Business Plan Sections
Your Business Plan is a decision-making tool and whilst there is no fixed content for a business plan the content and format of your plan should be determined by the goals and audience - but there are certain business plan sections you must have!
A well-thought-out business idea must have considered marketing the product or service, as well as the financial implications for the survival of the business and the controls within the business.
Once you have decided on your business idea and aims, you must look at the likely market for your services. Talk to other people, including potential customers, to get their views on your products or services. Do they like the ideas? If they don’t can they say why not, or what other possible products or service could be produced? If there are no alternatives, then it is back to square one – but at least you have avoided an expensive mistake.
To start your Business Plan it is useful to write down the background information to your plans. Areas of particular importance include your business aims for the coming 12 months and beyond, and an outline of your business proposals.
Business Plan - Management Overview
- Key points of the plan
- The business and management
- Age of business, results to date (last three years), borrowing history, existing commitments, current accountants, bankers, lawyers
- Key personnel, their experience, knowledge of the industry, age, education and training
- Share holding structure, involvement of major shareholders in other ventures
- Number of current and future employees by category
- Reporting structure, internal organisation, skills level by department
- Profit share or bonus schemes Successes, failures and lessons learnt
- Product or service
- Current product range
- Current customers, existing customer contracts
- Status of product development - percentage of new product in current sales
- Any patent, trademark or copyright protection
- Market size, structure and growth over five years, major competitors
- Product / service trends
- Distribution outlets / service supply points
- Sales forecasts, promotional and pricing plan
- Current and future competitive advantage with relevant market research
- Objectives and strategy
- Business goals - general
- SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
- Short- and medium-term objectives - specific targets of gross profit, return on capital, new product development, personnel targets
- Information system and frequency of reporting
- Accounting methods - cash flow, profit and loss, balance sheet, financial ratios
- Production, marketing, personnel, new product development efficiencies
- Production / service supply system
- Equipment, age, sophistication, layout
- Product certification
- Supplier agreements
- Warehousing, physical distribution, order processing
- Future financial performance
- Projections stating assumptions of future performance for at least one year
- Estimated turnover to include balance sheets and profit and loss accounts monthly cash flow projections
- Capital expenditure budgets
- Sensitivity analysis to show effects of 20 per cent increase in sales and 30 per cent decrease
- Main assumptions underlying the plan
- Risk assessment and contingency planning
- Action plan
- Time scale and key tasks by month - milestones, success criteria
- Project plan for major investments, with critical path
- Finance required
- Level of return on the investment (for large scale investments a Net Present Value calculation or some other discounted cash flow)
- Total funding required based on projections
- Repayment assumptions
- Security available
- Assets available / assets used as security elsewhere
Exploring the Elements of a Simple Business Plan
Small Business Secrets Course
Business Plan - Marketing
Effective marketing is necessary for the success of any business. Without marketing, how would you expect your customers to know about your product or service?Marketing also helps you find out who wants your product – vital if promotional activities are to be used to the best possible effect.
Talk to your family, friends and possible customers about your business idea. Check on market trends with your local Business Link, Training and enterprise Council or Enterprise Agency and look in the trade journals in your local library. If your line of business is in a declining market, think whether you can still make it a success. If you appear to be in a rising market,good. But remember, you will still need to persuade customers to buy from you rather than from competitors.
Think about who is going to buy your product.
If your product is very expensive, then your sales may be limited. Where you trade and advertise depends on the price of your product and your position in the market. These factors are important when comparing your product to the competition.
What is my ‘USP’?
The USP is a famous marketing term invented when American advertising was at is height. The idea was that a product had to have a Unique Selling Point (USP) which made it different from the competition and persuaded people to buy it. You should think about why customers might buy from you and not someone else.
If you are marketing a product which has a USP that can be easily identified (a totally new product) or that can be given a USP, advertise and promote it. If you are in a business where there is not much difference between products, or you sell the same things as everybody else, your USP could be better service, more convenience, car parking, fast delivery, delivery to the door, after-sales service, a wider range of products and so on.
Be careful of just competing on price. After all, it is easy for your competitors to cut prices too.
