Last month, we talked about financing your business. Whether you are starting a new venture or expanding current operations, one thing you can be certain of is that you will need cash. The question is: Where you will get that cash? And more importantly, will the money be well spent? While nothing in life is certain, developing an effective business plan can make the uncertain a little more controllable.
A business plan is a roadmap, a step-by-step plan to success. Whether you realize it or not, as an entrepreneur you already have a business plan. Maybe it's on the back of a napkin or traveling the highways of your brain cells, but it is a plan nonetheless. In a perfect world, it is well thought out, well documented and well written. It is also professionally bound and ready for presentation to potential sources of capital, though that is not always the case. This article will show you why you need a written business plan and how one is structured.
Why do you need a written plan? You know what you want to do with your business, so why spend time in front of a computer working on a plan when you could be selling or consulting (or whatever it is your business does)? Can you tell anyone exactly what your business does? What is your mission? How you will achieve that mission? Without a written plan, do you think you will have credibility with lenders, investors and potential high-level employees? Ask a bank for a loan without a business plan and see how far you get. However, this is only a secondary reason to prepare a written business plan - the primary reason is to give your venture every possible chance for success. A great many ideas have withered on the vine once their sponsors found them too expensive to pursue.
The oil field is a perfect example. Before a company drills a well, it puts pen to paper and evaluates the following: 1) its chance of hitting oil or natural gas; 2) how much it will cost to drill and complete the well; 3) how much it will cost to operate the well; 4) and the amount of production it can expect plus its revenue from sales. If the numbers do not provide a sufficient return for the risk taken, the well is not drilled. In essence, oil and gas producers prepare a business plan for each well. If the numbers look good and they have the capital, they drill. If not, they wait.
The same scenario should occur with your business. Once you have assessed the market for your product and how you will tap into it, you need to look at the numbers. If your plan doesnÂÂ’t support a likelihood of acceptable profit, you might need to abandon it or wait awhile. Sometimes, it takes writing it down to guide you when your heart tells you something else. At other times, writing it down will confirm your goals and desires and help you sell your plan to investors or lenders. Either way, the written plan will help you make the decision to either stop or move forward and then help you stay focused on your plan.
Main Ingredients For a Business Plan
Start with a cover page. Include the company name, logo (if you have one), the name of the contact person (usually you) and contact information. You should also include a confidentiality and nondisclosure notice to minimize the chance of someone stealing your ideas or tipping off potential competitors.
The table of contents is next in line. Have you ever looked at the contents page in a catalog to find what you want quickly? Just like you, investors and lenders want to get to the meat of a proposal. While everything included in a business plan is important, some readers are more interested in the numbers and some in strategies. An effective table of contents will provide each reader with a direct path to the information they most want to see.
The executive summary is perhaps the most important page in the plan. In just a few words, your job is to capture the imagination of your target. You need to give the reader a compelling reason to go further and instill a belief that your plan will work. Lose them here and the rest of the plan will just be wasted paper.
Once you have given the reader a broad overview of your proposal, it's time to get into the specifics, starting with a description and history of your company. Is it an established enterprise or a start-up entity? Where did the concept originate? What about the current or proposed facilities? Where will the company operate? This is the section of the plan where you have a chance to familiarize the reader with your business operations and history.
The next logical progression in developing a compelling plan is introducing your products or services. Be certain that you fully explain the concept of your product (if it is new) and why the target customer will utilize it. If the product is established, what makes you think your offering is superior to your competitors? This goes hand-in-hand with the market analysis, one of the most crucial sections. You must prove to yourself and your reader that there is a market for your product or service. Who do you intend to sell to? Do the demographics in your area match your target market? Finally, what is your strategy to reach that target market? Will you use mass advertising or word of mouth? Will you sell through distributors or other parties?
Introducing the management team is also critical. It is the experience and judgment of your team that will determine the success of the company. DonÂÂ’t skimp in fully developing their qualifications.
Once you have established your credibility and demonstrated the need for and viability of your product, you are ready for the numbers. Every business plan needs an analysis of the sales and expenses of the venture. A month-by-month detailed income statement and cash flow analysis is critical in selling your proposal. You should give monthly amounts for the first year of operation, followed by yearly projections for up to three years. Much beyond that and the numbers start to lose credibility.
In presenting your financial analysis, make sure you explain your assumptions. If you have done a good job in the preceding sections, your task here is simply reiterating what has already been said.
Finish your plan with any appendices that further develop a case for your business. Data sources and other supporting material can be included. This will give the reader a better understanding of how you developed your plan without cluttering up the proposal with details.
Business plans are powerful tools both in guiding your business and obtaining capital. If you are starting a new business or expanding your current lines, give us a call. Our experience will help you develop a comprehensive plan to obtain financing, manage your project and reach your dream.
Have a great August.