How to Write a Business Plan
Every business needs a plan, and your business plan can serve a variety of purposes depending on where your company is in its life cycle. When you are just starting out and your business is only an idea, your plan can help you figure out what you don’t know. You will be able to do the research to fill in the gaps in your knowledge base, giving you a more solid foundation for success.
When you are just starting out and your business is only an idea, your plan can help you figure out what you don’t know. You will be able to do the research to fill in the gaps in your knowledge base, giving you a more solid foundation for success.
When you are ready to ask for funding, whether you are a new business or an established one, your business plan will serve as your investment proposal. It will have all the information your potential investors need to decide if they want to continue talks with you.
Even if you never need outside funding for your company, your business plan will be an invaluable internal document. It will be a map of sorts for where your business has been and where it is going. It will serve as a marketing guide, and it can be used as an introduction for new employees. There is no way around it: You need a business plan!
Writing Your Plan
There is no hard and fast rule about how many sections a business plan needs and what they should be called, but this guide will suggest nine sections. However you choose to divide up your plan, it should have the same critical information. You may already know much of the information that should be included, but there may be more research in some areas that you will need to do to complete the plan.
Section One: The Executive Summary
The Executive Summary is a brief summary of your business that should cover a page or two.
It will vary a bit depending on whether you are just starting or if you are an established company, but it basically tells the reader where your business came from, where it is now, and where it is going.
Because this is a summary, you should write it after you have completed all the other sections of your plan. At that point, you will have all the information about your company compiled, and you can pull the highlights for your executive summary.
First, you should clearly express your mission statement. This is simply a sentence or two about why your business exists. It doesn’t need to be deep and philosophical, just a clear statement about what your company is going to do.
Second, give a bit of background information about your company. If you are already up and running, give its founding date, location, and principle employees. If you have growth history, briefly summarize those numbers and emphasize your success. If you are just starting out and don’t have some of this information, that’s okay. Focus on your personal background, and show that you have done your research.
Third, all businesses, at any stage of development, should include in this section a description of their products and services. A brief statement about what you sell, who you sell it to, and why your offerings are superior to those of your competitors belongs here.
Fourth, provide the necessary financial overview. This is vital if you are presenting your plan to investors, less so if it will be an internal document. Basically, you just want to give a summary of your sales, expenses, and profit expectations. If you already have investors, give their names, and provide a reference from your banker.
Fifth, share your vision of the future. Where are you planning to take your company? What goals do you plan to meet, and when do you plan to reach them? If you already have a history with your company, present the progress you have made so far and why you expect it to continue.
The point of the Executive Summary is to hold the attention of the reader, but it shouldn’t be “sales-y.” You want readers to be impressed that your company has identified a need in the marketplace and has positioned itself to profitably fill that need. You want them to come away thinking that they have met the person or team who can take this idea and make it successful.
Section Two: The Company Description
The purpose of this section is to introduce your business in more detail. You can begin with a couple of sentences that describe what you sell and where you are positioned in the market relative to your competitors.
You will go into this in more detail in later sections. You should make it clear whether you are a startup or an established entity, and where the business is physically located.
Besides discussing what your company will produce, you also need to describe its legal structure in this section. You should have made a decision by this point whether you are going to operate as a sole proprietorship, a partnership, or a corporation.
You need to give the names of everyone with a controlling ownership in the company, and tell a bit about them. If you are seeking funding, this helps reassure investors that they will be giving their money to competent people.
If your plan is going to be primarily an internal document, this information acts as a record of your company at this moment in time and clearly spells out who is in charge.
Section Three: Product or Service Line
In this section, you will describe in detail the products or services you plan to deliver. You will also present the market analysis that is guiding your plan.
First, from the customer’s perspective, describe the specific benefits that a customer will gain from using your product.
Present this in the form of a problem the customer has that your product will solve. You should have determined by this point in your process how your customers are currently solving this problem and why your solution is better.
Don’t just assume that it is; actually go out and talk to people and ask them if they would prefer your product, and ask if they would be willing to pay the price you are planning to charge.
If your business plan is for an outside audience, be clear about how your customers will be using your product. People who are not familiar with the market you are going to serve may not understand what you are trying to do.
