It takes more than a great idea to get a small business off the ground.
A crucial step in the process is creating a business plan – a formal presentation that details the different aspects of the business, the market, the finances involved and the expectations. Here’s how the Small Business Administration describes it:
“The business plan generally projects 3-5 years ahead and outlines the route a company intends to take to reach its yearly milestones, including revenue projections.
A well thought-out plan also helps you to step back and think objectively about the key elements of your business venture and informs your decision-making on a regular basis.”
To help us better understand this process, let’s take a look at each step involved in creating a business plan.
Key Takeaways:
- A business plan is essential for guiding a company’s strategy and attracting investment.
- It outlines objectives, market analysis, operations, products/services, and financial projections.
- Regular updates ensure relevance and effectiveness in achieving business goals.
What is a Business Plan?
A business plan is a detailed document that outlines a company’s objectives, strategies, and the steps it plans to take to achieve these goals. It serves as a roadmap for the business’s operations, financial health, and growth.
This plan is crucial for guiding decision-making and attracting investors or lenders.
Here are the key components of a business plan:
- Executive Summary
- Business Description
- Market Analysis
- Organization and Management
- Products or Services
- Marketing and Sales Strategy
- Funding Request
- Financial Projections
- Appendix
Let’s explore each of the steps into more detail:
1. Executive Summary
Although this is the first thing the reader will encounter in your business plan, it is often the last piece to be completed.
As the SBA says, “This section briefly tells your reader where your company is, where you want to take it, and why your business idea will be successful.” A startup’s approach to an executive summary will differ from that of an established business.
The SBA goes on to say:
“If you are just starting a business, you won’t have as much information as an established company. Instead, focus on your experience and background as well as the decisions that led you to start this particular enterprise.
Demonstrate that you have done thorough market analysis. Include information about a need or gap in your target market, and how your particular solutions can fill it. Convince the reader that you can succeed in your target market, then address your future plans.”
2. Company Description
This part outlines the different segments of the business. According to the SBA, this includes a description of how the products or services will satisfy the market needs. Katherine Arline of Business News Daily writes that the company description should be considered to be “an extended elevator pitch.”
“You want to thoroughly explain the goals of your business and how you will satisfy the needs of your market,” Arline says. “Your company description also explains the competitive advantages that you believe will make your business a success.”
3. Market Analysis
A startup owner will need to demonstrate industry knowledge and have a firm grasp on the market size and potential market share, according to the SBA. This is where a SWOT analysis (strengths, weaknesses, opportunities, threats) comes in, which Kristie Lorette outlines in a story for Demand Media:
- Strengths: “Business strengths are aspects that you can manage,” she states. “… Strengths can include the people you hire (their skills, training, qualifications, etc.), the relationships you maintain with current customers, or your background (being one of the few providers of your product or service in your local area).”
- Weaknesses: “Weaknesses are also factors over which you have control, but are areas that you need to improve. Weaknesses are the factors holding your business back from gaining a competitive advantage. Some weaknesses include inexperience, the business location and access to resources such as cash.”
- Opportunities: “Opportunities are external to your business, the reasons your business exists or the need the business fulfills. Opportunities become results you will achieve through your marketing strategies.”
- Threats: “Threats are external forces beyond your control that you need to be aware of so you can make contingency plans. Threats may include poor economic conditions, bad publicity about your industry or business, laws and regulations or a change in consumer purchase behavior.”
4. Organization and Management
This segment breaks down the structure of the business and includes an organization chart that shows the chain of command as well as details on the owners and business leadership. Here’s how the SBA describes it:
“Who is responsible for what in your business? What is their experience, and why are you including them as board members or employees? What duties do they have? These questions might seem unimportant for a small team, but those reading your business plan want to know who is leading, so be clear about it. Provide a clear description of each division or department and its role. This section should also identify board members (if you have an advisory board) and your plans for their ongoing involvement. What salary and benefits do you offer your team? What incentives are available? What about promotions? Assure your reader that your staff are more than just names on a letterhead.”
5. Service or Product Line
This is where the focus turns to what the business will actually produce. What is it, how does it work, what need does it fill and how does it benefit others?
The SBA says this part should represent the benefits as perceived by the customer. Other elements to include in this section are the product’s advantages, its life cycle, and any details on copyrights, patents, research and legal agreements. Alyssa Gregory further details this for About.com:
“The purpose of the products or services section of your business plan is to clearly express the benefits you’re providing to your customers or clients,” she writes. “
All of the background you provide should focus on that goal.
Think in terms of answering, ‘Why does my ideal client want this? How will my product or service make his/her life better, easier or more profitable?’”
6. Marketing and Sales
For marketing, the SBA advises you include a description of potential market penetration and growth, along with channels of distribution and methods of communication with customers.
For sales, you should describe the team, the training process, recruitment strategies and an analysis of sales prospects. Randy Duermyer writes about this for About.com, saying:
“Those who are considering lending your small business money or investing will want to know how you intend to reach your target market and attain the market share you feel you can attain, which you’ve already discussed in the Market Analysis section of your business plan,” he says. “Your marketing plan will help them understand that. … If it applies to your business, outline your sales strategy in this section when you are writing a business plan.
For example, will there be a sales force? Will sales training be provided? Will your sales team be given incentives to encourage them to increase sales and meet or exceed their goals?”
