You
have a killer concept for a new
business. It may be an online
business, or a more traditional offline business. In either case, it is
imperative that you lay the groundwork for this new venture with a
properly constructed business plan.
Yes, it takes a bit of work to pull together the information your plan
will require.
But there are a number of reasons why the success of your business
depends on this plan. For example, if you are seeking any type of
financing for your business, you can be sure that your financial
sources will require this plan before they will consider funding your
venture.
But what if you don't need outside financing?
You still need a business plan! Here is the secret -- while the
finished plan will be shown to outside sources such as potential
partners, lenders and perhaps government officials … the
true value of the plan lies in the process of writing it. Why? Because
it forces you, the business owner, to thoroughly evaluate this business
before you begin.
After completing the plan, you may conclude that this business does not
hold the profit potential that you had envisioned. Or you may realize
that your business
will require twice the capital investment that you had expected. Or,
your research may uncover new markets that you hadn't previously
considered and the business may reveal itself to be more profitable
than you had ever dreamed.
In any event, the process of writing a business plan presents a
tremendous opportunity. You are encouraged to take the opportunity
seriously and to complete the sections of this guide with true
deliberation.
The length of time required to write the plan will vary a bit depending
on the nature of your new business and how much research you have
already completed. So, let's get going … and Good Luck!
P.S. If you are interested in automating the business plan process, you
may want to check out a software program called Business Plan Pro. It
has some neat short
cuts and might be helpful if you are short on time.
Chapter One: The Product
The very concept of your business revolves around the product (or
service) that you are offering to the customer. It's important to know
exactly what it is that
sets your product or service apart from an undoubtedly crowded
marketplace.
So as the first step to your business plan, you must identify the USP,
or Unique Selling Proposition, that your product offers its buyers.
Your business plan should explain this with as much detail as you can
provide. It
is also worth mentioning in your plan how much development has already
gone into the product in terms of time and financial resources, and a
description of any product development that remains to be done.
Remember, most business plans are submitted to a third party who will
read it at his or her leisure. You will likely not be there to present
the plan in person. So it's
important to assume that the reader knows nothing about your business
concept or the product you are planning to offer. Be detailed. Be
specific. Be honest. That last point pertains to you personally
… are you being honest about the commercial potential of
this product? Does it offer something that no other competing product
offers? Do customers value that difference, or is it just a nice
twist on the competition but not something that customers would be
willing to pay for? Be brutally honest with yourself. Better now than
later.
The following questions should be answered in detail in your business
plan:
1. What is the primary customer benefit or value that your
product/service provides?
2. What is the exact nature of your product?
3. How far along is the product in terms of technical development?
4. How does you product compare to existing products or other products
that are under development?
5. Does your product or service require special legal permits or
licenses? Have these been applied for and obtained?
6. Does you product qualify for a patent? Has one been
applied for and obtained?
7. Are partnerships necessary to provide greater customer value? Have
these partners been approached and their cooperation pledged?
8. What types of market research have you performed? What were the
results of any surveys, interviews or focus groups?
9. How large have you determined the size of your market to be? How
have you come to this conclusion?
Remember, every successful business must offer a distinctive product,
process or service. Taking the time to outline your distinct product
advantage will set the
stage for all of your future marketing efforts, operational processes
and employee training.
ChapterTwo: The People
If you are seeking outside funding for your business, your lenders will
jump straight to this section of your business plan. You cannot
underestimate the importance of the management team, although many new
entrepreneurs do just that. They throw together a few paragraphs about
their personal background and that of any partners, without taking the
time to demonstrate their business
acumen to their potential lenders.
This section is another opportunity to be brutally honest with yourself
and your abilities. Do you have the skills, education, experience, and
market knowledge to
successfully run this business? If you do, then by all means don't be
shy … take time to show your readers exactly how your past
experience relates to this
business venture. But this is not the time to exaggerate or inflate
your business experience. If you find that you cannot offer significant
evidence of your ability,
or if there is a particular business process that you are not
comfortable managing, you should take time to address the weakness
before starting your business.
