The Basic Business Plan


The Basic Business Plan

The basic business plan is an excellent tool to get you thinking about your business idea and help you describe the fundamentals of your business.

There is no longer any doubt that to survive in the present market you need to plan; so why do so many businesses race towards failure without bothering?

A business plan precisely defines your business, identifies your goals, and serves as your firm's resume. The basic components include a current and pro forma balance sheet, an income statement, and a cash flow analysis. It helps you allocate resources properly, handle unforeseen complications, and make good business decisions. Because it provides specific and organized information about your company and how you will repay borrowed money, a good business plan is a crucial part of any loan application. Additionally, it informs sales personnel, suppliers, and others about your operations and goals.







The Basic Business Plan - Structuring the Plan

First, incorporating best practice means that the plan, for whatever audience it is designed will have continuing value to the organisation. Incorporating the appropriate operational components will ensure that management will be able to develop and control the business.

Second is to be aware of the demands of different types of business. As your business grows, the demands of control will mean that your planning performance must improve if you are to stay in business. Continual small steps lead to large improvements - but if you do not know which way to step you will progress in circles.

Third is an awareness of the audience and the emphasis which needs to be placed on the plan as a marketing document.

The importance of a comprehensive, thoughtful business plan cannot be overemphasized. Much hinges on it: outside funding, credit from suppliers, management of your operation and finances, promotion and marketing of your business, and achievement of your goals and objectives.

The business plan is a necessity. If the person who wants to start a small business can't put a business plan together, they arein trouble.

Despite the critical importance of a business plan, many entrepreneurs drag their feet when it comes to preparing a written document. They argue that their marketplace changes too fast for a business plan to be useful or that they just don't have enough time. But just as a builder won't begin construction without a blueprint, eager business owners shouldn't rush into new ventures without a business plan.

Before you begin writing your business plan, consider four core questions:

  • What service or product does your business provide and what needs does it fill?

  • Who are the potential customers for your product or service and why will they purchase it from you?

  • How will you reach your potential customers?

  • Where will you get the financial resources to start your business?.

What goes in a business plan? The body can be divided into four distinct sections:

  • Description of the business

  • Marketing

  • Finances

  • Management

Addenda should include an executive summary, supporting documents, and financial projections.




How To Write A Business Plan

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The Basic Business Plan - Description of the business

You must provide a detailed description of your business. An excellent question to ask yourself is: "What business am I in?" In answering this question include your products, market and services as well as a thorough description of what makes your business unique. Remember, however, that as you develop your business plan, you may have to modify or revise your initial questions.

Although there is no single formula for developing a business plan, some elements are common to all business plans.

They are summarized in the following outline:

Elements of a Business Plan

Cover sheet

Statement of purpose

Table of contents

The Business

  • Description of business

  • Marketing

  • Competition

  • Operating procedures

  • Personnel

  • Business insurance

Financial Data

  • Loan applications

  • Capital equipment and supply list

  • Balance sheet

  • Breakeven analysis

  • Pro-forma income projections (profit & loss statements)

  • Three-year summary

  • Detail by month, first year

  • Detail by quarters, second and third years

  • Assumptions upon which projections were based

  • Pro-forma cash flow

Supporting Documents

  • Tax returns of principals for last three years Personal financial statement (all banks have these forms)

  • For franchised businesses, a copy of franchise contract and all supporting documents provided by the franchisor

  • Copy of proposed lease or purchase agreement for building space

  • Copy of licenses and other legal documents

  • Copy of resumes of all principals

  • Copies of letters of intent from suppliers, etc.

Products and / or Services

In the Products/Services section, you described your products and services as you see them. Now describe them from your customer’s point of view.

Features and Benefits

List all your major products or services

For each product/service: Describe the most important features. That is, what does the product do? What is special about it?

Now, for each produce/service, describe its benefits. That is, what does the product do for the customer?

Note the difference between features and benefits, and think about them. For example, a house gives shelter and lasts a long time; those are its features. Its benefits include pride of ownership, financial security, providing for the family, inclusion in a neighborhood. You build features into your product so you can sell the benefits.

What after sale services are supplied? For example: delivery, warranty, service contracts, support, follow-up, or refund policy.

The Marketing Plan

Marketing plays a vital role in successful business ventures. How well you market you business, along with a few other considerations, will ultimately determine your degree of success or failure. The key element of a successful marketing plan is to know your customers-their likes, dislikes, expectations. By identifying these factors, you can develop a marketing strategy that will allow you to arouse and fulfill their needs.

Identify your customers, their characteristics, and their geographic locations; i.e., demographics.

The description will be completely different depending on whether you sell to other businesses or directly to consumers. If you sell a consumer product, but sell it through a channel of distributors, wholesalers and retailers, then you must carefully analyze both the end user and the middlemen businesses to whom you sell.

