How to Develop and Use a Business Plan

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Digital Library > Building and Inspiring an Organization > Business plans"How to Develop and Use a Business Plan"

A well-prepared business plan is more than a necessary tool to seek funding. It should also be a functional road map for your growth strategyI

WHAT TO EXPECT

For any business to be successful, it must be started and operated with a clear understanding of its customers, its internal strengths, its competitive environment, and a vision of how it will evolve to compete in the future. A business also needs money to start, to operate, and to grow. By expending the effort to develop a comprehensive business plan, you will have a powerful tool for attracting investors. Your business plan is the roadmap for your company. It clearly states where you are, how you got there, and how you plan to proceed.

This Business Builder steps you through the process of developing a comprehensive business plan. Although businesses may vary with regard to the products or services they offer, there are specific elements that a potential investor will look for in any business plan. Therefore, every well thought-out business plan includes a description of products and services, a competitive analysis, a marketing plan, a management plan, and a financial plan. Your business plan will provide you — and potential investors or lenders — with a clear understanding of your objectives, strategies, and financial viability.

WHAT YOU SHOULD KNOW BEFORE GETTING STARTED [top]

Why Write a Business Plan?

Business plans are prepared as a necessary instrument for raising capital from potential investors, bankers and other lenders. It is an essential document when taking your business public or selling all or part of a company. In fact, without one, soliciting a bank for funds is pointless. To lenders or potential investors, it not only provides information and reveals an evaluation of your venture's feasibility, but also reflects your management abilities. An analytical, objective business plan convinces lenders that you are capable, organized and prepared. One that is poorly researched, or makes unsupported assumptions shows that you are inexperienced and in their eyes…reckless. Lenders receive an enormous number of proposals and usually don't spend much time with them. That means your plan has only a few minutes to make a good impression, and must stand alone as an initial sales tool. Do the best job you can, and let it favorably represent you as the capable, competent business owner that you are.

Preparing a business plan will take time, but it is well worth your investment in the long run. Not only will this document provide valuable information to outside investors and lenders, it will lay out the game plan from which to operate your firm. This is, by far, the most important use for your business plan. It will become your blueprint and direct you towards achieving your overall business goals. A typical entrepreneur has a good business idea but is rarely qualified in all areas of running a business. Good business plans are comprehensive, well thought-out documents that provide the basis for entrepreneurs to make sound business decisions. Whatever the intended use of your business plan, make sure it's thorough, accurate, and backs up all your claims with facts.

Tips For Creating a Good Business Plan

The following are some pointers to consider before creating your business plan:

  • Very few people would argue that planning is unnecessary. However, it involves a great deal of work. Be prepared to spend weeks — or months — completing your plan.

  • While this undertaking may appear overwhelming at first, don't get discouraged. Break the project into manageable chunks. One effective approach is to put each of the following steps behind a separate tab in a three-ring binder. Fill in your plan, making steady progress toward your goal.

  • Although you may have volumes of supporting material, aim for a plan that is brief and succinct but includes everything important to the business. A proposal of 10-15 typed pages, double-spaced is often ideal. Leave secondary issues and details for discussion for a later meeting.

  • Focus on your intended reader. Use the plan to organize your effort around your objectives is to ensure that you have all the bases covered. Investors or lenders are interested in determining whether you will be able to achieve your objectives.

  • Avoid highly technical descriptions of your products, processes, and operations. Use layman's terms.

  • A business plan is a "living" document. Update it as your knowledge grows and whenever your strategies become more concrete.

  • Be realistic — base your projections on the results gathered from your analysis. Be honest about positive and negative findings.

  • Discuss your company's business risks. Your credibility can be seriously undermined if existing risks and problems are uncovered by lenders or investors on their own.

  • Don't make vague or unsubstantiated statements. For example, do not just say that sales will double in the next two years or that you are adding new product lines. Back up your statements with underlying data and market information.

  • You may have two sets of business plans — one internal, one external. To be an effective management tool internal business plans usually are more detailed than those presented externally.

Who Should Write Your Business Plan?

The only right answer is — YOU! You may be persuaded by professional advisors that you need their services or maybe the software they peddle to produce an effective business plan. However, the truth is you will be doing most of the work with or without their help. A business plan is 75% research and 25% format. They can help you with your format, putting your information into a readable plan, but you will have to provide the research that makes up the bulk of the plan. The same is true with this Business Builder — it'll show you what needs to go into a comprehensive business plan and how the plan should be organized for maximum readability, but you will need to do the majority of the work. It's a lot of work to be sure, but is an important investment towards your business success.

What Lenders Look For

Following are some key questions that investors and lenders will be looking to answer. Keep them in mind when writing your business plan.

  • Is there sufficient demand for your product or service? You'll need to provide evidence that there is a customer base for the product or service you want to offer. If the product exists today, provide market potential data, market share breakdown, sales history and sales projections for the product/service. If this is a new concept, you'll want to conduct some market research and present results of surveys, focus groups, or test markets.

  • Do you have a sustainable competitive advantage? Your product or the process for manufacturing your product may be unique enough to apply for and be awarded a patent that provides you with protection from "copy cats" for a maximum of seventeen years. Maybe your location is protected from allowing additional competition. Or perhaps you provide your service in such a way that makes you the cost leader.

  • Are you being realistic? Although investors and lenders love to back businesses with high growth potential, they are also skeptical when the projections seem too good to be true. This is a flag to them that you may be overly optimistic, naive, or worse, deceitful. Make sure you can back up your projections with reliable data.

