Why you need a business plan
You’ve heard it before, you should write a plan before you start your business. You might be wondering why that’s so important. Here are three good reasons. Writing a plan
- clarifies what your business goals are so you know how to measure success,
- helps you spot potential problems so you can plan for them instead of getting caught by surprise, and
- shows potential investors or lenders how you will make the business profitable so they will be more likely to invest their money or approve your loan.
How detailed a plan do you need before you jump in and get started? That depends on two things-the amount of risk you are taking and how much outside financing you need. For example, if you are a painter that has been employed by a reputable contractor and you want to start your own business by taking some additional jobs on your own, you aren’t taking much risk. As long as you verify that you are not putting your full-time income at risk, you may be able to just start taking jobs and plan as you go. When I started my coaching and consulting business, I used a personal credit line in an amount that I knew I could pay off to cover expenses. I did some planning to ensure that I would have a good chance of success and keep my expenses under budget. If you are planning a business start up that involves significant upfront investment, you will want a more detailed plan. Even if you plan on financing the business through personal loans, a second mortgage, or your own savings, you will want to know that you are investing your money wisely and developing a plan will help you be sure of this. If you are seeking outside investors or business loans that are not secured by your personal assets, you will need to convince investors or lenders to say yes to your request with a detailed, realistic and well-researched plan.
What goes into your business plan?
The body of a well-written business plan contains:
- a description of the business
- market information
- financial information, and
- management information
Business description
The description of your business is based on its mission, vision, and values. What will your business do and how will it generate income? Will you have employees? If so, what training, education or experience will your key employees need? Your description should clarify exactly what service or product(s) your company will offer and identify your target market. It should also indicate what business structure you will use and identify the key players in the company.
Market
After you have defined those basics, it’s time to discuss the market for your business. Who are your competitors and who dominates the market? Think about the unique strengths that will allow you to obtain a sustainable competitive advantage in serving the target market you identified above. In order to succeed, you will need to identify and build upon your unique strengths. You might want to perform a SWOT analysis to help you clarify your competitive position. A SWOT is simply a collection of lists-your strengths and weaknesses (things that are inherent to the business you plan to run) and your opportunities and threats (things that are external to your business) You should only list things that pertain to your business objective. For example, if you want to be a model, an attractive appearance would be strength. If you want to be a technical writer, your appearance is probably irrelevant. Once you’ve made your list, take it a step further. Clarify how you can use your strengths to counteract your weaknesses and take advantage of market opportunities to build a sustainable advantage over your competitors and develop a plan to overcome potential threats.
Financial
This is the most important piece of your plan. If your business is not profitable, it won’t work as a business! If it’s something you love, you can still enjoy it as a hobby. If it makes a difference in the world and you want to fund it, that’s fine. Just be realistic and recognize whether or not you can make a living out of what you plan to do. If you can’t-it’s better to know that up front.
You will start with a detailed listing of your start-up expenses. While expenses will vary depending on the type of business you plan to establish, common start-up expenses include legal work, logo and brochure design, training, and site selection and improvement. You will also include the available assets you will use to pay for start up expenses and the loans or outside capital that you will obtain. Start-up expenses, assets and funding all refer to what is needed and available before you actually start your business.
Then you will project your future income and expenses after you start doing business for the first year in a projected profit and loss statement. It’s important to be as accurate as possible here. Many businesses will operate at a loss when they first open because it takes time to build up a customer base and becomes established. That’s OK, if it’s part of your plan and you know how you will keep the business going. It’s not OK if you were too optimistic in your projections and can’t find the money to keep operating until the business starts turning a profit. When I studied for my MBA, we learned to game the system by starting with the numbers that we needed and adjusting the different income and expense numbers so the end result was a profitable “business.” That’s OK for the classroom, but it’s not really an effective or smart way to plan your business. If your projections show that the business is not likely to show a profit or that you can’t afford to fund it until it does, rethink your plan. Is there anything that you can realistically do to turn things around? If not, it’s better to look at a different business idea until you find one that works.
As you work on your profit and loss projections, give a detailed monthly forecast for the first year and quarterly forecasts for years two and three. Of course, these forecasts will change as your business grows and prospers, but they should be based on a realistic evaluation of the market and the competitive conditions your business faces. Be prepared to explain to lenders and investors where you will find your first clients and how you will establish and grow your customer base. In business, nothing happens until somebody buys something. Who will buy from you and what will you do to ensure that they keep buying?
Packaging the Plan
Congratulations! You’ve finished the hardest part of completing a business plan. If you’re a solo entrepreneur and you don’t need outside funding, you can stop planning and stop doing. If you need to convince lenders or investors to help you fund your business, you’ll want to take the time to present your plan in a professional format.. A good way to do this is to add a cover sheet and executive summary in front of the body of your plan. The cover sheet will identify your business and the key people involved in the business. The executive summary will briefly summarize your plan so an investor or loan officer can quickly determine whether or not they want to look at the details in the body of the plan. Obviously, you want the answer to be yes, so take the time to make your summary as compelling as possible. Then, attach supporting documents as an appendix at the end of the plan. This section would include things like tax returns for the owners that are funding the business and any documentation that supports your financial projections.