- Sources of Business Finance
- Small Business Loans
- Small Business Grants
- Crowdfunding Sites
- How to Get a Business Loan
- Small Business Insurance Providers
- Best Factoring Companies
- Types of Bank Accounts
- Best Banks for Small Business
- Best Business Bank Accounts
- Open a Business Bank Account
- Bank Accounts for Small Businesses
- Free Business Checking Accounts
- Best Business Credit Cards
- Get a Business Credit Card
- Business Credit Cards for Bad Credit
- Build Business Credit Fast
- Business Loan Eligibility Criteria
- Small-Business Bookkeeping Basics
- How to Set Financial Goals
- Business Loan Calculators
- How to Calculate ROI
- Calculate Net Income
- Calculate Working Capital
- Calculate Operating Income
- Calculate Net Present Value (NPV)
- Calculate Payroll Tax
12 Key Elements of a Business Plan (Top Components Explained)
Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .
You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.
When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.
Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.
This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.
Let’s get started.
Why Are Business Plans Important?
Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .
1. Proves Your Business Viability
A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.
2. Guides You Throughout the Business Cycle
A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .
During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.
After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.
Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.
3. Helps You Make Better Business Decisions
As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.
A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.
4. Eliminates Big Mistakes
Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.
Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.
5. Secures Financing and Attracts Top Talents
Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.
A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).
You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.
Key Elements of Business Plan
Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.
A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.
With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.
Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.
Here are some of the components of an effective business plan.
1. Executive Summary
One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.
In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.
A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.
The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.
A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.
An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.
Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.
Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.
Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.
Components of an Executive Summary
Here are some of the information that makes up an executive summary:
- The name and location of your company
- Products and services offered by your company
- Mission and vision statements
- Success factors of your business plan
2. Business Description
Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.
What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.
A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.
Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.
Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.
In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.
Components of a Business Description
Your business description needs to contain these categories of information.
- Business location
- The legal structure of your business
- Summary of your business’s short and long-term goals
3. Market Analysis
The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.
Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.
All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.
In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.
The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.
Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.
Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.
Market Analysis Factors
Here are some of the factors to be included in your market analysis.
- The geographical location of your target market
- Needs of your target market and how your products and services can meet those needs
- Demographics of your target audience
Components of the Market Analysis Section
Here is some of the information to be included in your market analysis.
- Industry description and statistics
- Demographics and profile of target customers
- Marketing data for your products and services
- Detailed evaluation of your competitors
4. Marketing Plan
A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.
Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.
Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.
The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.
5. Sales Strategy
Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.
Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.
Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.
Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.
6. Competitive Analysis
Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.
Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.
The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.
This section should define the following:
- Your competitors' identified advantages in the market
- How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
- The standout qualities that distinguish you from other companies
- Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks
In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.
7. Management and Organization
Management and organization are key components of a business plan. They define its structure and how it is positioned to run.
Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.
Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.
The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.
Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.
Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.
This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.
8. Products and Services
This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.
Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.
At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.
The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.
Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.
You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.
Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.
This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.
9. Operating Plan
An operations plan describes how you plan to carry out your business operations and processes.
The operating plan for your business should include:
- Information about how your company plans to carry out its operations.
- The base location from which your company intends to operate.
- The number of employees to be utilized and other information about your company's operations.
- Key business processes.
This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.
The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.
What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.
10. Financial Projections and Assumptions
Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.
The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.
All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.
The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.
Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.
Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:
- Projected income statements
- Cash flow statements
- Balance sheets
- Income statements
Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.
11. Request For Funding
The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.
When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.
If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.
When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.
Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.
12. Exhibits and Appendices
Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.
Some of the documents that comprise the exhibits and appendices section includes:
- Legal documents
- Licenses and permits
- Credit histories
- Customer lists
The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.
Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.
There are key points to include in the appendix and exhibits section of your business plan.
- The management team and other stakeholders resume
- Marketing research
- Permits and relevant legal documents
- Financial documents
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Business Plan Development Guide
(6 reviews)
Lee Swanson, University of Saskatchewan
Copyright Year: 2017
Publisher: OPENPRESS.USASK.CA
Language: English
Formats Available
Conditions of use.
Learn more about reviews.
Reviewed by Kevin Heupel, Affiliate Faculty, Metropolitan State University of Denver on 3/4/20
The text does a good job of providing a general outline about writing and developing a written business plan. All of the important steps and components are included. However, the text is light on details, examples, and rationale for each element... read more
Comprehensiveness rating: 3 see less
The text does a good job of providing a general outline about writing and developing a written business plan. All of the important steps and components are included. However, the text is light on details, examples, and rationale for each element of the business plan. Some examples from actual business plans would be helpful.
Content Accuracy rating: 4
For the most part, the content is accurate. The content covers all important aspects of drafting a business plan. I thought the industry analysis could use more information about collecting primary and secondary sources; instead, this information was referenced in the marketing plan section.
Relevance/Longevity rating: 5
Most of the content relies on cites as far back as 2006; however, when it comes to developing and writing a business plan nothing has changed. Thus, the content is current and there is no concern about it becoming obsolete in the near future.
Clarity rating: 4
The text is clear. There are no difficult terms used and the writing is simple. The text uses a lot of bullet points though, which gets tedious to read for a few pages.
Consistency rating: 5
The text does a good job of maintaining consistency in terms of framework and terminology. The text is organized where it's easy to find the information you want in a quick manner.
Modularity rating: 3
The text has a lot of bullet points and the paragraphs are dense. However, the use of subheading is excellent.
Organization/Structure/Flow rating: 5
The book is organized as if you're writing a business plan from start to finish, which is helpful as a practical guide.
Interface rating: 5
There are no navigation problems, distortion of images/charts, or any other display features that may distract or confuse the reader.
Grammatical Errors rating: 5
The text is free of grammatical errors. The sentence structure is simple with many bullet points, which helps to avoid any grammatical issues.
Cultural Relevance rating: 5
This book was written by a Canadian professor and provides references to Canadian sources. However, the information in this text can be used for U.S. schools.
This book is very short and provides a good, general overview about the process of creating and writing a business plan. It won't help a reader if he/she is confused about a certain part of the business plan. The reader will have to find another source, such as "Preparing Effective Business Plans" by Bruce Barringer, Ph.D. The book provides links to good resources and a finished business plan that the reader can reference. I would recommend the book for undergraduate courses.
Reviewed by Kenneth Lacho, Professor of Management, The University of New Orleans on 6/19/18
1. Text is relevant to Canada. Not the United States 2. Needs to cover resources available to entrepreneur, e.g., federal government agencies, trade associations, chambers of commerce, economic development agencies. 3. Discuss local economy or... read more
1. Text is relevant to Canada. Not the United States 2. Needs to cover resources available to entrepreneur, e.g., federal government agencies, trade associations, chambers of commerce, economic development agencies. 3. Discuss local economy or economic area relevant to this proposed business. 4. Business model ok as a guide. 5. Suggested mission statement to cover: product/business, target customer, geographical area covered. 6. Need detailed promotion plan, e.g., personal selling, advertising, sales promotion, networking publicity, and social media. 7. How do you find the target market? 8. Chapter 6 too much detail on debt and equity financing. 9. Discuss how to find sources of financing, e.g., angels. 10. Expand coverage of bootstring, crowdfunding. 11. Chapter 4 – good checklist. 12. Chapter 3 - overlaps. 13. Chapter 7 – 3 pages of executive summary – double or single spaced typing. Number all tables, graphs. 14. Some references out-of-date, mostly academic. Bring in trade magazines such as Entrepreneur.
Content Accuracy rating: 5
In my opinion, the content is accurate and error free.
Relevance/Longevity rating: 4
The material is relevant to writing a business plan. I wonder if the Porter, SWOT VRIO, etc. material is too high level for students who may not be seniors or have non-business degrees (e.g., liberal arts). Porter has been around for a while and does have longevity. The author has to be more alert to changes in promotion, e.g., social media and sources of financing, e.g., crowdfunding.
Clarity rating: 3
As noted in No. 9, the tone of the writing is too academic, thus making the material difficult to understand. Paragraphs are too long. Need to define: Porter, TOWS Matrix, VRIO, PESTEL. A student less from a senior or a non-business major would not be familiar with these terms.
Consistency rating: 4
The text is internally consistent. The model approach helps keep the process consistent.
Modularity rating: 4
The process of developing a business plan is divided into blocks which are parts of the business plan. Paragraphs tend to be too long in some spots.
Organization/Structure/Flow rating: 4
The topics are presented in a logical step-wise flow. The language style is too academic in parts, paragraphs too long. Leaves out the citations. Provides excellent check lists.
There are no display features which confuse the reader.
Grammatical Errors rating: 4
The text has no grammatical errors. On the other hand, I found the writing to be too academic in nature. Some paragraphs are too long. The material is more like an academic conference paper or journal submission. Academic citations references are not needed. The material is not exciting to read.
The text is culturally neutral. There are no examples which are inclusive of a variety of races, ethnicities, and backgrounds.
This book best for a graduate class.
Reviewed by Louis Bruneau, Part Time Faculty, Portland Community College on 6/19/18
The text provides appropriate discussion and illustration of all major concepts and useful references to source and resource materials. read more
Comprehensiveness rating: 5 see less
The text provides appropriate discussion and illustration of all major concepts and useful references to source and resource materials.
Contents of the book were accurate, although it could have benefited from editing/proofreading; there was no evidence of bias. As to editing/proofreading, a couple of examples: A. “Figure 1 – Business Plan… “ is shown at the top of the page following the diagram vs. the bottom of the page the diagram is on. (There are other problems with what is placed on each page.) B. First paragraph under heading “Essential Initial Research” there is reference to pages 21 to 30 though page numbering is missing from the book. (Page numbers are used in the Table of Contents.)
The book is current in that business planning has been stable for sometime. The references and resources will age in time, but are limited and look easy to update.
Clarity rating: 5
The book is written in a straightforward way, technical terms that needed explanations got them, jargon was avoided and generally it was an easy read.
The text is internally consistent in terms of terminology and framework.
Modularity rating: 5
The book lends itself to a multi-week course. A chapter could be presented and students could work on that stage of Plan development. It could also be pre-meeting reading for a workshop presentation. Reorganizing the book would be inappropriate.
The topics in the text are presented in a logical, clear fashion.
Generally, the book is free of interface problems. The financial tables in the Sample Plan were turned 90° to maintain legibility. One potential problem was with Figure 6 – Business Model Canvas. The print within the cells was too small to read; the author mitigated the problem by presenting the information, following Figure 6, in the type font of the text.
I found no grammatical errors.
The text is not culturally insensitive or offensive in any way.
I require a business plan in a course I teach; for most of the students the assignment is a course project that they do not intend to pursue in real life. I shared the book with five students that intended to develop an actual start-up business; three of them found it helpful while the other two decided not to do that much work on their plans. If I were planning a start-up, I would use/follow the book.
Reviewed by Todd Johnson, Faculty of Business, North Hennepin Community College on 5/21/18
The text is a thorough overview of all elements of a business plan. read more
Comprehensiveness rating: 4 see less
The text is a thorough overview of all elements of a business plan.
The content is accurate and seems to lack bias.
Content seems relevant and useful . It does not help an entrepreneur generate ideas, and is very light on crowdfunding and other novel funding source content. It is more traditional. This can be easily updated in future versions, however. "Social Media" appears once in the book, as does "Crowd Funding".
The book is comprehensive, but perhaps not written in the most lucid, accessible prose. I am not sure any college student could pick this up and just read and learn. It would be best used as a "teach along guide" for students to process with an instructor.
The text seems consistent. The author does a nice job of consistently staying on task and using bullets and brevity.
Here I am not so certain. The table of contents is not a good guide for this book. It does make the book look nicely laid out, but there is a lot of complexity within these sections. I read it uncertain that it was well organized. Yes there are many good bits of information, however it is not as if I could spend time on one swathe of text at a time. I would need to go back and forth throughout the text.
Organization/Structure/Flow rating: 2
Similar to the above. I did not like the flow and organization of this. An editor would help things be in a more logical order.
Interface rating: 2
The interface is just OK. It is not an attractice interface, as it presents text in a very dense manner. The images and charts are hard to follow.
I did not find any grammatical errors.
