A business plan is a good document for any business to create. However, it is essential for a business that will rely on external funding. No matter who is lending you money, even if it is someone in your own family, they will usually want to be certain that you have a sensible plan in place before they hand over any cash.
There are no fixed rules about what a business plan should contain, so you can freely exclude some recommended sections. There are some sections, however, that are vital to include if you want to prove that you have a viable, sustainable business idea.
In the list that follows, I will briefly explain the sections you should give extra attention to when drafting your business plan, listed in order of importance.
1. Financial Projections (at least 2 years)
Investors or financiers will often turn to this section first before they even check your Executive Summary. Before putting money into your business, they will want to see if and when you expect your business to become profitable.
The usual format is to set this out like a spreadsheet with 13 columns (one for each calendar month, plus one for the total) and rows for all of your income and expense items, plus additional rows for subtotals and totals.
You should show your income first, with all deductions that will be made from the income other than taxes (commissions, royalties, cost-of-goods-sold, etc.) This provides your gross margin, which is shown as a subtotal.
Next you show your operating expenses. These are all the items not directly related to creating the product or service that you are providing. That means things like rent, utilities, stationery, etc. You should also provide a subtotal of all the operating expenses.
Finally, you show your gross income (subtract operating expenses from gross margin), taxes, and net income (subtract taxes from gross income).
2. Market Analysis
You should be able to show that you have thoroughly researched the market for your products or services and that you understand it.
In particular, you need to show that your business will meet an existing demand, or perhaps create a new demand where none exists. Consider, for example, the microcomputer.
There wasn’t really a demand for microcomputers when they were developed, but demand began to grow the moment they were released onto the market.
If you are going to be a business that will create a new demand, you’ll have to convince investors or financiers that your idea will really work. When Steve Wozniak approached Hewlett Packard and offered to sell his Apple 1 computer, they rejected it because they didn’t believe people would ever have a use for a home computer.
If, on the other hand, you are targeting an existing demand, you’ll need to show that you are offering something unique that will help you stand out from others who are already meeting that demand.
Suppose you are creating a child-care business. An example of a good market analysis would be data showing significant new and planned constructions in the local area, indicating there would likely be a rise in the number of people potentially in need of a child-care service.
To this, you would add data indicating the number of existing child-care businesses and their capacity. You would then explain how the existing businesses will not have sufficient capacity to meet the demand as new families move to the area.
3. Marketing Plan
Showing that you understand your market well enough to explain it to potential investors is a good start. But you also need to discuss how you will reach the market. That is the purpose of a marketing plan.
Here’s how it works:
- Identify, if possible, a key target demographic for what you are selling
- Define how you will reach the demographic
- Identify the competition
- Define what the competition is doing
- Define how you will compete
Sticking with the child-care business example, you would identify the target demographic simply as "working parents". A business of this type normally would only need to distribute some flyers and put up a notice in the local supermarket to attract customers.
The competition would be other child-care providers in the local area. Try to figure out what they are doing to attract customers, and look at what they are offering. Think about what you could offer that would be better.
An always-in-demand business like this does not need to work hard to attract customers, and there is a limit to how many customers you can accept per premises. But if you had a more general business—selling fruit, for example—you would have to put much more thought into how you would compete against other fruit sellers in the area.
Competitive points can include:
- Operating Hours
- Attitude and knowledge of staff, etc
Getting customers is absolutely vital to the success of your business, and without them, you won’t really have a business.
The US Small Business Administration has provided a guide to marketing basics, which is well worth reading.
4. A Strong Mission Statement
Many "experts" advise that you should not get personal in a business plan, and keep it very formal. In my opinion, this is bad advice. What you need is a strong mission statement that shows you have a clear vision of what you want to achieve, and a clear plan to do it. Not just a bland bullet-point list, but a statement that conveys your passion for your business and your goals.
Somebody investing in your business should feel that you are committed to seeing the project through, that you are determined to achieve your objectives. The bullet-point crowd are just as good at following rules, and this is not what is needed for success in business.
What is needed for success in business is drive, passion, determination... all personal qualities, so if you can’t put something personal, nobody will know that you have those necessary qualities.
5. Description of Product or Service
It is necessary to go into some detail when describing exactly what you plan to sell. Many entrepreneurs get so excited talking about their financial objective that they forget to give much information about the actual product or service they will be providing.
Don’t be shy. You need to really talk up the benefits of what you’re going to be offering, and that means you have to market your product or service as strongly as you would in your real marketing. You need not worry about seeming too enthusiastic. That’s another myth left over from a bygone time. Worry more about not being enthusiastic enough!
Apart from the obvious, which is a description of what you’re selling and why, you should also give some thought to less obvious (but still important) factors. These could include:
- Do you need any special licenses to provide the product or service?
- Are there any mandatory limits involved?
- Does your plan include expansion into other products and services?
The concept of mandatory limits probably needs some explanation. A mandatory limit is some restriction you can’t avoid. For example:
- If you are selling fruit, you have to sell it while it’s fresh.
- If you are running a child-care business, the local council will probably impose a limit on the number of children you are allowed to accept into care per day.
- If you sell computer hardware, your supplier may require you to purchase a minimum quantity of stock, which can be a financial risk in an industry where technology quickly becomes obsolete.
See Also: How to Understand a Business Plan
The items I have listed above are especially important ones to include in a business plan and require special attention because they are also areas that investors and financiers focus on. These sections tell readers who you are, what you are selling, how you will sell it, and most importantly whether you will make any money from the activity.
You may find you disagree with the items I have listed, so if you feel there are other sections of the business plan that deserve more attention, why not share your thoughts in the comments section below?