An Introduction to Business Plans

An Introduction to Business Plans

Entrepreneur.com

Why is a business plan so vital to the health of your business? Read the first section of our tutorial on How to Build a Business Plan to find out.

A business plan is a written description of your business’s future. That’s all there is to it–a document that desribes what you plan to do and how you plan to do it. If you jot down a paragraph on the back of an envelope describing your business strategy, you’ve written a plan, or at least the germ of a plan.

Business plans can help perform a number of tasks for those who write and read them. They’re used by
investment-seeking entrepreneurs to convey their vision to potential investors. They may also be used by firms that are trying to attract key employees, prospect for new business, deal with suppliers or simply to understand how to manage their companies better.

So what’s
included in a business plan, and how do you put one together? Simply
stated, a business plan conveys your business goals, the strategies
you’ll use to meet them, potential problems that may confront your
business and ways to solve them, the organizational structure of your
business (including titles and responsibilities), and finally, the
amount of capital required to finance your venture and keep it going
until it breaks even.

Sound impressive? It can be, if put
together properly. A good business plan follows generally accepted
guidelines for both form and content. There are three primary parts to
a business plan:

  • The first is the business concept,
    where you discuss the industry, your business structure, your
    particular product or service, and how you plan to make your business a
    success.
  • The second is the marketplace section, in which
    you describe and analyze potential customers: who and where they are,
    what makes them buy and so on. Here, you also describe the competition
    and how you’ll position yourself to beat it.
  • Finally, the financial section
    contains your income and cash flow statement, balance sheet and other
    financial ratios, such as break-even analyses. This part may require
    help from your accountant and a good spreadsheet software program.

Breaking these three major sections down even further, a business plan consists of seven key components:

  1. Executive summary
  2. Business description
  3. Market strategies
  4. Competitive analysis
  5. Design and development plan
  6. Operations and management plan
  7. Financial factors

In addition to these sections, a business plan should also have a cover, title page and table of contents.

How Long Should Your Business Plan Be?
Depending on what you’re using it for, a useful business plan can be
any length, from a scrawl on the back of an envelope to, in the case of
an especially detailed plan describing a complex enterprise, more than
100 pages. A typical business plan runs 15 to 20 pages, but there’s
room for wide variation from that norm.

Much
will depend on the nature of your business. If you have a simple
concept, you may be able to express it in very few words. On the other
hand, if you’re proposing a new kind of business or even a new
industry, it may require quite a bit of explanation to get the message
across.

The purpose of your plan also determines its length. If
you want to use your plan to seek millions of dollars in seed capital
to start a risky venture, you may have to do a lot of explaining and
convincing. If you’re just going to use your plan for internal purposes
to manage an ongoing business, a much more abbreviated version should
be fine.

 

About
the only person who doesn’t need a business plan is one who’s not going
into business. You don’t need a plan to start a hobby or to moonlight
from your regular job. But anybody beginning or extending a venture
that will consume significant resources of money, energy or time, and
that is expected to return a profit, should take the time to draft some
kind of plan.

  • Startups. The classic business plan
    writer is an entrepreneur seeking funds to help start a new venture.
    Many, many great companies had their starts on paper, in the form of a
    plan that was used to convince investors to put up the capital
    necessary to get them under way.

    Most books on business planning seem to be aimed at these startup
    business owners. There’s one good reason for that: As the least
    experienced of the potential plan writers, they’re probably most
    appreciative of the guidance. However, it’s a mistake to think that
    only cash-starved startups need business plans. Business owners find
    plans useful at all stages of their companies’ existence, whether
    they’re seeking financing or trying to figure out how to invest a
    surplus.

  • Established firms seeking help. Not all
    business plans are written by starry-eyed entrepreneurs. Many are
    written by and for companies that are long past the startup stage.
    WalkerGroup/Designs, for instance, was already well-established as a
    designer of stores for major retailers when founder Ken Walker got the
    idea of trademarking and licensing to apparel makers and others the
    symbols 01-01-00 as a sort of numeric shorthand for the approaching
    millennium. Before beginning the arduous and costly task of
    trademarking it worldwide, Walker used a business plan complete with
    sales forecasts to convince big retailers it would be a good idea to
    promise to carry the 01-01-00 goods. It helped make the new venture a
    winner long before the big day arrived. "As a result of the retail
    support up front," Walker says, "we had over 45 licensees running the
    gamut of product lines almost from the beginning."

These
middle-stage enterprises may draft plans to help them find funding for
growth just as the startups do, although the amounts they seek may be
larger and the investors more willing. They may feel the need for a
written plan to help manage an already rapidly growing business. Or a
plan may be seen as a valuable tool to be used to convey the mission
and prospects of the business to customers, suppliers or others.

Plan Updating Checklist
Here are seven reasons to think about updating your business plan. If even just one applies to you, it’s time for an update.

  1. A
    new financial period is about to begin. You may update your plan
    annually, quarterly or even monthly if your industry is a fast-changing
    one.
  2. You need financing, or additional financing. Lenders and
    other financiers need an updated plan to help them make financing
    decisions.
  3. There’s been a significant market change. Shifting
    client tastes, consolidation trends among customers and altered
    regulatory climates can trigger a need for plan updates.
  4. Your
    firm develops or is about to develop a new product, technology, service
    or skill. If your business has changed a lot since you wrote your plan
    the first time around, it’s time for an update.
  5. You have had a change in management. New managers should get fresh information about your business and your goals.
  6. Your
    company has crossed a threshold, such as moving out of your home
    office, crossing the $1 million sales mark or employing your 100th
    employee.
  7. Your old plan doesn’t seem to reflect reality any
    more. Maybe you did a poor job last time; maybe things have just
    changed faster than you expected. But if your plan seems irrelevant,
    redo it.

