Let’s say you want to start this great new business. You’ve done some excruciating soul searching and you are certain that you have what it takes to make your new super-gadget business a success. At this point, you may be focused on what you believe will be the hardest sale you’ll ever make - your first sale to a real customer, but you would probably be wrong. Aside from your immediate family members (who may be wondering how the house note will be paid once you quit your "real" job), your hardest sale will be to the banker or investor you ask to bankroll your startup business.
Unless you have the money to plow into your new venture, you’ll need to sell someone on the idea that you have a winning business idea. For that matter, if you’re really serious about making money, you should be doing all the legwork necessary to convince a sophisticated investor to front the money for the new business, even if you’re the investor. So how are you going to convince the skeptics that you’re the next Bill Gates? You are going to create a winning business plan; a plan that proves you’ve looked at every angle imaginable and you know how to do what you say you will do.
That’s what we are about this month - creating a winning business plan. Lest you think this article is only for the startup venture, remember that a good business plan will guide any business, regardless of its stage of maturity. Success requires planning, so let’s talk about what your plan should have.
First, whatever you plan is, it must be in writing. Ideas that are kept in your head are just ideas. Once you invest the time to put your ideas into a formal plan, 1) you show potential lenders and investors the depth of your commitment and 2) you show yourself how committed you are.
So, what should you include in this plan? Here’s a rough outline to start from:
- Executive Summary
- Market Analysis - Definition of Need
- Description of Business
- Products and/or Services
- Marketing Plan
- Capital Needs
- Financial Information
- Supporting Documentation/Appendices
When writing the Executive Summary, remember the title of the section and summarize what the potential lender and/or investor will be reading later in the plan. The Executive Summary is like the headline on page one of your local newspaper - it’s meant to get the readers’ attention and give them a reason to keep reading the rest of the plan. For that reason, you want to give the reader your business’s mission statement - your company’s purpose for living. Follow this up with a brief history of the business, including when it began, who started it, how many employees there are, what you sell or do and where you do business. You should also briefly discuss your plans for future growth, current banking relationships and major investors. In short, you want to give any prospects you intend on contacting a concise overview of your business, regardless of how young or old it is.
Market Analysis - Definition of Need
You may have just invented the greatest mousetrap ever known to man, but if there are no more mice to catch, what you have is a worthless conversation piece. What the reader of a business plan wants to know is what burning needs in the human experience you intend on addressing with your business. This is where you will tell the reader just how bad life is for your target market without your product. You should provide adequate information to let the reader know that you have conducted enough research to 1) know that your product will address a real need, 2) know who your target market is, 3) know the size of your target market and 4) know whether the target market can afford your product.
In general, how are you going to reach your target market and what is its buying cycle. How much lead time is your target market used to dealing with and what will your target lead time be? What are the trends in the market for your super-gadget? Is there an established market or will you have to "create" one. If there is a market already, how much of the market can you hope to capture and why will the market accept your solution over another company’s solution? What regulatory environment will you operate in?
Description of Business - Organizational Structure
So now you’ve convinced J. Q. Investor that there really is a need for the super-gadget in the market place; who are you and how are you going to fill the need? This is where you begin to show your prospects just how well you have thought out your strategy. How are you going to operate? Will you form a Limited Liability Company or perhaps a Corporation? Are you now or will you operate as a sole proprietor? How are you going to structure your organization if there is more than one person (i.e. you) involved? How experienced are the key players in the company? Be sure to include profiles of all major owners and key employees. This will help your prospect evaluate the likelihood of achieving your goals. Describe the departments in the company and how they contribute to the overall capacity to achieve your company’s mission.
This section gives the details that will convince your prospect that you have the management talent and organizational structure in place to put your strategic plan into action. That action is what will pay the bank note off or give the investors the required return on their investment.
Products and/or Services
This is where you tell your prospects how your super-gadget fills that burning need you identified. Speak as if you are the customer and tell your reader why you would want this new super-gadget. How will the super-gadget make your life better? Include information on any patents, trade secrets, or other exclusive rights you may have that will help you maximize the profit potential of the super-gadget. What is the life cycle of the super-gadget? Will it stay the same as it is now, or will you continuously improve it? How long will the super-gadget last and when will your loyal customers want new and improved versions? How much of your effort will go into continuing research and development?
Don’t underestimate the importance of continued research and development in a business plan. Very few products can stand the test of time without some change, whether it be minor or major. Think about the first computer you ever worked on and the one you’re using now - are they the same? Even if you’re young, there have been major changes in computer technology in your lifetime because the industry has changed at a tremendous rate. Those who didn’t adapt are now dead.
How are you going to get people to buy the super-gadget? Do you think they will just "beat a path to your doorstep" because you have this great gadget? How will they do that if they don’t know you exist? Tell your potential investors/lenders how you will make sure people know about your super-gadgets.
The subtitle of this section could well be, "How are you and your employees going to eat until the sales start rolling in?" Assuming you have made a persuasive case that the super-gadget is needed, will be bought and can be produced, now’s the time to ask for the funds you need to make your dreams a reality. Tell potential investors and lenders how you will spend their money, including capital purchases (equipment, patents, etc.), inventory financing and working capital needs. A good rule of thumb is to determine what you really think you will need and then double it. There’s nothing worse in an investor’s mind than being asked for more money when you said you could get the job done with the initial funding. You instantly become suspect when you can’t meet your projections.
The financial information section should provide both historical and forward-looking financial information. If you’ve been in business for some period of time, you will have past information on which to draw. If you are new, you may be starting from scratch, but you should be able to find representative industry statistics to help develop your projections. Remember to be realistic in your projections. Don’t get so pumped up that you think you will take the entire market in the first year, but don’t sell your potential short either; just be realistic. Typically, you will want to project financial results out three to five years. Be sure to provide both income statement and balance sheet data. From this information, you will develop your cash flow expectations and, therefore, your financing needs. Finally, make sure you 1) adequately explain any negative historical trends and how you will overcome them and 2) are clear about the assumptions you use in developing your projections. This discussion will help the prospect evaluate your projections and plan.
While you want to be detailed enough in the preceding sections of the plan to convince your potential lender/investor to back you, you don’t want to bog them down in details. Keep details of research, market studies and any other background to a minimum in the major sections of your plan, but give the prospect access to such information in an appendix to your plan.
Regardless of how old your business is, constant planning and refocusing of your company’s efforts is a necessity for survival. There are many good resources to assist you in creating a business plan, but the best resource is experience - your experience in your industry and our experience in presenting financial and operational data in a concise manner. If you need help shaping the business plan for a new or existing business, let us help you develop a plan that will make your sales job as easy as possible.
Have a great February and please keep our troops in your thoughts and prayers.