Developing a Business Plan

Objective
Throughout the process of creating a plan, you need to keep in mind the objective of the plan. Why are you writing the plan? Is it to manage the business? Or is it to raise money?
Annual plans are used to manage a business. Business plans are used to attract capital. But there are exceptions, and often the difference between annual plans and business plans becomes muddled. Banks and other lenders or investors may require a copy of each year’s annual plan. And management may use the start-up business plan as a basis for operating the business.
Keeping a clear distinction between annual plans and business plans is not important. What is important is keeping the primary objective of and the primary audience for the plan clear. As a rule of thumb, if the plan will be used to attract investors or lenders, this is the primary objective and outsiders are the primary audience. If the plan will help manage the business, this is the primary objective and insiders are the primary audience.
Some or all of the following elements should be a part of your plan, depending upon your objective.
Summary
Summaries should be short and concise—one page is ideal. It should cover the following points:
• Strategy overview. Start with a brief overview of your business strategy. If your business will be based, at least initially, on a particular product or service, describe it in the introductory paragraph.
• Strategy logic. In the the next paragraph or two ex- plain why your strategy makes sense or why your product or service has promise. Are you entering a fast- growing market or providing a unique product or service that distinguishes your business from existing businesses?
• Business development. Next, you should describe the stage your business is in.
? Is it already generating sales?
? Have you done test marketing?
? Is a prototype developed?
? Has market research been performed?
• Business development. Name the key people in your organization and describe, briefly, what special talents, expertise, or connections they will bring to the business.
• Financial objectives. If your plan is being developed to raise capital, be clear about the amount of capital you are seeking and how you plan to use investor or lender funding.
• Business organization. Describe the form of business organization you will take and where the company will be located.
Remember to keep your summary short and easy to understand. Avoid technical jargon and details. Don’t try to summarize all of the different major elements of your plan. Just focus on the key elements that you think will be of most interest to your audience. Skip the pie-in-the-sky profit projections and outlook generalizations.
Concept
The concept is a clear explanation of your business strategy. It is not a definition of the business or a summary of its markets but, instead, a quick summary of the one or two key factors that set your business apart from the competition.
• Product description. New business strategies are often closely tied to a particular product or service. If this is your situation, include a clear and substantive description of your principal product or service. Follow this with a focused discussion of what will make your product or service stand out from any similar offerings in the marketplace. Focus, in depth, on just a few of the most competitive attributes of your product or service.
• Impact factors. You should also describe any other aspect of your business that is fundamental to your strategy. Areas that might have significant impact on your strategy are marketing, research and development, or strategic alliances with other firms. For example, if everyone else in your industry is selling their product through retail channels but you feel that you can develop a strong competitive advantage by selling via direct mail, then you should discuss this in the concept section.
Market conditions and the competition should be included as points of reference only when necessary. An in-depth analysis of these factors will be included later in the plan.
Current situation
This section is most appropriate for plans being used to seek financing. Within this section you will describe what stage of development your company is in and what the sought-after financing will be used for.
There are three basic reasons for seeking outside financing: start-up financing, expansion financing, and work-out financing.
• Start-up financing. If you are seeking start-up financing, you will need to list specific milestones that have been achieved and emphasize all positive developments without being misleading. You should anticipate the questions your lenders or investors may ask.
? Has the market research been done?
? Has a prototype product been developed?
? Have facilities been leased?
? Is the management team in place?
? Has manufacturing been contracted?
? Are marketing plans finalized?
Whether or not you receive financing and the terms of that financing will depend upon the stage of development your company is in. The more fully developed your company is, the better your financial arrangements will be.
• Expansion financing. If your business is already up and running and you are seeking expansion financing, you need to give clear evidence that you are not, in reality, seeking financing as a way to solve existing problems, or to cover losses or extraordinary expenses such as might be experienced during a start-up.
• Work-out financing. Many investors and lenders do not like to offer work-out financing. Those who are willing to consider it will want to see a plan that clearly identifies the reasons for current or previous problems and provides a strong plan for corrective action.
