CHAPTER

10

Plan of Attack

Creating a Winning Business Plan

Think you don’t need a full-fledged business plan? Think again. According to a recent State of Small Business report, commissioned by Palo Alto Software, 79 percent of companies with a business plan say they are better off financially year after year, while only a third of small businesses without a business plan can say the same thing. Additionally, nearly 75 percent of established companies that have a business plan in place expect to grow, compared to only 17 percent that don’t have a business plan. That’s even stronger evidence than an earlier study conducted for AT&T, showing only 42 percent of small-business owners bother to develop a formal business plan; of those who do use a plan, 69 percent say it was a major contributor to their success.

Some people think you don’t need a business plan unless you’re trying to borrow money. Of course, it’s true that you do need a good plan if you intend to approach a lender—whether a banker, a venture capitalist, or any number of other sources—for startup capital. But a business plan is more than a pitch for financing; it’s a guide to help you define and meet your business goals.


“My interest is in the future because I am going to spend the rest of my life there.”

—CHARLES F. KETTERING, AMERICAN INVENTOR AND SCIENTIST


Just as you wouldn’t start off on a cross-country drive without a road map, you should not embark on your new business without a business plan to guide you. A business plan won’t automatically make you a success, but it will help you avoid some common causes of business failure, such as undercapitalization or lack of an adequate market.

As you research and prepare your business plan, you’ll find weak spots in your business idea that you’ll be able to repair. You’ll also discover areas with potential you may not have thought about before—and ways to profit from them. Only by putting together a business plan can you decide whether your great idea is really worth your time and investment.

What is a business plan, and how do you put one together? Simply stated, a business plan conveys your business goals and the strategies you’ll use to meet them, potential problems that may confront your business and ways to solve them, the organizational structure of your business (including titles and responsibilities), and the amount of capital required to finance your venture and keep it going until it breaks even.

Sound impressive? It can be, if put together properly. A good business plan follows generally accepted guidelines for both form and content. There are three primary parts of a business plan.

       1.  The first is the business concept, where you discuss the industry, your business structure, your product or service, and how you plan to make your business a success.

       2.  The second is the marketplace section, in which you describe and analyze potential customers: who and where they are, what makes them buy, and so on. Here, you also describe the competition and how you will position yourself to beat it.

       3.  Finally, the financial section contains your income and cash-flow statements, balance sheet, and other financial ratios, such as break-even analyses. This part may require help from your accountant and a good spreadsheet software program.

Breaking these three major sections down further, a business plan consists of seven major components:

       1.  Executive summary

       2.  Business description

       3.  Market strategies

       4.  Competitive analysis

       5.  Design and development plan

       6.  Operations and management plan

       7.  Financial factors

In addition to these sections, a business plan should also have a cover, title page, and table of contents.


tip

Although it’s the first part of the plan to be read, the executive summary is most effective if it’s the last part you write. By waiting until you have finished the rest of your business plan, you ensure you have all the relevant information in front of you. This allows you to create an executive summary that hits all the crucial points of your plan.


Executive Summary

Anyone looking at your business plan will first want to know what kind of business you are starting. So the business concept section should start with an executive summary, which outlines and describes the product or service you will sell.

The executive summary is the first thing the reader sees. Therefore, it must make an immediate impact by clearly stating the nature of the business and, if you are seeking capital, the type of financing you want. The executive summary describes the business, its legal form of operation (sole proprietorship, partnership, corporation, or limited liability company), the amount and purpose of the loan requested, the repayment schedule, the borrower’s equity share, and the debt-to-equity ratio after the loan, security, or collateral is offered. Also listed are the market value, estimated value, or price quotes for any equipment you plan to purchase with the loan proceeds.

Your executive summary should be short and businesslike—generally between half a page and one page, depending on how complicated the use of funds is.

Business Description

This section expands on the executive summary, describing your business in much greater detail. It usually starts with a description of your industry. Is the business retail, wholesale, food service, manufacturing, or service-oriented? How big is the industry? Why has it become so popular? What kind of trends are responsible for the industry’s growth? Prove, with statistics and anecdotal information, how much opportunity there is in the industry.

Explain the target market for your product or service, how the product will be distributed, and the business’ support systems—that is, its advertising, promotions, and customer service strategies.

Next, describe your product or service. Discuss the product’s applications and end users. Emphasize any unique features or variations that set your product or service apart from others in your industry.

If you’re using your business plan for financing purposes, explain why the money you seek will make your business more profitable. Will you use the money to expand, to create a new product, or to buy new equipment?

Market Strategies

Here’s where you define your market—its size, structure, growth prospects, trends, and sales potential. Based on research, interviews, and sales analysis, the marketplace section should focus on your customers and your competition. How much of the market will your product or service be able to capture?

