Entrepreneurs often overlook the importance of having a comprehensive business plan. There are multiple reasons for this oversight.
The most common is that they underestimate the value placed on a quality business plan by the investor community. Another is that they fail to understand the value inherent in the analysis of the business model with respect to the predictive accuracy of the financial modeling contained within the plan.
In this article I will discuss the reasons why having a good business plan matters, and what should be included within the plan, depending on the specific purpose and intended use of the plan.
I have been writing business plans for many years. It is not uncommon that I write a plan, only to determine that the business model, as envisioned by the entrepreneur, is not viable — it just doesn’t pencil out financially.
Despite the understandable disappointment of the entrepreneur, I always explain that it is far better to find out that the business, as anticipated, will not work, than to place capital at risk — the entrepreneur’s money, or the bank’s or investors’, only to realize too late that the business will inevitably fail.
Often, if the initial business model that the entrepreneur has formulated will not work, there are adjustments that can be made to the operating model that will address the deficiencies, to allow the business to move forward.
Again, it is far better to know up front that these changes are necessary, rather than getting six or 12 months down the road, only to realize things are not working and then having to make a painful and costly pivot.
Before beginning the process of writing a business plan, it is important to know the purpose of the plan. There are two basic reasons to write a plan, and they are not mutually exclusive.
The first is to secure funding, and the second is to determine if the business model is viable (as stated above), and if so, to have a detailed roadmap to follow, to build a successful business.
With regard to funding, it is important to know what the target funding source or sources will be. If the source of funding is expected to be a bank loan, such as an SBA loan, there are specific things that banks need to see within the plan, and particularly within the financial model, that must be included, or the chances of securing a loan will be greatly diminished.
Likewise, if funding is expected to come from investors, there are specific elements that investors expect to see, and if they are absent, investors will view this as a huge red flag, and will likely pass.
Knowing your audience, not only up front, as you develop your strategy for writing your plan, but also throughout the entire plan-writing process, will greatly improve your chances of successful fundraising.
If the main purpose of writing the business plan is for strategic planning — building a detailed roadmap to follow as you build the business, then you will want to write the plan with this goal in mind.
The key elements of the plan should include those key aspects of building the business, including specific milestones with timelines to achievement of each, that the entrepreneur feels are critical to success.
Once the main purpose for writing the plan, and the related elements necessary to write the plan according to that purpose have been outlined, the entrepreneur needs to know the basic sections that every plan must include.
These basic main sections are part of every well-written, comprehensive business plan. Based on the main purpose of the plan, additional details, and possibly additional full sections of the plan, will need to be added to create an effective tool for its intended purpose.
Main Business Plan Sections
The order of the basic sections of the business plan are not all that important, except that you should always include an executive summary at the beginning of the plan. This is the section you will write last, as it is a summary of all of the other sections of the plan (plus some additional information that should be included).
In order the write the executive summary, you must have written all of the other sections of the plan, and you must have completed your financial model with all relevant summary tables.
Every well-written business plan must include at least the following basic sections. Again, the order is not all that important, although I am presenting them here in the order that I typically use.
Depending on the type of business, the industry within which it will operate, the audience and other factors, the entrepreneur may want to alter the order of the sections to include those most relevant sections earlier in the plan format.
I always include a cover page that includes the company name and logo, if one has been created, and some kind of imagery or artwork that reflects the type of company, product or service, industry, technology, etc., to set the expectations of the reader onto the right path. First impressions definitely matter.
I also include a disclaimer/safe harbor statement. The wording of these should be carefully crafted, and they are far from fool-proof, but they will provide a reasonable level of protection. (A qualified attorney can assist with this aspect of the plan.)
I typically include a confidentiality/nondisclosure agreement, although most investors refuse to sign these. The entrepreneur must decide, based on the content of the business plan, if an NDA is essential. (More on this below.)
» Company Description — The first main or basic section of the business plan, after the executive summary, is the company description or company summary.
In this section, you should outline the legal structure of the company — corporation, LLC, LP, etc., company history, ownership, values, mission statement, vision statement and any related descriptive information about the company that is relevant to the target audience.
» Product/Service Description — The next section I include is the product or service description. Here, a detailed description of the product(s) or service(s) should be outlined.
If the company owns any intellectual property, this is a good place to include it if it relates to the product(s) or service(s) of the company. If the IP relates to a core technology, process, etc., of the business, then it could be included in the company description section.
The entrepreneur must decide how much information to include about the IP. This relates back to the NDA issue — if you do not anticipate that readers will voluntarily sign NDAs, and you have valuable IP you need to protect, you will not want to disclose that information. You can reserve it for one-on-one meetings or conversations, or secure an NDA before releasing that specific information.
If you have revenues, you may want to include historical sales results by product or service, or by product or service category. If advantageous, you could also include pricing, profit margins, growth rates for revenues and the like.
For most new businesses, this is the section where you can make your case that your product or service is revolutionary, disruptive, niche market, critical to some other product, service, or process, and generally valuable and likely to sell well. Potential funders are typically focused on two areas — the product or service, and the people, so these two sections (People will be addressed below) are where you need to really shine and stand out.
