More Information About Starting Your Small Business
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Essential Elements
of a Good Business Plan For Growing Companies |
A business plan should
be a work-in progress. Even successful, growing businesses should
maintain a current business plan.
As any good salesperson knows, you have to know everything you
can about your products or services in order to persuade someone
to buy them. In this discussion, you are the salesperson and your
products represent your business. Your customers are potential investors
and employees. Since you want your customers to believe in you,
you must be able to convince them that you know what you are talking
about when it comes to your business.
To become an expert (or to fine-tune your knowledge if you already
believe you are one), you must be willing to roll up your sleeves
and begin digging through information. Since not all information
that you gather will be relevant to the development of your business
plan, it will help you to know what you are looking for before you
get started. In order to help you with this process, we have developed
an outline of the essential elements a good business plan.
Every Successful business plan should include something about each
of the following areas since these are what make up the essential
elements of a good business plan:
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Part
1: The Executive Summary |
The Executive Summary
is the most important section of your business plan. It provides
a concise overview of the entire plan along with a history of your
company. This section tells your reader where your company is and
where you want to take it. It's the first thing your readers see.
Therefore, it is the thing that will either grab their interest
and make them want to keep reading . . . or make them want to put
it down and forget about it. More than anything else, this section
is important because it tells the reader "why" you think
your business idea will be Successful.
The Executive Summary should be the last section you write. After
you've worked out all the details of your business plan, you'll
be in a better position to summarize it. And it should be a summary
(ie., no more than 4 pages!).
Contents of the Executive Summary
- The Mission Statement. The mission statement
briefly explains the thrust of your business. It could be two
words, two sentences, a paragraph, or even a single image. It
should be as direct and focused as possible. And it should leave
the reader with a clear picture of what your business is all about.
- Date business began
- Names of founders and the functions they perform
- Number of employees
- Location of business and any branches or subsidiaries
- Description of plant or facilities
- Products manufactured/services rendered
- Banking relationships and information regarding current
investors
- Summary of company growth including financial or market
highlights (e.g. your company doubled its worth in 12-month
period; you became the first company in your industry to provide
a certain service)
- Summary of management's future plans
With the exception of the mission statement, all of the information
in the Executive Summary should be highlighted in a brief, even
bulleted fashion. Remember, these facts are laid out in depth
further along in the business plan.
If you're just starting a business, you won't have a lot of information
to plug into the areas mentioned above. Instead, focus on your experience
and background as well as the decisions that led you to start this
particular enterprise. Include information about the problems your
target market has and what solutions you provide. Show how the expertise
you have will allow you to make significant inroads into the market.
Tell your reader what you're going to do differently or better.
Convince the reader that there is a need for your service or product.
Then go ahead and address your (the company's) future plans.
To assist the reader in locating specific sections in your business
plan, include a table of contents directly following the Executive
Summary. Make sure that the content titles are very broad. In other
words, avoid detailed descriptions in your table of contents. |
Part
2: Market Analysis |
The Market Analysis section
should illustrate your knowledge about the particular industry your
business is in. It should also present general highlights and conclusions
of any marketing research data you have collected. However, the specific
details of your marketing research studies should be moved to the
appendix section of your business plan.
This section should include: an industry description and outlook;
target market information; market test results; lead times; and
an evaluation of your competition.
Industry Description and Outlook
This overview section should include: a description of your primary
industry; the current size of the industry as well as its historic
growth rate; trends and characteristics related to the industry
as a whole (ie. what life cycle stage is industry in? what is its
projected growth rate, etc.); as well as the major customer groups
within the industry (ie., businesses, governments, consumers, etc).
Identifying Your Target Market
Your target market is simply the market (or group of customers)
that you want to target (or focus on and sell to). When you are
defining your target market, it is important to narrow it to a manageable
size. Many businesses make the mistake of trying to be everything
to everybody. Often times, this philosophy leads to failure.
