No matter how long you’ve been in operation, your business needs a plan. A good business plan can help you secure funding for your startup, or expand your operation.
Even if you aren’t looking for a capital infusion right this moment, a business plan can still be a great deal of help. The process of creating a business plan forces you to look at your business and evaluate what’s working — and what isn’t. It can help you focus on the right things and give you a roadmap to future success.
The Importance of a Business Plan
A few years ago, a software company surveyed its users to determine how helpful a business plan was to success. The results were reviewed by the University of Oregon for validation, and seem to point to the improved outcomes for those with business plans:
- Of those who created plans, 64 percent grew their businesses, compared to 43 percent of companies that hadn’t yet finished a plan.
- Those who created plans were more likely to secure a loan or investment capital.
A Babson College study discovered a written business plan wasn’t all that important — unless you were trying to raise money. In cases involving raising capital or getting a loan, businesses with plans were more likely to get the funding they needed.
Consider the company Coffee House, Inc. The founders are excited about providing a coffee shop for customers using their own brand of coffee. They plan to grind the beans at the coffee house to provide fresh coffee, as well as sell some of their product in bulk to customers who want to brew at home. They can also sell accessories to help customers make the most of their coffee experience, at the shop and at home.
Coffee House isn’t sure about how to proceed or measure success. A business plan can take ideas from the founders, put them to paper and provide a roadmap to take action.
Times You’ll Be Glad You Have a Business Plan
Any business hoping to raise funds, either with the help of loans or through venture capital, needs a plan. If you show up at the bank to ask for a loan, all the decision-makers will want to see a business plan. Venture capitalists also like to know that you are organized and informed and that you have a strategy to help them realize a return on their investment.
However, you can benefit from a business plan beyond raising money. Even if you aren’t currently looking for funding, you’ll be glad to have a direction when you are trying to figure out what your next step should be. The market analysis section can help you clarify your efforts so you focus on just the right thing to find your niche and exploit it.
A good business description can help you stay on track, while sales strategies can remind you of how you plan to increase your revenue. Your business plan is about organizing and planning ahead so you have the lay of the land and are ready to build your business in a way that makes sense. When you face uncertainty and you aren’t sure where to go next, your business plan can provide you with the guidance you need.
7 Elements of a Business Plan
Your well-thought-out business plan lets others know you’re serious, and that you can handle all that running a business entails. It can also give you a solid roadmap to help you navigate the tricky waters. The seven components you must have in your business plan include:
- Executive Summary
- Business Description
- Market Analysis
- Organization Management
- Sales Strategies
- Funding Requirements
- Financial Projections
All of these elements can help you as you build your business, in addition to showing lenders and potential backers that you have a clear idea of what you are doing.
1. Executive Summary
The executive summary is basically the elevator pitch for your business. It distills all the important information about your business plan into a relatively short space. It’s a high-level look at everything and should include information that summarizes the other sections of your plan.
One of the best ways to approach writing the executive summary is to finish it last so you can include the important ideas from other sections.
Coffee House, Inc.’s executive summary focuses on the value proposition of the business. Here’s what they’ve written into their plan:
“Market research indicates that an increasing number of consumers in our city are interested in the experience of coffee. However, there isn’t a viable place for them to meet and learn locally. Instead, they only have access to fast coffee. Coffee House, Inc., provides a place for people to enjoy fresh-ground beans and truly enjoy their cup.
“Coffee House, Inc., provides a hub for a subculture of coffee, offering customers a place to purchase their own coffee-grinding supplies in addition to enjoying the modern atmosphere of a coffee house.
“The founders of Coffee House, Inc., are coffee aficionados with experience in the coffee industry and connections to sustainable growing operations. With the experience and expertise of the Coffee House team, a missing niche in town can be fulfilled.”
2. Business Description
This is your chance to describe your company and what it does. Include a look at when the business was formed, and your mission statement. These are the things that tell your story and allow others to connect to you. It can also serve as your own reminder of why you got started in the first place. Turn to this section for motivation if you find yourself losing steam.
Some of the other questions you can answer in the business description section of your plan include:
- What is the business model? (What are your customer base, revenue sources and products?)
- Do you have special business relationships that offer you an advantage?
- Where are you located?
- Who are the principals?
- What is the legal structure?
- What are some of the market opportunities?
- What is your projected growth?
Answering these questions narrows your focus and shows potential lenders and backers how you’re viewing your venture.
3. Market Analysis
This is your chance to look at your competition and the state of the market as a whole. Your market analysis is an exercise in seeing where you fit in the market — and how you are superior to the competition.
As you create your market analysis, you need to make sure to include information on your core target market, profiles of your ideal customers and other market research. You can also include testimonials if you have them.
Part of your market analysis should come from looking at the trends in your area and industry. Coffee House, Inc., recognizes that there is a wide trend toward “slow” food and the idea of experiencing life. On top of that, Coffee House surveyed its city and found no local coffee houses that offered fresh-ground beans or high-end accessories for do-it-yourselfers.
Coffee House can create an ideal customer identity. The ideal customer is a millennial or younger member of Gen X. He or she is a professional and interested in experiencing life and enjoying pleasures. The ideal customer probably isn’t wealthy, but is middle class, and has enough disposable income to have a hobby like coffee. Coffee House appeals to professionals who work (and maybe live) in a downtown area. They meet their friends for a good cup of coffee, but also want the ability to make good coffee at home.
The Executive Summary is a brief outline of the company's purpose and goals.
While it can be tough to fit on one or two pages, a good Summary includes:
- A brief description of products and services
- A summary of objectives
- A solid description of the market
- A high-level justification for viability (including a quick look at your competition and your competitive advantage)
- A snapshot of growth potential
- An overview of funding requirements
I know that seems like a lot, and that's why it's so important you get it right. The Executive Summary is often the make-or-break section of your business plan.
