A Business Plan is a very important document that describes your business in great detail. Consider it as your business compass. It helps you find your True North when things go awry, and trust me they will when running a startup.
A Business Plan details ways in which you intend to structure and operate your business as well as the strategies and methodologies to make it grow.
On average, a Business Plan has about 20-200 pages depending on the size and structure of your business. These pages contain your objectives/goals for the next 3 to 5 years. These include topics such as your product, market, operational strategies, financials, competition, opportunity, and risks/challenges that you anticipate. All this content is mainly in the format of detailed texts with the occasional graphs and charts to aid in further description.
Whether you are a new startup with just a business idea or already have a business running, it is essential to have a Business Plan for the following reasons.
Reasons why you need a Business Plan
- It is a tool of communication
A Business Plan is the best tool of communication on all the intentions of the business to your employees, partners, suppliers, customers and any other parties with a stake in your business. By familiarizing themselves with the Business Plan, they are able to understand the business and align themselves accordingly.
This way, a business plan is like a business card for your business. It introduces your business in detail to other parties.
2. It is an important tool when looking for funding
Investors/capital providers including debt financiers e.g. banks will want to have a look at your Business Plan to know more about your business. They are specifically interested to know the viability of your business, its market, future forecasts, financial, etc. to help them know if they will get a return on their investment or if it is for the case of a bank your business ability to make repayments on the loan to be disbursed.
In this sense, a Business Plan is a tool of due diligence by parties interested in providing funding.
3. For business reflection
Preparing a Business Plan gives the business’ founders an opportunity to make strategic deliberations and pondering with regards to their business. That way, they are able to continually analyze the feasibility of the business. Also, over time, they can look back to check and compare if they are on track with the objectives they set when starting if there is a need to amend and include new changes as well as to measure any progress made.
4. As a management tool
A Business Plan functions as a management tool through the strategic financial, marketing, economic projections therein. Through it, the management of a business is able to evaluate and analyze any significant elements of success as well as risk factors.
5. You will need it in the event you want to sell your business
If you ever get to a point when you want to sell your business or be in an acquisition, having a Business Plan will be a major asset for you. Acquirers/buyers of your business will want to have a proper understanding of the business before buying. There is no better document to do so other than a Business Plan.
The Business Plan will help very much in your negotiation of the consideration to receive on the sale of the business. This is because a Business Plan will help you put a case to justify the valuation of your business.
A well written Business Plan that spells out in detail the future prospects of the business will place you in a strong negotiating position.
Contents of a Business Plan
To create a Business Plan, you need to expound on the following key topics;
- Executive Summary
- Company overview
- Financial Plan
Just as the name suggests, this is a summary of your Business Plan. It is what should come first to capture the attention of any person reading it. However, when writing a Business Plan, it is good practice to write this section last. By then you will have all the materials to make you a successful Executive Summary.
An effective executive summary gives an introduction to your business comprehensively. It should be able to be relied upon by itself. Actually, it is not unusual for many people to just read the executive summary and decide if they are interested in the rest of the document. Some investors will ask for the executive summary and if interested, request for either a pitch deck presentation or the rest of the Business Plan for their due diligence.
Now that we know the executive summary is such an essential part of your Business Plan, you should make sure you prepare it in the best way possible.
Keep it brief and to the point while making sure that you highlight all the key elements of your business. It can be as short as 2 pages depending on the nature and size of your business. The way to keep it this short is finding one-sentence summaries of the key areas in your plan. These should be catchy taglines that are sufficient enough for your readers but leave them wanting for more.
Pro Tip: You might not require an executive summary if your Business Plan is just for your own internal consumption.
This video explains how to write an attention-catching executive summary for a business plan.
This is the first main chapter of the Business Plan. It is the meat of the matter.
In this section, you cover the problem your business is solving, how you are solving it (solution), the target market you intend to serve, any existing solutions already in the market (competition) and how yours fit into that space.
Let us have a look at each of these sub-components;
This is the essence of your business. The reason why you exist. You must have identified a gap/pain within your target market. This gap should be very realistic, not just an assumption that you are making up. You can validate this through preliminary market research to better identify the problem.