You may well have more than one customer group. Identify the most important groups. Then, for each consumer group, construct a demographic profile:

  • Age

  • Gender

  • Location

  • Income level

  • Social class/occupation

  • Education

For business customers, the demographic factors might be:

  • Industry (or portion of an industry)

  • Location

  • Size of firm

  • Quality / technology / price preferences

Competition

Competition is a way of life. We compete for jobs, promotions, scholarships to institutes of higher learning, in sports-and in almost every aspect of your lives. Nations compete for the consumer in the global marketplace as do individual business owners. Advances in technology can send the profit margins of a successful business into a tailspin causing them to plummet overnight or within a few hours. When considering these and other factors, we can conclude that business is a highly competitive, volatile arena. Because of this volatility and competitiveness, it is important to know your competitors.

What products and companies compete with you?

List your major competitors:

Names & addresses

Do they compete with you in across the board, or just for certain products, certain customers, or in certain locations?

Now that you have systematically analyzed your industry, your product, your customers and the competition, you should have a clear picture or where your company fits into the world.

In one short paragraph, define your niche, your unique corner of the market.

The Basic Business Plan Strategy

Now outline a marketing strategy that is consistent with your niche.

Promotion

How do you get the word out to customers?

Advertising: what media, why, and how often? Has your advertising been effective? How can you tell?

Do you use other methods: trade shows, catalogs, dealer incentives, word of mouth, network of friends or professionals?

If your have identifiable repeat customers, do you have a systematic contact plan?

Why this mix and not some other?

Promotional Budget

How much will you spend on the items listed above?

Should you consider spending less on some promotional activities and more on others?

Pricing

What is your pricing strategy? For most small businesses, having the lowest prices is not a good strategy. Usually you will do better to have average prices and compete on quality and service. Does your pricing strategy fit with what was revealed in your competitive analysis?

Compare your prices with those of your competition. Are they higher, lower, the same? Why?

How important is price as a competitive factor?

What are your payment and customer credit policies?

Location

You will describe your physical location in the Operational section of your business plan. Here in the marketing section, analyze your location as it affects your customers.

The starting point for the modification of the business plan for the audience is to consider the classic marketing questions: who is the target (segment), and what do they want (product or service benefit)?

Generalizations are always dangerous, but there are a number of common characteristics between various types of reader which enable those that work within the business planning environment to identify the key differences.

The banker is looking for security. This means that the plan that provides a high "comfort factor" is that which is most acceptable. Elements of a high comfort factor in a plan will obviously include asset backing; a demonstrable and established customer base with a stable demand pattern; personnel who have worked in the industry over a period of time and have a credible position and many contacts, and a good credit history. The crucial question which the plan needs to answer is: if the bank lends this company money, what is the risk that they will not repay it? In an ideal world, the bank is working towards the elimination of 99% of risk - even the most conservative bankers will agree that they can never eliminate it all - much as they would like to!

The venture capital company is looking for security as well, but this is measured against growth, profitability and the ability to sell their stake in the company in a very short period of time. The crucial elements will consist of an external and internal environment in which the company can grow very rapidly, and become a highly desirable "property" within the chosen time horizon. This will mean that the company will have to offer credible, proven products or services, an excellent industry reputation, high growth prospects, and a senior management team able to effectively carry out the rapid growth strategy. The crucial question is: can we multiply our original stake at least five-fold within three years in a business which will require little supervision, pay as little for it as possible, and achieve an easy exit? In an ideal world, the venture capital company is working towards buying a stake in a multi-billion dollar business for millions, and banking the returns as soon as possible.

The private angel investor is much the most difficult potential external stakeholder to categorise. Their motives are often complex. Some are investing for their interest in a particular sector, some for regional loyalties, some for part-time employment prospects, some for dividend growth, and some with the same aims in mind as the venture capital company. Private angel investors are however often the most risk tolerant of the potential external stakeholders, and often also accept the longest payback period. Few have specific quantified returns in mind when investing in the business. The typical angel investor is however likely to have greater experience in the practicalities of business development than either the banker or the venture capital provider, and will be much more likely to develop a personal relationship with the senior management of the company prior to investment. The crucial question is often: is the company worthy of trust, will it make continuing demands on me?

Financing Basics

While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you're starting a business or expanding one, sufficient ready capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.

Before inquiring about financing, ask yourself the following:

  • Do you need more capital or can you manage existing cash flow more effectively?

  • How do you define your need? Do you need money to expand or as a cushion against risk?

  • How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.

  • How great are your risks? All businessess carry risks, and the degree of risk will affect cost and available financing alternatives.

  • In what state of development is the business? Needs are most critical during transitional stages.

  • For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.

  • What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.

  • Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.

  • How strong is your management team? Management is the most important element assessed by money sources.

  • Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your for the start-up and growth of your business.

