Start your Business
A business plan is not just a tool for start up enterprises. It is a valuable exercise and guide for businesses of all sizes, shapes and ages. Through the process of writing a business plan an entrepreneur can visualize their company’s future, identify challenges and opportunities, and pin down key financing and operating details impacting the enterprise.
There are a lot of different formats for business plans.
What business will you be in? What will you do?
Company Goals and Objectives: Goals are destinations—where you want your business to be. Objectives are progress markers along the way to goal achievement. For example, a goal might be to have a healthy, successful company that is a leader in customer service and that has a loyal customer following. Objectives might be annual sales targets and some specific measures of customer satisfaction.
To whom will you market your products? State it briefly here—you will do a more thorough explanation in the Marketing Plan section.
Describe your industry. Is it a growth industry? What changes do you foresee in the industry, short term and long term? How will your company be poised to take advantage of them?
Describe your most important company strengths and core competencies. What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills, and strengths do you personally bring to this new venture?
Determine legal form of ownership: Sole proprietor, Partnership, Corporation, Limited liability corporation (LLC)? Why have you selected this form?
Products and Services
Describe in depth your products or services (technical specifications, drawings, photos, sales brochures, and other bulky items belong in Appendices).
What factors will give you competitive advantages or disadvantages? Examples include level of quality or unique or proprietary features.
What are the pricing, fee, or leasing structures of your products or services?
(Write this section last and keep it short, 1-2 pages!)
Explain the fundamentals of the proposed business: What will your product be? Who will your customers be? Who are the owners? What do you think the future holds for your business and your industry? Make it enthusiastic, professional, complete, and concise.
If applying for a loan, state clearly how much you want, precisely how you are going to use it, and how the money will make your business more profitable, thereby ensuring repayment.
Making Your Marketing Plan
No matter how good your product and your service, the venture cannot succeed without effective marketing. And this begins with careful, systematic research. It is very dangerous to assume that you already know about your intended market. You need to do market research to make sure you’re on track. Use the business planning process as your opportunity to uncover data and to question your marketing efforts. Your time will be well spent.
There are two kinds of market research: primary and secondary. Secondary research means using published information such as industry profiles, trade journals, newspapers, magazines, census data, and demographic profiles. This type of information is available in public libraries, industry associations, chambers of commerce, from vendors who sell to your industry, and from government agencies. Start with your local library. Most librarians are pleased to guide you through their business data collection. You will be amazed at what is there. There are more online sources than you could possibly use. Your chamber of commerce has good information on the local area. Trade associations and trade publications often have excellent industry specific data.
Primary research means gathering your own data. For example, you could do your own traffic count at a proposed location, use the yellow pages to identify competitors, and do surveys or focus group interviews to learn about consumer preferences. Professional market research can be very costly, but there are many books that show small business owners how to do effective research themselves. In your marketing plan, be as specific as possible; give statistics, numbers, and sources. The marketing plan will be the basis, later on, of the all important sales projection.
Business plans should contain some information about your industry:
- What is the total size of your market?
- What percent share of the market will you have? (This is important only if you think you will be a major factor in the market.)
- Current demand in target market.
- Trends in target market—growth trends, trends in consumer preferences, and trends in product development.
- Growth potential and opportunity for a business of your size.
- What barriers to entry do you face in entering this market with your new company? Some typical barriers are high capital costs, high production costs, high marketing costs, consumer acceptance and brand recognition, training and skills, unique technology and patents, unions, and shipping costs.
In the Products and Services section, you described your products and services as you see them. Now describe them from your customers’ point of view.
List all of your major products or services. For each product or service:
Describe the most important features. What is special about it?
Describe the benefits. That is, what will the product do for the customer?
Note the difference between features and benefits, and think about them. For example, a house that gives shelter and lasts a long time is made with certain materials and to a certain design; those are its features. Its benefits include pride of ownership, financial security, providing for the family, and inclusion in a neighborhood. You build features into your product so that you can sell the benefits.
What after sales services will you give? Some examples are delivery, warranty, service contracts, support, followup, and refund policy.
Identify your targeted customers, their characteristics, and their geographic locations, otherwise known as their demographics. The description will be completely different depending on whether you plan to sell to other businesses or directly to consumers. If you sell a consumer product, but sell it through a channel of distributors, wholesalers, and retailers, you must carefully analyze both the end consumer and the middleman businesses to which you sell. You may have more than one customer group. Identify the most important groups. Then, for each customer group, construct what is called a demographic profile:
- Income level
- Social class and occupation
- Other (specific to your industry)
For business customers, the demographic factors might be:
- Industry (or portion of an industry)
- Size of firm
- Quality, technology, and price preferences
- Other (specific to your industry)
What products and companies will compete with you?