After identifying the problem you want to solve through your business, the next step is providing a solution. Describe your solution through the products and services you intend to offer. The solution could be existent but maybe not the best fit for the market. Expound how your solution specifically solves the problem identified, how its offering will be, and if the market is ready and willing to pay for the solution.
For you to offer the solution to the problem you have identified, it must be to a certain group of people. This is your target market. A business without a target market is bound to fail.
Start by identifying everyone who could possibly use your product. Because it is not realistic to reach everyone in this category, narrow down to a portion within this group that you specifically want to reach. This can be further narrowed down to another smaller group that you are very certain you will convince to sell to. For example, you can be in the business of making clothes. Ideally, everyone can use your product but you need to specify a narrowed market group e.g sportswear. From here you can narrow down even further to target specifically through sports-type e.g sportswear for athletics.
This process is known as market analysis and is achieved through market research. Market research will help you identify certain trends in the market that will allow you to align strategically with your key and ideal customers.
This section is very critical for the success of your business.
Every business has either direct or indirect competition in one way or another. Under this section, you should outline other businesses that are providing solutions similar to your business. With the help of a matrix, identify what your competitors are good at, their weaknesses, and then why your solution is superlative to theirs. This is your competitive advantage. You will need to clearly indicate how you will differentiate your business. This can be through your unique business proposition or unique selling points that set you apart from your competition.
Future products and services
This section is a representation of your business in the future i.e what future plans do you have for your products and services.
You need not elaborate too much since the future may not be very certain and other than dwelling too much on far stretched future plans that might not come to be you would rather put your efforts into making your current products a success.
The execution chapter includes all the plans, strategies and operations that will make your business successful. It also includes any fundamental milestones you want to achieve and the metrics to measure your success.
This goes hand in hand with the marketing plan. It details the methodology to use to gain your target market. It follows that this comes after the Opportunity chapter where you will have already identified your target market clearly.
You can first start with a positioning statement that you will use in presenting your business to the target market. For example, if your products are premium/luxury, highly-priced, or budget-friendly.
After knowing your positioning statement and strategy, the next thing is to set up your pricing. Pricing can be very tricky since you do not want to communicate a different message than what is your positioning statement. As a rule of thumb, your pricing should cater to your costs i.e unless in certain exceptions what it costs you to make your products should be less than their pricing. One way to play around with this is to have scenarios where applicable, the initial price is low but with an embedded support/maintenance cost on the purchase that makes the product much profitable.
Pro Tip: Be keen to match your prices with the expectations of your target market. If the price is too high than the market rate, that might deter customers from consuming your products. If too low, you might have customers underrating your products.
Other factors worthy of noting done in this section are promotion strategies to increase your sale, how to package your products and the various methods to use to advertise. It is also important to include any strategic partnerships you intend to have e.g distribution alliances.
The operations section is the ins and outs of the business and includes the how and technology in use to operate your business. This section will differ from business to business based on the nature of their business.
Ensure that you detail your source process if you are manufacturing the products, the production process, the technology in use, your distribution process (whether it is retail or direct distribution), any notable milestones you want to accomplish, the metrics to measure your success and the assumptions as well as risks you are taking.
This chapter includes the key members in your team, their roles, level of expertise and skillset, past experiences as well as the business structure.
It is okay especially for business startups to have missing personnel in the team. These may be filled later as the business grows. You can use charts to outline the organizational structure. The team information may also be presented visually with profile photos of each member and their bios underneath.
The company overview is all about the ownership of the business, legal structure, history of the business, its location, its mission and vision as well as the possession of any intellectual property.
Many people may find this section challenging. However, it mustn’t be. Just keep it simple and realistic as well as disclosing any key assumptions you make in preparing forecasts.
The financial plan showcases your current financial status as well as projected financial figures for the next three to five years. That is through these statements;
- Income statement which is your profit and loss statement that clearly outlines your sales and any additional income versus the cost of sales and other expenses. This statement indicates if you are operating at a profit or on losses.