Second, present an analysis of the competitive environment.
You need to discuss the competition for each major product or service category you plan to offer. Many businesspeople find it most efficient to make a matrix or spreadsheet to show the status of the competition.
This spreadsheet should list all of your competitors and their locations. List the products they offer that will compete with yours, their market share, and their pricing structure. Also note if your customers are a large or small part of the business of your competitors. List any of your competitors’ strengths and weaknesses that you have discovered.
After you have this information in a table or chart, discuss what it means to your business.
- How are you positioned relative to your competitors?
- What is your advantage, and how do you plan to capitalize on it?
Remember to include indirect competitors. When you researched how your customers are currently solving their problem, you may have discovered that they use a solution from a completely different type of business.
There are a few things that can be discussed in this section that may or may not apply to your situation.
- If you are developing a brand new product, what stage of development is it in?
- Is it ready to go to market, or do you only have a prototype that will need funding to go into production?
- What is your product’s lifespan?
- Is it a cupcake that is gone in a few minutes, or a machine that will last for years?
- Are there intellectual property concerns, like patent disputes or non-compete agreements?
Finally, briefly discuss the future of your product.
- Is it technology that will become obsolete? If so, what is your plan for keeping your business relevant?
- What kind of research and development are your competitors doing, and how will you ensure that they don’t outstrip you?
You don’t need to spend a lot of time on this subject as the main focus will be on the current state of your business, but be prepared to address these questions.
Step Four: Define Your Target Market
At this point in your business plan, you have covered how your company will be set up, what it will deliver, and why it will crush the competition. Now you need to clearly define your customers. This will require some research.
First, describe your “typical customer.”
- How old is this person?
- How much money does he make?
- Where does he live?
- What does he do in his spare time?
- Is “he” even a he?
Once you know this, you can then find out how many people like this person are in your area. This is your market segment: all the people that might conceivably be interested in what you are selling.
The U.S. Census Data is a great source for demographic and lifestyle information, so mine this and other sources deeply to get a clear idea of the people who might be available as customers.
The next step is to break down your market segment. You will only be able to target a subset of the market, for example, people within a certain geographic radius of your store. From this group, you will only realistically capture business from a fraction.
You now need to discover how fast this segment is growing and how much they spend per year on products or services in your industry. Can your business thrive on the amount of money that a realistic market share of this segment of the population spends on products and services like yours?
You also need to think about future trends.
- How is your customer base changing?
- Will you keep them as they age, or will you constantly need to attract younger customers?
- Is your product or service something that could potentially become an online-only industry? If so, how fast is that transition happening, and how are you preparing to meet that challenge?
You can never truly predict the future, of course, but your business plan should reflect any research and thought that you have put into these sorts of questions.
Step Five: Sales and Marketing
Now that you have defined your customer base, this section of your business plan defines how you will reach them. You will enter the market with your company positioned to appeal to certain customers.
This results from your location, the products you offer and the price point you have chosen.
Your position will also depend somewhat on the status of your competitors as you will want to distinguish yourself from them.
Your pricing structure should be clearly presented in your business plan.
- One common option is “cost plus” pricing, where you calculate your costs and add a percentage to that to determine the sale price.
- Another option is to set your prices at “whatever the market will bear.” This will usually be determined by your competition and the desirability of your offerings. A fiercely competitive environment will not allow you to price your products significantly higher than your competition unless the products are uniquely desirable.
- You can also choose the opposite strategy and distinguish yourself as the lower-cost option.
Finding any unoccupied pricing niche will help capture customers who have been waiting for that price point to be available.
This section is also where you will discuss the promotional strategies you have planned. These strategies should match the position you hope to maintain in the market. For example, if you are launching a luxury brand, shoddy packaging will work against that image.
You also want to have an advertising plan that is tailored to the appropriate audience and have data to back up its effectiveness. In other words, how many people read a particular magazine, how many of them do you expect to respond to your advertising, and how much will the ad ultimately cost per customer?
