Key elements to writing a business plan
Have a business idea and want to put it into action?
How can you make sure you can start a successful business out of it?
A business plan is a multi purpose tool for refining your idea. It’s a brief write up that lays out the basic elements of a soon to be company. It essentially helps you structure your project, confirm its feasibility and crunch the numbers of its projected profits. It’s a thinking process that helps you determine how likely your chances of success are and whether your idea is financially sound. The business plan is about stating your value proposition and defending it all through. You need to answer the following questions: what is the problem you are solving? How are you better than the competition? How will you succeed when others have failed?
1. Executive summary
The opening section of the business plan is very important, it can make or break the deal. It’s called the executive summary and it’s absolutely essential. This section might also be the only one your investors will look at.
It’s a rundown of your entire business that is consistent with everything that follows.
So in the first paragraph, state the problem you’re trying to solve for your customers and how your solutions are unique. Then in a marketing paragraph, explain who your target is, how much you expect to sell, and what competition you’ll face.
The following section should be brief and focus on your team. Give details about all your past experience and expertise in your industry. Finally your last paragraph should detail your finances through key figures like your expected income over the next first 3 years. Here you should list how much money you need to get going, then split this amount between what you already and how much you need from investors.
But remember to keep the executive summary short at 1 page max. And although it’s the first section of your business plan, it’s better to write it at the end after you’ve drafter the rest of your plan and know exactly what your project is about.
2. Concept, operations and team
You might have been working on a project for years and take things about it for granted, but it’s all new to those reading your business plan which means you need to present your ideas clearly.
For starters, you need to detail your products or services, the channel through which it will be distributed and any competitors. When it comes to the products, your readers will naturally want to know how it works in detail.
Your distribution channels are also important: whether you plan to sell your product on the internet, through retailers or on the wholesale market, it’s essential to explain why the choice you made is the right one for your business.
It’s also important to highlight your competitive advantages. Maybe you’re local meaning you’ve got inside knowledge of your market or tons of experience in your field.
Then you should lay out every detail of your operations, from your production technique to your schedule. Maybe your main supplier is on the other side of the globe. In this case you would want to think how the two of you will actually work together across this distance.
Any potential legal or security issues need to be outlined and detailed. If you are opening a liquor store, you would need to acquire a license. If you are opening a warehouse, you should take security issues very seriously.
Finally you should introduce your team. That’s because investors will want to know who is getting paid with their money. Putting your entire family on the payroll will likely raise some red flags. So to be clear about this answer these questions: Will you work in a team or by yourself? Do you want to hire people on a contractual basis? And “Do your staff members have the necessary expertise?”
3. Strategy and path to success
First step is to include a market analysis that details the size of you market and the potential customers and business clients showing that there are enough of them to make your idea profitable.
Then you can profile you ideal customer figuring out ways to reach him. For example, let’s say you created an airbnb like website for backpackers. You need to figure out the best way to reach homeowners in a certain city who could host backpackers but also potential backpackers coming to this city.
Second step is to study the competition. You cannot enter a market without cerning this point. You need to identify at least 5 competitors with their strengths and weaknesses. Then you need to figure out how they will react when you enter their market (increase marketing, decrease prices, etc…). You also need to address your main differentiators relative to this competition.
Finally, you will need to offer specific marketing techniques that suit your business (email marketing, blogs, adwords campaigns). Most important thing to determine if they are right for you is to keep track of their benefit cost ratio.
4. Forecasted financial statements
Financial statements are essential in a business plan, they are sheets which will provide enough information in a concise way to know whether your business makes sense financially on the long run and whether your numbers add together or not.
There are 3 types of financial statements you need to provide: Balance Sheet, Income Statement and Cash Flow Statement.
First the balance sheet is simply a two table comparison between your assets and your liabilities. What you own in the company and what you owe to others. For example you might be holding inventory or cash these are assets. You might have taken a loan from the bank, this is a liability.
Second is the income statement, it details your sales minus your expenses, thereby displaying your net profits.
Finally, the cash flow statement shows the inflows and outflows of money from your company. It’s like a bank account statement. Cash is very important in running a business, you might be profitable on the paper but if you don’t have cash to pay your liabilities on time, your business will fail.
Accurately producing these statements will require you to rely on solid assumptions. Remember each figure must be supported by evidence.
Congrats, you’ve got everything your need to craft a sound business plan. Now it’s time to talk to investors. There are 2 types of them: banks which offer you debt and are typical reluctant on giving you money without financial guarantees, and angels investors or VCs which will take shares in your company in return for their money and expect and high return (5 to 10 times their investment) on the mid to long run.
Regarding of the type of investors, all of them will want to see you business plan and will be interested in the 3 year forecast of your operations and finances. They will also closely watch what we call the burn rate, the % of money you lose each month before being profitable. This rate and its evolution over time are a key indicator of your company’s ability to success.