- Cash Flow statement. This statement keeps tabs on the cash that you have available.
- Financial Statement position. This is also known as a balance sheet. It indicates the net worth of your business after outlining all your liabilities and subtracting them from your total assets.
- Personnel plan. This is an outline of all your payroll expenses. This includes the amount of salaries to pay your team plus other associated costs such as insurance, taxes, bonuses, etc.
- Sales forecasts. This projects the sales you anticipate to make in the future say 3-5 years.
The finance plan should also include your use of investment if you are looking into raising funds from other third parties. You may encounter the term burn rate which is related to financials. Burn rate is the speed (often monthly) at which a business is losing money i.e operating on a negative cash flow. For startups, this is not a strange phenomenon especially because the cost of building and marketing a product can be quite significant on inception without matching any incoming revenues from sales/product adoption. To the investors, the burn rate is important to them since it indicates the rate at which the business will be “eating” into their invested capital before being profitable.
Also, have an exit strategy in this section that outlines your future plans to sell your business if applicable.
The appendix contains all the reference material needed for your Business Plan. This includes; charts, graphs, additional documentation, lists, tables, any legal notes, illustrations, etc.
While it is a good thing to have, it is not mandatory.
Business Plan FAQs
When do I really need a Business plan?
You need a Business Plan in the following scenarios;
- When you are involved in the running of a business
- When you are selling your business
- When you are looking for funding i.e from investors, venture capitalists, etc
- When you are want to apply for a business loan
- When you are looking for strategic business partnerships
- When you want to commit to plans that you have set out for your business
A Business Plan vs a Pitch Deck?
If you recall from this guide on Investor Pitch Deck, we expounded on the contents of a Pitch deck. These are similar to what is contained in a Business Plan. The difference is size and structure. While a Business Plan is heavily worded (100 pages) as it must detail each of the contents therein, a Pitch deck is short (20 slides) and is highly visual. Therefore a Pitch deck is a summary of the Business Plan since it is used in an oral presentation for a short timed duration. You can think of it as a preview of the Business Plan. Also, a Pitch deck is mainly used to gain the attention of potential investors/customers/partners and make them want more information - which will be in the Business Plan.
What is SOM, SAM, and TAM in a Business Plan?
The SOM-SAM-TAM is a bottom-top marketing approach to derive your target market.
SOM stands for Share Of Market and refers to a very narrowed portion of the market that you already have as your customers or can easily convince to buy your products.
SAM is Segmented Addressable Market. This is a larger group than SOM which is a section of the market that is available to be served by your business.
TAM is the Total Addressable Market which encompasses everyone who can make use of your business products. This is a very large set and is the dream of most businesses to get to serve such a market.
When determining your target market, you can use this approach. It is easier starting from TAM, then narrowing down to SAM, and then further down to SOM.
Tips to create an effective Business Plan
- An effective Business Plan should be dynamic. This means that it should be a living document not to be written and forgotten. Instead, when writing a Business Plan, make it as flexible as possible to accommodate new solutions for the challenges that you may encounter in the future as well as any other additional changes. In short do not make your Business Plan stiff, boring, and unrealistic.
- The content of your Business Plan should be well understood by your audience. This is through the use of simple and straightforward explanations. Feel free to tweak the language used depending on the audience intended to consume the plan. This means that a Business Plan should be accommodative of its intended audience.
- Your Business Plan is not a decorative tool. It is meant to be consumed by parties within and outside of your business. To this end, you want them to actually read the document. Failing to keep it concise will bore them out easily.
- You will also need to revisit the document frequently in the running of your business to amend some parts to accommodate your growth and changing situations. This will be so much easier when the document is short and easy to handle.
You can compare a Business Plan to a map. It is what guides you in your business. Use the Business Plan to come up with your business objectives, to make and document future projections, and as a guide in prioritizing your business focus.
As you can tell from this guide, a Business Plan is a must-have for many businesses. Creating one is not as difficult many people wrongly believe. With the help of many readily available online tools and resources, you can create one within hours. Contact us today to reach out to our in-house team of experts to help you out with your Business plan needs.