How to Write a Business Plan to Start Your Own Business

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By: Site Engineer, Staff

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The business plan is part of the on-going process of strategic planning for the entrepreneur and small business, whether produced for a start-up business or an existing business.

This article aims to explain how a business plan can be used effectively as an ongoing monitoring and strategic planning document which, although it may need revision, should be effective for several years as a strategic planning tool for the entrepreneur.

Designing and writing the business plan should be seen as the outcome of a careful research process and subsequent planning procedure. It should be regarded as part of that procedure but not as the end of that process. It can have several purposes; it may be required to obtain grant funding from an agency, serve as a strategic planning document for the entrepreneur, as a plan to guide the business, serve as a basis for making decisions and as a subsequent monitoring device.

It is good to note here that in designing and writing a business plan different funding bodies have different requirements. Even among different bank managers, there were considerable different expectations in terms of what was expected and required from entrepreneurs when producing a business plan for a startup business as already seen from the research.

Also, venture capitalists will require a much more detailed business plan and perhaps more market than a bank manager will, for the obvious reason that the venture capitalists will not be able to take security to safeguard his/her investment.

Therefore, the advice to potential and existing entrepreneurs before writing the business plan is to seek to determine what format the potential funder prefers in terms, not of content but presentation. This will avoid unnecessary re-writing and changes to the presentation. It is best to have a full business plan that you are satisfied with and will serve you as the entrepreneur when taking strategic decisions for the business.

Remember that the business plan should be produced for yourself, not for the potential funders, it can be modified, shortened, summarized or extended for different potential funders and you should be prepared to make these changes.

A business plan is as a written document describing the what, who, where, how, when and why of developing and operating a new (or existing) venture. It is particularly useful to the entrepreneur before it forces him to come to grips immediately with the basic policies of his business.

Points to Consider While Writing the Business Plan

  • Always start each section on a fresh page. This will help you to improve the presentation and enables the user to find sections quickly.
  • At an early stage, the construction of the cash flow statement should be undertaken, perhaps after the analysis of the market research. This has the advantages of deciding what information and forecasts need to be justified and explained. Also whether sufficient research has been done and finally whether any additional expenses need to be calculated.
  • Avoid appendices where possible. This is to save the user the difficulty in referring to data while reading the appropriate section business plan. Appendices may be used sparingly.
  • Do use illustrations, but do not overdo this. Illustrations are used and can help the user assimilate data quickly.
  • Do include some notes with the accounts, whether you are providing a cash flow statement only or a more detailed set of accounts that may include profit and loss and a forecasted balance sheet.
  • Do put contact names on the front and back page of the business plan. Put copyright if you want to.
  • The business plan should not be too long. Perhaps 30 pages including appendices is a rough maximum (or 10,000 words as maximum). There is no ideal length; although there is little point in producing a very detailed plan if the only aim is to raise a small capital from the bank.
  • Bind the business van securely (not stapled) and provide a cover that will stand up to some wear and tear. It is recommended that a loosely spiral or ring-bound type should be used instead of hardcover bound. This is because of the flexibility that will allow one to modify and produce different versions of the same business plan for different user funders, which the hardcover will not provide.
  • Finally, the business plan should always “stack-up”; that is, the topics treated should always synchronize.

How to Design Various Business Plans

The following sections are recommended when designing the content of the business plan. These sections are not prescriptive and can be modified to suit the purpose of individual entrepreneurs and business plans.

These business plan design pattern are:

1. Executive Summary

Although the executive summary should be the first section, it is likely to be the last section to be written and it can be the most difficult because you have to summarize the main contents of the business plan.

In summarizing, always try to include:

  • What the venture is all about;
  • What market and potential businesses are profits;
  • Forecast and expected return on investment; and
  • Amount of money you now seek; in what form, and for what purpose, etc.

2. Introduction

A short introduction should give some background to the business, the key people, and an introduction to the nature of the business and the industrial sector. This section can be used to give the main aims and objectives of the business plan. Is it to map out an expansion plan for the business? Or is it to provide a strategy for the launch of a new business?

The aims and objectives could be placed in a separate section. A general guide is that aims can be considered to be quite broad and less specific than objectives. Objectives should be written in terms of specific outcomes.

For examples, the aim of a five years business plan would be to:

  • In the introduction, you can provide additional information like the nature of incorporation if a startup, whether the company is registered or not.
  • Provide a strategic planning process to become a major competitor in the industry, whereas an objective of the same business plan might be to achieve a fourfold growth in sales within five years.