There is always an element of risk when starting a business. Depending on how much risk a lender thinks there is you may need to give security as insurance against things going wrong. This security will often come from personal assets, so if you intend to borrow money be prepared to look at the business and personal assets you own.This form will help you to calculate your personal wealth and estimate the security levels that this will provide.
Few businesses break even in their first year.Calculating your survival income using the attached form in the Business Plan will help you to work out how much money you will need to make in order to cover all personal overheads.
Nature Of Business
This section will involve completing basic details about your business’s trading activities, VAT consideration and dates for business commencement.
Owner managers / Key personnel
Include brief details of the personal and business backgrounds of key personnel. If necessary, add more details about experience, job responsibilities and health on separate sheets of paper. You need to give a clear summary of the experience people in your business have, including your own. The exercise will also help show whether any of your staff need training and if so you will need to give details of any specialist training that will be needed. Be ready to answer questions about your own abilities and skills.
This section describes how you hope your business to develop and grow and what you hope to achieve over the next one to three years.Be realistic about your objectives.You should be able to achieve your aims and they must agree with Cashflow forecasts and Operational Budgets.
One of the most important parts of any business plan is how you see your market. It shows how much you have thought about your product and its place in the market.Basic details must cover a description of the markets, information about competitors, an explanation of how you expect to achieve market success and knowledge of the industry.
There needs to be brief details about your product and / or service. These details could include:
- Product or service description.
- Proposed price.
- Reasons for the choice of product.
- Market trends that will influence product sales.
- Material costs and mark up percentage.
- Payment methods.
- Description of how the product will be promoted.
- Information about who will buy your product and why they will chose to buy it instead of competitors products.
Business Plan - Finance Overview
This section needs to include a breakdown of the finance that you will require, with specific details about finance that will be required for equipment. Installation, carriage charges and VAT must all be calculated and added to this section. It is easy to underestimate the amount of money you will need to get going, but not having enough finance is one of the most common problems in small business, and can be fatal. Producing a Cashflow Forecast is the best way of estimating how much money you will need (an explanation of Cashflow Forecasts is given in the next section). If you are already in business Operational Budgets can be useful as a planning tool, as can breakeven points and profit and loss forecasts:
Budgeting gives you a useful planning tool. By comparing your actual performance with the budget, you can spot difficulties early on and take action to put them right. However, all forecasts are based on assumptions, so these must be specific and as realistic as possible. Also think about ‘building in’ unforeseen costs in case the worst happens. This can be shown as a separate item or by building it into the individual cost figures.
Whatever you do, you must explain your reasoning. Remember, this is an operating budget is a plan for your trading operations. It is to do with profit and loss, not cash. Include any item that gives a profit, or is a cost against profit. Do not include any other items, such as capital expense, if they will not directly affect your profits.
You must also be clear about the difference between the various costs of running your business. Some will vary depending on how well your business is doing (variable costs). Some will not change (fixed costs or overheads).
At this point, we must explain the term ‘depreciation’, as it will be used when compiling an Operating Budget.
Depreciation takes into account the reduction in value of an asset over its working life. It is an expense the business must pay regardless of how much business it does, and so you should include it in the Operating
Finally, work out the amount you need to sell every month just to break even. This figure is important because you can use it to check whether or not you are on target, or need to make some adjustments. But remember that this calculation does not take into account any seasonal changes which might affect your business.
Like your Operating Budget, your Cashflow Forecast will be based upon assumptions. Again you must be realistic. Think about the best and worst cases and explain the assumptions you make. The more realistic your forecasts, the better any bank will like them.
Unlike your Operating Budget, your Cashflow Forecast is not to do with profit and loss. It is just your best estimates of how the cash will go in and out of our business over a certain period.
Things to bear in mind when completing your Cashflow Forecast:
Think about the period of credit you give your customers or take from your suppliers. For example, if you can keep your customers to 30 days' credit (which will not be easy), your Operating Budget could show the sales you invoiced, say, in January. But this cash should not be in your cashflow projection until February. And then only if you are sure your customers will pay on time. If you have never had dealings with your suppliers before, you might have to settle their bills immediately. Obviously, this will affect your cashflow.
