can offer you the opportunity to experience freedom:
• the freedom to use your own ideas;
• the freedom be the boss;
• the freedom to not be fired; and
• the freedom to earn as much as you want.
In fact, you don't have to work unless you want to; or do you?
The reality of small-business ownership can be quite different. Many small business owners will tell you that they work more hours than when they worked for someone else.
A lot of those hours are the result of demands of others.
Some of the more demanding others can be the regulations imposed by provincial and federal governments. Some of the other regulations that must be adhered to are: federal and provincial licensing; local safety and health regulations; environmental protection rules; employee deductions and labour standards.
Then there are the significant others, who impact the bottom line -- the customer. You must satisfy your customers. For these are the people who will ultimately decide whether or not your business will succeed. You will be successful only if you can provide them with the goods and/or services that they want or need badly enough to pay for.
Then there are your financial others -- the people who provided you with funds to get your business started. They might be relatives, friends, bankers. No matter who they are, they will have a vested interest in how well you run your business.
Even your competitive others will become more significant as their policies and competition will affect the way you run your business, the hours you work, prices, profits and more.
As the most important other, you alone will take full credit when errors in business decisions are made. A decision that can result in losses not only to yourself, but to your employees, creditors and customers as well.
It is money, after all, that is the bottom line. Your success depends upon your ability as a boss to make sure your business is making more money than it spends.
Why Will "You" Succeed?
At this point, the idea of running a small business may not seem very attractive. Don't let the negatives get you down. Running your own business provides you with a tremendous source of self-satisfaction and pride.
Most small-business experts urge prospective business owners to carefully and completely analyze their potential to succeed.
Typically, you will begin by analysing yourself as a future entrepreneur. What kind of person are you? What technical or special knowledge do you have?
Self-confidence and drive, innovative thinking, goal-orientation, and business and technical knowledge are necessary to succeed. These traits must also be tempered with realism. Knowing the limits of your own abilities and not being afraid to ask for help is imperative.
Successful people as well as business owners know what they want to achieve in life. They determine where they are going by setting goals, paying attention to details and motivating others around them. It is wise to understand and follow the lead of those successful people around you.
What Kind of Business
The type of business that you enter should complement your experience, interest and/or technical knowledge. It is fine for you to dream about becoming your own boss some day, however, before you put too much work into your business, make sure that the area you choose is the right one for you.
When deciding what business to start, you may want to consider what hobbies and/or interests you have as well as your experience and background. If you are interested in an area in which you have little experience, you may want to seek some training before you begin. Arranging a job in the area of interest or acquiring a mentor are two ways that may help you gain the knowledge and experience that you need.
Two other factors that are equally as important as the above mentioned are:
1. Is there a need for the goods and/or services you are going to offer?
2. Will there be a market for your product in the future?
Fads, technology, and innovations all affect the opportunity for any business to be and remain successful.
The Odds of Success
Starting your own business is risky.
Of all firms started, just about a third fail within one year, and half fail within two years. By five years, approximately two-thirds are gone, but after five years the rate of discontinuation drops rapidly.
Lack of management experience accounts for nearly 90 percent of all small business failures. This does not mean that all small business managers have poor management skills. More accurately it refers to the person's ability to deal with the "unknown" that is so likely to occur.
A recent example is the poor national and world economic situation. In tough times, Some small businesses are surviving it. Others are not.
Desire and persistence along with innovative thinking improve the odds. In tough times, a small business can quickly change direction by introducing new ideas and creating better methods to help move its product and sustain an adequate income.
After you have decided that you want to be in business, you face the problem of money. How much money will it take to start your new business? How much operating capital will you need?
There are forms available that will help you put together a very good estimate of your start-up and continuing capital requirements.
It is recommended that you become well acquainted with your local bank, as it will probably be the main outside source of capital.
All the above information should be helpful to you as you think about establishing your new business. Remember, it never hurts to gain more knowledge in your business area. Few businesses have gone broke because the owner knew too much about his/her business.