List your major competitors (Names and addresses).
Will they compete with you across the board, or just for certain products, certain customers, or in certain locations?
Will you have important indirect competitors? (For example, video rental stores compete with theaters, although they are different types of businesses.)
How will your products or services compare with the competition?
What are your Strengths, Weaknesses, Opportunities & Threats as a business?
How will you get the word out to customers?
Advertising: What media, why, and how often? Why this mix and not some other?
Have you identified low-cost methods to get the most out of your promotional budget?
Will you use methods other than paid advertising, such as trade shows, catalogs, dealer incentives, word of mouth (how will you stimulate it?), and network of friends or professionals?
What image do you want to project? How do you want customers to see you?
In addition to advertising, what plans do you have for graphic image support? This includes things like logo design, cards and letterhead, brochures, signage, and interior design (if customers come to your place of business).
Should you have a system to identify repeat customers and then systematically contact them?
How much will you spend on the items listed above?
- Before startup- (These numbers will go into your startup budget.)
- Ongoing- (These numbers will go into your operating plan budget.)
Explain your method or methods of setting prices. For most small businesses, having the lowest price is not a good policy. It robs you of needed profit margin; customers may not care as much about price as you think; and large competitors can under price you anyway. Usually you will do better to have average prices and compete on quality and service.
Does your pricing strategy fit with what was revealed in your competitive analysis?
Compare your prices with those of the competition. Are they higher, lower, the same? Why?
How important is price as a competitive factor? Do your intended customers really make their purchase decisions mostly on price?
What will be your customer service and credit policies?
Probably you do not have a precise location picked out yet. This is the time to think about what you want and need in a location. Many startups run successfully from home for a while. You will describe your physical needs later, in the Operational Plan section. Here, analyze your location criteria as they will affect your customers. Is your location important to your customers? If yes, how?
If customers come to your place of business: Is it convenient? Parking? Interior spaces? Not out of the way? Is it consistent with your image? Is it what customers want and expect?
Where is the competition located? Is it better for you to be near them (like car dealers or fast food restaurants) or distant (like convenience food stores)?
How do you sell your products or services?
- Direct (mail order, Web, catalog)
- Your own sales force
- Independent representatives
- Bid on contracts
Now that you have described your products, services, customers, markets, and marketing plans in detail, it’s time to attach some numbers to your plan. Use a sales forecast spreadsheet to prepare a month-by-month projection. The forecast should be based on your historical sales, the marketing strategies that you have just described, your market research, and industry data, if available. You may want to do two forecasts: 1) a best guess-, which is what you really expect, and 2) a ?worst case- low estimate that you are confident you can reach no matter what happens.
This section explains the daily operation of the business, its location, equipment, people, processes, and surrounding environment.
How and where are your products or services produced?
Explain your methods of:
- Production techniques and costs
- Quality control
- Customer service
- Inventory control
- Product development
Location: What qualities do you need in a location? Describe the type of location you’ll have.
- Amount of space
- Type of building
- Power and other utilities
- Licensing and bonding requirements
- Health, workplace, or environmental regulations
- Special regulations covering your industry or profession
- Zoning or building code requirements
- Insurance coverage
- Trademarks, copyrights, or patents (pending, existing, or purchased)
- Type of labor (skilled, unskilled, and professional)
- Where and how will you find the right employees?
- Quality of existing staff
- Pay structure
- Training methods and requirements
- Who does which tasks?
- Do you have schedules and written procedures prepared?
- Have you drafted job descriptions for employees? If not, take time to write some. They really help internal communications with employees.
- For certain functions, will you use contract workers in addition to employees?
- What kind of inventory will you keep: raw materials, supplies, finished goods?
- Average value in stock (i.e., what is your inventory investment)?
- Rate of turnover and how this compares to the industry averages?
- Seasonal buildups?
- Lead Time for ordering?
- Identify key suppliers:
- Names and addresses
- Type and amount of inventory furnished
- Credit and delivery policies
- History and reliability
Should you have more than one supplier for critical items (as a backup)?
Do you expect shortages or short term delivery problems?
Are supply costs steady or fluctuating? If fluctuating, how would you deal with changing costs?
- Do you plan to sell on credit?
- Do you really need to sell on credit? Is it customary in your industry and expected by your clientele?
- If yes, what policies will you have about who gets credit and how much?
- How will you check the creditworthiness of new applicants?