» Management Team — In this section, the entrepreneur will outline the value proposition of each key team member. For new or newer businesses, there are often gaps in the team. This is to be expected and is not a deal killer.
However, to the extent that you can identify these gaps, and provide a reasonable gap filler, you can reduce or remove potential red flags.
The use of advisers, mentors, board members and consultants can provide effective gap fillers. Having a lead investor who is also highly experienced and skilled in the specific industry, or with the specific product or service, can go a long way toward alleviating any negative perceptions stemming from gaps in the team.
The typical information to include here is biographical — education, experience skills, etc., but targeted toward the business, product or service.
Each team member bio should be written succinctly, and should be highly focused on driving the success of the business. As the question; Why was this specific team member chosen for this team?
» Industry Analysis and Competitive Comparison — This is probably the most difficult section to write, other than the financial analysis (see below). Market research can be difficult or impossible to find, especially if the business has a completely new product or service so that there is no available market research or competitors to discuss.
However, every product or service sells into a specific market or to a targeted consumer.
The entrepreneur may need to get creative with regard to finding relevant information. The objective with this section is to discuss the potential market for the product or service, and the potential competitors that can affect the chances for success for the company.
If the product or service is already generating revenues, an analysis of the current and projected market share secured and anticipated can provide visibility.
There are many research services available that generate detailed reports on industries, but for U.S.-specific industries and global reports. These can be expensive to buy, and there is also a lot of free information available on the Internet.
Some entrepreneurs may be able to conduct their own specific market research through a variety of efforts, including surveys, interviews or questionnaires of potential consumers, focus groups, pilot sales in a target market that offers a high percentage of targeted consumers, crowdfunding campaigns and the like.
Money is usually the constraint for these activities, but they can be highly valuable and relevant to potential funders, so it is worth taking some time to create a strategy for securing this information. Summarizing this information should be well-planned as well. The use of tables, graphs and other organizational tools can help.
Competitor information can also be very difficult to secure. Most competitors, particularly for newer technologies, or product or service categories, will be private companies, which typically do not release much, if any, information to the public. As a result, it is virtually impossible to gather any specific data on them.
Public companies are much easier, since they are required to file at least quarterly data with the SEC. The entrepreneur must gather as much information as possible in this area because potential funder will want to know.
» Facilities and Operational Plan — In this section, which is a very important one for entrepreneurs in our local market, the details of the physical facilities required to operate the business are outlined.
I typically include a five-year financial projection (see the next section), and part of that forecast includes projecting the current and future facilities needs and costs. The operational plan includes expected employee and contractor/consultant costs for the five-year projection period, along with any equipment, or other significant expected expenses.
This section really shows the potential funders of the business that the entrepreneur has done his or her homework, and fully understands, to the extent possible, what it will take from a financial standpoint, to build and run the business.
» Financial Analysis — This is probably the most important section of the business plan. A minimum of three years of financial projections should be included, and I usually work with a five-year projection.
At minimum, there should be annual profit & loss statements, income statements and statement of cash flows for each year represented. This is the bare minimum, and I often include additional tables and details, such as monthly or quarterly projections for each of those major statements, supporting tables with projections for employee costs, facilities costs, break-even analysis, product or service pricing and profitability details, etc.
The choice of what to include will depend to a degree on the type of business, product or service. If historical financials are available, I also include those, showing them as the starting point for the projections.
When creating the financial forecast, there are many assumptions that must be included. These assumptions should be realistic, and should be based on reliable data, to the extent possible, or reasonable estimates for the key inputs.
This is the area where savvy investors will dig in, so it is best to have a ready answer for each key assumption. Including those assumptions in a separate table is a good idea, especially if you can justify your choices.
Investors tend to see red flags when reviewing projections, and this can be where the entrepreneur loses the interest of those investors, so to the extent that these potential red flags can be eliminated or mitigated, it is best to do so.
Anticipating where a potential funder may take issue with a key data point, and addressing that issue effectively, can make all the difference.
Once these main sections are complete, as stated above, the writer must then write the executive summary. This first section must include a succinct, but detailed summary of each main section to follow.
Often, potential funders only read the executive summary, and if they don’t immediately like what they see, they will stop reading. Only if they are intrigued by the executive summary will they venture into the other main sections for more detail.
It is absolutely critical that the executive summary is well written, and compelling. Thus, this is arguable the most important section of the business plan.
As mentioned above, these are the basic sections that every business plan should contain. Additional sections may be required, or may add significant value, depending on the business model, and the purpose of the plan.
Keep in mind that a good business plan is a dynamic document, meaning that it is not static, and should be updated regularly as the business grows over time, to accurately reflect the changing operating environment and the performance of the business.
The financial model, of course, must also be updated to reflect those changing conditions.
Hopefully, this article will help entrepreneurs gain a better understanding of the importance of a well-reasoned, well-written business plan, and the required components of a good plan. I wish you great success with your project!
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