In this section, you should gather information which identifies
the:
- Distinguishing characteristics of the major/primary
market you are targeting. This section might include
information about the critical needs of your potential customers,
the degree to which those needs are (or are not) currently being
met, and the demographics of the group. It would also include
the geographic location of your target market, the identification
of the major decision-makers, and any seasonal or cyclical trends
which may impact the industry or your business.
- Size of the primary target market. Here, you
would need to know the number of potential customers in your primary
market, the number of annual purchases they make of products or
services similar to your own, the geographic area they reside
in, and the forecasted market growth for this group.
- The extent to which you feel you will be able to gain
market share and the reasons why. In this research, you
would determine the market share percentage and number of customers
you expect to obtain in a defined geographic area. You would also
outline the logic you used to develop these estimates.
- Your pricing and gross margin targets. Here,
you would define the levels of your pricing, your gross margin
levels, and any discount structures that you plan to set up for
your business such as volume/bulk discounts or prompt payment
discounts.
- Resources for finding information related to your target
market. These resources might include directories, trade
association publications, and/or government documents.
- Media you will use to reach your target audience.
These might include publications, radio or television broadcasts,
or any other type of credible source that may have influence with
your target market.
- Purchasing cycle of your potential customers.
Here, you will need to identify the needs of your target market,
do research to find the solutions to their needs, evaluate the
solutions you come up with, and, finally, identify who actually
has the authority to choose the final solution.
- Trends and potential changes which may impact your primary
target market.
Key characteristics of your secondary markets.
Just like with your primary target market, here you would again
want to identify the needs, demographics, and the significant
trends which will influence your secondary markets in the future.
Market Tests
When you are including information about any of the market tests
you have completed for your business plan, be sure to focus only
on the results of these tests. Any specific details should be included
in the appendix of your business plan. Market test results might
include: the potential customers who were contacted; any information
or demonstrations that were given to prospective customers; how
important it is to satisfy the target market's needs; and the target
market's desire to purchase your business's products or services
at varying prices.
Lead Times
Lead time is the amount of time between when a customer places
an order and when the product or service is actually delivered.
When you are researching this information, you need to determine
what your lead time will be for the initial order, for reorders,
and for volume purchases.
Competitive Analysis
When you are doing a competitive analysis, you need to identify
your competition by product line or service as well as by market
segment, assess their strengths and weaknesses, determine how important
your target market is to your competitors, and identify any barriers
which may hinder you as you are entering the market.
Be sure to identify all of your key competitors for each of your
products or services. For each key competitor, determine what their
market share is. Then, try to estimate how long it will take before
new competitors will enter into the marketplace. In other words,
what is your "window of opportunity"? Finally, identify
any indirect or secondary competitors which may have an impact on
your business's success.
The strengths of your competitors are also competitive advantages
which you, too, can provide. The strengths of your competitors may
take many forms, but the most common include:
- an ability to satisfy customer needs
- a large share of the market and the consumer awareness
that comes with it
- a good track record and reputation
- solid financial resources and the subsequent staying
power which that provides
- key personnel
Weaknesses are simply the flip side of strengths. In other words,
analyze the same areas as you did before to determine what your
competitors' weaknesses are. Are they unable to satisfy their customers'
needs? Do they have poor market penetration? Is their track record
or reputation not up to par? Do they have limited financial resources?
Can they not retain good people? All of these can be red flags for
any business. If you find weak areas in your competition, be sure
to find out why they are having problems. This way, you can avoid
the same mistakes they have made.
If your target market is not important to your competition, then
you will most likely have an open field to run in if your idea is
a good one. That is, at least for a while. However, if the competition
is keen for your target market, be prepared to overcome some barriers.