Cultural Relevance rating: 4
I a not certain of the origins of Saskatchewan, but I do feel this is a different read. It is more formal and dense than it has to be. This would be a difficult read for my students. I do not feel it is insensitive in any way, or offensive in any way.
I would not adopt this book if given the chance. It is too dense, and not organized very well, even though the information is very good. The density and lack of modularity are barriers to understanding what is obviously very good information.
Reviewed by Mariana Mitova, Lecturer, Bowling Green State University on 2/1/18
Though this textbook has a prescriptive nature, it is quite comprehensive. The author strikes a good balance between presenting concepts in a concise way and providing enough information to explain them. Many every-day examples and live links to... read more
Though this textbook has a prescriptive nature, it is quite comprehensive. The author strikes a good balance between presenting concepts in a concise way and providing enough information to explain them. Many every-day examples and live links to other resources add to the completeness of the textbook.
Content seems accurate.
Since the content is somewhat conceptual, the text will not become obsolete quickly. In addition, the author seems to be updating and editing content often hence the relevance to current developments is on target.
The text is very clear, written in clear and straight-to-the point language.
The organization of content is consistent throughout the entire text.
The textbook is organized by chapters, beginning with overview of the model used and followed by chapters for each concept within the model. Nicely done.
The flow is clear, logical and easy to follow.
Overall, images, links, and text are well organized. Some headlines were misaligned but still easy to follow.
No concerns for grammar.
No concerns for cultural irrelevance.
Reviewed by Darlene Weibye, Cosmetology Instructor, Minnesota State Community and Technical College on 2/1/18
The text is comprehensive and covers the information needed to develop a business plan. The book provides all the means necessary in business planning. read more
The text is comprehensive and covers the information needed to develop a business plan. The book provides all the means necessary in business planning.
The text was accurate, and error-free. I did not find the book to be biased.
The content is up-to-date. I am reviewing the book in 2017, the same year the book was published.
The content was very clear. A business plan sample included operation timelines, start up costs, and all relevant material in starting a business.
The book is very consistent and is well organized.
The book has a table of contents and is broken down into specific chapters. The chapters are not divided into sub topics. I do not feel it is necessary for sub topics because the chapters are brief and to the point.
There is a great flow from chapter to chapter. One topic clearly leads into the next without repeating.
The table of contents has direct links to each chapter. The appearance of the chapters are easy to read and the charts are very beneficial.
Does not appear to have any grammatical errors.
The text is not culturally insensitive or offensive.
I am incorporating some of the text into the salon business course. Very well written book.
Table of Contents
Introduction
- Chapter 1 – Developing a Business Plan
- Chapter 2 – Essential Initial Research
- Chapter 3 – Business Models
- Chapter 4 – Initial Business Plan Draft
- Chapter 5 – Making the Business Plan Realistic
- Chapter 6 – Making the Plan Appeal to Stakeholders and Desirable to the Entrepreneur
- Chapter 7 – Finishing the Business Plan
- Chapter 8 – Business Plan Pitches
References Appendix A – Business Plan Development Checklist and Project Planner Appendix B – Fashion Importers Inc. Business Plan Business Plan Excel Template
Ancillary Material
About the book.
This textbook and its accompanying spreadsheet templates were designed with and for students wanting a practical and easy-to-follow guide for developing a business plan. It follows a unique format that both explains what to do and demonstrates how to do it.
About the Contributors
Dr. Lee Swanson is an Associate Professor of Management and Marketing at the Edwards School of Business at the University of Saskatchewan. His research focuses on entrepreneurship, social entrepreneurship, Aboriginal entrepreneurship, community capacity-building through entrepreneurship, and institutional-stakeholder engagement. Dr. Swanson’s current research is funded through a Social Sciences Humanities Research Council grant and focuses on social and economic capacity building in Northern Saskatchewan and Northern Scandinavia. He is also actively studying Aboriginal community partnerships with resource based companies, entrepreneurship centres at universities, community-based entrepreneurship, and entrepreneurial attitudes and intentions. He teaches upper-year and MBA entrepreneurship classes and conducts seminars on business planning and business development.
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The 12 Key Components of a Business Plan
There are 12 components of a business plan entrepreneurs must know as they lay out how their business will work.
Entrepreneurs who create business plans are more likely to succeed than those who don’t.
Not only can a sound plan help your business access investment capital but—as the study found—it can even determine the success or failure of your venture.
Here are the critical components of a business plan to help you craft your own.
What is a business plan?
A business plan is a document outlining your business goals and your strategies for achieving them. It might include your company’s mission statement , details about your products or services, how you plan to bring them to market, and how much time and money you need to execute the plan.
For a thorough explanation of how to write a business plan, refer to Shopify’s guide .
12 key components of a business plan
Business plans vary depending on the product or service. Some entrepreneurs choose to use diagrams and charts, while others rely on text alone. Regardless of how you go about it, good business plans tend to include the following elements:
- Executive summary
- Company description
- Market analysis
- Marketing plan
- Competitive analysis
- Organizational structure
- Products and services
- Operating plan
- Financial plan
- Funding sources
1. Executive summary
The executive summary briefly explains your business’s products or services and why it has the potential to be profitable. You may also include basic information about your company, such as its location and the number of employees.
2. Company description
The company description helps customers, lenders, and potential investors gain a deeper understanding of your product or service. It provides detailed descriptions of your supply chains and explains how your company plans to bring its products or services to market.
3. Market analysis
The market analysis section outlines your plans to reach your target audience . It usually includes an estimate of the potential demand for the product or service and a summary of market research .
The market analysis also includes information about marketing strategies, advertising ideas, or other ways of attracting customers.
Another component of this section is a detailed breakdown of target customers. Many businesses find it helpful to analyze their target market using customer segments , often with demographic data such as age or income. This way, you can customize your marketing plans to reach different groups of customers.
4. Marketing plan
The marketing plan section details how you plan to attract and retain customers. It covers the marketing mix: product, price, place, and promotion. It shows you understand your market and have clear, measurable goals to guide your marketing strategy.
For example, a fashion retail store might focus on online sales channels, competitive pricing strategies, high-quality products, and aggressive social media promotion.
5. Sales plan
This section focuses on the actions you’ll take to achieve sales targets and drive revenue. It’s different from a marketing plan because it’s more about the direct process of selling the product to your customer. It looks at the methods used from lead generation to closing the sale, as well as revenue targets.
An ecommerce sales strategy might involve optimizing your online shopping experience, using targeted digital marketing to drive traffic, and employing tactics like flash sales , personalized email marketing, or loyalty programs to boost sales.
6. Competitive analysis
It’s essential that you understand your competitors and distinguish your business. There are two main types of competitors: direct and indirect competitors.
- Direct competitors. Direct competitors offer the same or similar products and services. For example, the underwear brand Skims is a direct competitor with Spanx .
- Indirect competitors. Indirect competitors, on the other hand, offer different products and services that may satisfy the same customer needs. For example, cable television is an indirect competitor to Netflix.
A competitive analysis explains your business’s unique strengths that give it a competitive advantage over other businesses.
7. Organizational structure
The organizational structure explains your company’s legal structure and provides information about the management team. It also describes the business’s operating plan and details who is responsible for which aspects of the company.
8. Products and services
This component goes in-depth on what you’re actually selling and why it’s valuable to customers. It’ll provide a description of your products and services with all their features, benefits, and unique selling points. It may also discuss the current development stage of your products and plans for the future.
The products and services section also looks at pricing strategy , intellectual property (IP) rights, and any key supplier information. For example, in an ecommerce business plan focusing on eco-friendly home products, this section would detail the range of products, explain how they are environmentally friendly, outline sourcing and production practices, discuss pricing, and highlight any certifications or eco-labels the products have received.
9. Operating plan
Here is where you explain the day-to-day operations of the business. Your operating plan will cover aspects from production or service delivery to human and resource management. It shows readers how you plan to deliver on your promises.
For example, in a business plan for a startup selling artisanal crafts, this section would include details on how artisans are sourced, how products are cataloged and stored, the ecommerce platform used for sales, and the logistics for packaging and shipping orders worldwide.
10. Financial plan
The financial plan is one of the most critical parts of the business plan, especially for companies seeking outside funding.
A plan often includes capital expenditure budgets, forecasted income statements , and cash flow statements , which can help predict when your company will become profitable and how it expects to survive in the meantime.
If your business is already profitable, your financial plan can help with convincing investors of future growth. At the end of the financial section, you may also include a value proposition , which estimates the value of your business.
11. Funding sources
Some businesses planning to expand or to seek funds from venture capitalists may include a section devoted to their long-term growth strategy, including ways to broaden product offerings and penetrate new markets.
12. Appendix
The final component of a business plan is the appendix. Here, you may include additional documents cited in other sections or requested by readers. These might be résumés, financial statements, product pictures, patent approvals, and legal records.
Components of a business plan FAQ
What are 8 common parts of a good business plan.
Some of the most common components of a business plan are an executive summary, a company description, a marketing analysis, a competitive analysis, an organization description, a summary of growth strategies, a financial plan, and an appendix.
What is a business plan format?
A business plan format is a way of structuring a business plan. Shopify offers a free business plan template for startups that you can use to format your business plan.
What are the 5 functions of a business plan?
A business plan explains your company’s products or services, how you expect to make money, the reliability of supply chains, and factors that might affect demand.
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13 Key Business Plan Components
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As is the case with most big projects, crafting a business plan is one of those things that takes an incredible amount of diligence and no shortage of courage. After all, your business idea is probably more than just some passionless money-making ploy — it’s your dream that you’re getting ready to lay bare for the world to scrutinize!
Never fear!
We have 4 sample business plans here to make it all less scary.
If you approach this with a firm understanding of what key information to include in each section of your business plan and know how each section works together to form a cohesive, compelling, and — above all — persuasive whole, it will make the writing process a whole lot less daunting.
We’re about to help you do exactly that by deconstructing each of the core components of your business plan one at a time and showing you exactly what information you should present to your readers so when all is said you done, you can walk away confidently knowing you’ve penned the most effective business plan possible.
As we learned in the “ What is a Business Plan? ” article, a business plan generally consists of the following sections:
Executive Summary
Company Synopsis
Market Analysis / Overview
Product (How it Works)
Revenue Model
Operating Model
Competitive Analysis
Customer Definition
Management Team
Financial Statements
Let’s dive in, shall we?
1. Executive Summary
In the same way that a great movie trailer gives you a basic understanding of what the film is about while also enticing you to go check out the full-length feature, your Executive Summary serves as an overview of the main aspects of your company and business plan that you will discuss in greater length in the rest of your plan.
In other words, your Executive Summary is the highlight reel of your business plan.
Remember, you’re not giving away every last little detail about your company and business opportunity right up front. Just enough of the “good parts” to both inform and intrigue your reader to dig in further.
You do this by presenting a concise, 1-sentence outline of the following information:
Mission Statement
A “big idea” statement that introduces why your company exists, what it does for your customers, and why it matters.
Product/Service Summary
A brief description of your company’s products or services, with a special emphasis on what makes them unique.
Market Opportunity Summary
A quick explanation of the one or two key problems and/or trends your product/service addresses, and how it translates to a big opportunity for your company (and investors ).
Traction Summary
Highlight a few of the biggest accomplishments that you have achieved and describe how those accomplishments lay the groundwork for what’s to come.
Outline the next objectives or milestones that you hope to meet and what it means for the growth of your company.
Vision Statement
What is the scope or “big picture vision” of the business you are trying to build? If you’re in tech, are you trying to build the next Nest? If you’re in food and beverage, are you aiming to be the next Chipotle? In other words, how big is this company going to get, and why should an investor/partner/hire be excited to be a part of it?
A word of advice:
While your Executive Summary is the first piece of content people will read in your business plan, it’s usually a good idea to write this section last so you can take a step back after you’ve written everything and have a better sense of which high-level information you want to pull from the rest of your plan to focus on here.
First impressions are everything!
2. Company Synopsis
The Company Synopsis section is where you provide readers with a more in-depth look at your company and what you have to offer.
Before your readers will ever bother caring about things like your marketing strategy or your financial assumptions, they’ll want to know two absolutely fundamental details that will set up the rest of the plan that follows:
What painful PROBLEM are you solving for your customers?