You may be able to take a short concentrated class in finance or
marketing to shore up a particular weakness. You could also bring in a
partner or subcontractor to perform certain management responsibilities
that you have not yet mastered. There are a number of ways to address
any management insufficiencies, but you are far better off asking
yourself these tough questions before your lender brings up the subject.
Your business plan should address the following key questions:
1. Who is responsible for each process your business requires? Describe
the skills and experience of each individual and how those skills
relate to the
business function they will oversee.
2. Does your management team consist of at least 3 people? This helps
leverage complementary strengths and experience. Business leaders like
to refer to the analogy of the 3-stranded rope, which is exponentially
stronger than a rope with a single strand, or even a double strand.
3. Is your management team limited to no more than 6 people? At some
point, your management team can grow too large to function as a whole.
It is generally advised that an executive team consist of 3-5 people.
4. Is each member of the management team equally committed to the
success of the business?
5. Has the team worked together before?
6. Is there an outside advisory team available for ad-hoc questions and
advice?
7. Do all team members share a common vision for the success of the
business?
8. Have target goals been established and shared among the team?
Chapter Three: The Market
A thorough understanding of your customers and their needs is essential
to the success of your new business. At the end of each business day,
it is your customers who give your company a reason for being. And it
is they who will
decide if, and how successful, your company will ultimately become.
Market size and growth. Any significant increase in the value of your
company can be expected only if the market holds great potential. The
market size should
be presented in terms of the total number of potential customers, of
unit sales,and of total margin in sales.
Your expectations for market growth are critical, particularly if you
are seeking venture capital partners who will profit from growth. You
should indicate which
factors are now affecting or may later influence the given industry
segment.
Show what factors will affect developments (technology, legislative
initiatives, etc.) and what relevance these factors have for your
business.
The external data necessary for a competitive market analysis are often
easier to obtain than you might have previously thought. It's not
difficult to find this
information once you start thinking strategically.
Be creative and determined; make use of all possible sources including
trade literature (journals, market studies, scholarly essays), industry
directories,
industry associations and government agencies (statistics offices,
chambers of commerce, patent offices), banks for industry surveys,
databases, the Internet
(keep your searches focused), and, of course, interviews.
It often helps to conduct your own proprietary research by calling and
talking with potential customers. You should use a short list of
discussion questions to
keep your conversation focused and to increase your efficiency and
productivity.
Being well-organized will also increase the willingness of your
customer to disclose information. This collection of individual pieces
of data seldom provides a direct answer to your questions—you
will have to draw a few intuitive conclusions or make reasonable
estimates. When making an estimate, think logically and present your
estimate without leaps of logic or unsupported assumptions.
The information you glean in your research will allow you to further
segment your market. Segmenting a market simply means to define
different groups of potential buyers in different ways. Not all markets
can be segmented, or defined,in the same manner. You will have to
decide which market segments apply to your general target market, but
you find it makes sense to segment your customers on the basis of:
• Location: country, zip code, urban/rural, distance from
your retail location
• Demographics: age, gender, income, profession, company size
• Lifestyle: techies, moms, mainstream teens, counterculture
teens, active seniors
• Behavior: frequency of product use, product application
• Buying habits: brand preferences, price consciousness
Possible customer segmentation criteria for industrial goods markets:
• Demographics: company size, industry, location
• Operations: technology employed (e.g., digital, analog)
• Buying habits: centralized or decentralized purchasing,
purchasing criteria, supplier agreements
• Situational factors: urgency of need, order size, etc.
Once you have identified your market segments, you can predict sale
volume and profit potential for each segment.
Chapter Four: The Competition
Competition. Your first job is to evaluate the strengths and weaknesses
of your major competitors. To do this, compare each competitor in terms
of sales volume
and revenues (pricing), growth, market share, cost positioning, product
lines, customer support, target groups, and distribution channels. You
should not bore
your audience with detailed numbers, but rather present an overall
sense of the competition.
Evaluate your own company using these same criteria, and make a
estimate as to how large and how sustainable you feel your competitive
advantage will be.