A great business solves customer problems; if your Summary cannot clearly describe, in one or two pages, how your business will solve a particular problem and make a profit, then it's very possible the opportunity does not exist--or your plan to take advantage of a genuine opportunity is not well developed.
So think of it as a snapshot of your business plan. Don't try to "hype" your business--focus on helping a busy reader get a great feel for what you plan to do, how you plan to do it, and how you will succeed.
Since a business plan should above all help you start and grow your business, your Executive Summary should first and foremost help you do the following.
1. Refine and tighten your concept.
Think of it as a written "elevator pitch" (with more detail, of course). Your Summary describes the highlights of your plan, includes only the most critical points, and leaves out less important issues and factors.
As you develop your Summary you will naturally focus on the issues that contribute most to potential success. If your concept is too fuzzy, too broad, or too complicated, go back and start again. Most great businesses can be described in several sentences, not several pages.
2. Determine your priorities.
Your business plan walks the reader through your plan. What ranks high in terms of importance? Product development? Research? Acquiring the right location? Creating strategic partnerships?
Your Summary can serve as a guide to writing the rest of your plan.
3. Make the rest of the process easy.
Once your Summary is complete, you can use it as an outline for the rest of your plan. Simply flesh out the highlights with more detail.
Then work to accomplish your secondary objective by focusing on your readers. Even though you may be creating a business plan solely for your own purposes, at some point you may decide to seek financing or to bring on other investors, so make sure your Summary meets their needs as well. Work hard to set the stage for the rest of the plan. Let your excitement for your idea and your business shine through.
In short, make readers want to turn the page and keep reading. Just make sure your sizzle meets your steak by providing clear, factual descriptions.
How? The following is how an Executive Summary for a bicycle rental store might read.
Blue Mountain Cycle Rentals will offer road and mountain bike rentals in a strategic location directly adjacent to an entrance to the George Washington National Forest. Our primary strategy is to develop Blue Mountain Cycle Rentals as the most convenient and cost-effective rental alternative for the thousands of visitors who flock to the area each year.
Once underway we will expand our scope and take advantage of high-margin new equipment sales and leverage our existing labor force to sell and service those products. Within three years we intend to create the area's premier destination for cycling enthusiasts.
Company and Management
Blue Mountain Cycle Rentals will be located at 321 Mountain Drive, a location providing extremely high visibility as well as direct entry and exit from a primary national park access road. The owner of the company, Marty Cycle, has over twenty years experience in the bicycle business, having served as a product manager for ACME Cycles as well as the general manager of Epic Cycling.
Because of his extensive industry contacts, initial equipment inventory will be purchased at significant discounts from OEM suppliers as well by sourcing excess inventory from shops around the country.
Due to the somewhat seasonal nature of the business, part-time employees will be hired to handle spikes in demand. Those employees will be attracted through competitive wages as well as discounts products and services.
460,000 people visited the George Washington National Forest during the last twelve months. While the outdoor tourism industry as a whole is flat, the park expects its number of visitors to grow over the next few years.
- The economic outlook indicates fewer VA, WV, NC, and MD cycling enthusiasts will travel outside the region
- The park has added a camping and lodging facilities that should attract an increased number of visitors
- The park has opened up additional areas for trail exploration and construction, ensuring a greater number of single-track options and therefore a greater number of visitors
The market potential inherent in those visitors is substantial. According to third-party research data, approximately 30% of all cyclists would prefer to rent rather than transport their own bicycles, especially those who are visiting the area for reasons other than cycling.
The cycling shops located in Harrisonburg, VA, are direct and established competitor. Our two primary competitive advantages will be location and lower costs.
Our location is also a key disadvantage where non-park rentals are concerned. We will overcome that issue by establishing a satellite location in Harrisonburg for enthusiasts who wish to rent bicycles to use in town or on other local trails.
We will also use online tools to better engage customers, allowing them to reserve and pay online as well as create individual profiles regarding sizes, preferences, and special needs.
Blue Mountain Cycle Rentals expects to earn a modest profit by year two based on projected sales. Our projections are based on the following key assumptions:
- Initial growth will be moderate as we establish awareness in the market
- Initial equipment purchases will stay in service for an average of three to four years; after two years we will begin investing in "new" equipment to replace damaged or obsolete equipment
- Marketing costs will not exceed 14% of sales
- Residual profits will be reinvested in expanding the product and service line
We project first-year revenue of $720,000 and a 10% growth rate for the next two years. Direct cost of sales is projected to average 60% of gross sales, including 50% for the purchase of equipment and 10% for the purchase of ancillary items. Net income is projected to reach $105,000 in year three as sales increase and operations become more efficient.
Keep in mind this is just a made-up example of how your Summary might read. Also keep in mind this example focused on the rental business, so a description of products was not included. (They'll show up later.) If your business will manufacture or sell products, or provide a variety of services, then be sure to include a Products and Services section in your Summary. (In this case the products and services are obvious, so including a specific section would be redundant.)
Bottom line: Provide some sizzle in your Executive Summary... but make sure you show a reasonable look at the steak, too.
Now let's look at another main component in a business plan: your Business Overview and Objectives.
More from this series:
- How to Write a Great Business Plan: Key Concepts
- How to Write a Great Business Plan: the Executive Summary
- How to Write a Great Business Plan: Overview and Objectives
- How to Write a Great Business Plan: Products and Services
- How to Write a Great Business Plan: Market Opportunities
- How to Write a Great Business Plan: Sales and Marketing
- How to Write a Great Business Plan: Competitive Analysis
- How to Write a Great Business Plan: Operations
- How to Write a Great Business Plan: Management Team
- How to Write a Great Business Plan: Financial Analysis