What is your elegant SOLUTION to that problem?
You might have the most revolutionary product the world has ever seen, but if you don’t take the time to carefully articulate why your product exists in the first place and how it helps your customers solve a pain point better than anything else out there, nothing else in your business plan really matters from the reader’s perspective.
If you spend the majority of your time on any one part of your business plan, take the time to really nail this part. If you can build an engaging story around the problem that your audience can relate to, it makes the payoff of your solution statement all the more powerful.
When considering how to position your problem in the context of your business plan, think to yourself: what is the single greatest problem my customers face? How do other solutions in the market fail to alleviate that problem, thus creating a major need for my product?
Once you’ve thoroughly explained the problem you’re setting out to solve, it’s time to tell investors how your product/service solves that problem beautifully.
The goal here is less about describing how your product or service actually works (you’ll get to that in the “How It Works” section later) than it is about communicating how your solution connects back directly to the problem that you just described.
Key questions to consider:
What is the product/service you’re offering?
In what way does it solve my customers’ most painful problem?
What impact does my solution have on my customers’ lives?
How does my product/service effectively address the biggest shortcomings of other solutions currently in the market?
3. Market Overview
While your problem and solution statements help set the stage and provide readers with insight into why you’re starting this company in the first place, clearly defining your market will allow you to call attention to the trends and industry conditions that demonstrate why now is the time for your company to succeed.
You’re going to want to supplement your own expertise with plenty of evidence in the form of market statistics and research to show readers that you’re not only an expert when it comes to your product, but your industry as well. Your goal here is to help illustrate:
The SIZE of the market opportunity your company is positioned to address
The amount of GROWTH occurring in your market
The TRENDS driving the demand for your solution
The SUCCESS STORIES happening with similar companies in your industry
Market Size & Growth
Indicating to your readers that your problem addresses a big enough market will play a huge role in how excited they’ll be about getting involved in helping your company. This is where you’ll want to put your research cap on and start uncovering some numbers that help your reader better understand:
How big the market is (locally/nationally/internationally)
Approximately how much revenue it generates every year
If it’s growing
How much it’s expected to grow over the next 5-10 years
What recent emerging trends have you developed your product/service in response to?
Are there any new technologies that have emerged recently that make your product/solution possible? Are there any specific brands or products you can point to that illustrate the demand for products/services like (but not too like) yours?
Examples of Trends
An increasing number of consumers are “cutting the cord,” replacing traditional cable subscriptions with subscriptions to services like Netflix, Amazon Prime and HBO NOW.
As the Baby Boomer generation continues to age, there is a growing demand for products that empower them to stay safe and maintain their independence for longer.
Consumers are increasingly seeking food options that feature locally-sourced ingredients.
The emergence of image recognition technology for smartphones.
Industry Success Stories
Are there any examples of similar companies that investors have supported that you could point to? Are there any recent acquisitions (examples of larger companies buying up companies similar to yours) that could bolster the case for your own exit strategy ? Are there any similar companies that have recently IPO’d (gone public)?
4. Product (How it Works)
You used your Company Synopsis section to cover why your new product delivers crazy value to your customers by breaking down the ways that it benefits your customers and meets a highly specific need for them.
Now it’s time to use your Product or How it Works section to get into the finer details around the mechanics of how it does so.
This might sound like they’re one and the same. Not exactly. And here’s a good way to distinguish this.
Let’s say you were building a subscription box service for pet flea treatment. In your Company Synopsis section, you’d probably spend your time talking about how your solution conveniently spares pet owners the hassle of remembering to make a vet appointment, traveling to the clinic, and waiting to talk with the vet just to pick up Scrambles’ medication.
In your How it Works section, on the other hand, you’d shift your focus to describing how your customers have the ability to choose from a variety of brand name medications, set their own delivery schedule, enjoy 2-day delivery, and gain real-time support 24/7 from a team of industry experts.
What are some of your product’s key features ?
How will customers actually use your product or service?
Is there any technology underlying your solution you will need to explain in order for readers to fully understand what your company does and how it works?
If your product or service has some sort of proprietary element or patent at the core of what makes it work, you might be a bit hesitant to show your hand for fear that someone might run off with your idea. While this is a completely understandable concern, know that this pretty much never happens.
That being said, you can still give your readers a clear idea of how your product or service works by explaining it through the lens of how it relates to the problems that your customers face without giving up your secret sauce.
Put another way, you don’t have to explicitly tell your readers the precise source code to your new app, but you will want to call attention to all of the great things it makes possible for your customers.
5. Revenue Model
It’s the age-old question that every business owner has had to answer: how will your company make money?
If you’re just starting out , clearly defining your framework for generating revenue might seem like somewhat of a shot in the dark. But showing investors you have even a cursory idea of how you will convert your product or service into sales is absolutely fundamental in lending credibility to your business plan.
You’ll want to determine the following:
Revenue Channels
Are you leveraging transaction-based revenue by collecting one-time payments from your customers? Are you generating service revenue based on the time spent providing service to your customers? Are you following a recurring revenue model selling advertising and monthly subscriptions for your mobile app?
What are your price points and why have you set them that way? How does your pricing compare with similar products or services in the market?
Cost of goods sold, otherwise known as COGS, refers to the business expenses associated with selling your product or service, including any materials and labor costs that went into producing your product.
Your margin refers to the profit percentage you end up with after you subtract out the costs for the goods or services being sold. If you purchase your inventory for $8 per item from a supplier and sell them for $10, for example, your margin on sales is 20%.
Why is this revenue model the right fit for this product/market/stage of development?
Are there any additional revenue sources that you expect to add down the line?
Have you generated any revenue to date? If so, how much?
What have you learned from your early revenue efforts?
If you haven’t started generating revenue, when will you “flip the switch”?
6. Operating Model
Where your Revenue Model refers to how you’re going to make money, your Operating Model is about how you’re going to manage the costs and efficiencies to earn it.
Basically, it’s how your business will actually run. For this component, you’ll want to focus on the following:
Critical Costs
Your Critical Costs are the costs that make or break your business if you can’t manage them appropriately. These essentially determine your ability to grow the business or achieve profitability.
Cost Maturation & Milestones
Often your Critical Costs mature over time, growing or shrinking. For example, it might only cost you $10 to acquire your first 1,000 users, but $20 to acquire the next 10,000. It’s important to show investors exactly where costs might improve or worsen over time.
Investment Costs
Investment costs are strategic uses of capital that will have a big Return on Investment (ROI) later. The first step is to isolate what those investment costs are. The second step is to explain how you expect those investments to pay off.
Operating Efficiencies
What can you do from an efficiency standpoint that no one else can? It could be the way you recruit new talent, how you manage customer support costs, or the increasing value your product provides as more users sign up.
7. Competitive Analysis
Now that you’ve introduced readers to your industry and your product, it’s time to give them a glimpse into the other companies that are working in your same space and how your company stacks up.
It’s important to research both your direct competitors (businesses that offer products or services that are virtually the same as yours) and your indirect competitors (businesses that offer slightly different products or services but that could satisfy the same consumer need).
A skimpy Competitor Analysis section doesn’t tell investors that your solution is unrivaled. It tells them that you’re not looking hard enough.
Pro tip: avoid saying that you have “no competitors” at all costs.
Why? Because while there may not be anyone exactly like you out there, if you say this, the investor is more than likely thinking one of two things: Either, “They don’t know what they’re talking about,” or, “If there’s truly no competition, is there even a market worth pursuing here at all?”
When you set out to identify your fiercest competitors, ask yourself this:
What products/services are my target customers using to solve this problem now?
What products/services could they potentially use to solve this problem now?
Identify at least three sources of competition and answer the following questions about each one:
Basic Information
Where is your competitor based? When was the company founded? What stage of growth is your competitor in? Are they a startup? A more established company?
How much revenue does your competitor generate each year? Approximately how many users/customers do they have? Have they received venture funding? How much? From whom?
Similarities & Differences
What are the points of similarity between your competitor and you in terms of the offering, price point, branding, etc? What are the points of difference, both for the better and for the worse?
Strengths & Weaknesses
What are your competitors’ biggest strengths? What do you plan to do to neutralize those strengths? What are your competitors’ biggest weaknesses? How do they translate into an advantage for your company?
8. Customer Definition
The name of the game here is to know your audience !
This is where you show readers that you know who your audience is (who’s most likely to buy and use your product), where they are, and what’s most important to them. Are they price-conscious? Do they value convenience? Are they concerned about environmental impact? Do they tend to be early adopters of new technologies?
Once you have a good idea of your customer personas and demographics, you’ll want to explain how you’re designing your products/services, branding, customer service, etc. to appeal to your target audience and meet their needs.
Who are the people that your product/service is designed to appeal to?
What do you know about customers in this demographic?
Does your target audience skew more male or more female?
What age range do your target customers fall in?
Around how many people are there in this target demographic?
Where do your target customers live? Are they mostly city dwellers? Suburbanites?
How much money do they make?
Do they have any particular priorities or concerns when it comes to the products/services they buy?
9. Customer Acquisition
Now that we know who your customers are, the next question is — how do you plan on getting them ? This essentially refers to your marketing plan where you’ll go into detail about how you intend on raising awareness for your brand to expand your customer base .
Which channels will you use to acquire your customers? Direct sales? Online acquisition (paid ads, organic SEO, social, email)? Offline acquisition (newspaper, TV, radio, direct mail)? Channel partners (retailers, resellers)? Word-of-mouth? Affiliates?
Channel Cost Assumptions
There are hard costs associated with every customer acquisition channel. Yes, even social media. It’s your job here to forecast and compile all of the associated costs with a particular channel so that you can arrive at a preliminary budget for what it would cost to use this channel.
Are there specific subcategories of customers that you plan to target first?
Will you introduce your product in certain key geographic locations?
Are there specific components of your product offering that you will introduce to the market first?
Are there any existing brands that you are planning to partner with to increase brand awareness / expedite market penetration?
10. Traction
Many investors see hundreds of deals every year.
If you want to stand a chance of making any sort of meaningful impression, it’s important to show them that your business is more than just an idea and that you’ve already got some irons in the fire.
Traction is a huge part of making that case.
When investors see that Founders are already making things happen, they think to themselves, “Wow, look at everything they’ve already accomplished! If they can do that much by themselves, just think what they can do with my money behind them!”
Here are some common categories of traction that can help emphasize your business is gaining momentum:
Product Development
Where are you in the product development process? Do you have a working prototype? Is your product already in the market and gaining customers?
Manufacturing/Distribution
Do you already have an established partner for production/manufacturing? How about distribution? Tell us about your relationships and what they can handle.
Early Customers & Revenue
Do you have any existing customers? If so, how many, and how fast is your customer base growing? Have you started generating revenue? If so, how much?
Testimonials & Social Proof
Do you have any client reviews or comments that can illustrate positive customer responses to your product/service? Has your product/service been reviewed/endorsed by any industry experts? Do you have any high-profile customers (celebrities or industry experts if it’s a B2C product, well-known brands if it’s a B2B product)
Partnerships
Have you secured partnerships with any established or notable companies or brands?
Intellectual Property
Do you have any patents for the technology or ideas behind your company?
Is your company name trademarked?
Press Mentions
Has your company been featured by any media outlets? Which ones?
11. Management Team
Your Management Team section is where you introduce your team and, if possible, explain how each team member’s background is highly relevant to the success of your company.
You may have gotten a Ph.D. in Chemical Engineering from Carnegie Mellon, but if you’re building the next hot dating app, that doesn’t really lend much credence to why you’re uniquely qualified for this particular product.
An ideal Management Team section shows investors that your team’s combination of skills, experience, relationships, and expertise make you the best group of people on the planet to drive the success of your company.
Each team bio should cover:
The team member’s name
Their title and position at the company
Their professional background
Any special skills they’ve developed as a result of their past experience
Their role and responsibilities at your company
It’s important to keep team bios focused and to the point: readers don’t need to know where you were born or what your favorite hobbies were growing up. They don’t even necessarily need to know what you studied in undergrad (unless what you studied in undergrad is super-relevant to what they’re doing at your company.)