Position your company against the competition. This step presents the
heart and soul of your business plan. Why should a potential customer
buy your product or service instead of that of your competitor? Does it
offers greater value than competing products; is your product
objectively or emotionally "better," have you developed a unique
selling proposition for your business idea?
Formulating this competitive position and planting it firmly in the
mind of your customer will be your primary focus for your marketing
plan. A well-positioned
product leaves consumers with a particular impression whenever they
think of it. The most important guideline for positioning is to look at
the product from the
customer's point of view. Your positioning must be distinctive from
that of competitors. Only then can customers connect the value
proposition that you
offer with the name of your product or business, - and then buy your
product.
Because positioning is so critical to the market success, you should
pay particular attention to it. Effective positioning is not a one-time
exercise -- it will need
frequent revision to achieve the maximum effect.
STOP
You have now reached a critical point in your business plan. You should
not move on to the next chapter unless you can write a single sentence
that describes
your product positioning as it relates to the market and its
competition.
This positioning statement should be prominently included in your
business plan as the conclusion to this section on competitive analysis.
Chapter Five: The Marketing Plan
Perhaps you have heard of the 4P's of Marketing. They are taught in
every introductory college marketing course and form the foundation of
any welldesigned
marketing plan. The 4P's include Product, Price, Place (or distribution
channel) and Promotion. You business plan should address each of these
marketing factors as follows.
1. Product
You have already given considerable thought to your product or service
and how it will be positioned within the marketplace. You should now
determine
whether your product actually meets the desired customer needs or to
what extent your product should be modified in order to fill its
intended market niche. You also need to decide whether you should
manufacture one single product for all targeted market segments or
whether you want to provide variations of the product to meet the needs
of individual market segments.
2. Price
Your product should be priced as high as the market will bear. Contrary
to popular thinking, price is never to be derived from costs. Of
course, cost is an important factor, but the cost-price ratio only
becomes critical when the price asked will not cover costs within the
foreseeable future. In this case it is advisable
to get out of the business as quickly as possible or better yet, never
to go into the business in the first place. The price you can ask
depends entirely on how much the value of your product is worth to the
customer. You have defined, and perhaps quantified, the customer value
in the business concept or product description. Now define a price
bracket based on the quantified customer value of your product.
Perhaps you even asked pricing questions when you were conducting your
preliminary market survey. The pricing strategy you now choose will
depend on your goals:
Do you want to penetrate the market quickly by going with a low price
(penetration strategy)? Or do you want to generate the highest possible
return from the outset (skimming strategy)?
New companies can justify the skimmig strategy if their product is
positioned as offering greater value than previous options, so a higher
price can be justified.
Higher prices usually create higher profit margins, and allow the new
company to finance its own growth. But skimming can be a short term
strategy once
competitors enter the market place and the product positioning is
eroded.
As opposed to the skimming strategy, the penetration strategy generally
requires high initial working capital in order for supply to meet the
high demand created
by the ultra-low price. This higher investment risk can make investors
uncomfortable.
There are a few certain situations that make a penetration strategy the
better choice. For example, if the barriers to entry are low and tough
competition is likely, a penetration strategy is the best way to be
faster than the competition in capturing a large market share. But it's
also questionable as to whether a start-up business should be taking
such a risk with capital.
3. Place
Your distribution channel will determine who interacts with your
customers and how your customers physically access your product. These
functions used to be
the sole responsibility of the manufacturer, but this is no longer the
case. These days, a manufacturer has a multitude of choices when it
comes to distribution
options.
The choice of distribution channel is influenced by various factors,
such as: how many potential customers do you expect to have? Are they
companies or
individuals? Do they prefer to shop in retail stores, by catalog or
online? Does the product require explanation? Is it in an upper or
lower price bracket? At this
point, you need to decide whether your company will control
distribution of the product in-house, or whether you will outsource
from another company to
handle it for you.
This sort of "make-or-buy" decision will have a significant impact on
both the Organizational chart and the business systems of your new
business. Like all
business decisions, the choice of distribution channel is inter-related
to other marketing decisions and will, in turn, affect other processes.
Distribution can be roughly categorized into two forms:
direct or multi-channel.
