Writing a Business Plan

Writing a Business Plan

(Ch.6 from Entrepreneurship by Bruce R. Barringer & R. Duane Ireland)

What Is a Business Plan?

· Business Plan

· A business plan is a written narrative, typically 25 to 35 pages long, that describes what a new business plans to accomplish.

· Dual-Use Document

· For most new ventures, the business plan is a dual-purpose document used both inside and outside the firm.

Who Reads the Business Plan—And What Are They Looking For?

There are two primary audiences for a firm’s business plan:

AudienceWhat they are looking for
A Firm’s EmployeesA clearly written business plan helps the employees of a firm operate in sync and move forward in a consistent and purposeful manner.
Investors and other external stakeholdersA firm’s business plan must make the case that the firm is a good use of an investor’s funds or the attention of others.

Guidelines for Writing a Business Plan

· Structure of the Business Plan

· To make the best impression a business plan should follow a conventional structure, such as the outline for the business plan shown further below.

· Software Packages:

· There are many software packages available that employ an interactive, menu-driven approach to assist in the writing of a business plan.

· Some of these programs are very helpful. However, entrepreneurs should avoid a boilerplate plan that looks as though it came from a “canned” source.

· Although some entrepreneurs want to demonstrate creativity, departing from the basic structure of the conventional business plan is usually a mistake.

· Typically, investors are busy people and want a plan where they can easily find critical information.

· Sense of Excitement:

· Along with facts and figures, a business plan needs to project a sense of anticipation and excitement about the possibilities that surround a new venture.

· Content of the Business Plan

· The business plan should give clear and concise information on all the important aspects of the proposed venture.

· It must be long enough to provide sufficient information, yet short enough to maintain reader interest.

· For most plans, 25 to 35 pages is sufficient.

· Types of Business Plans

· There are three types of business plans:

· Recognizing the Elements of the Plan May Change

· It’s important to recognize that the plan will usually change while being written, even as the business evolves.

· New insights invariably emerge when an entrepreneur or a team of entrepreneurs immerse themselves in writing the plan and start getting feedback from others.

· This process continues throughout the life of a company, which keeps entrepreneurs alert and open to new insights and ideas.

· Outline of Business Plan

· A suggested outline of a business plan is provided below.

· Most business plans do not include all the elements introduced in the sample plan; we include them here for the purpose of completeness.

· Each entrepreneur must decide which elements to include in his or her plan.

Section 1: Executive Summary

· Executive Summary

· The executive summary is a short overview of the entire business plan.

· It provides a busy reader with everything that needs to be known about the new venture’s distinctive nature.

· The cleanest format to write an executive summary is to go on a section-by-section basis (i.e., topics must be presented in the same order as they appear in the business plan).

· An executive summary shouldn’t exceed two single-spaced pages.

· Even though the executive summary appears at the beginning of the business plan, it should be written last.

· The plan itself will evolve as it’s written, so not everything is known at the outset.

· Executive Summary: Key Insights

· In many instances an investor will ask for a copy of a firm’s executive summary, and will ask for a copy of the entire plan only if the executive summary is sufficiently convincing.

· The executive summary, then, is arguably the most important section of a business plan.

Section 2: Industry Analysis

· Industry Analysis

· This section should begin by describing the industry that the business intends to enter in terms of its size, growth rate, and sales projections.

· Items to include in this section:

· Industry size, growth rate, and sales projections

· Industry structure – fragmented or concentrated

· Nature of participants – innovative or conservative

· Key success factors – may vary from one industry to another

· Industry trends – environmental and business

· Long-term prospects

· Industry Analysis: Key Insights

· Before a business selects a target market it should have a good grasp of its industry—including where its promising areas are and where its points of vulnerability are.

· The industry that a company participates in largely defines the playing field that a firm will participate in.

Section 3: Company Description

· Company Description

· This section begins with a general description of the company.

· Items to include in this section:

· Company description.

· Company history.

· Mission statement.

· Products and services – how unique it is and how it is positioned.

· Current status.

· Legal status and ownership.

· Key partnerships (if any).

· Company Description: Key Insights

· While at first glance this section may seem less important than the others, it is extremely important.

· It demonstrates to your reader that you know how to translate an idea into a business.

Section 4: Market Analysis

· Market Analysis

· The market analysis breaks the industry into segments, and zeroes in on the specific segment (or target market) to which the firm will try to appeal.

· Items to include in this section:

· Market segmentation and target market selection.

· Buyer behavior of the target group.

· Competitor analysis.

· Market Analysis: Key Insights

· Most start-ups do not service their entire industry. Instead, they focus on servicing a specific (target) market within the industry.

· It’s important to include a section in the market analysis that deals with the behavior of the consumers in the market. The more a start-up knows about the consumers in its target market, the more it can tailor its products or services appropriately.

Section 5: The Economics of the Business

· The Economics of the Business

· This section addresses the basic logic of how profits are earned in the business and how many units of a business’s profits must be sold for the business to “break even” and then start earning a profit.