Aim for around 3-5 sentences of good information on each team member.
12. Funding
Chances are you’re shopping your business plan around to secure capital for your project. If that’s the case , don’t forget to actually ask for the one thing you set out to achieve!
In fact, you’ll want to devote an entire section to your request for funding. This is your opportunity to tell investors:
What your funding goals are
How they can help you achieve those goals
What they have to gain from getting involved in your company
Funding Goal
How much funding do you need to move forward with your goals? How did you arrive at this figure?
What will investors get in exchange for their investment in your company?
Use of Funds
How will you use the funding that you secure from investors? Provide a very basic breakdown, either by amounts or by percentages, of how you plan to allocate the funds you receive. For example:
25%: R&D
25%: Marketing
25%: Product Development
25%: Key Hires
What key milestones will you and your company be able to achieve with the help of this funding?
Why Invest? / Conclusion
Wrap up your Funding section with by driving home why investors should get involved with your company. Is it the experience of your team? The originality of your product? The size of the market? Identify a few key factors that make your company a great opportunity from an investment perspective.
13. Financials
At last, we’ve arrived at everybody’s least favorite section of the business plan: Financials !
Your Financials section comes last after what we’ll call the more “narrative”-driven content that makes up the vast majority of your business plan.
It’s here where you’ll present your various spreadsheets, charts, tables, and graphs that communicate to investors your projections for the company in dollars and cents over the next few years. And while this is a numbers-dominant section, you’ll still want to back-up all of your figures with either a quick intro or summary explaining how you got there.
Because despite the fact that some people underplay financials as merely a guessing game, it’s crucial to remember that investors are looking for estimates, not guesses.
Simply put, you want to build your financial forecasts on a series of assumptions that incorporate as many known parameters as possible. Indicate how you arrived at these assumptions (maybe you compared them against similar products in the market, for example).
Some common elements included in your Financials section are:
Income Statement
A financial statement that showcases your revenues, expenses, and profit for a particular period and whether or not your business is profitable at that point in time.
Balance Sheet
A summary of your business’s net worth at a particular point, breaking it into assets, liabilities, and capital.
Cash Flow Projection
An estimate of the amount of cash that is expected to flow in and out of your business. Your cash flow projection will give you a good idea of how much capital investment you need to secure.
Break-Even Analysis
Just like it sounds, your break-even analysis helps you determine when your total revenue equals your total expenses. In other words, your break-even point. The total profit here equals 0.
If this sounds intimidating, it’s because it kind of is. On the plus side, there are some great online tools available designed to help you create super sleek financials and still maintain your sanity.
We’ve spent time picking apart each core component of a business plan, and as it has probably become abundantly clear, each section is essentially its own in-depth presentation within the overarching plan itself.
While no two business plans will ever be exactly the same, the key takeaway here is that every great plan incorporates the same basic elements that give investors the information they need when determining whether your business idea has legs or not.
Now that you’re ready to roll up your sleeves and finally launch into the writing process , you can refer back to this as you start tailoring these elements to your specific business. If you find yourself getting hung up along the way, check out one of our many other resources on business planning to help you tackle this project head-on!
Karlina Popwell
This article was immensely helpful. Thank you for writing in such a thorough manner. Very grateful!!
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What Is a Business Plan?
Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.
Key Takeaways
- A business plan is a document detailing a company's business activities and strategies for achieving its goals.
- Startup companies use business plans to launch their venture and to attract outside investors.
- For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
- There's no single required format for a business plan, but certain key elements are essential for most companies.
Investopedia / Ryan Oakley
Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.
Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.
A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.
There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.
While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.
A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.
While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.
Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.
The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.
Common elements in many business plans include:
- Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
- Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
- Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
- Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
- Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.
Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.
2 Types of Business Plans
Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.
- Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
- Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.
Why Do Business Plans Fail?
A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.
How Often Should a Business Plan Be Updated?
How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.
What Does a Lean Startup Business Plan Include?
The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.
A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.
As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.
University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.
Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."
Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."
Harvard Business Review. " How to Write a Winning Business Plan ."
U.S. Small Business Administration. " Write Your Business Plan ."
SCORE. " When and Why Should You Review Your Business Plan? "
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8 Things You Need in a Business Plan
The Harvard Business Review says a good business plan is super important for entrepreneurs. It’s like a guide for them in the tricky world of business. The plan has different parts, and each part is like a piece of the puzzle for success.
For example, there’s the short and powerful Executive Summary that tells the most important things about the business. Then, there’s the smart Market Analysis that helps you understand what customers want.
All of these parts work together to make a strong plan. So, let’s take a closer look at these important pieces that help turn business dreams into successful reality.
What is a business plan?
A business plan is a detailed document that explains how a business works and what it aims to achieve. It outlines the business’s goals, strategies , and resources. It’s like a roadmap for the business, helping it stay on course and navigate challenges.
The plan typically includes sections about the business’s description , market research , marketing and sales strategies, operations, management, and financial projections .
Entrepreneurs use it to clarify their vision, secure funding, and measure progress. It’s a crucial tool for anyone starting or running a business, helping them make informed decisions and work toward success.
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Eight Key Components of Business Plans
Crafting a business plan is akin to laying the foundation for a grand architectural masterpiece. It’s your roadmap to success, a strategic blueprint that breathes life into your entrepreneurial dreams. Allow me to take you on a journey through the essential components of this vital document.
- Executive Summary
- Business Description
- Market Analysis
- Marketing and Sales Strategy
- Operations Plan
- Management and Organization
- Financial Plan
1. Executive Summary
Picture this as the dazzling opening act of your business plan, where you showcase your vision, mission, and why your venture is destined for greatness. It’s a compelling glimpse into the heart and soul of your business.
It’s like a short summary of your business, including what it does and what makes it special.
- Advice: Keep it concise and engaging. Think of it as a teaser that makes people want to read more. Highlight what makes your business unique.
2. Business Description
Here, we dive deep into the DNA of your business. You’ll spill the beans on what you do, your industry, your history, and your grand plans for the future. It’s a snapshot that captures the essence of your business.
This part explains your business in detail, like what it sells, the industry it’s in, and its history.
- Advice: Be clear about what your business does and why it matters. Describe your industry and explain how your business fits into it.
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3. Market Analysis
This section is where we turn detective. We unearth market trends, study customer behaviors, and dissect your competitors. It’s a treasure trove of insights that helps you navigate the marketplace.
Here, you look at the market your business is in. You study things like customer behavior and what other businesses are doing.
- Advice: Research thoroughly. Understand your customers’ needs and your competition. Show that you know your market inside and out.
4. Marketing and Sales Strategy
Imagine this as the stage where you reveal your magic tricks. Here, you outline how you’ll entice and retain your customers. It’s where the art of attracting and selling meets strategy.
This section talks about how you’ll get customers and sell your products or services.
- Advice: Outline your plan for attracting customers and selling your products or services. Focus on how you’ll reach your target audience and convince them to buy from you.
5. Operations Plan
Ever wondered how the show runs backstage? This is where you spill the beans. From location to logistics, it’s the nitty-gritty of daily operations. It’s the backbone that keeps your business standing tall.
It’s about how your business will work day-to-day, like where you’ll be located and how you’ll make your products.
Advice: Detail how your business will operate day-to-day. Discuss your location, equipment, suppliers, and how you’ll ensure quality.
6. Management and Organization
Introducing the cast and crew of your business. Who’s in charge? What’s their expertise? It’s where you showcase your dream team and the hierarchy that keeps everything in check.
This part introduces the people running the business and how it’s organized.
- Advice: Introduce your team and their qualifications. Explain who’s in charge and how your business is structured.
7. Financial Plan
This section is your crystal ball into the future. It predicts your financial performance, balances your books, and forecasts cash flows. Investors love it, and you will too.
It’s like a prediction of how much money your business will make and spend in the future.
Advice: Be realistic with your financial projections. Include income, expenses, and cash flow predictions. Show how you’ll make a profit.
8. Appendix
This is your secret stash. All those extra documents, licenses, contracts, and accolades find their home here. It’s the vault of credibility that adds weight to your plan.
This is where you put extra documents like licenses, contracts, and other important stuff.
- Advice: Use this section for supporting documents. Include licenses, contracts, and anything that adds credibility to your plan.
Hire our professional business plan writing consultants now!
Remember, your business plan isn’t set in stone. It’s a living, breathing document that evolves with your journey. It’s your guiding star, your go-to reference, and your pitch to investors, all rolled into one.
With a well-crafted business plan, you’re equipped to clarify your vision, rally support from investors, and steer your venture to success. So, let’s get started on your masterpiece!
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8 Components of a Business Plan
Back to Business Plans
Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on February 19, 2023
A key part of the business startup process is putting together a business plan , particularly if you’d like to raise capital. It’s not going to be easy, but it’s absolutely essential, and an invaluable learning tool.
Creating a business plan early helps you think through every aspect of your business, from operations and financing to growth and vision. In the end, the knowledge you’ll gain could be the difference between success and failure.
But what exactly does a business plan consist of? There are eight essential components, all of which are detailed in this handy guide.
1. Executive Summary
The executive summary opens your business plan , but it’s the section you’ll write last. It summarizes the key points and highlights the most important aspects of your plan. Often investors and lenders will only read the executive summary; if it doesn’t capture their interest they’ll stop reading, so it’s important to make it as compelling as possible.
The components touched upon should include:
- The business opportunity – what problem are you solving in the market?
- Your idea, meaning the product or service you’re planning to offer, and why it solves the problem in the market better than other solutions.
- The history of the business so far – what have you done to this point? When you’re just getting started, this may be nothing more than coming up with the idea, choosing a business name , and forming a business entity.
- A summary of the industry, market size, your target customers, and the competition.
- A strong statement about how your company is going to stand out in the market – what will be your competitive advantage?
- A list of specific goals that you plan to achieve in the short term, such as developing your product, launching a marketing campaign, or hiring a key person.
- A summary of your financial plan including cost and sales projections and a break-even analysis.
- A summary of your management team, their roles, and the relevant experience that they have to serve in those roles.
- Your “ask”, if applicable, meaning what you’re requesting from the investor or lender. You’ll include the amount you’d like and how it will be spent, such as “We are seeking $50,000 in seed funding to develop our beta product”.
Remember that if you’re seeking capital, the executive summary could make or break your venture. Take your time and make sure it illustrates how your business is unique in the market and why you’ll succeed.
The executive summary should be no more than two pages long, so it’s important to capture the reader’s interest from the start.
- 2. Company Description/Overview
In this section, you’ll detail your full company history, such as how you came up with the idea for your business and any milestones or achievements.
You’ll also include your mission and vision statements. A mission statement explains what you’d like your business to achieve, its driving force, while a vision statement lays out your long-term plan in terms of growth.
A mission statement might be “Our company aims to make life easier for business owners with intuitive payroll software”, while a vision statement could be “Our objective is to become the go-to comprehensive HR software provider for companies around the globe.”
In this section, you’ll want to list your objectives – specific short-term goals. Examples might include “complete initial product development by ‘date’” or “hire two qualified sales people” or “launch the first version of the product”.
It’s best to divide this section into subsections – company history, mission and vision, and objectives.
3. Products/Services Offered
Here you’ll go into detail about what you’re offering, how it solves a problem in the market, and how it’s unique. Don’t be afraid to share information that is proprietary – investors and lenders are not out to steal your ideas.
Also specify how your product is developed or sourced. Are you manufacturing it or does it require technical development? Are you purchasing a product from a manufacturer or wholesaler?
You’ll also want to specify how you’ll sell your product or service. Will it be a subscription service or a one time purchase? What is your target pricing? On what channels do you plan to sell your product or service, such as online or by direct sales in a store?
Basically, you’re describing what you’re going to sell and how you’ll make money.
- 4. Market Analysis
The market analysis is where you’re going to spend most of your time because it involves a lot of research. You should divide it into four sections.
Industry analysis
You’ll want to find out exactly what’s happening in your industry, such as its growth rate, market size, and any specific trends that are occurring. Where is the industry predicted to be in 10 years? Cite your sources where you can by providing links.
Then describe your company’s place in the market. Is your product going to fit a certain niche? Is there a sub-industry your company will fit within? How will you keep up with industry changes?