Here is an overview of potential distribution channels:
• Third-party retailers. Products are sold via retailers who
have ready access to potential customers. It can be difficult to
achieve entrance to some of the better
retailers, as shelf space is limited and the number of competing
products may be high. A new business, such as yours, may be better off
using an alternative
method of distribution until brand awareness has been established and
retailers are confident in your product's market appeal.
• Outside agents. Specialized companies act as agents for the
distribution of products from various manufacturers. They take over the
function of the inhouse sales person. Outside agents are relatively
expensive, although since they are paid on commission, you don't incur
an expense unless a sale is made.
This makes them an attractive channel for new companies since risk is
limited. Good sales agents, however, are not always easy to find or to
keep.
• Franchising. A business concept is created by a franchisor
who collects a franchise fee by licensing the business concept to other
users. The franchisor
maintains control off the business processes, while enabling the
company to grow rapidly via franchisees who can enter the business
without a huge personal
investment.
• Wholesalers. It can be difficult for a small (and new)
company to make and maintain contacts with a large number of retailers.
It can be advantageous to contract this function with a wholesaler who
already has these relationships intact. The wholesaler can help improve
market penetration while lowering distribution costs. Even though your
new company will be paying the wholesaler
for their distribution efforts, it may be more profitable than trying
to work your way onto the shelves of large retailers.
• Retail Stores. Selling in your own store is a good choice
when you need to control the buying experience for your customers. It's
best if only a small number
of stores is necessary to cover the market., so that you can limit the
amount of investment capital needed.
• Own sales staff. Sales agents are a good distribution option
when the product is complex and requires extensive knowledge. Having
your own sales staff as the
distribution channel is relatively expensive and only worthwhile for
complex, high-margin products.
• Direct mail. You can establish your own mailing list of
customers, or purchase a list from database companies. Some companies,
such as LandsEnd, begin istribution via a mailorder catalog and
graduate to retail stores once their brand name has been established.
• Call center. Through advertising, customers are invited to
order a product by telephone. The call center is associated with a
fulfillment center that actually
ships the product on behalf of your company. This alleviates the cost
and operational expenses of storing inventory, but you will lose some
control by not
interacting with the customer directly.
• Internet. The Internet is a relatively new, but increasingly
popular, marketing channel, through which a global market can be
reached at minimal cost. Your
company can market its product directly to consumers via the Internet,
or you can contract with an affiliate salesforce who will promote your
product for a
percentage of the sale.
It is clearly important to determine your distribution strategy as part
of your overall marketing strategy before you complete your business
plan. Many of
your operational processes will be directly affected by your chosen
method of distribution.
4. Promotion
As you can see, the marketing plan consists of much more than simply a
promotional plan. However, the promotional plan is an important piece
of the overall marketing puzzle. The promotional plan will determine
how your
company will reach its potential customers and educate those customers
on your product and it benefits.
There are a vast number of different advertising media that you can use
to position your product within the marketplace. Your business plan
should include as much detail about your intended promotional plan as
possible.
The classic promotional mix consists of three parts: paid advertising,
unpaid public relations, and personal selling. It is not necessary, or
advisable, to use all
of these promotional avenues, but this list will give you an overview
of the available promotional channels.
1. Paid advertising can include newspapers, direct mail, magazines,
trade journal ads, radio, TV, movie theaters, Internet Pay-Per-Click
Ads, Internet banner ads and other medium that is designed to attract
the
attention of your target market.
2. Public relations opportunities include articles in your local
newspaper, articles on related Internet websites, or any other venue
that will profile your company or product from a journalist's point of
view.
3. Personal selling is any opportunity that you use to explain your
product to potential customers face-to-face. This can be done through
customer visits, industry exhibitions or trade fairs. If your market is
local, there are many creative ways to put your company directly in
front of a prospect.
Promotion can be expensive, and it becomes even more so when done
without a comprehensive promotional plan. It's very easy to say "yes"
to every advertising
opportunity that comes along and eventually end up with few results to
show for it. Instead, determine the amount per sale that you can afford
to spend on promotion and commit to your promotional budget.
