A business
plan serves two purposes:
·
It
provides a road map for your business.
·
t
helps you obtain outside financing.
If you're
going into business for yourself, you must have a business plan - period.
Numerous studies have shown that one of the major reasons new businesses fail
is poor planning. (Many people want to start a business, but not everyone has
what it takes to succeed.
The good
news is that developing a business plan is not as hard as it seems. In order to
develop a solid business plan, you need to have a thorough understanding of the
business you're entering. Next, you need to determine how you'll use the plan
and who your target audience is. Finally, you should create a complete a
business plan that is comprehensive and concisely written. We'll explore each
of these steps in detail.
Step 1: Know Your Business
In order to
prepare a business plan, you must know the business you are entering inside and
out. This means lots of research. Research comes in two forms: reading
everything you can about the industry and talking to those who are already in
it. Learn everything you can about your business and industry.
Step 2: Determine Your Purposes for
the Plan
A business
plan serves to crystallize your business vision and guide you in fulfilling
that vision; it is also frequently used to entice potential investors.
If you are
self-financing your business, you design the plan mostly for your benefit, but
if you're seeking outside investors, you'll need to target them. As such,
before you create your plan, determine whether you will solicit outside
investors.
Step 3: Determine Your Audience
If you plan
to recruit investors, you need to build a plan to suit them. Outside investors,
who range from friends and family members to banks and venture capitalists,
will invest through either loaning you the money, buying shares in your company
or some combination of the two. Determine their level of sophistication and what
they are looking for in a potential business investment. Remember that
regardless of their level of sophistication, they are all looking for four
things:
1. Trust in
you - You build trust by demonstrating ethics and integrity, so your business
plan should demonstrate those qualities
2. Understanding
of the business - It is your job to clearly articulate your mission statement,
your product offerings and how you will make money. Your may have to tailor
your plan to suit your audience: less-sophisticated investors may be scared off
by industry jargon, while investment professionals will probably expect it
3. Financial
confidence - Clearly articulate the risks of investing in your business. Also,
show investors how they can recoup their money - whether your venture succeeds
or fails
4. A good
return on investment - Over the period of 1928-2007, the geometric
(exponential) return for stocks was 9.8%, while for 10-year Treasury bonds, it
was 5%. Historical private-equity returns are more difficult to measure, but,
in general, investors will expect a premium of anywhere from 2-5% over
public-equity market returns. The return on equity for your new business must
be in the private-equity range
Typically,
investors will look to beat a certain internal rate of return. Your job is to
make sure your projected returns are in line with those of similar industries.
Step 4: Create Your Business Plan
First,
develop an outline of your business plan. Consider every aspect of your
business and how it will affect your business plan. Remember, this business
plan is a road map. It must guide you. It must also communicate to investors
what you're doing and why they should invest with you.
The order in
which your plan is presented should be something like the following:
- · Mission Statement
- · Executive Summary
- Product or Service Offerings
- · Target Market
- · Marketing Plan
- · Industry and Competitive Analysis
- · Pro-Forma Financials
- · Resumes of the Company Principals
- · Your Offering (what type of financing you're seeking)
- · Appendix (any other pertinent information)
- You'll probably also want to note any personal seed capital you're investing in the venture. Financiers want (and often require) entrepreneurs to put their own funds in the venture, and the greater the portion you invest relative to your net worth, the better.
Now let's
review each section of the business plan in detail.
1. Mission Statement
The mission
statement is a concise, one- to three-paragraph description of your business
objectives, or your business's guiding principles. In this section, you should
state your unique selling point, or what separates your company from all the
others in the industry that are otherwise just like it.
2. Executive Summary
This is a
one- to two-page summary of your business. Potential investors will read this
to decide whether they want to look at the rest of your plan.
3. Product or Service Offering
Create a
section describing your product or service offerings in detail, as well as how
much you'll charge for what you're selling.
4. Target Market
Present your
primary and secondary target markets, along with any research that demonstrates
how your target market will benefit from and consequently purchase what you're
offering.
5. Marketing Plan
Present your
marketing plan, which should show in detail how you'll reach your target
market. This part of the plan will include advertising and promotional
strategies.
6. Industry and Competitive Analysis
Include a
complete and thorough industry and competitive analysis that includes all
stakeholders in your business. Don't forget to include governmental and
regulatory agencies.
7. Financial Statements
These must
be complete, accurate and thorough. Each number on your spread sheets must mean
something. Don't estimate payroll, for instance; determine what it will
actually be. Your income statement must reconcile to your cash flow statement,
which reconciles to your balance sheet. Your balance sheet must balance at the
end of every period. You must have supporting schedules (e.g., depreciation and
amortization schedules) to back up your projections.
If you are
having trouble building your pro-forma financial models, which should project
out for at least five years, seek outside help from a qualified professional.
Use
realistic projections. In estimating the growth of your business, you will make
certain assumptions, which should be based on thorough industry research
combined with a strategy for how you'll compete. Also, analyse how quickly
you'll achieve positive cash flow. Investors vary in their standards, but most
like to see positive cash flow within the first year of operation, particularly
if this if your first venture.
In order for
your projections to be accurate, you must know your business. If you've built
an accurate and realistic model, but still project negative cash flow for more
than 12 months, rethink your business model.
8. Resumes of Company Principals
Include the
bios and professional backgrounds of all significant employees of your
business. You will want to emphasize how their backgrounds have prepared them
to take on the challenge of running your new start-up. Also, if an employee's
business background is in a significantly different industry, you might want to
emphasize how this can be an advantage instead of a detriment.
9. Your Offering
Present what
level of investment you're seeking and for what purposes you will use the
funds. If you're selling business units, state the individual price per unit.
Once you've
put together all of this key information, make sure to present your plan
professionally. It should be typed, margin aligned and neatly bound. Use colour
graphics and pictures where possible. Do not hand write changes or corrections.
The inside of your business plan should be near book or magazine quality.
After you've
finished your plan, have a professional you trust, such as a Certified Public
Accountant (CPA) or attorney, look it over. This person may catch details,
errors or omissions you've made. They also will be able to give you a more
objective opinion of the viability of your business.
Building Your Business Plan Is Just
the First Step
Once you've
completed your plan, you'll submit it to potential investors, who may
ultimately commit to financing. Once you receive those commitments, you'll
negotiate terms and then, finally, open your doors for business, which is where
theory ends and the real work begins.
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