Competitor analysis
Now you’ll dig into your competition. Detail your main competitors and how they differentiate themselves in the market. For example, one competitor may advertise convenience while another may tout superior quality. Also highlight your competitors’ weaknesses.
Next, describe how you’ll stand out. Detail your competitive advantages and how you’ll sustain them. This section is extremely important and will be a focus for investors and lenders.
Target market analysis
Here you’ll describe your target market and whether it’s different from your competitors’. For example, maybe you have a younger demographic in mind?
You’ll need to know more about your target market than demographics, though. You’ll want to explain the needs and wants of your ideal customers, how your offering solves their problem, and why they will choose your company.
You should also lay out where you’ll find them, where to place your marketing and where to sell your products. Learning this kind of detail requires going to the source – your potential customers. You can do online surveys or even in-person focus groups.
Your goal will be to uncover as much about these people as possible. When you start selling, you’ll want to keep learning about your customers. You may end up selling to a different target market than you originally thought, which could lead to a marketing shift.
SWOT analysis
SWOT stands for strengths, weaknesses, opportunities, and threats, and it’s one of the more common and helpful business planning tools.
First describe all the specific strengths of your company, such as the quality of your product or some unique feature, such as the experience of your management team. Talk about the elements that will make your company successful.
Next, acknowledge and explore possible weaknesses. You can’t say “none”, because no company is perfect, especially at the start. Maybe you lack funds or face a massive competitor. Whatever it is, detail how you will surmount this hurdle.
Next, talk about the opportunities your company has in the market. Perhaps you’re going to target an underserved segment, or have a technology plan that will help you surge past the competition.
Finally, examine potential threats. It could be a competitor that might try to replicate your product or rapidly advancing technology in your industry. Again, discuss your plans to handle such threats if they come to pass.
5. Marketing and Sales Strategies
Now it’s time to explain how you’re going to find potential customers and convert them into paying customers.
Marketing and advertising plan
When you did your target market analysis, you should have learned a lot about your potential customers, including where to find them. This should help you determine where to advertise.
Maybe you found that your target customers favor TikTok over Instagram and decided to spend more marketing dollars on TikTok. Detail all the marketing channels you plan to use and why.
Your target market analysis should also have given you information about what kind of message will resonate with your target customers. You should understand their needs and wants and how your product solves their problem, then convey that in your marketing.
Start by creating a value proposition, which should be no more than two sentences long and answer the following questions:
- What are you offering
- Whose problem does it solve
- What problem does it solve
- What benefits does it provide
- How is it better than competitor products
An example might be “Payroll software that will handle all the payroll needs of small business owners, making life easier for less.”
Whatever your value proposition, it should be at the heart of all of your marketing.
Sales strategy and tactics
Your sales strategy is a vision to persuade customers to buy, including where you’ll sell and how. For example, you may plan to sell only on your own website, or you may sell from both a physical location and online. On the other hand, you may have a sales team that will make direct sales calls to potential customers, which is more common in business-to-business sales.
Sales tactics are more about how you’re going to get them to buy after they reach your sales channel. Even when selling online, you need something on your site that’s going to get them to go from a site visitor to a paying customer.
By the same token, if you’re going to have a sales team making direct sales, what message are they going to deliver that will entice a sale? It’s best for sales tactics to focus on the customer’s pain point and what value you’re bringing to the table, rather than being aggressively promotional about the greatness of your product and your business.
Pricing strategy
Pricing is not an exact science and should depend on several factors. First, consider how you want your product or service to be perceived in the market. If your differentiator is to be the lowest price, position your company as the “discount” option. Think Walmart, and price your products lower than the competition.
If, on the other hand, you want to be the Mercedes of the market, then you’ll position your product as the luxury option. Of course you’ll have to back this up with superior quality, but being the luxury option allows you to command higher prices.
You can, of course, fall somewhere in the middle, but the point is that pricing is a matter of perception. How you position your product in the market compared to the competition is a big factor in determining your price.
Of course, you’ll have to consider your costs, as well as competitor prices. Obviously, your prices must cover your costs and allow you to make a good profit margin.
Whatever pricing strategy you choose, you’ll justify it in this section of your plan.
- 6. Operations and Management
This section is the real nuts and bolts of your business – how it operates on a day-to-day basis and who is operating it. Again, this section should be divided into subsections.
Operational plan
Your plan of operations should be specific , detailed and mainly logistical. Who will be doing what on a daily, weekly, and monthly basis? How will the business be managed and how will quality be assured? Be sure to detail your suppliers and how and when you’ll order raw materials.
This should also include the roles that will be filled and the various processes that will be part of everyday business operations . Just consider all the critical functions that must be handled for your business to be able to operate on an ongoing basis.
Technology plan
If your product involves technical development, you’ll describe your tech development plan with specific goals and milestones. The plan will also include how many people will be working on this development, and what needs to be done for goals to be met.
If your company is not a technology company, you’ll describe what technologies you plan to use to run your business or make your business more efficient. It could be process automation software, payroll software, or just laptops and tablets for your staff.
Management and organizational structure
Now you’ll describe who’s running the show. It may be just you when you’re starting out, so you’ll detail what your role will be and summarize your background. You’ll also go into detail about any managers that you plan to hire and when that will occur.
Essentially, you’re explaining your management structure and detailing why your strategy will enable smooth and efficient operations.
Ideally, at some point, you’ll have an organizational structure that is a hierarchy of your staff. Describe what you envision your organizational structure to be.
Personnel plan
Detail who you’ve hired or plan to hire and for which roles. For example, you might have a developer, two sales people, and one customer service representative.
Describe each role and what qualifications are needed to perform those roles.
- 7. Financial Plan
Now, you’ll enter the dreaded world of finance. Many entrepreneurs struggle with this part, so you might want to engage a financial professional to help you. A financial plan has five key elements.
Startup Costs
Detail in a spreadsheet every cost you’ll incur before you open your doors. This should determine how much capital you’ll need to launch your business.
Financial projections
Creating financial projections, like many facets of business, is not an exact science. If your company has no history, financial projections can only be an educated guess.
First, come up with realistic sales projections. How much do you expect to sell each month? Lay out at least three years of sales projections, detailing monthly sales growth for the first year, then annually thereafter.
Calculate your monthly costs, keeping in mind that some costs will grow along with sales.
Once you have your numbers projected and calculated, use them to create these three key financial statements:
- Profit and Loss Statement , also known as an income statement. This shows projected revenue and lists all costs, which are then deducted to show net profit or loss.
- Cash Flow Statement. This shows how much cash you have on hand at any given time. It will have a starting balance, projections of cash coming in, and cash going out, which will be used to calculate cash on hand at the end of the reporting period.
- Balance Sheet. This shows the net worth of the business, which is the assets of the business minus debts. Assets include equipment, cash, accounts receivables, inventory, and more. Debts include outstanding loan balances and accounts payable.
You’ll need monthly projected versions of each statement for the first year, then annual projections for the following two years.
Break-even analysis
The break-even point for your business is when costs and revenue are equal. Most startups operate at a loss for a period of time before they break even and start to make a profit. Your break-even analysis will project when your break-even point will occur, and will be informed by your profit and loss statement.
Funding requirements and sources
Lay out the funding you’ll need, when, and where you’ll get it. You’ll also explain what those funds will be used for at various points. If you’re in a high growth industry that can attract investors, you’ll likely need various rounds of funding to launch and grow.
Key performance indicators (KPIs)
KPIs measure your company’s performance and can determine success. Many entrepreneurs only focus on the bottom line, but measuring specific KPIs helps find areas of improvement. Every business has certain crucial metrics.
If you sell only online, one of your key metrics might be your visitor conversion rate. You might do an analysis to learn why just one out of ten site visitors makes a purchase.
Perhaps the purchase process is too complicated or your product descriptions are vague. The point is, learning why your conversion rate is low gives you a chance to improve it and boost sales.
8. Appendices
In the appendices, you can attach documents such as manager resumes or any other documents that support your business plan.
As you can see, a business plan has many components, so it’s not an afternoon project. It will likely take you several weeks and a great deal of work to complete. Unless you’re a finance guru, you may also want some help from a financial professional.
Keep in mind that for a small business owner, there may be no better learning experience than writing a detailed and compelling business plan. It shouldn’t be viewed as a hassle, but as an opportunity!
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Elements of a Business Plan There are seven major sections of a business plan, and each one is a complex document. Read this selection from our business plan tutorial to fully understand these components.
Now that you understand why you need a business plan and you've spent some time doing your homework gathering the information you need to create one, it's time to roll up your sleeves and get everything down on paper. The following pages will describe in detail the seven essential sections of a business plan: what you should include, what you shouldn't include, how to work the numbers and additional resources you can turn to for help. With that in mind, jump right in.
Executive Summary
Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. This is very important. All too often, what the business owner desires is buried on page eight. Clearly state what you're asking for in the summary.
The statement should be kept short and businesslike, probably no more than half a page. It could be longer, depending on how complicated the use of funds may be, but the summary of a business plan, like the summary of a loan application, is generally no longer than one page. Within that space, you'll need to provide a synopsis of your entire business plan. Key elements that should be included are:
- Business concept. Describes the business, its product and the market it will serve. It should point out just exactly what will be sold, to whom and why the business will hold a competitive advantage.
- Financial features. Highlights the important financial points of the business including sales, profits, cash flows and return on investment.
- Financial requirements. Clearly states the capital needed to start the business and to expand. It should detail how the capital will be used, and the equity, if any, that will be provided for funding. If the loan for initial capital will be based on security instead of equity, you should also specify the source of collateral.
- Current business position. Furnishes relevant information about the company, its legal form of operation, when it was formed, the principal owners and key personnel.
- Major achievements. Details any developments within the company that are essential to the success of the business. Major achievements include items like patents, prototypes, location of a facility, any crucial contracts that need to be in place for product development, or results from any test marketing that has been conducted.
When writing your statement of purpose, don't waste words. If the statement of purpose is eight pages, nobody's going to read it because it'll be very clear that the business, no matter what its merits, won't be a good investment because the principals are indecisive and don't really know what they want. Make it easy for the reader to realize at first glance both your needs and capabilities.
Business Description
Tell them all about it.
The business description usually begins with a short description of the industry. When describing the industry, discuss the present outlook as well as future possibilities. You should also provide information on all the various markets within the industry, including any new products or developments that will benefit or adversely affect your business. Base all of your observations on reliable data and be sure to footnote sources of information as appropriate. This is important if you're seeking funding; the investor will want to know just how dependable your information is, and won't risk money on assumptions or conjecture.
When describing your business, the first thing you need to concentrate on is its structure. By structure we mean the type of operation, i.e. wholesale, retail, food service, manufacturing or service-oriented. Also state whether the business is new or already established.
In addition to structure, legal form should be reiterated once again. Detail whether the business is a sole proprietorship, partnership or corporation, who its principals are, and what they will bring to the business.
You should also mention who you will sell to, how the product will be distributed, and the business's support systems. Support may come in the form of advertising, promotions and customer service.
Once you've described the business, you need to describe the products or services you intend to market. The product description statement should be complete enough to give the reader a clear idea of your intentions. You may want to emphasize any unique features or variations from concepts that can typically be found in the industry.
Be specific in showing how you will give your business a competitive edge. For example, your business will be better because you will supply a full line of products; competitor A doesn't have a full line. You're going to provide service after the sale; competitor B doesn't support anything he sells. Your merchandise will be of higher quality. You'll give a money-back guarantee. Competitor C has the reputation for selling the best French fries in town; you're going to sell the best Thousand Island dressing.
How Will I Profit?
Now you must be a classic capitalist and ask yourself, "How can I turn a buck? And why do I think I can make a profit that way?" Answer that question for yourself, and then convey that answer to others in the business concept section. You don't have to write 25 pages on why your business will be profitable. Just explain the factors you think will make it successful, like the following: it's a well-organized business, it will have state-of-the-art equipment, its location is exceptional, the market is ready for it, and it's a dynamite product at a fair price.
If you're using your business plan as a document for financial purposes, explain why the added equity or debt money is going to make your business more profitable.
Show how you will expand your business or be able to create something by using that money.