7. Funding Request
Here is where any loan or financial assistance requests will be examined. The SBA recommends including current and future funding requirements, how the funds will be used and any other relevant financial strategies involved.
“When you are outlining your funding requirements, include the amount you want now and the amount you want in the future,” the SBA says. “Also include the time period that each request will cover, the type of funding you would like to have (e.g., equity, debt), and the terms that you would like to have applied.”
8. Financial Projections
Creditors will want to understand your financial expectations and projections, the SBA says, as well as an analysis of your finances that includes “a ratio and trend analysis for all of your financial statements (both historical and prospective).” Elizabeth Wasserman examines this for Inc.com:
“The purpose of the financial section of a business plan is two-fold,” says Wasserman. “You’re going to need it if you are seeking investment from venture capitalists, angel investors or even smart family members. They are going to want to see numbers that say your business will grow — and quickly — and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan.”
9. Appendix
The final section may include a variety of information that may be needed as supplemental material, according to the SBA, all of it being dependent on each unique scenario.
This can include credit history, reference letters, licenses and permits, legal documents, building permits, contracts, and a list of business consultants.
Why Write a Business Plan?
Writing a business plan is a fundamental step in starting and running a successful business. It serves several key functions:
- Roadmap for Growth: It provides a detailed blueprint for what you want your business to be and how to achieve it. This roadmap helps in setting short-term and long-term objectives, and in outlining strategies to meet these goals.
- Decision-Making Tool: A business plan is a valuable tool for making informed decisions. It helps in identifying potential challenges and opportunities, and in strategizing how to tackle or leverage them.
- Attracting Investors and Lenders: A well-crafted business plan is essential to attract funding. Investors and lenders want to see a clear, coherent plan that outlines the potential for profitability and growth, and how their funds will be used.
- Projection of Success: Business plans typically include financial projections for the next 3-5 years. These projections are critical in showing the potential for revenue growth and financial stability, providing a convincing case to stakeholders.
- Market and Competitor Analysis: Through market research included in the business plan, you gain a deeper understanding of your market, target audience, and competition. This information is crucial in crafting strategies that give you a competitive edge.
- Risk Management: It helps in foreseeing potential risks and developing strategies to mitigate them, ensuring a more resilient business model.
3 Common Business Plan Types
There are 3 different business plan types, depending on your business:
- Traditional Business Plans: These are comprehensive documents, typically used by businesses seeking significant funding from banks or investors. Key components include an executive summary, business description, market analysis, organization and management structure, product/service line, marketing and sales strategy, funding request, financial projections, and an appendix. Traditional business plans are detailed, providing thorough information about every aspect of the business.
- Lean Business Plans: Lean business plans are more concise and focus on the essential aspects of the business. They are ideal for startups and small businesses that don’t require substantial external funding or those that need to quickly adapt to market changes. These plans typically include key partnerships, activities, resources, value propositions, customer relationships, channels, customer segments, cost structure, and revenue streams. The lean plan is agile, allowing for easy updates and adjustments as the business evolves.
- Nonprofit Business Plans: Nonprofit business plans are tailored to the unique needs and structure of nonprofit organizations. They focus not only on funding strategies but also on operational strategies and impact measurement. Key components include an executive summary, program descriptions, market analysis, marketing plan, operational plan, organizational structure, financial plan, and fundraising strategy. These plans often emphasize the organization’s mission, vision, and impact on the community or cause, which is crucial for attracting donors, grants, and volunteers.
8 Tips for Creating a Small Business Plan
Each type of business plan serves a different purpose and targets different audiences, but all are essential in providing a structured way to think about the business’s goals and strategies.
- Know Your Audience: Tailor your business plan to the specific needs and interests of your audience, whether they are investors, lenders, partners, or potential customers. Understanding their expectations will help you focus your plan to address their concerns and requirements.
- Have a Clear Goal: Define what you want to achieve with your business plan. This could be securing funding, guiding your team, or laying out a strategy for growth. Having a clear objective will help you stay focused and make your plan more effective.
- Invest Time in Research: Conduct thorough research on your market, competitors, and industry trends. This includes understanding your target audience, the demand for your product or service, and the competitive landscape. Solid research provides a strong foundation for your business plan.
- Keep it Short and to the Point: A concise, well-structured plan is more effective than a lengthy document filled with unnecessary details. Focus on the most critical information and keep your plan readable and engaging.
- Keep the Tone, Style, and Voice Consistent: Maintain a professional and consistent tone throughout your business plan. This helps in presenting a cohesive and well-thought-out plan that is easy to follow and understand.
- Use a Business Plan Template: Starting with a template can provide structure and ensure you cover all the necessary elements. However, be sure to customize it to fit your specific business needs and goals.
- Try Business Plan Software: Business plan software can simplify the process of creating your plan. These tools often come with templates, guidance, and resources to help you through each step of the plan.
- Regularly Review and Update Your Plan: A business plan is a living document that should evolve as your business grows and market conditions change. Regularly revisiting and updating your plan ensures it remains relevant and useful as a strategic tool.
Final Thoughts
By following these tips and guidelines, you can create a more effective and impactful business plan that not only serves as a blueprint for your business’s future but also impresses and convinces potential stakeholders of your business’s potential.