Following, you will find a thorough discussion on what can be included in a business plan, but understand ALL OF THIS INFORMATION DOES NOT NEED TO BE IN YOUR PLAN. What goes into your plan depends upon your specific business and the information required by your lenders and investors. If you can, you may want to check with your lender or potential investors beforehand to determine their specific requirements.

PROCESS FOR DEVELOPING YOUR BUSINESS PLAN [top]

This section presents the steps for developing your business plan. This is the basic information that you will be required to provide to lenders and investors and is the minimum you'll need to operate your business effectively. Read each step, and complete the tasks outlined in each. Then, depending upon the nature of your business, you may want to add further information that may prove valuable to potential investors and lenders. Where possible, examples will be included to provide you with further clarification on what you should supply. Following is a ten step process you can use to develop your business plan.

  • Begin the Plan with a Summary

  • Describe Your Company — Its Business, Goals and Objectives

  • Analyze Your Market and Determine Your Marketing Strategy

  • Describe Your Product/Service and How They are Produced

  • Describe Your Management Organization

  • Describe Your Operations

  • Summarize Your Financial Needs

  • Determine Your Proposed Financing

  • Outline Your Plan(s) for the Future

  • Other Considerations

These steps are presented in a logical order for discussion. Use your judgment on how you work through the process. You may be able to perform many of the steps simultaneously. Use the checklists provided in each step to ensure that your information is complete.

Begin The Plan With a Summary

Most investors and lenders are inundated with potential opportunities, so provide a focused and brief summary — about one or two pages in length. Your summary will give them a first impression of whether your business is worth further scrutiny. A business plan is unique to your company and, accordingly, the approach used and structure of plans vary considerably. Regardless of form, however, certain basic questions should be addressed considering your plan. They are:

  • Cover Sheet: Include the company name, owner's name(s), business address, and phone number.

  • Business Description: Briefly describe the business that you are in. For instance, is your business in high tech computer imaging, or are you a developer of shopping malls? If you have an existing company, describe your company's history, highlighting your successes/achievements that might be pertinent. Also, include your major short-term and long-term goals and objectives with the strategy and tactics that will enable you to achieve them.

  • Describe the purpose of your business plan. Are you seeking financing from lenders and investors or are you using it to attract potential managers for your business?

  • Describe your product/service sufficiently so that someone reasonably familiar with the technology or the industry can determine whether it is viable and what stage of development it's in — concept, prototype, or market-ready. Discuss the extent of invention or development required for successful commercialization of the product/service. Highlight the track record of key personnel who have completed similar developments. Explain why your product/service is better than what exists. Don't forget to include proprietary or any other sustainable competitive advantage that you may have. For instance, do you own any patents? Does your location restrict entry of additional competitors?

  • Describe the five or six critical factors that will make a difference in your success. Also, discuss your most vulnerable spot, what would happen if it were exposed, and what you will do to guard against it. For example, if you are a high tech firm in the computer imaging business, potential factors might be key R&D personnel, a highly trained workforce, state-of-the art imaging equipment, and a strategic alliance with a reputable technical school.

  • Customers: List your present major customers and describe your market potential. You'll want to highlight the results of your market analysis here.

  • Financial Picture: Describe your financial forecasts and explain how they were determined. Include relevant assumptions such as projected market share, market potential, market penetration, etc. State your desired financing and show how the funds will be allocated. Show when and how the money will be paid back.

Describe Your Company — Its Business, Goals And Objectives

It is critical that you present a thorough picture of your company — a description of your business with your key goals and objectives.

  • Describe your business. Include an explanation of the business that you are in. While this may sound obvious, it really isn't. For instance, if you manufacture catalytic converters, are you in the pollution control business or the auto supply business? Different answers to that question can mean different businesses altogether. When you decide on the type of business that you're in, you'll know the types of product and services you need to provide, the market that you should target, the competitors that you are up against.

    Also include your company history, current business conditions, industry trends, and what makes you unique. To help you with your business description, ask yourself the following questions:

    • When and why was your company formed?

    • What is the nature of the product/service that you provide?

    • What successes have you experienced over the years?

    • What is your competitive advantage?

      An example of a business description is:
      Pets with Pizzazz, Inc. was established in 1989 to supply specialty collars for the pet supply industry. The premium pet supply market experienced strong growth over the past five years due, in part, to the trend that couples are delaying starting families and are opting for pets instead. Many of these are dual income couples and are choosing to spend significant amounts on their pets. Their pets are their children. Pets with Pizzazz has experienced an average annual growth rate of 30% over the past five years, maintaining its competitive edge through customer service excellence, an innovative supply system, and a patented fastener for its premium collars. The company is currently located in a 10,000 square foot building which houses its collar assembly operation.

    • Describe your goals and objectives for the short and long term.

    • What are your major goals and objectives?

    • Where do you see your firm at the end of this year, in three years, in five years?

    • What is your vision for the future of your company?

      For example:
      Pets with Pizzazz will be THE premium pet supply company. In the next 1-2 years, we plan to double market share from 16% to 32% for our premium collars. By the year 2000 we plan to offer a broader product line for the premium market including specialty dishes, bowls, beds, and houses. We plan to do that by…

Analyze Your Market And Determine Your Marketing Strategy

It is critical that you understand your market. A good product is not enough to guarantee marketing success. For example, you may make the best buggy whips in the world, but this doesn't matter if there aren't customers to buy your product. This is one of the most important sections of your business plan. It will be scrutinized carefully, therefore, your market analysis should be as specific as possible, focusing on believable, reliable, achievable projections. You may want to refer to the following training Business Builders to help you with this step:

How to Prepare a Market Analysis

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