Business Plan - Funding Requirements
Many entrepreneurs discover that they need financial help to achieve their business goals. Luckily, there are plenty of financing options available to help today's small business entrepreneur. However, before you sign on the dotted line or reach into your personal financial coffers, be aware of exactly how this investment will impact you, your family, and your business.
It's easy to underestimate the personal and financial sacrifices that come with starting a successful small business. Caught up in the excitement of creating your distinctive niche, you may not realize the impact your business will have on you, your family, and your finances. Before investing more time and money into your new business, it's a good idea to revisit your goals and expectations. This action will help you determine how well your business goals mesh with your personal and family goals.
If your first-year budget shows the need for additional personal investment or outside funding, revisit your goals before moving ahead.
- Create a personal budget if you have not already done so. Project all personal expenses for yourself and your family for the coming year, including both necessary expenses and the discretionary funds you expect to have. Given your first-year budget for your business, what impact might you expect on your ability to meet your personal financial obligations? Is that impact acceptable to you? Will you and your family be able to continue the same level of discretionary spending? If not, is that acceptable to you? To your family?
- Review your expectations for the first year of business in terms of its qualitative impact on your personal life. If you have a family, consider the impact on the family as a whole and on each individual. Will you have to invest more time and energy than you or your family expected? Is this acceptable to you and to your family?
- Review the overall risks involved in starting and financing your first year in business. Are these risks acceptable?
- Review your original vision and financial goals for starting your own business. Now that you've done the first financial projections, do you still feel your business is aligned with your goals and vision? If the business has deviated from your original goals, is that okay with you? Do you need to update your vision and goals?
- Discuss any concerns about the above with family, friends, and personal advisors before you make any additional personal investment, scale back your personal/family expenditures, or acquire outside funding.
Business Plan - Additional Funding
Acquiring additional funding for your small business is one of the riskier aspects of entrepreneurship. It requires careful thought and thorough research, not to mention a great deal of confidence in your ability to succeed. This action will help you assess how much and what type of financing you should seek for your business
The Best Funding Approach for Your Business
Before you invest your own personal money -- or the money of others -- into your business, determine how much money you will need to cover your first-year budget. Then look at which funding options are most suited to your business.
Identify how much funding you need to cover the projected loss from your first-year budget.
Total Income - Total Expenses = Profit / Loss
If you feel that outside funding will allow you to generate a profit, identify your profit goal and add that amount into the total funding needed.
Choose which of the following funding options are most suitable for your situation.
- Personal financial assets
- Conventional bank financing
- Small Business Association (SBA) financing
- Home equity financing
- Angel financing
- Financing from relatives
- Leasing companies
- Private offerings
- Corporate partnerships
Thoroughly research the options and compare their benefits, costs, risks, and payback obligations.
The best financing mechanism is a good savings account and/or brokerage account. Using your own funds increases your future flexibility, keeps you in charge of your business, and reduces the risk of business failure due to inability to make high loan payments.
Conventional Bank Financing
Conventional bank financing involves a loan (term loan or line of credit) from a commercial bank. It's very difficult to get a commercial loan in your first year of operation, however, your chances are greater if one of the following applies to you:
- You have a strong personal financial statement. If you have significant cash or marketable securities along with equity in real estate, bankers will definitely look twice at your business plan. They are inclined to believe that even if your business runs into trouble, you can afford the losses and will still be able to pay off the loan. Chances are the lender will want to hold collateral that exceeds the loan amount, to ensure payoff.
- You have a strong personal guaranty. A strong personal guaranty is an individual who has both financial capacity and character. Capacity is defined as the ability to easily pay off a loan with funds that can be accessed relatively quickly. Character for a guaranty is more difficult for the lender to determine. The guarantor needs to have strong personal credit. It helps if the lender knows the guarantor. If you are looking for this type of support, you'll need to find someone who's willing to disclose his or her personal financial situation, sign a continuous (and possibly unlimited) guarantee, and put up collateral to support the guarantee.