Show why your business is going to be profitable. A potential lender is going to want to know how successful you're going to be in this particular business. Factors that support your claims for success can be mentioned briefly; they will be detailed later. Give the reader an idea of the experience of the other key people in the business. They'll want to know what suppliers or experts you've spoken to about your business and their response to your idea. They may even ask you to clarify your choice of location or reasons for selling this particular product.
The business description can be a few paragraphs in length to a few pages, depending on the complexity of your plan. If your plan isn't too complicated, keep your business description short, describing the industry in one paragraph, the product in another, and the business and its success factors in three or four paragraphs that will end the statement.
While you may need to have a lengthy business description in some cases, it's our opinion that a short statement conveys the required information in a much more effective manner. It doesn't attempt to hold the reader's attention for an extended period of time, and this is important if you're presenting to a potential investor who will have other plans he or she will need to read as well. If the business description is long and drawn-out, you'll lose the reader's attention, and possibly any chance of receiving the necessary funding for the project.
Market Strategies
Define your market.
Market strategies are the result of a meticulous market analysis. A market analysis forces the entrepreneur to become familiar with all aspects of the market so that the target market can be defined and the company can be positioned in order to garner its share of sales. A market analysis also enables the entrepreneur to establish pricing, distribution and promotional strategies that will allow the company to become profitable within a competitive environment. In addition, it provides an indication of the growth potential within the industry, and this will allow you to develop your own estimates for the future of your business.
Begin your market analysis by defining the market in terms of size, structure, growth prospects, trends and sales potential.
The total aggregate sales of your competitors will provide you with a fairly accurate estimate of the total potential market. Once the size of the market has been determined, the next step is to define the target market. The target market narrows down the total market by concentrating on segmentation factors that will determine the total addressable market--the total number of users within the sphere of the business's influence. The segmentation factors can be geographic, customer attributes or product-oriented.
For instance, if the distribution of your product is confined to a specific geographic area, then you want to further define the target market to reflect the number of users or sales of that product within that geographic segment.
Once the target market has been detailed, it needs to be further defined to determine the total feasible market. This can be done in several ways, but most professional planners will delineate the feasible market by concentrating on product segmentation factors that may produce gaps within the market. In the case of a microbrewery that plans to brew a premium lager beer, the total feasible market could be defined by determining how many drinkers of premium pilsner beers there are in the target market.
It's important to understand that the total feasible market is the portion of the market that can be captured provided every condition within the environment is perfect and there is very little competition. In most industries this is simply not the case. There are other factors that will affect the share of the feasible market a business can reasonably obtain. These factors are usually tied to the structure of the industry, the impact of competition, strategies for market penetration and continued growth, and the amount of capital the business is willing to spend in order to increase its market share.
Projecting Market Share
Arriving at a projection of the market share for a business plan is very much a subjective estimate. It's based on not only an analysis of the market but on highly targeted and competitive distribution, pricing and promotional strategies. For instance, even though there may be a sizable number of premium pilsner drinkers to form the total feasible market, you need to be able to reach them through your distribution network at a price point that's competitive, and then you have to let them know it's available and where they can buy it. How effectively you can achieve your distribution, pricing and promotional goals determines the extent to which you will be able to garner market share.
For a business plan, you must be able to estimate market share for the time period the plan will cover. In order to project market share over the time frame of the business plan, you'll need to consider two factors:
- Industry growth which will increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
- Conversion of users from the total feasible market. This is based on a sales cycle similar to a product life cycle where you have five distinct stages: early pioneer users, early users, early majority users, late majority users and late users. Using conversion rates, market growth will continue to increase your market share during the period from early pioneers to early majority users, level off through late majority users, and decline with late users.
Defining the market is but one step in your analysis. With the information you've gained through market research, you need to develop strategies that will allow you to fulfill your objectives.
Positioning Your Business
When discussing market strategy, it's inevitable that positioning will be brought up. A company's positioning strategy is affected by a number of variables that are closely tied to the motivations and requirements of target customers within as well as the actions of primary competitors.
Before a product can be positioned, you need to answer several strategic questions such as:
- How are your competitors positioning themselves?
- What specific attributes does your product have that your competitors' don't?
- What customer needs does your product fulfill?
Once you've answered your strategic questions based on research of the market, you can then begin to develop your positioning strategy and illustrate that in your business plan. A positioning statement for a business plan doesn't have to be long or elaborate. It should merely point out exactly how you want your product perceived by both customers and the competition.
How you price your product is important because it will have a direct effect on the success of your business. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward:
- All prices must cover costs.
- The best and most effective way of lowering your sales prices is to lower costs.
- Your prices must reflect the dynamics of cost, demand, changes in the market and response to your competition.
- Prices must be established to assure sales. Don't price against a competitive operation alone. Rather, price to sell.
- Product utility, longevity, maintenance and end use must be judged continually, and target prices adjusted accordingly.
- Prices must be set to preserve order in the marketplace.
There are many methods of establishing prices available to you:
- Cost-plus pricing. Used mainly by manufacturers, cost-plus pricing assures that all costs, both fixed and variable, are covered and the desired profit percentage is attained.
- Demand pricing. Used by companies that sell their product through a variety of sources at differing prices based on demand.
- Competitive pricing. Used by companies that are entering a market where there is already an established price and it is difficult to differentiate one product from another.
- Markup pricing. Used mainly by retailers, markup pricing is calculated by adding your desired profit to the cost of the product. Each method listed above has its strengths and weaknesses.
- Distribution
Distribution includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose will depend upon the industry and the size of the market. A good way to make your decision is to analyze your competitors to determine the channels they are using, then decide whether to use the same type of channel or an alternative that may provide you with a strategic advantage.
Some of the more common distribution channels include:
- Direct sales. The most effective distribution channel is to sell directly to the end-user.
- OEM (original equipment manufacturer) sales. When your product is sold to the OEM, it is incorporated into their finished product and it is distributed to the end user.
- Manufacturer's representatives. One of the best ways to distribute a product, manufacturer's reps, as they are known, are salespeople who operate out of agencies that handle an assortment of complementary products and divide their selling time among them.
- Wholesale distributors. Using this channel, a manufacturer sells to a wholesaler, who in turn sells it to a retailer or other agent for further distribution through the channel until it reaches the end user.
- Brokers. Third-party distributors who often buy directly from the distributor or wholesaler and sell to retailers or end users.
- Retail distributors. Distributing a product through this channel is important if the end user of your product is the general consuming public.
- Direct Mail. Selling to the end user using a direct mail campaign.
As we've mentioned already, the distribution strategy you choose for your product will be based on several factors that include the channels being used by your competition, your pricing strategy and your own internal resources.
Promotion Plan
With a distribution strategy formed, you must develop a promotion plan. The promotion strategy in its most basic form is the controlled distribution of communication designed to sell your product or service. In order to accomplish this, the promotion strategy encompasses every marketing tool utilized in the communication effort. This includes:
- Advertising. Includes the advertising budget, creative message(s), and at least the first quarter's media schedule.
- Packaging. Provides a description of the packaging strategy. If available, mockups of any labels, trademarks or service marks should be included.
- Public relations. A complete account of the publicity strategy including a list of media that will be approached as well as a schedule of planned events.
- Sales promotions. Establishes the strategies used to support the sales message. This includes a description of collateral marketing material as well as a schedule of planned promotional activities such as special sales, coupons, contests and premium awards.
- Personal sales. An outline of the sales strategy including pricing procedures, returns and adjustment rules, sales presentation methods, lead generation, customer service policies, salesperson compensation, and salesperson market responsibilities.
Sales Potential
Once the market has been researched and analyzed, conclusions need to be developed that will supply a quantitative outlook concerning the potential of the business. The first financial projection within the business plan must be formed utilizing the information drawn from defining the market, positioning the product, pricing, distribution, and strategies for sales. The sales or revenue model charts the potential for the product, as well as the business, over a set period of time. Most business plans will project revenue for up to three years, although five-year projections are becoming increasingly popular among lenders.
When developing the revenue model for the business plan, the equation used to project sales is fairly simple. It consists of the total number of customers and the average revenue from each customer. In the equation, "T" represents the total number of people, "A" represents the average revenue per customer, and "S" represents the sales projection. The equation for projecting sales is: (T)(A) = S
Using this equation, the annual sales for each year projected within the business plan can be developed. Of course, there are other factors that you'll need to evaluate from the revenue model. Since the revenue model is a table illustrating the source for all income, every segment of the target market that is treated differently must be accounted for. In order to determine any differences, the various strategies utilized in order to sell the product have to be considered. As we've already mentioned, those strategies include distribution, pricing and promotion.
Competitive Analysis
Identify and analyze your competition.
The competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.
The first step in a competitor analysis is to identify the current and potential competition. There are essentially two ways you can identify competitors. The first is to look at the market from the customer's viewpoint and group all your competitors by the degree to which they contend for the buyer's dollar. The second method is to group competitors according to their various competitive strategies so you understand what motivates them.
Once you've grouped your competitors, you can start to analyze their strategies and identify the areas where they're most vulnerable. This can be done through an examination of your competitors' weaknesses and strengths. A competitor's strengths and weaknesses are usually based on the presence and absence of key assets and skills needed to compete in the market.
To determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book, Developing Business Strategies , suggests concentrating your efforts in four areas:
- The reasons behind successful as well as unsuccessful firms
- Prime customer motivators
- Major component costs
- Industry mobility barriers
According to theory, the performance of a company within a market is directly related to the possession of key assets and skills. Therefore, an analysis of strong performers should reveal the causes behind such a successful track record. This analysis, in conjunction with an examination of unsuccessful companies and the reasons behind their failure, should provide a good idea of just what key assets and skills are needed to be successful within a given industry and market segment.
Through your competitor analysis, you will also have to create a marketing strategy that will generate an asset or skill competitors don't have, which will provide you with a distinct and enduring competitive advantage. Since competitive advantages are developed from key assets and skills, you should sit down and put together a competitive strength grid. This is a scale that lists all your major competitors or strategic groups based upon their applicable assets and skills and how your own company fits on this scale.
Create a Competitive Strength Grid
To put together a competitive strength grid, list all the key assets and skills down the left margin of a piece of paper. Along the top, write down two column headers: "weakness" and "strength." In each asset or skill category, place all the competitors that have weaknesses in that particular category under the weakness column, and all those that have strengths in that specific category in the strength column. After you've finished, you'll be able to determine just where you stand in relation to the other firms competing in your industry.
Once you've established the key assets and skills necessary to succeed in this business and have defined your distinct competitive advantage, you need to communicate them in a strategic form that will attract market share as well as defend it. Competitive strategies usually fall into these five areas:
- Advertising
Many of the factors leading to the formation of a strategy should already have been highlighted in previous sections, specifically in marketing strategies. Strategies primarily revolve around establishing the point of entry in the product life cycle and an endurable competitive advantage. As we've already discussed, this involves defining the elements that will set your product or service apart from your competitors or strategic groups. You need to establish this competitive advantage clearly so the reader understands not only how you will accomplish your goals, but also why your strategy will work.
Design and Development Plan
What you'll cover in this section.
The purpose of the design and development plan section is to provide investors with a description of the product's design, chart its development within the context of production, marketing and the company itself, and create a development budget that will enable the company to reach its goals.
There are generally three areas you'll cover in the development plan section:
- Product development
- Market development
- Organizational development
Each of these elements needs to be examined from the funding of the plan to the point where the business begins to experience a continuous income. Although these elements will differ in nature concerning their content, each will be based on structure and goals.
The first step in the development process is setting goals for the overall development plan. From your analysis of the market and competition, most of the product, market and organizational development goals will be readily apparent. Each goal you define should have certain characteristics. Your goals should be quantifiable in order to set up time lines, directed so they relate to the success of the business, consequential so they have impact upon the company, and feasible so that they aren't beyond the bounds of actual completion.
Goals For Product Development
Goals for product development should center on the technical as well as the marketing aspects of the product so that you have a focused outline from which the development team can work. For example, a goal for product development of a microbrewed beer might be "Produce recipe for premium lager beer" or "Create packaging for premium lager beer." In terms of market development, a goal might be, "Develop collateral marketing material." Organizational goals would center on the acquisition of expertise in order to attain your product and market-development goals. This expertise usually needs to be present in areas of key assets that provide a competitive advantage. Without the necessary expertise, the chances of bringing a product successfully to market diminish.