Barriers to any market might include:
- a high investment cost
- the time it takes to set up your business
- changing technology
- the lack of quality personnel
- customer resistance (ie., long-standing relationships,
brand loyalty)
- existing patents and trademarks that you can not infringe
upon
Regulatory Restrictions
The final area that you should look at as you're researching this
section is regulatory restrictions. This would include information
related to current customer or governmental regulatory requirements
as well as to any changes that may be upcoming in regards to regulatory
requirements. Specific details that you need to find out include:
the methods for meeting any of the requirements which will effect
your business, the timing involved (ie., how long do you have to
comply, when do the requirements go into effect, etc.), and the
costs involved.
For more information on how to set up a marketing plan, check out
the Marketing
Mall.
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Part
3: Company Description |
Without going into
detail, this section should include a high level look at how all
of the different elements of your business fit together. The Company
Description section should include information about the nature
of your business as well as list the primary factors that you believe
will make your business a success.
When defining the nature of your business (or "why" you're
in business), be sure to list the marketplace needs that you are
trying to satisfy and include the ways in which you plan to satisfy
these needs using your products or services. Finally, list the specific
individuals and/or organizations that you have identified as having
these needs.
Primary success factors might include a superior ability to satisfy
your customers' needs, highly efficient methods of delivering your
product or service, outstanding personnel, or a key location. Each
of these would give your business a competitive advantage. |
Part
4: Organization & Management |
This section should
include: your company's organizational structure; details about
the ownership of your company; profiles of your management team;
and the qualifications of your board of directors.
Who does what in your business? What is their background and why
are you bringing them into the business as board members or employees?
What are they responsible for? These may seem like unnecessary questions
to answer in a one or two person organization, but the people reading
your business plan want to know who's in charge. So tell them. Give
a detailed description of each division or department and its function.
This section should include who's on the board (if you have an
advisory board) and how you intend to keep them there. What kind
of salary and benefits package do you have for your people? What
incentives are you offering? How about promotions? Reassure your
reader that the people you have on staff are more than just names
on a letterhead.
Organizational Structure
A simple, but effective, way to lay out the structure of your company
is to create an organizational chart along with a narrative description
of what the chart means. This will prove that you're leaving nothing
to chance. You've thought out exactly who is doing what. There is
someone in charge of every function of your company. Nothing will
fall through the cracks, and nothing will be done three or four
times over. To a potential investor or employee, that is very important.
Ownership Information
This section should also include the legal structure of your business
along with the subsequent ownership information it relates to. Have
you incorporated your business? If so, is it a C or S corporation?
Or perhaps you have formed a partnership with someone. If so, is
it a general or limited partnership? Or maybe you are a sole proprietor.
Important ownership information that should be incorporated into
your business plan includes:
- names of owners
- percentage ownership
- extent of involvement with the company
- forms of ownership (ie., common stock, preferred
stock, general partner, limited partner)
- outstanding equity equivalents (ie., options,
warrants, convertible debt)
- common stock (ie., authorized or issued).
Management Profiles
Experts agree that one of the strongest factors for success in
any growth company is the ability and track record of it's owner/management.
So let your reader know about the key people in your company and
their backgrounds. Provide resumes that include the following information:
- Name
- Position (include brief position description
along with primary duties)
- Primary responsibilities and authority
- Education
- Unique experience and skills
- Prior employment
- Special skills
- Past track record
- Industry recognition
- Community involvement
- Number of years with company
- Compensation basis and levels (make sure these
are reasonable - not too high or too low)
Be sure you quantify achievements (e.g. "Managed a sales force
of ten people" - "Managed a department of fifteen people"
- "Increased revenue by 15% in the first six months" -
"Expanded the retail outlets at the rate of two each year"
- "Improved the customer service as rated by our customers
from a 60% to a 90% rating.")
Also, highlight for the reader how the people surrounding you complement
your own skills. If you're just starting out, show how each person's
unique experience will contribute to the success of your venture.
Board of Directors' Qualifications
The major benefit of an unpaid advisory board is that it can provide
expertise that your company cannot otherwise afford. A list of well-known,
successful business owners/managers can go a long way toward enhancing
your company's credibility and perception of management expertise.