The Basic Business Plan - Obtaining a Grant

The grant aiding authority is normally the least demanding of the external stakeholders. Such organisations have a clear set of bureaucratic rules which define the criteria for providing finance. The crucial question is: does the company plan meet the requirements laid down in the regulations? For the company, this means that they need to understand what the regulations require and provide the basic information required.

The senior management team within a company considering a divisional plan is looking for certainty in investment flows. They want to be sure that there will be no nasty surprises, and that the operating unit is achieving the best possible returns given its market and operating environment. This means that the plan will need to rely on operating detail, not only in financial management, but also in many non-financial performance areas as well. The crucial question is: does the operating plan work, and how does it perform against the competition?

The existing management team within a company or a division needs to ensure that resources are correctly directed, that objectives can be achieved, and that activities can be effectively monitored and controlled so that variances can be contained and corrective action taken where necessary. The crucial question is: Do we know what we are doing, and can we effectively control the operation?

Other employees will also be an important group for the business plan. They have a requirement that the plan will meet their social and economic objectives. The crucial question is: Does the plan give us an acceptable future and have we been involved in its development?

The banker is most interested in the financial aspects of the plan. Business planning has been bedevilled by the lack of willingness of the banking sector to consider non-financial aspects of the plan - even though 50 per cent of business failures occur in non-financial areas.

The venture capital company is concerned with competition, management and financial projections

The business angel is normally most concerned with the product/ service, the vision and the financial projections.

The grant aiding authority is normally most concerned with personnel and financial projections.

The senior management team is most concerned with the activities of the various parts of the organisation and their impact on the cash flows.

The management team is most concerned in operational issues and how these can be monitored and controlled

Other employees are concerned about operational targets and how they will be achieved. .

A business plan is a tool with three basic purposes: communication, management, and planning.

As a communication tool, it is used to attract investment capital, secure loans, convince workers to hire on, and assist in attracting strategic business partners. The development of a comprehensive business plan shows whether or not a business has the potential to make a profit. It requires a realistic look at almost every phase of business and allows you to show that you have worked out all the problems and decided on potential alternatives before actually launching your business.

As a management tool, the business plan helps you track, monitor and evaluate your progress. The business plan is a living document that you will modify as you gain knowledge and experience. By using your business plan to establish timelines and milestones, you can gauge your progress and compare your projections to actual accomplishments.

As a planning tool, the business plan guides you through the various phases of your business. A thoughtful plan will help identify roadblocks and obstacles so that you can avoid them and establish alternatives. Many business owners share their business plans with their employees to foster a broader understanding of where the business is going.

Clarity of Purpose

If a business plan defines the venture for the entrepreneur, it does so as well for his or her "significant others," namely members of the management team, venture capitalists and other financiers, and professionals such as lawyers and accountants. A plan offers a clear and consistent snapshot of the organization's objective from the outset. It provides clarity of purpose, the given against which changes can be made.

Benchmark for Progress

A well-documented business plan enables the entrepreneur to avoid the dangerous trap of confusing activity with progress. Instead of a mere locomotion, a plan offers a steady benchmark against which to measure progress. As each interim goal is achieved, the entrepreneur gains a greater level of personal and organizational satisfaction.

It goes without saying that a formal plan is a rock-bottom necessity for convincing venture capitalists, angels, or bankers to put money into the enterprise. Prospective investors and lenders need to be assured that the founder has researched and analyzed the venture in sufficient detail and that the management team has the background, skills, and qualifications to succeed.

Taking Advantage

In formulating a plan, an entrepreneur needs to consider three big basics: a well-thought-out concept or idea that will form the basis of the business, a clear assessment of the size of the market for the product or service, and a comprehensive study of existing or potential competitors.

That latter is key; you might recall that it was the factor that convinced Rink to jump aboard the Executive Options bandwagon. A look at your competitors should include who they are, how good they are, how they differ from what you are, who their clients or customers are--and how you can take those prospects away from them.

Beyond the basics, a list of do's and don'ts will enable you to take best advantage of a business plan.

Do:

  • Keep the plan as short as possible, no more than 20 pages.

  • Start with a one-page executive summary, drafting the summary last.

  • Write and arrange the plan to be orchestrated as an oral presentation.

  • Estimate sales potential on hard evidence of your product's marketability.

  • Involve your management team and professional consultants.

  • Disclose current or potential problems so that others hear the bad news from you first.

Do Not:

  • Use jargon, which shouts arrogance; instead, shoot for verbal simplicity.

  • Over-diversify; instead, focus on one or two products or markets.

  • Include unnamed members of the management team who will "join later"--instead, identify everyone involved.

  • Make ambiguous, vague or unsubstantiated statements, which label you a fuzzy thinker or a dreamer; instead, use facts to describe market size.

A strong Business Plan may not guarantee success; but it could certainly prevent failure!




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