Here are a few tips to keep in mind as your plan your promotional
strategy :
• When you address your customers, focus on the people who
have the
greatest influence on the purchasing decision.
• Since a new business can't afford to advertise in all media,
plan a budget that will dominate one media. In the 1970's, the soft
drink 7-Up took market share from its mammoth rival Coke by foregoing
expensive TV
ads and dominating radio advertising.
• Don't budget a dime for paid advertising until you have
exhausted all public relations opportunities. In fact, when writing
your business plan, pretend you have zero-budget for paid advertising
and force yourself to
design a promotional strategy that depends entirely on public relations.
Public relations efforts are more time consuming, but the return on
investment is exponentially more profitable.
Chapter Six: The System and Operational Plan
A business system is the relationship between the various functions
within your business enterprise. There are no general rules or
standards for a business
system. Your own system should be logical, complete and useful for
planning – just don't let it get too complicated.
For example purposes, the following is a model of a generic business
system that is common to most businesses:
Research & Development > Production > Marketing
> Sales > Service
You can use the above example as a jumping-off-point to design your own
business system. The exact system you choose will depend on the
functions within your business. For example, a manufacturer may find it
useful to
subdivide the production category into separate stages, such as
purchasing, raw materials, processing, component manufacture and
assembly. You may also need
to separate sales into logistics, wholesale distribution, and retail
sales, for example.
A different plan will be appropriate to each case, depending on the
industry in which you operate and, of course, the business itself. The
business system of a
computer manufacturer will look quite different from that of a fast
food chain.
Concentrate on the major activities in your business system. Your
management team of three to five people will not be able to cover all
tasks themselves, either
because they do not have the abilities or because it would not be
efficient for them do to so. Think carefully about which activities
really create something new
and how you and your staff can best make use of your time to create the
highest value for your customer, giving you a distinct competitive
advantage. The buzzword here is focus. Once you have determined which
activities make up
your business system, choose those activities that your team can
execute better than anyone else. This brings up to the topic of
specialization.
Specialization is particularly important for startups. A new business
should concentrate all its energy on just a few select activities in
the business system. At
the beginning, even software giant Microsoft concentrated solely on the
development of the DOS, leaving all other activities in the business
system up to IBM. When you are starting out, it's best to master one
important function that is highly valued by your customer base. There
is plenty of opportunity for growth after you have mastered your
original business model.
Organization. Your business plan should include a simple organizational
chart, showing the primary business functions and who will be heading
them. You should set up the interdisciplinary functions such as
production, sales, human resources, finance and administration. Keep
your organization simple, so that each staff member will know which
assignments he or she is accountable for. On
the other hand, everyone should be in a position -- nobody should be
left to fly solo.
Be prepared to reorganize your company repeatedly during the first few
years as your business grows, you refine processes and streamline
operations.
Location. Your systems and organizational plan should include a brief
description of your location and where you plan to operate. If you have
already signed a lease, it’s a good idea to include a copy of
the lease as an appendix to your business plan. It is not advisable
that you purchase property in the early stages of a new business, but
instead lease space until you can better predict cash
flow, the viability of the business and your long term space needs.
Contractors and Third-Parties. This section of your plan should also
describe the relationships you expect to form with outside consultants,
contractors, and suppliers. Again, if you have already entered into
written agreements with partners or third-parties, you should include
copies of these agreements in you’re the appendix section of
your business plan.
Examples of third-party relationships might include: major suppliers,
strategic alliance partners for marketing purposes, contracted human
resource companies
or contracted bookkeeping companies.
In summary, the following questions should be answered as you choose a
business system and prepare the organizational section of your business
plan:
• What will the business system for your product or service
look like?
• What activities do you and your management team want to
handle?
• Where will the focus of your own activities lie?
• What business functions make up your organization, and how
is it structured?
• What resources do you need (quantitative and qualitative) to
create your
product/service?
• How high is your need for technical input (raw materials,
materials to create
your service)?
• What will you make, what will you buy?
• Which partners and contractors do you plan to work with?
Chapter Seven: The Financial Plan
Your financial strategy is the pinnacle of your business plan. It takes
into account all of your other strategies and processes and predicts
the eventual profitability
of your new enterprise.