If you have a board of directors, be sure to gather the following
information when developing the outline for your business plan:
- Names
- Positions on the board
- Extent of involvement with company
- Background
- Historical and future contribution to the company's
success
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Part
5: Marketing and Sales Strategies |
Marketing is the process
of creating customers . . . and customers are the lifeblood of your
business. In this section, the first thing you want to do is define
your marketing strategy. There is no single "right" way
to approach a marketing strategy. Your marketing strategy should
be part of an ongoing self-evaluation process, and unique to your
company. However, there are steps you can follow which will help
you "think through" the strategy you would like to use.
An Overall Marketing Strategy would include a:
- Market penetration strategy
- Strategy for growing your business. This growth
strategy might include: an internal strategy such as how to increase
your human resources; an acquisition strategy such as buying another
business; a franchise strategy for branching out; a horizontal
strategy where you would provide the same type of products to
different users; and/or a vertical strategy where you would continue
providing the same products but would offer them at different
levels of the distribution chain.
- Channels of distribution strategy. Choices
for distribution channels could include: original equipment manufacturers
(OEMs); an internal sales force; distributors; and/or retailers.
- Communication strategy. How are you going
to reach your customers? Usually some combination of the following
works the best: promotions; advertising; public relations; personal
selling; and/or printed materials such as brochures, catalogues,
flyers, etc.
Once you have defined your marketing strategy, you can then define
your sales strategy. How do you plan to actually sell your product?
Your Overall Sales Strategy should include:
- A sales force strategy. If you are going to
have a sales force, do you plan to use internal or independent
representatives? How many salespeople will you recruit for your
sales force? What type of recruitment strategies will you use?
How will you train your sales force? What about compensation for
your sales force?
- Your sales activities. When you are defining
your sales strategy, it is important that you break it down into
activities. For instance, you need to identify your prospects.
Once you have made a list of your prospects, you need to prioritize
it. Next, identify the number of sales calls you will make over
a certain period of time. From there, you need to determine the
average number of sales calls you will need to make per sale,
the average dollar size per sale, and the average dollar size
per vendor.
You can find more information on sales and marketing strategies
at the
Marketing Mall.
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Part
6: Service or Product Line |
What are you selling?
In this section, you describe your service or product emphasizing
the benefits to potential and current customers. For example, don't
tell your readers which 89 foods you carry in your "Gourmet
to Go" shop. Tell them why busy, two-career couples will prefer
shopping in a service-oriented store that records clients' food
preferences, and caters even the smallest parties on short notice.
Focus on the areas where you have a distinct advantage. Identify
the problem in your target market for which your service or product
provides a solution.
Give the reader hard evidence that people are, or will be, willing
to pay for your solution versus others. List your company's services
and products and attach any marketing/promotional materials. Provide
details regarding suppliers, availability of products/services,
and service or product costs. Also, include information addressing
new services or products which will soon be added to the company's
line.
Overall, this section should include:
- a detailed description of your product or service (from
your customers' perspective). Here, you would need to
include information about the specific benefits of your product
or service. You would also want to talk about your product/service's
ability to meet consumer needs, any advantages your product has
over that of the competition, and the present development stage
your product is in (ie., idea, prototype, etc.).
- information related to your product's life cycle.
Be sure to include information about where your product or service
is in its life cycle as well as any factors that may influence
it's life cycle in the future.
- any copyright, patent, and trade secret information
that may be relevant. Here, you need to include information
related to existing, pending, or anticipated copyright and patent
filings along with any key characteristics of your products/services
that you cannot obtain a copyright or patent for. This is where
you should also incorporate key aspects of your products/services
that may be classified as trade secrets. Last, but not least,
be sure to add any information pertaining to existing legal agreements
in this section such as nondisclosure or noncompete agreements.
- research and development activities you are involved
in or are planning to be involved in. R&D activities
would include any in-process or future activities related to the
development of new products/services. This section would also
include information about what you expect the results of future
R&D activities to be. Be sure to analyze the R&D efforts
of not only your own business, but also that of others in your
industry.