The following checklists are meant to assist you in assessing each point against your business plan.
Nature of the Market
• number of potential buyers, by region;
• number of existing buyers, by region;
• profile of buyers ... age, income, occupation, education, sex, family size, etc. by region;
• profile of users (if buyers and users are different) by region;
• where buyers and users live ... region, city size, urban, suburban, rural;
• where buyers buy ... urban, suburban, rural, trading centre, local, type of store;
• size of purchases;
• when buyers buy ... time of day, week, month, year, and frequency of purchase;
• how buyers buy ... name brand specifications or not, impulse, planned, comparison, personal inspection, cash/credit;
• why buyers buy ... attitudes, motivation, trends, styles;
• who influences buying decisions ... type of product and brand, uses of product;
• unfavourable attitudes of buyers and brand;
• indications of changes in buying habits.
Structure of Your Market
• number of competitors;
• number of brands ... national, regional, local;
• share of market by brands ... total, regional, city size, type of store;
• characteristics of leading brands;
• differentiation of own brand from leading brands;
• policies, presentation, methods and tools of principal competitors.
• quality ... materials, design, durability, safety, method of manufacture and workmanship;
• models, sizes, colours, flavours, etc.;
• luxury, standard, essential;
• convenience of shopping.
• protection ... shipping, handling, theft, tampering, spoilage, etc.;
• utility ... measures, closure, reseal, disposable, etc.;
• identification ... universal product code, visual exposure, colour, label;
• display ... versatility for stacking, hanging, filing, etc.
• legal ... logo, trademark, copyright, industrial design;
• image ... memory value, goodwill value, recognition, suggestiveness, pleasingness, generic original.
• installation ... who, when, cost, delivery;
• maintenance ... who, when, cost, convenience;
• repair ... who, when, cost;
• warranty ... who, when, how long;
• accessories ... aftermarket, compatible.
Place in the Market
• number of retailers ... each type by region;
• number of wholesalers ... each type by region;
• per cent of retailers ... each type, handling brand by region;
• aggressiveness of retailers, co-operation by region, store type and city size;
• indications of shift in relative importance of channels.
• recruiting and selection ... methods, qualifications, standards;
• training ... methods, skill development, motivation;
• supervision ... performance reviews, development;
• compensation ... commission, bonus, benefit plans.
• effectiveness ... comparison of spaces purchased, timing, appeals and themes, black and white vs. colour;
• cost effectiveness ... various media, style, background, placement;
• product effectiveness ... feature products, merchandising.
• co-operative advertising;
• deals, premiums, coupons, discounts, bonus gifts.
• announcements, press releases, mentions.
• from factory ... volume capacity vs. demand;
• to wholesalers ... by type, size and region;
• to retailers ... by type, size and region;
• discounts ... functional, volume, cash, other;
• allowance and deals;
• service charges;
• price stability ... commodity influences such as energy, labour, weather, technology.
• selection of a target market;
• development of a marketing mix.
Facilities Operating Systems Operating Assistance
- traffic patterns - lease/purchase - production - lawyer
- parking - utilities - inventory - accountant
- zoning - storage - record keeping - management consultant
- local development trends - expansion potential - job procedure - engineering services
- installations - maintenance - financial services
- fixtures and equipment
- manpower services
- leasehold improvements
Operating Forecast Financial Services
- equity (25 percent) - sales - bank/credit union
- current assets - cost of sales - mortgage lender
- current liabilities - gross margin - insurance coverage
- fixed assets - general operating expenses - bonding
- long term debt - net profit - trade credit
- income tax payable - venture capitalists
- cash flow analysis - background equity
- contingency analysis - government programs
- risk analysis
- inflation impact analysis
- interest rate impact analysis
Registrations General Arrangements
- proprietorship - trade names - contracts
- partnership - trademark/logos - business forms
- private corporation - business license - personal will
- public corporation - permits - buy/sell agreement
- Education and Health Tax - cross insurance
- Excise Tax - key man insurance
- Goods and Services Tax (GST) - occupational health and safety
- professional or trade licenses
• qualification standards;
• job descriptions;
• wages and salaries;
• performance standards;
• staff benefits;
• staff training.