No matter what type of financing you are seeking, financiers like to be apprised of the source and amount of any capital that has already been secured. They will expect key executives to have made substantial personal equity investments in the business. They will feel even more comfortable if they recognize any other investors who may have participated in earlier stages of the financing process.
The market
Later in this book, you will learn how to develop and write a marketing plan. You may want to refer to that section now. Aspects of that plan need to be addressed in your business plan.
? How large is the potential market?
? How many people or businesses are currently using a competitor’s product that is the same or similar to the one you are offering or plan to offer?
? How many prospects potentially have any possible use for the product?
? Is the market growing, flattening, or shrinking?
Market segmentation
Almost every market has some major and distinctive segments. Even if it is not currently segmented, the probability that it could or will be is great. This is particularly true if the marketplace for your product or service is multi-regional or national. If this is the case, segmentation is almost necessary, especially for a small firm, if you hope to be competitive.
You will need to discuss segmentation within your business category and how you intend to cope with any positive or negative affects it may have on your particular business. Almost all markets are segmented by price and quality issues. Generally, however, price and quality do not provide the most clear or definitive market segmentation. Much stronger segmentation can usually be found through an evaluation of product or service uses and importance to various consumers.
Consumer analysis
In your business plan you will need to evaluate the typical consumers within the market segments you are targeting. There are countless variables to consider when analyzing consumer behavior. Try to focus on those behavioral possibilities that best determine how viable your product will be in your target markets. Look at
? Which features will most appeal to consumers?
? How are choices made between competing products?
? Which marketing promotions or media avenues seem to offer the best vehicles for reaching the consumer base?
And ask the following questions:
? How much disposable income do target consumers have to spend on this product?
? How do your target consumers reach purchasing
decisions?
? Are consumers presold on a particular brand before they visit a store or do they buy on impulse?
? What characteristics influence the purchase of one product or service over a competing one?
Competition
Include an overview of those firms and their products and/or services that you will be in direct competition with. Identify the market leader and define what makes it
successful. Emphasize those characteristics of the firm or offerings that are different than yours.
Don’t dismiss this section just because you don’t have
any current competition. If there isn’t a product or service similar to yours on the market, identity those firms that provide products or services that perform essentially the same function. You should also make an attempt to identify any firms that are likely to enter the market or are in the process of developing products or services that will be competitive with those you are offering.
Product features and benefits
You briefly described the key features of your product or service in the concept section of the plan. In this section you should explore features and benefits in depth. It is essential to be clear not only about the distinguishing features of your product or service but also to delineate any strong consumer benefits. What makes your product or service significantly better than competitive offerings?
Competitive analysis
In this section you need to do an in-depth analysis of the competitive advantages and weaknesses of your firm. When exploring weaknesses you should include information that will help allay any concerns that may arise as to their ability to significantly hinder your success.
This section is important, especially if your company is a start-up, because you will, typically, be competing with established companies that have inherent advantages such as financial strength, name recognition, and established distribution channels.
Positioning
Positioning can be thought of as a marketing strategy for your product or service. Positioning defines how you are going to portray your product to your targeted marketplace.
Your first step is deciding who your target market will be. It will consist of those potential customers toward whom you will direct most of your marketing efforts. Often this group will not be the sole or even the largest market
for your product, but it will be the market that, based on competitive factors and product benefits, you feel you can most effectively reach.
Start-ups are more likely to be successful if they focus on a highly specific, very narrow target market. General markets are usually dominated by large, well-established firms.
Once you have determined who your target market is, you need to decide how you want consumers to perceive your product.
? Is it the premium quality leader?
? Is it a low-cost substitute?
? Is it a full-service alternative?
If you have a one-product or service company, your marketing strategy may coincide with your overall business strategy. This doesn’t necessarily have to be the case, however, but, it is extremely important, in all cases, that your product strategy be in sync with your overall business strategy.
Advertising and promotion
Use this section to provide an overview of your general promotional plan. Give a break-out of what methods and media you intend to use and why. If you have developed an advertising slogan or unique selling proposition you may mention it, but it isn’t strictly necessary. (A detailed explanation of unique selling propositions and their purpose can be found in Chapter 2, “Marketing”.)