3. Market Analysis and Research

In this section, you report the findings of market research that might have been undertaken along the lines suggested before. Illustrations of the main findings can be quite useful for presentation purposes and potential readers of the plan. However, those readers will not want to wade through a large amount of information and data. If the questionnaire that has been used as the basis for the research has been well-designed, then it should be possible to present the information and analysis in the form of summary tables with brief comments on the significance and importance of market analysis and summaries of the potential total market and market share.

The marketing plan effectively sets out how sales are to be achieved. It includes all aspects of the so-called “marketing mix.”

  • Pricing policy
  • Promotion (advertising and other forms of promotion)
  • Production: The outlets and marketing strategy should reflect the production capabilities of the business.
  • Place: How are the goods going to be distributed and how are they to be sold? What outlets are being used? Are direct selling methods to be used or are agents being used perhaps working on commission?

If the product is new, you need to demonstrate that you have given some thought to this and you have secured retail outlets.

4. Production Strategy

If your business is concerned with manufacturing and production, a separate section should be devoted to the planning of production. You will need to identify the additional resources and capabilities that will be required for new production levels.

For a new startup business that requires production facilities, the business plan will need to describe how these are to be obtained and how the staff is to be recruited.

An important element of any manufacturing business is timing production to coordinate with sales orders and to match the supply of materials with production because resources and finance will be required before products are made, before sales are made and certainly well before income is received.

To aid the planning process, it is worth providing an action plan. The purpose is to map actions against time and the production process.

5. SWOT Analysis

SWOT analysis involves the identification of Strengths, Weaknesses, Opportunities, and Threats for the business. A SWOT analysis should consist of a series of short power points so that the reader can see quickly the main strengths and weaknesses of the business and the opportunities. There should be an honest and articulate balance in the strengths and weaknesses because a long list of strengths and a few weaknesses are likely to raise suspicions from potential funders rather than impress them. It is always better for the entrepreneurs to write the SWOT analysis, which must always ‘fit’ the business plan.

6. Competition

The competition and a section dealing with competitive analysis will follow from the identification of threats in the SWOT analysis. The extent of knowledge on competitors will probably vary, as to the major competitors and what their relative strengths are.

It is useful to identify what strategies they have used to establish their market position. For example, have they used market niching strategies? Or perhaps more aggressive market penetration strategies? Or have they established their position merely by reputation?

You should also give some thought to potential competition. As opportunities develop, it could be that you face competition either from additional entrepreneurs (new start-ups) or from the existing competition. If the business plan is to be a valuable document over a three or five year planning period then some thought must be given to that competition.

It is always necessary to conduct a limited amount of sensitivity analysis that will demonstrate to potential fund providers, outcomes and the reaction of existing and potential competitors.

7. Competitive Strategy

This is the most important section of the business plan since it should map out the strategy for the survival, development, and growth of your business. A strategy should be identified that will enable the business to meet the aims and objectives which will have been set out in the early part of the business plan. The development of the competitive strategy will be the natural outcome of the process of researching the market opportunity, the nature of the product or services, the SWOT analysis, and the competitive analysis.

There are three generic strategies, which are:

  • Focus: This strategy is the one that is most likely to be adopted by new firm entrepreneurs. It recognizes that many market opportunities result from specialization. There is no right or wrong strategy, but it must be appropriate for the business, the operator, the market, and the business development plan.
  • Cost Leadership: Here there is an emphasis on maintaining a competitive edge through a cost advantage over competitors. The advantage of cost leadership for entrepreneurs will lie in the generation of additional income that may result from cost reduction and which may be re-invested to provide new production techniques or products.
  • Differentiation: This strategy may follow from a need to diversify production or services, It is a strategy that is more likely to apply to existing and well-established producers; perhaps, products have entered a maturity stage of their life cycle and there is a need to diversify production to maintain growth in the firm. It should not be confused with the focus strategy.

8. Critical Success Factors

This is a useful section that should be included in the final business plan. It serves as a useful summary and checks factors that have been identified in other sections of the business plan and are best placed towards the end of the business plan.