 

Business
plans tend to have a lot of elements in common, like cash flow
projections and marketing plans. And many of them share certain
objectives as well, such as raising money or persuading a partner to
join the firm. But business plans are not all the same any more than
all businesses are.

Depending on your business and what you
intend to use your plan for, you may need a very different type of
business plan from another entrepreneur. Plans differ widely in their
length, their appearance, the detail of their contents, and the varying
emphases they place on different aspects of the business.

The
reason that plan selection is so important is that it has a powerful
effect on the overall impact of your plan. You want your plan to
present you and your business in the best, most accurate light. That’s
true no matter what you intend to use your plan for, whether it’s
destined for presentation at a venture capital conference, or will
never leave your own office or be seen outside internal strategy
sessions.

When you select clothing for an important occasion,
odds are you try to pick items that will play up your best features.
Think about your plan the same way. You want to reveal any positives
that your business may have and make sure they receive due
consideration.

Types of Plans
Business plans can be divided roughly into four separate types. There
are very short plans, or miniplans. There are working plans,
presentation plans and even electronic plans. They require very
different amounts of labor and not always with proportionately
different results. That is to say, a more elaborate plan is not
guaranteed to be superior to an abbreviated one, depending on what you
want to use it for.

  • The Miniplan.
    A miniplan may consist of one to 10 pages and should include at least
    cursory attention to such key matters as business concept, financing
    needs, marketing plan and financial statements, especially cash flow,
    income projection and balance sheet. It’s a great way to quickly test a
    business concept or measure the interest of a potential partner or
    minor investor. It can also serve as a valuable prelude to a
    full-length plan later on.

Be careful about misusing a
miniplan. It’s not intended to substitute for a full-length plan. If
you send a miniplan to an investor who’s looking for a comprehensive
one, you’re only going to look foolish.

  • The Working Plan.
    A working plan is a tool to be used to operate your business. It has to
    be long on detail but may be short on presentation. As with a miniplan,
    you can probably afford a somewhat higher degree of candor and
    informality when preparing a working plan.

A plan intended
strictly for internal use may also omit some elements that would be
important in one aimed at someone outside the firm. You probably don’t
need to include an appendix with resumes of key executives, for
example. Nor would a working plan especially benefit from, say, product
photos.

Fit and finish are liable to be quite different in a
working plan. It’s not essential that a working plan be printed on
high-quality paper and enclosed in a fancy binder. An old three-ring
binder with "Plan" scrawled across it with a felt-tip marker will serve
quite well.

Internal consistency of facts and figures is just as
crucial with a working plan as with one aimed at outsiders. You don’t
have to be as careful, however, about such things as typos in the text,
perfectly conforming to business style, being consistent with date
formats and so on. This document is like an old pair of khakis you wear
into the office on Saturdays or that one ancient delivery truck that
never seems to break down. It’s there to be used, not admired.

  • The Presentation Plan.
    If you take a working plan, with its low stress on cosmetics and
    impression, and twist the knob to boost the amount of attention paid to
    its looks, you’ll wind up with a presentation plan. This plan is
    suitable for showing to bankers, investors and others outside the
    company.

Almost all the information in a presentation plan
is going to be the same as your working plan, although it may be styled
somewhat differently. For instance, you should use standard business
vocabulary, omitting the informal jargon, slang and shorthand that’s so
useful in the workplace and is appropriate in a working plan. Remember,
these readers won’t be familiar with your operation. Unlike the working
plan, this plan isn’t being used as a reminder but as an introduction.

You’ll
also have to include some added elements. Among investors’ requirements
for due diligence is information on all competitive threats and risks.
Even if you consider some of only peripheral significance, you need to
address these concerns by providing the information.

The big
difference between the presentation and working plans is in the details
of appearance and polish. A working plan may be run off on the office
printer and stapled together at one corner. A presentation plan should
be printed by a high-quality printer, probably using color. It must be
bound expertly into a booklet that is durable and easy to read. It
should include graphics such as charts, graphs, tables and
illustrations.

It’s essential that a presentation plan be
accurate and internally consistent. A mistake here could be construed
as a misrepresentation by an unsympathetic outsider. At best, it will
make you look less than careful. If the plan’s summary describes a need
for $40,000 in financing, but the cash flow projection shows $50,000 in
financing coming in during the first year, you might think, "Oops!
Forgot to update that summary to show the new numbers." The investor
you’re asking to pony up the cash, however, is unlikely to be so
charitable.

  • The Electronic Plan. The majority of
    business plans are composed on a computer of some kind, then printed
    out and presented in hard copy. But more and more business information
    that once was transferred between parties only on paper is now sent
    electronically. So you may find it appropriate to have an electronic
    version of your plan available. An electronic plan can be handy for
    presentations to a group using a computer-driven overhead projector,
    for example, or for satisfying the demands of a discriminating investor
    who wants to be able to delve deeply into the underpinnings of complex
    spreadsheets.

Source:The Small Business Encyclopedia, Business Plans Made Easy, Start Your Own Business and Entrepreneur magazine.

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Continue on to the next section of our Business Plan How-To >> Plan Your Plan

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