The answer is tricky since so many variables influence it. Think of it as a combination of words and numbers. Write down the who, what, when, where, and why of your customers. (You know all this because you researched it in Chapter 7.) The answer is critical to determining how you will develop pricing strategies and distribution channels.


Sample Executive Summary

       The business will provide ecology-minded consumers with an environmentally safe disposable diaper that will feature all the elements that are popular among users of disposable diapers but will include the added benefit of biodegradability. The product, which is patent pending, will target current users of disposable diapers who are deeply concerned about the environment as well as those consumers using cloth diapers and diaper services. The product will be distributed to wholesalers who will, in turn, sell to major supermarkets, specialty stores, department stores, and major toy stores.

       The company was incorporated in 1989 in the state of California under the name of Softie Baby Care. The company’s CEO, president, and vice president have more than 30 years of combined experience in the diaper industry.

       With projected net sales of $871 million in its third year, the business will generate pretax net profits of 8 percent. Given this return, investment in the company is very attractive. Softie Baby Care Inc. will require a total amount of $26 million over three stages to start the business.

              1.  The first stage will require $8 million for product and market development.

              2.  The second stage of financing will demand $12 million for implementation.

              3.  The third stage will require $6 million for working capital until break-even is reached.

       First-stage capital will be used to purchase needed equipment and materials to develop the product and market it initially. To obtain its capital requirements, the company is willing to relinquish 25 percent equity to first-stage investors.

       The company has applied for a patent on the primary technology that the business is built around, which allows the plastic within a disposable diaper to break down upon extended exposure to sunlight. Lease agreements are also in place for a 20,000-square-foot facility in a light industrial area of Los Angeles, as well as for major equipment needed to begin production. Currently, the company has funding of $3 million from the three principals, with purchase orders for 500,000 units already in hand.


Be sure to document how and from what sources you compiled your market information. Describe how your business fits into the overall market picture. Emphasize your unique selling proposition (USP)—in other words, what makes you different? Explain why your approach is ideal for your market.

Once you’ve clearly defined your market and established your sales goals, present the strategies you’ll use to meet those goals.

         Price. Thoroughly explain your pricing strategy and how it will affect the success of your product or service. Describe your projected costs and then determine pricing based on the profit percentage you expect. Costs include materials, distribution, advertising, and overhead. Many experts recommend adding 25 to 50 percent to each cost estimate, especially overhead, to ensure you don’t underestimate.

         Distribution. This includes the entire process of moving the product from the factory to the end user. The type of distribution network you choose depends on your industry and the size of the market. How much will it cost to reach your target market? Does that market consist of upscale customers who will pay extra for a premium product or service, or budget-conscious consumers looking for a good deal? Study your competitors to see what channels they use. Will you use the same channels or a different method that may give you a strategic advantage?

         Sales. Explain how your sales force (if you have one) will meet its goals, including elements such as pricing flexibility, sales presentations, lead generation, and compensation policies.


e-fyi

Looking for inspiration? Visit Uncle Sam: The SBA (www.sba.gov/writing-business-plan) offers clear, concise business plan outlines and tutorials. When you’re done, if you feel like your business plan has the right stuff, consider submitting it to a business plan competition. Universities, such as Wharton and Harvard Business School, and corporations often sponsor such competitions, offering grants and other cash prizes that can really help offset your startup costs. To find a competition, Google “business plan competition” and see what turns up.


Competitive Analysis

How does your business relate to the competition? The competitive analysis section answers this question. Using what you’ve learned from your market research, detail the strengths and weaknesses of your competitors, the strategies that give you a distinct advantage, any barriers you can develop to prevent new competition from entering the market, and any weaknesses in your competitors’ service or product development cycle that you can take advantage of.

The competitive analysis is an important part of your business plan. Often, startup entrepreneurs mistakenly believe their product or service is the first of its kind and fail to recognize that competition exists. In reality, every business has competition, whether direct or indirect. Your plan must show that you recognize this and have a strategy for dealing with the competition.


Write Your Plan in Pencil

       Bob Reiss, author of Bootstrapping 101: Tips to Build Your Business with Limited Cash and Free Outside Help, has been involved in 16 startups. His recommendation: Have a business plan, but write it in pencil. Why? You will likely have to change, amend, modify, scrap, or abandon your original business plan altogether. One of the attributes of successful entrepreneurs is flexibility, Reiss says. Writing your business plan in pencil forces you to look at change as the only constant. Make change your friend, embrace it, and work it to your benefit.


Design and Development Plan

This section describes a product’s design and charts its development within the context of production, marketing, and the company itself. If you have an idea but have not yet developed the product or service, if you plan to improve an existing product or service, or if you own an existing company and plan to introduce a new product or service, this section is extremely important. (If your product is already completely designed and developed, you don’t need to complete this section. If you are offering a service, you will need to concentrate only on the development half of the section.)