• Can management prepare and implement a sound business plan?
• Does management have adequate authority and control to fulfill its responsibility?
• Do training programs encourage personal skill development towards increased responsibility?
• Can management change be introduced as required to benefit the business? Even if the changes require a new manager?
• Does the manager have the qualities of time, character, stamina, planning, control, development, leadership, decision-making, confidence, practical realism? And commitment?
Preparation and Commitment
• Have you obtained independent legal advice on all contracts?
• Are all financial commitments finalized? In writing?
• Does the business plan have time in its favour?
• Are you prepared to lose your business investment?
• Are you prepared to succeed?
The critical risks section of your business plan should demonstrate that you understand the potential problems that could occur with your business and that you have contingency plans to deal with these risks. Realistically dealing with risks demonstrates that you understand the environment in which your business functions and that you have sufficiently planned for challenges.
Consider the following:
• In what ways might your competition respond or try to block your efforts?
How will you effectively respond?
• Is the depth of your management team sufficient?
If not, where and how will you attract the management players needed?
What policies are in place to assure continuity of leadership?
What are your plans for responding to the loss of important personnel?
Have you considered and negotiated non-compete agreements with key management?
• What patent, copyright, trademark, and other protection procedures are important for your company?
• How do you plan to protect these, and what steps have been taken?
• Which licensing requirements must be maintained?
• What regulations must you be aware of and keep current with?
• What personnel needs will you have over time?
• How will you meet those needs in terms of capital requirements, training, benefits, hiring, etc?
• Will competitive forces make retaining employees difficult?
• How do you plan to compensate workers to reach maximum productivity?
Other Areas of Vulnerability:
• Obsolescence factors
• Cheaper products expected from competitors in the future
• Cyclical trends in your market
• Seasonality of your products or services
• General economic factors
It's important to present both the positive and negative aspects of your business if you are serious about raising capital. Experienced entrepreneurs and managers clearly understand the risks associated with their business and industry, and they address them head on - often the reason for their success. The critical risk section of your plan is your chance to demonstrate that you have the ability to see the big picture and have the ability to get through tough business challenges.
Critical Risks: Common Mistakes to Avoid
The following are the some of the most common mistakes found in the critical risk Section:
1. Failing to identify and quantify market barriers.
2. Failing to present uncontrollable business factors and contingency plans.
3. Failing to acknowledge management weaknesses.
4. Failing to present an honest assessment of the possible downsides of your business.
In order to attract investment dollars for your business, it's critical to supply an exit plan to investors so they can get their money back (hopefully with a healthy return) and exit your company. The exit strategy section of your business should also outline your long-term plans for your business.
Begin by asking yourself why you are getting into business. Do you see yourself running your company twenty years from now, or are you interested in moving on after a few years? Are you in it for the big money at the end of the rainbow, or are you more interested in running a solid and steadily growing family business?
It's important to think through these issues and decide what you intend to do with your business before you can adequately answer the questions, and address the issues, concerning how your investor will exit your company. The requirements of each investor will vary in terms of return and exit strategy they seek. Two examples follow:
Venture Capital – These investors look for a high return and an exit strategy of approximately 3-7 years. They work almost exclusively with companies that may go public or can be sold for a significant profit. However, keep in mind that going public is very rare and is unattainable for most companies.
Angel Investor – These investors typically are looking for a high return but are more flexible with the terms of the exit strategy. Angels are typically less sophisticated than venture capitalists or institutional investors, and will become involved in your business because of a personal relationship with you.