With your goals set and expertise in place, you need to form a set of procedural tasks or work assignments for each area of the development plan. Procedures will have to be developed for product development, market development, and organization development. In some cases, product and organization can be combined if the list of procedures is short enough.
Procedures should include how resources will be allocated, who is in charge of accomplishing each goal, and how everything will interact. For example, to produce a recipe for a premium lager beer, you would need to do the following:
- Gather ingredients.
- Determine optimum malting process.
- Gauge mashing temperature.
- Boil wort and evaluate which hops provide the best flavor.
- Determine yeast amounts and fermentation period.
- Determine aging period.
- Carbonate the beer.
- Decide whether or not to pasteurize the beer.
The development of procedures provides a list of work assignments that need to be accomplished, but one thing it doesn't provide are the stages of development that coordinate the work assignments within the overall development plan. To do this, you first need to amend the work assignments created in the procedures section so that all the individual work elements are accounted for in the development plan. The next stage involves setting deliverable dates for components as well as the finished product for testing purposes. There are primarily three steps you need to go through before the product is ready for final delivery:
- Preliminary product review . All the product's features and specifications are checked.
- Critical product review . All the key elements of the product are checked and gauged against the development schedule to make sure everything is going according to plan.
- Final product review . All elements of the product are checked against goals to assure the integrity of the prototype.
Scheduling and Costs
This is one of the most important elements in the development plan. Scheduling includes all of the key work elements as well as the stages the product must pass through before customer delivery. It should also be tied to the development budget so that expenses can be tracked. But its main purpose is to establish time frames for completion of all work assignments and juxtapose them within the stages through which the product must pass. When producing the schedule, provide a column for each procedural task, how long it takes, start date and stop date. If you want to provide a number for each task, include a column in the schedule for the task number.
Development Budget
That leads us into a discussion of the development budget. When forming your development budget, you need to take into account all the expenses required to design the product and to take it from prototype to production.
Costs that should be included in the development budget include:
- Material . All raw materials used in the development of the product.
- Direct labor . All labor costs associated with the development of the product.
- Overhead . All overhead expenses required to operate the business during the development phase such as taxes, rent, phone, utilities, office supplies, etc.
- G&A costs . The salaries of executive and administrative personnel along with any other office support functions.
- Marketing & sales . The salaries of marketing personnel required to develop pre-promotional materials and plan the marketing campaign that should begin prior to delivery of the product.
- Professional services . Those costs associated with the consultation of outside experts such as accountants, lawyers, and business consultants.
- Miscellaneous Costs . Costs that are related to product development.
- Capital equipment . To determine the capital requirements for the development budget, you first have to establish what type of equipment you will need, whether you will acquire the equipment or use outside contractors, and finally, if you decide to acquire the equipment, whether you will lease or purchase it.
As we mentioned already, the company has to have the proper expertise in key areas to succeed; however, not every company will start a business with the expertise required in every key area. Therefore, the proper personnel have to be recruited, integrated into the development process, and managed so that everyone forms a team focused on the achievement of the development goals.
Before you begin recruiting, however, you should determine which areas within the development process will require the addition of personnel. This can be done by reviewing the goals of your development plan to establish key areas that need attention. After you have an idea of the positions that need to be filled, you should produce a job description and job specification.
Once you've hired the proper personnel, you need to integrate them into the development process by assigning tasks from the work assignments you've developed. Finally, the whole team needs to know what their role is within the company and how each interrelates with every position within the development team. In order to do this, you should develop an organizational chart for your development team.
Assessing Risks
Finally, the risks involved in developing the product should be assessed and a plan developed to address each one. The risks during the development stage will usually center on technical development of the product, marketing, personnel requirements, and financial problems. By identifying and addressing each of the perceived risks during the development period, you will allay some of your major fears concerning the project and those of investors as well.
Operations & Management
The operations and management plan is designed to describe just how the business functions on a continuing basis. The operations plan will highlight the logistics of the organization such as the various responsibilities of the management team, the tasks assigned to each division within the company, and capital and expense requirements related to the operations of the business. In fact, within the operations plan you'll develop the next set of financial tables that will supply the foundation for the "Financial Components" section.
The financial tables that you'll develop within the operations plan include:
- The operating expense table
- The capital requirements table
- The cost of goods table
There are two areas that need to be accounted for when planning the operations of your company. The first area is the organizational structure of the company, and the second is the expense and capital requirements associated with its operation.
Organizational Structure
The organizational structure of the company is an essential element within a business plan because it provides a basis from which to project operating expenses. This is critical to the formation of financial statements, which are heavily scrutinized by investors; therefore, the organizational structure has to be well-defined and based within a realistic framework given the parameters of the business.
Although every company will differ in its organizational structure, most can be divided into several broad areas that include:
- Marketing and sales (includes customer relations and service)
- Production (including quality assurance)
- Research and development
- Administration
These are very broad classifications and it's important to keep in mind that not every business can be divided in this manner. In fact, every business is different, and each one must be structured according to its own requirements and goals.
The four stages for organizing a business are:
Calculate Your Personnel Numbers
Once you've structured your business, however, you need to consider your overall goals and the number of personnel required to reach those goals. In order to determine the number of employees you'll need to meet the goals you've set for your business, you'll need to apply the following equation to each department listed in your organizational structure: C / S = P
In this equation, C represents the total number of customers, S represents the total number of customers that can be served by each employee, and P represents the personnel requirements. For instance, if the number of customers for first year sales is projected at 10,110 and one marketing employee is required for every 200 customers, you would need 51 employees within the marketing department: 10,110 / 200 = 51
Once you calculate the number of employees that you'll need for your organization, you'll need to determine the labor expense. The factors that need to be considered when calculating labor expense (LE) are the personnel requirements (P) for each department multiplied by the employee salary level (SL). Therefore, the equation would be: P * SL = LE
Using the marketing example from above, the labor expense for that department would be: 51 * $40,000 = $2,040,000
Calculate Overhead Expenses
Once the organization's operations have been planned, the expenses associated with the operation of the business can be developed. These are usually referred to as overhead expenses. Overhead expenses refer to all non-labor expenses required to operate the business. Expenses can be divided into fixed (those that must be paid, usually at the same rate, regardless of the volume of business) and variable or semivariable (those which change according to the amount of business).
Overhead expenses usually include the following:
- Maintenance and repair
- Equipment leases
- Advertising & promotion
- Packaging & shipping
- Payroll taxes and benefits
- Uncollectible receivables
- Professional services
- Loan payments
- Depreciation
In order to develop the overhead expenses for the expense table used in this portion of the business plan, you need to multiply the number of employees by the expenses associated with each employee. Therefore, if NE represents the number of employees and EE is the expense per employee, the following equation can be used to calculate the sum of each overhead (OH) expense: OH = NE * EE
Develop a Capital Requirements Table
In addition to the expense table, you'll also need to develop a capital requirements table that depicts the amount of money necessary to purchase the equipment you'll use to establish and continue operations. It also illustrates the amount of depreciation your company will incur based on all equipment elements purchased with a lifetime of more than one year.
In order to generate the capital requirements table, you first have to establish the various elements within the business that will require capital investment. For service businesses, capital is usually tied to the various pieces of equipment used to service customers.
Capital for manufacturing companies, on the other hand, is based on the equipment required in order to produce the product. Manufacturing equipment usually falls into three categories: testing equipment, assembly equipment and packaging equipment.
With these capital elements in mind, you need to determine the number of units or customers, in terms of sales, that each equipment item can adequately handle. This is important because capital requirements are a product of income, which is produced through unit sales. In order to meet sales projections, a business usually has to invest money to increase production or supply better service. In the business plan, capital requirements are tied to projected sales as illustrated in the revenue model shown earlier in this chapter.
For instance, if the capital equipment required is capable of handling the needs of 10,000 customers at an average sale of $10 each, that would be $100,000 in sales, at which point additional capital will be required in order to purchase more equipment should the company grow beyond this point. This leads us to another factor within the capital requirements equation, and that is equipment cost.
If you multiply the cost of equipment by the number of customers it can support in terms of sales, it would result in the capital requirements for that particular equipment element. Therefore, you can use an equation in which capital requirements (CR) equals sales (S) divided by number of customers (NC) supported by each equipment element, multiplied by the average sale (AS), which is then multiplied by the capital cost (CC) of the equipment element. Given these parameters, your equation would look like the following: CR = [(S / NC) * AS] * CC
The capital requirements table is formed by adding all your equipment elements to generate the total new capital for that year. During the first year, total new capital is also the total capital required. For each successive year thereafter, total capital (TC) required is the sum of total new capital (NC) plus total capital (PC) from the previous year, less depreciation (D), once again, from the previous year. Therefore, your equation to arrive at total capital for each year portrayed in the capital requirements model would be: TC = NC + PC - D
Keep in mind that depreciation is an expense that shows the decrease in value of the equipment throughout its effective lifetime. For many businesses, depreciation is based upon schedules that are tied to the lifetime of the equipment. Be careful when choosing the schedule that best fits your business. Depreciation is also the basis for a tax deduction as well as the flow of money for new capital. You may need to seek consultation from an expert in this area.
Create a Cost of Goods Table
The last table that needs to be generated in the operations and management section of your business plan is the cost of goods table. This table is used only for businesses where the product is placed into inventory. For a retail or wholesale business, cost of goods sold --or cost of sales --refers to the purchase of products for resale, i.e. the inventory. The products that are sold are logged into cost of goods as an expense of the sale, while those that aren't sold remain in inventory.
For a manufacturing firm, cost of goods is the cost incurred by the company to manufacture its product. This usually consists of three elements:
As in retail, the merchandise that is sold is expensed as a cost of goods , while merchandise that isn't sold is placed in inventory. Cost of goods has to be accounted for in the operations of a business. It is an important yardstick for measuring the firm's profitability for the cash-flow statement and income statement.
In the income statement, the last stage of the manufacturing process is the item expensed as cost of goods, but it is important to document the inventory still in various stages of the manufacturing process because it represents assets to the company. This is important to determining cash flow and to generating the balance sheet.
That is what the cost of goods table does. It's one of the most complicated tables you'll have to develop for your business plan, but it's an integral part of portraying the flow of inventory through your operations, the placement of assets within the company, and the rate at which your inventory turns.
In order to generate the cost of goods table, you need a little more information in addition to what your labor and material cost is per unit. You also need to know the total number of units sold for the year, the percentage of units which will be fully assembled, the percentage which will be partially assembled, and the percentage which will be in unassembled inventory. Much of these figures will depend on the capacity of your equipment as well as on the inventory control system you develop. Along with these factors, you also need to know at what stage the majority of the labor is performed.
Financial Components
Financial statements to include.
Financial data is always at the back of the business plan, but that doesn't mean it's any less important than up-front material such as the business concept and the management team. Astute investors look carefully at the charts, tables, formulas and spreadsheets in the financial section, because they know that this information is like the pulse, respiration rate and blood pressure in a human--it shows whether the patient is alive and what the odds are for continued survival.
Financial statements, like bad news, come in threes. The news in financial statements isn't always bad, of course, but taken together it provides an accurate picture of a company's current value, plus its ability to pay its bills today and earn a profit going forward.
The three common statements are a cash flow statement, an income statement and a balance sheet. Most entrepreneurs should provide them and leave it at that. But not all do. But this is a case of the more, the less merry. As a rule, stick with the big three: income, balance sheet and cash flow statements.
These three statements are interlinked, with changes in one necessarily altering the others, but they measure quite different aspects of a company's financial health. It's hard to say that one of these is more important than another. But of the three, the income statement may be the best place to start.
Income Statement
The income statement is a simple and straightforward report on the proposed business's cash-generating ability. It's a score card on the financial performance of your business that reflects when sales are made and when expenses are incurred. It draws information from the various financial models developed earlier such as revenue, expenses, capital (in the form of depreciation), and cost of goods. By combining these elements, the income statement illustrates just how much your company makes or loses during the year by subtracting cost of goods and expenses from revenue to arrive at a net result--which is either a profit or a loss.