The financial plan does not vary widely between companies. Regardless
of the nature of your business enterprise, you will need to provide, at
the very least:
• A cash flow calculation that details your liquidity plan on
a monthly basis for the first two years, and annually beyond that.
• Projected monthly income statements for the first two years,
and annually beyond that.
• A projected income statement that shows one year beyond the
point at which you expect to break even.
• An initial balance sheet.
Cash Flow Planning
You must be able to show your investors, lenders and partners the
projected amount of cash that will be generated or required on a
monthly basis for the first
two years of the operation. It's important to remember that cash flow
is not the same thing as income. While income reflects sales that have
been made, cash
flow is the result of revenue that has actually been collected -- minus
cash disbursements that have been made.
If you new enterprise is planning to extend credit to its customers,
cash flow could be a serious issue unless you have made similar credit
arrangements with
your suppliers.
Don't forget to include salaries or payments promised to any general
partner when you are forecasting cash flow.
Income Statement
Your income statement will be comprised of gross sales, minus your cost
of goods sold, minus operating expenses, minus depreciation and other
non-cash expenses. The difference will be your estimated profit or loss
for the projected period of time.
You should include a monthly pro forma income statement,
as well as a cumulative annual income statement for the first two years
of operations. If you don't anticipate to turn a profit within that
time period, your projections should extend on an annual basis for one
year beyond your break even year.
Balance Sheet
The initial balance sheet will show a list of assets being
contributed to the business in the form of cash, loans, purchased or
donated equipment, and any real estate that is has been purchased or
donated. The balance sheet will also show the amount of any loans
required to start the business, as well as capital or equity that has
been contributed by the partners or stock that has been sold to
shareholders.
The financial section of your business plan should answer the following
questions. If you have difficulty determining this information, you may
want to
engage the services of a Certified Public Accountant to assist with the
development of this information:
• How will your revenues, expenses and income develop?
• How will your cash flow develop? When will you expect to
break even (= sum of all revenues greater than the sum of all expenses)?
• How high is your need for financing based on your liquidity
planning? How much cash is needed in the worst case scenario?
• What assumptions underlie your financial planning?
• Which sources of capital are available to you to cover your
financing needs?
• What return can investors expect?
• What is the exit strategy for investors?
Chapter Eight: Opportunities and Risk
This section will help you identify and communicate to your partners
and lenders any possible margins of error and their causes. Your goal
is to predict the outcomes that result from three different business
environments: one being the most likely scenario, another being a best
case scenario and a third being a worst case scenario.
Based on your assumptions for each of these three scenarios, your
lenders and partners can judge how realistic your plans are, and better
assess the risk of their investment.
You should change various parameters in each of the scenarios (such as
price or sales volumes) to simulate how a change in conditions might
affect your key
figures (this exercise is called a sensitivity analysis).
The key questions to address in this section are:
• What basic risks (market, competition, technology) does your
business face?
• Describe the measures you will take to counter these risks.
• What extraordinary opportunities/business possibilities
do you see for your company?
• How could an expansion of your capital base help you take
advantage of these additional opportunities?
Chapter Nine: The Executive Summary
This is the most important section of your business plan, as it may
well be the only section that is ever read by your intended audience.
While it is the last
chapter of this guide, it should actually be the first section of your
completed business plan. This is the section that gives your readers a
quick overview of
your business strategy, the reasoning and assumptions that underpin
your plan, and a summary of the results that you expect from the
business.
If your reader doesn't buy into your business after reading the
Executive Summary, it is unlikely they will change their mind or even
continue to read the
remainder of the plan. To be effective, this section needs to be
written in a manner that catches the attention of your reader.
Specifically, it should highlight the product or service, the value to
the customer, the relevant markets, management expertise, financing
requirements, and the
projected return on investment.
The Executive Summary is not a compilation of the other sections in
your business plan. It is a stand-alone element of your plan that
should describe your
business in a clear, concise and compelling manner. You need to read it
with a critical eye and keep re-reading and re-writing until this
section is clearly
captures and communicates the brilliance of your business venture.
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