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Part
7: Funding Request |
In this section, you
will request the amount of funding you will need to start or expand
your business. If necessary, you can include different funding scenarios
such as a best and worst case scenario. But remember that, later,
in the financial section, you must be able to back up these requests
and scenarios with corresponding financial statements.
You will want to include the following in this section: your current
funding requirement; your future funding requirements over the next
five years; how you will use the funds you receive; and any long-range
financial strategies that you are planning that would have any type
of impact on your funding request.
When you are outlining your current and future funding requirements,
be sure to include the amount you want now and the amount you want
in the future, the time period that each request will cover, the
type of funding you would like to have (ie., equity, debt), and
the terms that you would like to have applied.
How you will use your funds is very important to a creditor. Is
the funding request for capital expenditures? Working capital? Debt
retirement? Acquisitions? Whatever it is, be sure to list it in
this section.
Last of all, make sure that you include any strategic information
related to your business that may have an impact on your financial
situation in the future such as: going public with your company;
having a leveraged buyout; being acquired by another company; the
method by which you will service your debt; or whether or not you
plan to sell your business in the future. Each of these are extremely
important to a future creditor since they will directly impact your
ability to repay your loan(s).
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Part
8: Financials |
The financials should
be developed after you've analyzed the market and set clear objectives.
That's when you can allocate resources efficiently. The following
is a list of the critical financial statements to include in your
business plan packet.
Historical Financial Data
If you own an established business, you will be requested to supply
historical data related to your company's performance. Most creditors
request data for the last three to five years, depending on the
length of time you have been in business.
The historical financial data you would want to include would be
your company's income statements, balance sheets, and cash flow
statements for each year you have been in business (usually for
up to 3 to 5 years). Often times creditors are also interested in
any collateral that you may have that could be used to ensure your
loan, regardless of the stage your business is at.
Prospective Financial Data
All businesses, whether start-up or growing, will be required to
supply prospective financial data. Most of the time, creditors will
want to see what you expect your company to be able to do within
the next five years. Each year's documents should include forecasted
income statements, balance sheets, cash flow statements, and capital
expenditure budgets. For the first year, you should supply monthly
or quarterly projections. After that, you can stretch it out to
quarterly and/or yearly projections for years 2 through 5.
Make sure that your projections match your funding requests. Creditors
will be on the lookout for inconsistencies. It's much better if
you catch mistakes before they do. If you have made assumptions
in your projections, be sure to summarize what you have assumed.
This way, the reader will not be left guessing.
Finally, include a short analysis of your financial information.
Include a ratio and trend analysis for all of your financial statements
(both historical and prospective). Since pictures speak louder than
words, you may want to add graphs of your trend analysis (especially
if they are positive).
For more information on how to develop your financials, check out
the Finance
Center. |
Part
9: The Appendix |
The appendix section
should be provided to readers on an as-needed basis. In other words,
it should not be included with the main body of your business plan.
Your business plan is your communication tool. As such, it will
be seen by a lot of people. Some of the information in the business
section you will not want everyone to see. However, specific individuals
(such as creditors) may want access to this information in order
to make lending decisions. Therefore, it is important to have the
appendix within easy reach.
The appendix would include:
- credit history (personal & business)
- resumes of key managers
- product pictures
- letters of reference
- details of market studies
- relevant magazine articles or book references
- licenses, permits, or patents
- legal documents
- copies of leases
- building permits
- contracts
- list of business consultants, including attorney and
accountant
Any copies of your business plan should be controlled. Keep a distribution
record of who has a copy of your plan. This will allow you to update
and maintain your business plan on an as-needed basis. Remember,
too, that you should include a private placement disclaimer with
your business plan if you plan to use it to raise capital.
(NAWBO, St. Louis, MO, and Women's Business Institute, Fargo, ND)
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