For a business plan, the income statement should be generated on a monthly basis during the first year, quarterly for the second, and annually for each year thereafter. It's formed by listing your financial projections in the following manner:
- Income . Includes all the income generated by the business and its sources.
- Cost of goods . Includes all the costs related to the sale of products in inventory.
- Gross profit margin . The difference between revenue and cost of goods. Gross profit margin can be expressed in dollars, as a percentage, or both. As a percentage, the GP margin is always stated as a percentage of revenue.
- Operating expenses . Includes all overhead and labor expenses associated with the operations of the business.
- Total expenses . The sum of all overhead and labor expenses required to operate the business.
- Net profit . The difference between gross profit margin and total expenses, the net income depicts the business's debt and capital capabilities.
- Depreciation . Reflects the decrease in value of capital assets used to generate income. Also used as the basis for a tax deduction and an indicator of the flow of money into new capital.
- Net profit before interest . The difference between net profit and depreciation.
- Interest . Includes all interest derived from debts, both short-term and long-term. Interest is determined by the amount of investment within the company.
- Net profit before taxes . The difference between net profit before interest and interest.
- Taxes . Includes all taxes on the business.
- Profit after taxes . The difference between net profit before taxes and the taxes accrued. Profit after taxes is the bottom line for any company.
Following the income statement is a short note analyzing the statement. The analysis statement should be very short, emphasizing key points within the income statement.
Cash Flow Statement
The cash-flow statement is one of the most critical information tools for your business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. In a cash-flow statement, both profits and losses are carried over to the next column to show the cumulative amount. Keep in mind that if you run a loss on your cash-flow statement, it is a strong indicator that you will need additional cash in order to meet expenses.
Like the income statement, the cash-flow statement takes advantage of previous financial tables developed during the course of the business plan. The cash-flow statement begins with cash on hand and the revenue sources. The next item it lists is expenses, including those accumulated during the manufacture of a product. The capital requirements are then logged as a negative after expenses. The cash-flow statement ends with the net cash flow.
The cash-flow statement should be prepared on a monthly basis during the first year, on a quarterly basis during the second year, and on an annual basis thereafter. Items that you'll need to include in the cash-flow statement and the order in which they should appear are as follows:
- Cash sales . Income derived from sales paid for by cash.
- Receivables . Income derived from the collection of receivables.
- Other income . Income derived from investments, interest on loans that have been extended, and the liquidation of any assets.
- Total income . The sum of total cash, cash sales, receivables, and other income.
- Material/merchandise . The raw material used in the manufacture of a product (for manufacturing operations only), the cash outlay for merchandise inventory (for merchandisers such as wholesalers and retailers), or the supplies used in the performance of a service.
- Production labor . The labor required to manufacture a product (for manufacturing operations only) or to perform a service.
- Overhead . All fixed and variable expenses required for the production of the product and the operations of the business.
- Marketing/sales . All salaries, commissions, and other direct costs associated with the marketing and sales departments.
- R&D . All the labor expenses required to support the research and development operations of the business.
- G&A . All the labor expenses required to support the administrative functions of the business.
- Taxes . All taxes, except payroll, paid to the appropriate government institutions.
- Capital . The capital required to obtain any equipment elements that are needed for the generation of income.
- Loan payment . The total of all payments made to reduce any long-term debts.
- Total expenses . The sum of material, direct labor, overhead expenses, marketing, sales, G&A, taxes, capital and loan payments.
- Cash flow . The difference between total income and total expenses. This amount is carried over to the next period as beginning cash.
- Cumulative cash flow . The difference between current cash flow and cash flow from the previous period.
As with the income statement, you will need to analyze the cash-flow statement in a short summary in the business plan. Once again, the analysis statement doesn't have to be long and should cover only key points derived from the cash-flow statement.
The Balance Sheet
The last financial statement you'll need to develop is the balance sheet. Like the income and cash-flow statements, the balance sheet uses information from all of the financial models developed in earlier sections of the business plan; however, unlike the previous statements, the balance sheet is generated solely on an annual basis for the business plan and is, more or less, a summary of all the preceding financial information broken down into three areas:
To obtain financing for a new business, you may need to provide a projection of the balance sheet over the period of time the business plan covers. More importantly, you'll need to include a personal financial statement or balance sheet instead of one that describes the business. A personal balance sheet is generated in the same manner as one for a business.
As mentioned, the balance sheet is divided into three sections. The top portion of the balance sheet lists your company's assets. Assets are classified as current assets and long-term or fixed assets. Current assets are assets that will be converted to cash or will be used by the business in a year or less. Current assets include:
- Cash . The cash on hand at the time books are closed at the end of the fiscal year.
- Accounts receivable . The income derived from credit accounts. For the balance sheet, it's the total amount of income to be received that is logged into the books at the close of the fiscal year.
- Inventory . This is derived from the cost of goods table. It's the inventory of material used to manufacture a product not yet sold.
- Total current assets . The sum of cash, accounts receivable, inventory, and supplies.
Other assets that appear in the balance sheet are called long-term or fixed assets. They are called long-term because they are durable and will last more than one year. Examples of this type of asset include:
- Capital and plant . The book value of all capital equipment and property (if you own the land and building), less depreciation.
- Investment . All investments by the company that cannot be converted to cash in less than one year. For the most part, companies just starting out have not accumulated long-term investments.
- Miscellaneous assets . All other long-term assets that are not "capital and plant" or "investments."
- Total long-term assets . The sum of capital and plant, investments, and miscellaneous assets.
- Total assets . The sum of total current assets and total long-term assets.
After the assets are listed, you need to account for the liabilities of your business. Like assets, liabilities are classified as current or long-term. If the debts are due in one year or less, they are classified as a current liabilities. If they are due in more than one year, they are long-term liabilities. Examples of current liabilities are as follows:
- Accounts payable . All expenses derived from purchasing items from regular creditors on an open account, which are due and payable.
- Accrued liabilities . All expenses incurred by the business which are required for operation but have not been paid at the time the books are closed. These expenses are usually the company's overhead and salaries.
- Taxes . These are taxes that are still due and payable at the time the books are closed.
- Total current liabilities . The sum of accounts payable, accrued liabilities, and taxes.
Long-term liabilities include:
- Bonds payable . The total of all bonds at the end of the year that are due and payable over a period exceeding one year.
- Mortgage payable . Loans taken out for the purchase of real property that are repaid over a long-term period. The mortgage payable is that amount still due at the close of books for the year.
- Notes payable . The amount still owed on any long-term debts that will not be repaid during the current fiscal year.
- Total long-term liabilities . The sum of bonds payable, mortgage payable, and notes payable.
- Total liabilities . The sum of total current and long-term liabilities.
Once the liabilities have been listed, the final portion of the balance sheet-owner's equity-needs to be calculated. The amount attributed to owner's equity is the difference between total assets and total liabilities. The amount of equity the owner has in the business is an important yardstick used by investors when evaluating the company. Many times it determines the amount of capital they feel they can safely invest in the business.
In the business plan, you'll need to create an analysis statement for the balance sheet just as you need to do for the income and cash flow statements. The analysis of the balance sheet should be kept short and cover key points about the company.
Source: The Small Business Encyclopedia , Business Plans Made Easy, Start Your Own Business and Entrepreneur magazine.
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COMMENTS
Provide projections for two to four years in the future, including: 1. Forecasted income (monthly for first two years, then by quarter or year thereafter), 2. Forecasted cash flows by month (monthly for first two years, then by quarter or year thereafter), 3. Forecasted balance sheet for all years (year-end), and. 4.
The remaining five components of the plan focus mainly on strategy, primarily the marketing, operational, financial and management strategies that your firm will employ. 6. Marketing, Sales & Product Plan. The marketing and sales plan component of your business plan details your strategy for penetrating the target markets.
Elements of a Business Plan. 1.1. Executive Summary. Within the overall outline of the business plan, the executive summary will follow the title page. The summary should tell the reader what you want. This is very important. All too often, what the business owner desires is buried on page eight.
Prepare the following projections place them in the Business Plan Appendix: • Income Statement by years for 5 years; by months for years 1-2 and by quarters for years 3-5. • Balance Sheet years for 5 years. • Cash Flow by years for 5 years; by months for years 1-2 and by quarters for years 3-5. • Break-even Analysis.
Here are some of the components of an effective business plan. 1. Executive Summary. One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.
not somebody else. By all means seek help with the plan but do not commission someone else to write the whole thing for you. Use this note as your guide or aide memoir. The Purpose of a Business Plan . Any business plan has a dual function: 1. Internal: Providing management and staff with a clear map, complete with signposts and
Step 11: Publish your Plan. Executive Summary. The Executive Summary of a Business Plan is a one to three page distillation of your entire plan, and often is the last section to be written. A first-time reader should be able to read the Summary by itself, and know what your plan is all about.
A business plan is an entrepreneur's blueprint for creating the new venture. It is a bridge between an idea and reality. It is a game plan that crystallizes your business dreams and hopes that provide your motivation. It should lay out your basic idea, describe where you are now, point out where you want to go, and outline how you propose to ...
8.6: Business Plans. Page ID. Boundless. Boundless. What you'll learn to do: list and describe the key components of a business plan. Personal time author Alan Lakein sets the stage for this section with this quote: "Planning is bringing the future into the present so that you can do something about it now.".
Chapter 1 - Developing a Business Plan. Chapter 2 - Essential Initial Research. Chapter 3 - Business Models. Chapter 4 - Initial Business Plan Draft. Chapter 5 - Making the Business Plan Realistic. Chapter 6 - Making the Plan Appeal to Stakeholders and Desirable to the Entrepreneur. Chapter 7 - Finishing the Business Plan.
Some entrepreneurs choose to use diagrams and charts, while others rely on text alone. Regardless of how you go about it, good business plans tend to include the following elements: Executive summary. Company description. Market analysis. Marketing plan. Sales plan. Competitive analysis. Organizational structure.
13 Key Business Plan Components. We've built a comprehensive guide to the major parts of a business plan for you. From elements like the executive summary to product descriptions, traction, and financials, we'll guide you on all of the key sections you should include in your business plan. December 14th, 2022 | By: The Startups Team | Tags ...
A good business plan guides you through each stage of starting and managing your business. You'll use your business plan as a roadmap for how to structure, run, and grow your new business. It's a way to think through the key elements of your business. Business plans can help you get funding or bring on new business partners.
As the road map for a business's development, the business plan. Defines the vision for the company. Establishes the company's strategy. Describes how the strategy will be implemented. Provides a framework for analysis of key issues. Provides a plan for the development of the business. Helps the entrepreneur develop and measure critical ...
A business plan is a document that details a company's goals and how it plans to achieve them. ... This article will explain the key components of an effective business plan and guidance on how to ...
Investors love it, and you will too. It's like a prediction of how much money your business will make and spend in the future. Advice: Be realistic with your financial projections. Include income, expenses, and cash flow predictions. Show how you'll make a profit. 8. Appendix.
There are eight essential components, all of which are detailed in this handy guide. 1. Executive Summary. The executive summary opens your business plan, but it's the section you'll write last. It summarizes the key points and highlights the most important aspects of your plan.
That's where your business plan comes in. It provides investors, lenders and potential partners with an understanding of your company's structure and goals. If you want to gain the financial autonomy to run a business or become an entrepreneur, a financial advisor can help align your finances. 1. Executive Summary.
The document discusses the main components that should be included in a business plan. It outlines the following key sections: (1) an executive summary that provides an overview of the business, (2) a business description that explains products/services and operations, (3) market research and marketing strategies, (4) management team bios, and (5) three-year financial projections including ...
10 essential components of a business plan. Effective business plans contain several key components that cover various aspects of a company's goals. The most important parts of a business plan include: 1. Executive summary. The executive summary is the first and one of the most critical parts of a business plan.
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The sum of capital and plant, investments, and miscellaneous assets. Total assets. The sum of total current assets and total long-term assets. After the assets are listed, you need to account for ...
A business plan is a formal document (about 15-25 pages in length) that precisely defines a company's objectives in fine detail. It also describes how the company plans to achieve its goals. All companies — including startups and established institutions — create and use business plans.