Think about the following factors:

  • Does the success of the strategy adopt depend on how competitors react?
  • What factor does the success of the business hinge upon? Are the factors concerned with gaining order or are they concerned with securing quantity from a supplier?
  • How important are the key personnel to the success of the business? If a key member of staff leaves, how will this affect the performance of the business? How easily can they be replaced?
  • How important is the strategy of the business? Does the success business depend on obtaining appropriately skilled staff?

It is worth considering each section of the business plan and identifying just one or more key factors from each section that will be critical to the performance of your firm and its success. Having identified such factors you can adopt strategies that can ensure success or lead to alternative arrangements. For example, if a supplier is identified as a critical factor you may wish to investigate alternative arrangements of ensuring supply.

9. Cash Flow Statement

The cash flow statement contains the projected income from sales and other sources and all the expenses concerned with the launch and operation of the business.

The importance of the cash flow statement is that:

  • It shows the timing of income and expenses.
  • It also shows all these figures for 12 monthly periods up to three or perhaps five years, depending on the potential users of the business plan.
  • It shows the liquidity of the business at any one time and reflects the need or otherwise to raise funds and credit.

If the business plan is being prepared for a bank manager then it is unlikely that cash flow forecasts will be required beyond three years. If, on the other hand, it is being prepared for a venture capitalist then it is more likely that five-year cash flow forecasts will be required.

10. Forecasted Profit and Loss Account

It is advisable but not essential to forecast an end of year profit and loss account. This involves adding up all the trading income, subtracting cost goods sold to get the trading profit and loss. General expenses for the year can be totaled, including depreciation subtracted from the trading profit to get the net profit.

11. Forecasted Balance Sheet

Particularly, bank managers sometimes require a forecasted balance sheet, and this can be relatively easily calculated from the projections for the end of the year.

The balance sheet is a statement of assets and liabilities at any particular period. As a planning tool, it is not very useful since it only provides a snapshot at any one time, but it seems to be required by bank managers. Several financial ratios can be calculated and included in terms of profitability and liquidity. It is not necessary to go into detail on the calculation and usefulness of these, but standard business planning software will calculate these automatically.

12. Sensitivity Analysis

The purpose of the sensitivity analysis is to provide a test of the weakness of the business to changes, or a test of the robustness of the business proposition to cope with unforeseen changes. We can assume that most of the expense forecasts will be accurate. Despite careful research, income forecasts will still contain some uncertainty and the purpose of sensitivity analysis is to examine the consequences of changing some of the income forecasts on the net cash flow.

There is little point in developing any sensitivity analysis beyond the first year of operation, but it is worth formulating for optimistic and pessimistic scenarios.

The optimistic scenario might increase sales and other income by 10 percent. Expenses will need to be adjusted to allow for this, for example through increased cost of materials, and perhaps through increased salary costs. The pessimistic scenario might decrease sales and other income by 10 percent with appropriate adjustment of expenses.

Importance of Business Plan

There are a lot of benefits to be derived from a good business plan by entrepreneurs. Most small business and entrepreneurship experts strongly recommend the development of a business plan. A business plan is a document written by the prospective owner or entrepreneur that details the nature of the business, the product or service, the customers, the competition, the production and marketing methods, the management, the financing, and other significant aspects of the proposed business venture.

A well-prepared business plan can take 200 to 400 hours or even more to complete, depending on the complexity of the business contemplated, the strength of the competition, the number of different parties involved and the member of other factors that must be considered.

Several important purposes of a business plan serve. These are:

  1. A business plan provides a basis for measuring plan progress. Some experts argue that planning is particularly important for new ventures because of their inherent instability milestones for periodic reviews, during which assumptions and accomplishments can be compared. Careful monitoring increases the likelihood of identifying significant deviations from the plan and making modifications before the weak new venture is forced out of business
  2. It helps prospective owners and entrepreneurs carefully think through every aspect of their proposed endeavor. Since the plan requires writing down information about such aspects of the risk involved, financing requirements, and intended markets, prospective owners and entrepreneurs are forced to think concretely about such matters.
  3. A business plan helps prospective owners and entrepreneurs obtain financing. For example, most financing institutions require that a business plan accompany applications for the agency’s small-business loan program. Most private investors will not even consider financing a venture without seeing a well-thought-out plan.
  4. Business plans often help prospective owners and entrepreneurs establish credibility with others. Those to establish credibility with including potential employees, potential suppliers who may be more willing to extend credit and the major customers who may be inclined to place orders when convinced of the small business soundness to deliver the necessary products and services.

 

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