- What terms will you offer your customers; that is, how much credit and when is payment due?
- Will you offer prompt payment discounts? (Hint: Do this only if it is usual and customary in your industry.)
- Do you know what it will cost you to extend credit? Have you built the costs into your prices?
Who will manage the business on a day-to-day basis? What experience does that person bring to the business? What special or distinctive competencies? Is there a plan for continuation of the business if this person is lost or incapacitated? If you’ll have more than 10 employees, create an organizational chart showing the management hierarchy and who is responsible for key functions. Include position descriptions for key employees. If you are seeking loans or investors, include resumes of owners and key employees.
List the following:
- Board of directors
- Management advisory board
- Insurance agent
- Consultant or consultants
- Mentors and key advisors
Include personal financial statements for each owner and major stockholder, showing assets and liabilities held outside the business and personal net worth. Owners will often have to draw on personal assets to finance the business, and these statements will show what is available. Bankers and investors usually want this information as well.
You will have many startup expenses before you even begin operating your business. It’s important to estimate these expenses accurately and then to plan where you will get sufficient capital. This is a research project, and the more thorough your research efforts, the less chance that you will leave out important expenses or underestimate them. Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, called contingencies, to account for the unforeseeable. This is the approach we recommend.
Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20 percent of the total of all other start-up expenses. Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.
The financial plan consists of a 12 month profit and loss projection, a four year profit and loss projection (optional), a cash-flow projection, a projected balance sheet, and a breakeven calculation. Together they constitute a reasonable estimate of your company’s financial future. More importantly, the process of thinking through the financial plan will improve your insight into the inner financial workings of your company.
Many business owners think of the 12 month profit and loss projection as the centerpiece of their plan. This is where you put it all together in numbers and get an idea of what it will take to make a profit and be successful. Your sales projections will come from a sales forecast in which you forecast sales, cost of goods sold, expenses, and profit month-by-month for one year.
Profit projections should be accompanied by a narrative explaining the major assumptions used to estimate company income and expenses. Research Notes: Keep careful notes on your research and assumptions, so that you can explain them later if necessary, and also so that you can go back to your sources when it’s time to revise your plan.
The 12-month projection is the heart of your financial plan. The Three Year Profit projection is for those who want to carry their forecasts beyond the first year. Of course, keep notes of your key assumptions, especially about things that you expect will change dramatically after the first year.
If the profit projection is the heart of your business plan, cash flow is the blood. Businesses fail because they cannot pay their bills. Every part of your business plan is important, but none of it means a thing if you run out of cash. The point of this worksheet is to plan how much you need before startup, for preliminary expenses, operating expenses, and reserves. You should keep updating it and using it afterward. It will enable you to foresee shortages in time to do something about them—perhaps cut expenses, or perhaps negotiate a loan.
But foremost, you shouldn’t be taken by surprise. There is no great trick to preparing it: The cash-flow projection is just a forward look at your checking account. For each item, determine when you actually expect to receive cash (for sales) or when you will actually have to write a check (for expense items). You should track essential operating data, which is not necessarily part of cash flow but allows you to track items that have a heavy impact on cash flow, such as sales and inventory purchases.
You should also track cash outlays prior to opening in a pre startup column. You should have already researched those for your startup expenses plan. Your cash flow will show you whether your working capital is adequate. Clearly, if your projected cash balance ever goes negative, you will need more start-up capital. This plan will also predict just when and how much you will need to borrow.
Explain your major assumptions, especially those that make the cash flow differ from the Profit and Loss Projection. For example, if you make a sale in month one, when do you actually collect the cash? When you buy inventory or materials, do you pay in advance, upon delivery, or much later? How will this affect cash flow? Are some expenses payable in advance? When? Are there irregular expenses, such as quarterly tax payments, maintenance and repairs, or seasonal inventory buildup, that should be budgeted?
Loan payments, equipment purchases, and owners’ draws usually do not show on profit and loss statements but definitely do take cash out. Be sure to include them.
And of course, depreciation does not appear in the cash flow at all because you never write a check for it.
A balance sheet is one of the fundamental financial reports that any business needs for reporting and financial management. A balance sheet shows what items of value are held by the company (assets), and what its debts are (liabilities). When liabilities are subtracted from assets, the remainder is owners’ equity.
Use a startup expenses and capitalization spreadsheet as a guide to preparing a balance sheet as of opening day. Then detail how you calculated the account balances on your opening day balance sheet.
A breakeven analysis predicts the sales volume, at a given price, required to recover total costs. In other words, it’s the sales level that is the dividing line between operating at a loss and operating at a profit.