You will also need a social media plan. This is vital in the current environment because your customers expect you to have an online presence. You don’t need to be on every platform. Your customer research should have given you an idea what platforms your potential customers like and use, and that is where you need to be. Clearly describe in this section of your plan what social media you will use and how you will use it.
Once you have attracted customers, you need to deliver the product. This is your method of distribution, and it needs to be in your plan.
- Will you ship directly from a warehouse?
- Will you have a retail store?
- Will you have outside salespeople to sell your product to consumers or businesses?
- Will you sell a component to another company that then incorporates it into their product and sells it to the customer?
- These are all viable distribution channels. Your business plan needs to clearly indicate your method of distribution, and it is okay to have more than one.
Step Six: Sales and Growth Predictions
In this section you will set down your sales and growth goals for the next three to five years. For the first year, you should have predictions for every month or every quarter. For years two through five, you can have predictions for every quarter or every year.
This part of the plan will vary somewhat depending on whether you are a startup or an established business. If you have already hit milestones and exhibited growth, detail that here. If not, list predicted dates of completion for steps that are clearly necessary, like finishing a prototype.
If you are seeking funding, try to find some measure of growth that you can include here, even if your company is very new. Investors want to see momentum.
Your future growth predictions can include plans for both horizontal and vertical strategies. That is, selling the same product to a different group of customers or selling a different product to the same group of customers. Growth can also include plans to franchise or to buy small competitors.
List the parameters by which you will judge your success. These should be clear numeric parameters that you will monitor closely, like the number of new subscribers every week or the percentage of repeat customers. Define what “success” will be in terms of these numbers.
Step Seven: Introduce Personnel
You have already listed the partners and owners of your business, but this section gives more detail. You want to give a brief biography of each person, highlighting what he or she brings to the team that will foster success. An organizational chart is a good idea as it shows that you have all of your bases covered with no redundancy.
If you don’t yet have every position filled, just indicate that the position is there, so investors know that you are aware of the gap.
Your personnel section should also include the compensation you will offer executives and employees and a general plan for raises and promotions. This demonstrates to investors that you will pay enough to keep good people but will not throw away money on lavish compensation packages.
The point of this section is twofold: When you show your plan to investors, you want to demonstrate that you have the best team on board to run your company. For internal use, the organizational chart gives a clear picture to everyone in the company of where they fit into the structure.
Step Eight: The Financial Plan
Your financial plan will be a rather detailed set of numerical data. You do not need a lot of text in this section except brief explanations of anything that may be unclear.
This section should include:
- Your direct costs for each product or service.
- Your personnel costs, including wages, benefits, taxes and training.
- A profit and loss statement. This shows “bottom line” profit figures that are obtained by subtracting expenses from earnings. Expenses include the cost of goods, operating expenses, interest, taxes, depreciation and amortization. These are added together and subtracted from sales to give your net profit.
- A statement of cash flow. This is a simple measure of cash on hand plus cash coming in from sales, minus cash out from purchases, bills and other expenses.
- Your balance sheet. This is a statement of assets, liabilities, and equity.
- Investor Funds. This is a statement of how you will use the money you are asking for from investors. You should be very clear about how much of the investment will be used for what purposes.
Your financial plan may be very simple or very complex, depending on the nature of your business. Regardless of the complexity, it should be complete, clear, and honest.
Step Nine: Appendix
You may not need an appendix, so just leave it out if you don’t. Even if you prepare one, you may not want to automatically include it in the plan you present to investors. It may contain “need to know” information that you do not want broadly distributed. It is acceptable to just have it available in case the investors ask for it.
The appendix can include information like patent applications, licenses and certifications. You may want to have pictures of your product or location or definitions of technical language. Any information that could clutter your business plan but that the investors might still ask about belongs in the appendix.
Remember to write steps two through eight of your plan first. Once all the details have been spelled out, you can pull the highlights for the executive summary. As a final step, put the entire document in a nice binder that can be presented to investors or stored in a desk drawer. A cover page with the logo of your business gives a professional touch.
A business plan contains a great deal of information, and it can be a challenge to pull everything together in a concise, readable form. If you take your time and work through the steps, however, your plan will not only make you shine for investors but will be your own guiding light through the first five years of your business journey.