A business plan is a living, written document that describes in detail how a business is going to achieve its goals. It is a road map that provides marketing, financial, and operational direction, so that your small business can avoid many of the bumps in the road along the way. It is also extremely helpful when seeking investors or financial help, because it allows people to visualize the opportunity your business provides.
In this edition of the Business Owner's Handbook, we are going to provide a quick and easy guide to small business planning. While much of this guide is focused on the overall creation of a business plan, you can easily pick and choose which sections you feel would benefit you business most.
It isn't much of a secret for those who follow our business guides and blogs that we have a very solid love / hate relationships with business plans. We often refer to the idea that this is the end all, be all document as The Business Plan Fallacy.
So, what exactly are the components of a business plan? According to the Small Business Administration (SBA) and Small Business Development Center (SBDC), there are several key components of a business plan that you should be aware of.
As a small business coach, we've reviewed quite a number of business plans and the ones that we found to be the most thorough and helpful had these things included:
1. Executive Summary
The Executive Summary is just that, a summary. It's a short dive into what your business idea is, the market opportunity, and how you intend to make it succeed.
You'll want to include brief information regarding the financials and the management team's experience, but don't worry, you'll be able to go more in depth later on. Focus on providing the information that you think provide the critical information you would want an investor to know.
Don't provide too much information or description, you only have a maximum of three pages for the summary. You'll need to fight the urge to "sell" your idea here in the executive summary. The entire business plan is the sales pitch, you'll have plenty of opportunity to fit in all the information that makes your idea amazing.
Think of the executive summary as your elevator pitch!
2. Business Description
Guess what you go over in the Business Description section? That's right, your business! We jest because it is so self explanatory.
As we said earlier, a lot of people will make the mistake of going into too much detail about their idea in the executive summary. However, THIS is really where you want to provide that information. This is your chance to expand on your idea in depth.
In the Business Description section you'll describe some of the following:
General Business Idea:
Describe the business in more detail. Imagine taking your elevator pitch and expanding it a bit. The items you mention here should be referenced throughout the remaining document.
History:
Describe the history of your business to date. Try to organize the history in a timeline as best as possible. Make sure to notate key points of success or even missteps. If you're a start-up, this might be a good chance to describe the history and experience of the entrepreneurs involved.
Performance:
List out how the business has performed thus far. Making note of every up and down if possible. If you are just starting out, lay out how you envision your 1st year.
Key Goals and Timelines:
Lay out your short and long term goals for the business. In order for this section to be effective, make sure that each of your goals follows the SMART Goal methodology.
Legal, Investment, and Ownership:
Describe all the technical legal items along with the ownership structure of the business. Refer to your Operating Agreement... that you should have as well.
3. Products and Services
This is the section where you will list out what you are providing through your business. You can be as detailed or generic here to fit your needs with respect to the business plan. If you are aiming for funding or investors, the more detail the better.
For each of your products you will want to speak to the special or unique benefits provided to your customer. List out the basics for the service, but also dive in to why your product is superior to those offered by your potential competitors.
You will also want to include the raw materials and time needed to provide these goods or services. List anything that offers a strategic competitive advantage for your business.
One last note on this section, you will be addressing the market related items like price etc. in the other sections.
4. Management and Organization
This is where you will describe the management structure of your business. Depending on the initial size of your business, it is entirely possible that the owner represents the majority of this section.
It's great to start off with an organization chart listing out all the essential roles needed to make the company successful. This is the perfect spot to describe the structure and hierarchy of your business. Are you planning to run as a flat or vertical type of organization? Why?
With each position, you should list out the basic job description and how it impacts success. Your next move is to list out the persons responsible for each role. Specify their background and why they are suited for the role.
This section should convince the reader of the management team's ability to make the company succeed.
5. Marketing Plan
Personally, marketing is my favorite part and that's why I consider it the heart of the plan! It's also our main focus when addressing the business plan fallacy as well! In fact, this section is so important we have a service dedicated just to marketing coaching.
This section requires a ton more research than the rest (except for the financial plan, maybe). Just about every item within your marketing plan will require some in depth research and/or critical thinking.
You'll want to address some of these points:
Identify your target market
Address the market size and potential
Trends within the industry and your plan for how you will keep up
Seasonality of the cash flows
Advertising, promotion, and packaging
Branding strategy
Pricing analysis
And most importantly the budget!