- Your business is in the same industry you're employed in now. If your present business is similar or the same as work you have done for previous employers, the lender is more likely to approve your term loan or revolving line of credit.
Small Business Association (SBA) Financing
The best time to apply for SBA financing is either before you start your business or after the first successful year in operation. It will be difficult to get this type of financing later if you show interim losses during the start-up phase of your business. The SBA will provide a 60-80 percent guarantee on any loan made under SBA programs. These loans are underwritten by an SBA-approved bank or other financial institution and are guaranteed by the SBA.
Look for a preferred SBA lender if you decide to go this route. A preferred SBA lender can approve a loan without getting SBA concurrence. This speeds up the processing of the loan and it indicates that the SBA lender is credible. We recommend interviewing your lender to find out how experienced he/she (and the bank) is in making SBA loans. You should definitely obtain expert help for this type of loan.
An SBA-guaranteed loan adds one additional risk to your business: you can never declare bankruptcy if you have an SBA loan.
Home Equity Financing
Many financial institutions offer home equity lines of credit with low-interest rates and no closing costs. This can be a good source of financing since most of these lenders do not require ongoing financial reporting. There's one thing you should know about home equity financing: you must secure the loan while you are still working as an employee of another company. Home equity loans are nearly impossible to get when you can't demonstrate that you have a consistent paycheck.
"Angel" financing comes through individuals who want to invest in good business ideas. They will lend you cash and/or provide you their financial experience. Generally, a business will have to give up significant ownership interest, 20-80 percent of the equity, and some degree of management control of the business. Look carefully at the terms and conditions of these types of arrangements. There are examples of successful small businesses paying out hundreds of thousands of dollars to "angel" investors on a yearly basis. The percent of financing acquired through these private financing relationships is not known for sure, but it is significant.
Financing from Relatives
This is a common financing mechanism with a few fundamental rules. Rule One is make sure the relative clearly understands the underlying risk. Ties with relatives last a lifetime and losses can be a sore subject for many years after the business is gone. Relationships with relatives can be more intense than other business relationships. This intense nature can lead to management control issues and demand for payment, factors that would not typically occur in strictly business relationships.
Leasing is a common form of financing for equipment, furniture, and vehicles. The standards for a lease are typically more lenient than for a loan, and the terms can be more flexible. The disadvantage of leasing is that the rate can be higher than other forms of financing. That is, if you can determine what the rate is. Leasing companies do not have the same disclosure obligations as banks do and it can be difficult to figure out the interest rate.
Avoid getting into discussions with leasing agents about "capitalized leases" versus "operating leases." These are tax issues that are not critical during your first year in operation.
Leasing is a reasonable option if the leasing company can meet the following criteria:
- The payments are reasonable
- They will allow you to purchase the equipment at a reasonable price during the lease (and eliminate the lease) and/or at the end of the lease
- They take as collateral only those assets they are financing
This is a relatively new financing alternative that's being tested with a variety of new and/or young businesses. You can make a public offering through Small Corporate Offering Registration (SCOR). This program allows small corporations to sell up to $1 million in stock to individual investors through public advertising. SCOR stocks are readily transferable but are not listed on a public trading market, which makes the sale of stock more difficult. The rules for this type of financing vary from state to state. Make sure you have expert help with this type of financing to ensure you're adhering to all SEC and/or state requirements.
There's significant start-up financing offered through some of the largest corporations in the country. These corporations are looking for small businesses to perform a Research and Development role for the corporation. They see the entrepreneurial spirit of a small business as a less expensive way to generate fresh ideas.
If your business could perform in this capacity and you're intrigued by this type of financing, look for corporations in your industry to partner with. Then insist on creating a Win-Win Partnership or walk away from the relationship. As a small business, you will not have the resources to fight a big corporation that does something harmful to your business. Get legal help from someone familiar with these types of agreements. The risk of an unclear or unenforceable agreement is that a large corporation can cripple your business by keeping you tied up in court and draining financial resources for years.
A strong Business Plan may not guarantee success; but it could certainly prevent failure!
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