You should outline the proposed mix of your advertising media, use of publicity, and/or other promotional programs.
• Explain how your choice of marketing vehicles will allow you to reach your target market.
• Explain how they will enable you to best convey your product features and benefits.
Be sure that your advertising, publicity, and promotional programs sound realistic, based upon your proposed marketing budget. Effective advertising, generally, relies on message repetition in order to motivate consumers to make a purchase. If you are on a limited budget, it is better to reach fewer, more likely prospects, more often, than too many people occasionally.
Sales
Your sales strategy needs to be in harmony with your business strategy, marketing strategy, and your company’s strengths and weaknesses. For example, if your start-up company is planning on selling products to other businesses in a highly competitive marketplace, your market entry will be easier if you rely on wholesalers or commissioned sales representatives who already have an established presence and reputation in the marketplace. If your business will be selling high-tech products with a range of customized options, your sales force needs to be extremely knowledgeable and personable.
Research and development
A discussion of research and development is, obviously, not germane to all companies. If it applies, though, financiers are going to want to know that research and development projects are aimed at specific, realistic objectives. And they will want to be assured that an undue portion of the company’s resources is not plowed into this area. Remember that banks generally lend money to businesses on a short-term basis, and venture capitalists and other first-round investors generally want to cash out in just a few years.
Operations
Operations is a catch-all term used to describe any important aspects of the business not described elsewhere. If the start-up is a manufacturing concern, discuss critical elements of the manufacturing process. For retail businesses, discuss store operations. Wholesalers should discuss warehouse operations.
In addition to discussing areas that are critical to operations, briefly summarize how major business functions will be carried out, and how certain functions may run more effectively than those of your competitors. But, don’t get into long descriptions of any business or operation practices that will not sell your business plan to financiers.
People
The focus here is key people and positions. Primary attention should be on key people who have already committed to joining the firm. Elaborate on their relevant past experience and successes and explain what areas of responsibility they will have in the new company. Resumes should be included here as part of an appendix or exhibits inclusion at the end of the plan.
If there are any important positions that have not been filled, describe position responsibilities and the type of employment/experience background necessary to the position.
If there is a board of directors, present each member, and summarize that person’s background. If they will have an active role in running their business, elaborate that role here.
If consultants have been engaged for key responsibilities, include a description of their backgrounds and functions.
Fill as many of your key positions as possible before you seek funding. Many financiers reject plans if the management team is incomplete.
Payback and exit plan
Both debt and equity lenders will want to know how they can expect to receive their investment back and realize interest or profit from the company.
Most private investors and venture capitalists will want to be able to exercise a cash-out option within five years. They will be concerned that, even if the company becomes highly profitable, it may be difficult for them to sell out their share at an attractive price. This concern is particularly true in the case of minority stake holders. This is why you must provide an exit strategy for investors.
Ideally, investors hope a firm will be so successful that it will be able to go public within five years and their shares will become highly liquid investments, trading at a hefty multiple of earnings. But, often, a more realistic goal is to make the company large and successful enough to sell to a larger firm. State what your exit plan is and be sure it appears realistic.
Financials
In this section you need to show projected, or “pro forma,” income statements, balance sheets, and cash flow. Existing businesses should also show historical financial statements. While how far into the future you need to project and the number of possible scenarios you can anticipate depends upon the complexity of the business, three to five years for financial projections and three scenarios are average.
Scenarios should be based on the most likely course your business will take, a weak scenario with sales coming in well under expectation, and a good scenario with projected sales well over expectation.
Pro-forma income statements should show sales, cost of operation, and profits on both a monthly and annual basis for each plan year. For all but the largest businesses, annual pro-forma balance sheets are all that are necessary. Cash flow pro formas should be presented in both monthly and annual form. And, if your business is already established, past annual balance sheets and income statements should also be included.
Include information that will assist potential lenders in understanding your projections. Lenders will give as much credence to the assumptions your projections are based on as they do the numbers themselves.