Many businesses don't invest much thought or money into the marketing side of things. From our experience that ends up being a major pitfall. There's an old business saying, you gotta spend money to make money, and I believe it to be true. How else are people going to know about your business?
It doesn't even necessarily have to be cold-hard-cash, just invest some time into spreading your business ideas. In fact, we have a whole article about ways you can market your small business on a budget. There are many ways you can promote your business without breaking the bank.
6. Competition Analysis
This is where the SWOT analysis comes in. Have you heard of a SWOT analysis? If not, it stands for Strengths and Weaknesses, which are internal to the company, and Opportunities and Threats, which are external factors impacting the business.
Be sure to consider all kinds of competitors, both direct and indirect.
Many small business owners will make the mistake of disregarding a competitor, because they don't do EXACTLY what they're doing. Remember a competitor should be anyone or anything a potential customer can spend their time or money instead of yours.
For example, a secondary competitor of Chuck E. Cheese is a public park. People can choose to host their kid's birthday party at a free park; however, a strength of Chuck E. Cheese is that it's indoors, so it's climate-controlled, which sounds pretty great in the summer heat!
As you can see, you need to address both your primary and alternative competition within your business plan. If you neglect to include both, you may miss a potential risk to your success.
7. Pricing
This is where you will discuss the pricing structure of your business. You need to take into account and address both the cost side as well as the pricing tolerance of the market. The pricing of your products should also be heavily weighted by what you learned in your research for your competitors.
On the cost side: Be detailed on the all the costs to provide your products. Service based businesses need to be extra vigilant here. Things like fuel, time, and insurance are all things that can impact the cost side of things.
On the market side: Using a combination of your own research along with information gained from your competition you should be able to formulate the price tolerance of the market. Keep in mind that can be on both the high an low end.
Your business plan should merge those two concepts together to craft and validate the pricing you decide to set for your product or service.
8. Financial Plan
The Financial Plan is where you go into detail about how you actually plan to pay for everything. You will discuss things from investors to loan repayment plans.
This is the one section that might rival marketing for the most important. Yes, most people would lean to giving the prize to the financial plan, but we are fairly biased towards the thought that without people actually buying your products your financial plan is moot.
It is extremely important that you are extremely pragmatic for your revenue projections. This is especially true for those of you writing this for investments. Banks and VC's are well versed in the markets and can easily sniff out if you are being overly optimistic. Plus, if you are far more pessimistic here and your numbers still lead to success then you're sitting pretty well.
Speaking of being pessimistic, you will also need a contingency plan outlined in this section. Life happens and nothing in life is guaranteed, this is an important component, which is often overlooked.
The key here is that you want to showcase that you did your due diligence. Whomever is reading your business plan should have a solid feeling that the data contained here is valid and well thought out.
9. Financial Projections
You described these projections in the section prior, but here's where you provide the worksheets, graphs, images, and otherwise fun accounting type items.
Here are a few of the items you'll want to include in this area of your business plan:
A list of financial assumptions:
List out all of the assumptions that set the tone for the rest of your projections. This is another great chance to showcase how well you thought through your business plan.
A Break-Even analysis:
Combining a few other items in the business plan, this is where you show what the bare minimum is for you to be sustainable.
Cash Flow Projections:
You should show the projections for the next three years. Your first year should be broken down into months. Be hyper realistic.
Profit and Loss Projections:
Show P&L's for the next three years. This is way easier with a historical P&L, but if you do not have one, make your best possible guess.
End-of-Year Balance Sheets
Balance sheet for the next three years. If you're just starting out, try to include any future assets if you plan to make purchases in the short term.
10. Appendices
The appendices are where you can put anything extra such as, financial statements, advertising samples, resumes, patents or copyrights, market studies, etc.
Again, the more detailed you can be the better!
The most important thing to remember is that a business plan should be a living document. That means updating it and keeping it current with your goals and aspirations for the business.
As the business matures, you may find yourself focusing less on certain areas of the plan and adapting other parts. Having a business plan aids in keeping focused on your business's goals and growth!
If you find this a bit overwhelming or if you just want a bit of help, consider bringing on a small business coach! They have experience developing business plans for many businesses and if anything, they can make the whole process easier.
At Out of the Box Advisors, we offer free consultations with one of our business coaches to help you sort out where to put your efforts and how we can help. Book your free session below!