· Items to include in this section:

· Revenue drivers and profit margins.

· Fixed and variable costs.

· Operating leverage[footnoteRef:1]* and its implications. [1: * Operating leverage is the ratio between fixed costs and variable costs. High proportion of fixed costs relative to variable costs means high operating leverage, and it takes longer for these firms to break even.]

· Start-up costs (including legal expenses, fees for business licences and permits, website design, business logo design, etc.)

· Break-even analysis.

· The Economics of the Business: Key Insights

· Two companies in the same industry may make profits in different ways. One may be a high-margin, low-volume business, while the other may be a low-margin, high-volume business. It’s important to check to make sure the approach you select is sound.

· Computing a break-even analysis is an extremely useful exercise for any proposed or existing business.

Section 6: Marketing Plan

· Marketing Plan

· The marketing plan focuses on how the business will market and sell its product or service.

· Items to include in this section:

· Overall marketing strategy – positioning and differentiation.

· Product, price, promotion, and distribution.

· Sales process (or cycle).

· Sales tactics.

· Marketing Plan: Key Insights

· The best way to describe a start-up’s marketing plan is to start by articulating its marketing strategy, positioning, and points of differentiation, and then talk about how these overall aspects of the plan will be supported by price, promotional mix, and distribution strategy.

· It’s also important to discuss the company sales process.

Section 7: Design and Development Plan

· Design and Development Plan

· If you’re developing a completely new product or service, you need to include a section in your business plan that focuses on the status of your development efforts. A prototype might be useful.

· Items to include in this section:

· Present stage of development and the remaining tasks.

· Challenges and risks – realistic outlook.

· Projected development costs.

· Proprietary issues (patents, trademarks, copyrights, licenses, brand names).

· Design and Development Plan: Key Insights

· Many seemingly promising start-ups never get off the ground because their product development efforts stall or the actual development of the product or service turns out to be more difficult than thought.

· As a result, this is a very important section for businesses developing a completely new product or service.

Section 8: Operations Plan

· Operations Plan

· Outlines how your business will be run and how your product or service will be produced.

· A useful way to illustrate how your business will be run is to describe it in terms of “back stage” (unseen to the customer) and “front stage” (seen by the customer) activities.

· Items to include in this section:

· General approach to operations (e.g., what is most important, what are the make or break issues, etc.)

· Business location (e.g., is it close to major distribution hubs in your line of business?)

· Facilities and equipment – purchased or leased.

· Operations Plan: Key Insights

· You have to strike a careful balance between adequately describing this topic and providing too much detail.

· As a result, it is best to keep this section short and crisp.

Section 9: Management Team and Company Structure

· Management Team and Company Structure

· The management team of a new venture typically consists of the founder or founders and a handful of key management personnel.

· Items to include in this section:

· Management team – brief profile of each member (e.g., title of the position; duties and responsibilities of the position; previous industry and related experience; previous successes; educational background).

· Board of directors – to oversee the management.

· Board of advisors – to counsel and advise on a regular basis.

· Company structure – organizational chart.

· Management Team and Company Structure: Key Insights

· This is a critical section of a business plan.

· Many investors and others who read the business plan look first at the executive summary and then go directly to the management team section to assess the strength of the people starting the firm.

Section 10: Overall Schedule

· Overall Schedule

· A schedule should be prepared that shows the major events required to launch the business.

· The schedule should be in the format of milestones critical to the business’s success.

· Examples of milestones:

· Incorporating the venture.

· Completion of prototypes.

· Rental of facilities.

· Obtaining critical financing.

· Starting production.

· Obtaining the first sale.

· Overall Schedule: Key Insight

· An effectively prepared and presented schedule can be extremely helpful in convincing potential investors that the management team is aware of what needs to take place to launch the venture and has a plan in place to get there.

Section 11: Financial Projections

· Financial Projections

· The final section of a business plan presents a firm’s pro forma (or projected) financial projections.

· Items to include in this section:

· Sources and uses of funds statement: document that lays out specifically how much money a firm needs (if the intention of the business plan is to raise money), where the money will come from, and how the money will be used.

· Assumptions sheet: explanation of the most critical assumptions on which the financial statements are based. Some may be based on general information; but if some of your assumptions are based on specific information or data, then you should cite sources.

· Pro forma income statements.

Pro forma financial statements are the heart of the financial section of a business plan. Usually prepared in the given order, for it makes logical sense. Tedious looking, but fairly straightforward process if the previous sections of the plan are right. Recommended that you prepare projections for the upcoming 3-5 years. If the business already exists, you should include past 3-years’ statements for comparison purposes. ROI, ROa, ROSales.

· Pro forma balance sheets.

· Pro forma cash flows.

· Ratio analysis.

· Financial Projections: Key Insights

· Having completed the earlier sections of the plan, it’s easy to see why the financial projections come last.

· They take the plans you’ve developed and express them in financial terms.

Checklist for a Good Business Plan

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