Here are some possible exit strategies to consider:
• Initial Public Offering (rarely realistic from investor's standpoint)
• Buyout by partner in business
• Franchise your business
• Hand down the business to another family member
• "Going out of business sale"
Exit Strategy: Common Mistakes to Avoid
The following are several common mistakes found in the exit strategy section:
12. Assuming you have a business with the potential to go public.
13. Failing to explain how your investor will specifically recoup their investment and a sufficient return.
14. Failing to take your personal goals into account when planning your exit strategy.
15. Completely ignoring this section in your business plan or having no exit strategy at all.
Pen the business plan, search for investors, build the business, and figure out how your investor will cash out later - right? Well, not exactly. Investors are interested in the growth of your business, but ultimately their commitment of capital hinges upon their ability to recoup their initial investment and a healthy profit. The lack of a solid and realistic exit strategy demonstrating how investors can accomplish this goal can immediately turn off many sources of capital. Your chances of cashing in with an investor are seriously reduced without a clear definition of how they will cash out their investment.
Entrepreneurs rarely place the same level of importance on the exit strategy in a business plan that an investor would. Business owners are focused on raising the capital needed to launch and expand their venture. Solid business plans with thorough marketing, sales, operations, management, and concept analysis can, and will, fall short when little consideration is given to the exit plan.
In our experience, entrepreneurs and business owners most often list "going public with an IPO in five years" as their intended exit strategy. Although this is an optimistic and hopeful goal, this outcome normally remains just that - a hope. Providing realistic exit strategies will result in instant credibility and helps reassure investors concerned with receiving a significant return.
The book "Finding Your Wings" by Benjamin & Margulis addresses the IPO misconception, noting that, "Acquisition or buyout is the predominant method for achieving liquidity for small company shareholders. The primary method of achieving liquidity is not IPO - far from it. But the misconception remains. Too often, entrepreneurs and their business plans say they will take their company public in five years. The odds are that such an event will not occur. So entrepreneurs need to consider how that investor is going to achieve liquidity."
So the exit strategy plays an important role in the business plan, especially in the eyes of your potential investors.
Sell the shares of the company to the public to be traded on a stock exchange
• Conversion to cash for investors,
• major shareholders usually maintain control,
• high potential return
• Company must have tremendous growth potential to receive IPO,
• costly process,
• uncertain outcome.
• Major shareholders may be limited as to how much, when, and how they can sell stock
Business bought outright by another existing company
• Receive cash or stock,
• often purchased by strategic partner,
• management contract can be negotiated
• Fit must be appropriate,
• potential management changes,
• corporate identity may disappear
Business bought by other individuals
• Receive cash immediately
• Must find willing buyer,
• normally results in new management
Join with an existing company
• May receive stock and some cash,
• resources are combined,
• current management may stay
• New partners or bosses,
• less control,
• may receive little or no cash
One or more stockholders buy out the others
• Seller receives cash,
• other owners remain in control of the company
• Seller must be willing,
• buyers must have sufficient cash to buy others
Sell business concept to others to replicate
• Receive cash,
• retain current management,
• opportunity for large scale growth
• Concept must be appropriate for franchising,
• legally complex
Because each business is different, a realistic exit plan should take into account your particular industry, business life-cycle, competitive environment, management needs, and more. It is also important to consider your personal and financial goals, and how they relate to the future of your business.
Do you value privacy and autonomy? Then an IPO, with its heavy public disclosure and extensive outsider demands, may be an unsuitable fit for you and your venture. Does building your business from the ground up excite you, but the prospect of managing it over the long haul turn you off? Exiting with a sale of your business may be your best bet, freeing you to pursue other entrepreneurial projects and allowing new owners to manage the day to day operations in the future.
Ultimately, the most effective exit plans will take into account business, personal, and investor goals. Keep in mind that the business plan is the road map for your company and a well thought out exit strategy simply clarifies a future destination when your investor can expect to reach liquidity.
Incorporating a variety of well thought-out exit strategies is typically the best approach to build investor confidence and increase your chances of successfully raising capital.