The design section should thoroughly describe the product’s design and the materials used; include any diagrams if applicable. The development plan generally covers these three areas: 1) product development, 2) market development, and 3) organizational development. If you’re offering a service, cover only the last two.

Create a schedule that shows how the product, marketing strategies, and organization will develop over time. The schedule should be tied to a development budget so expenses can be tracked throughout the design and development process.

Operations and Management Plan

Here, you describe how your business will function on a daily basis. This section explains logistics such as the responsibilities of each member of the management team, the tasks assigned to each division of the company (if applicable), and the capital and expense requirements for operating the business.

Describe the business’s managers and their qualifications, and specify what type of support staff will be needed for the business to run efficiently. Any potential benefits or pitfalls to the community should also be presented, such as new job creation, economic growth, and possible effects on the environment from manufacturing and how they will be handled to comply with local, state, and federal regulations.

Financial Factors

The financial statements are the backbone of your business plan. They show how profitable your business will be in the short and long term, and should include the following:

         The income statement details the business’s cash-generating ability. It projects such items as revenue, expenses, capital (in the form of depreciation), and cost of goods. You should generate a monthly income statement for the business’s first year, quarterly statements for the second year, and annual statements for each year thereafter (usually for three, five, or ten years, with five being the most common).

         The cash-flow statement details the amount of money coming into and going out of the business—monthly for the first year and quarterly for each year thereafter. The result is a profit or loss at the end of the period represented by each column. Both profits and losses carry over to the last column to show a cumulative amount. If your cash-flow statement shows you consistently operating at a loss, you will probably need additional cash to meet expenses. Most businesses have some seasonal variations in their budgets, so re-examine your cash-flow calculations if they look identical every month.

         The balance sheet paints a picture of the business’s financial strength in terms of assets, liabilities, and equity over a set period. You should generate a balance sheet for each year profiled in the development of your business.

After these essential financial documents, include any relevant summary information that’s not included elsewhere in the plan but will significantly affect the business. This could include ratios such as return on investment, break-even point, or return on assets. Your accountant can help you decide what information is best to include.

Many people consider the financial section of a business plan the most difficult to write. If you haven’t started your business yet, how do you know what your income will be? You have a few options. The first is to enlist your accountant’s help. An accountant can take your raw data and organize it into categories that will satisfy all the requirements of a financial section, including monthly and yearly sales projections. Or, if you are familiar with accounting procedures, you can do it yourself with the help of a good spreadsheet program. (For more information on developing financial statements, see Chapter 38.)


Finding Funding

       One of the primary purposes of a business plan is to help you obtain financing for your business. When writing your plan, it’s important to remember who those financing sources are likely to be.

       Bankers, investors, venture capitalists, and investment advisors are sophisticated in business and financial matters. How can you ensure your plan makes the right impression? Three tips are key:

              1.  Avoid hype. While many entrepreneurs tend to be gamblers who believe in relying on their gut feelings, financial types are likely to go “by the book.” If your business plan praises your idea with superlatives like “one of a kind,” “unique,” or “unprecedented,” your readers are likely to be turned off. Wild, unsubstantiated promises or unfounded conclusions tell financial sources you are inexperienced, naïve, and reckless.

              2.  Polish the executive summary. Potential investors receive so many business plans, they cannot afford to spend more than a few minutes evaluating each one. If at first glance your proposal looks dull, poorly written, or confusing, investors will toss it aside without a second thought. In other words, if your executive summary doesn’t grab them, you won’t get a second chance.

              3.  Make sure your plan is complete. Even if your executive summary sparkles, you need to make sure the rest of your plan is just as good and that all the necessary information is included. Some entrepreneurs are in such a hurry to get financing, they submit a condensed or preliminary business plan, promising to provide more information if the recipient is interested. This approach usually backfires for two reasons: First, if you don’t provide information upfront, investors will assume the information doesn’t exist yet and that you are stalling for time. Second, even if investors are interested in your preliminary plan, their interest may cool in the time it takes you to compile the rest of the information.

       When presenting a business plan, you are starting from a position of weakness. And if potential investors find any flaws in your plan, they gain an even greater bargaining advantage. A well-written and complete plan gives you greater negotiating power and boosts your chances of getting financing on your own terms.


A Living Document

You’ve put a lot of time and effort into your business plan. What happens when it’s finished? A good business plan should not gather dust in a drawer. Think of it as a living document, and refer to it often. A well-written plan will help you define activities and responsibilities within your business as well as identify and achieve your goals.

To ensure your business plan continues to serve you well, make it a habit to update yours annually. Set aside a block of time near the beginning of the calendar year, fiscal year, or whenever is convenient for you. Meet with your accountant or financial advisor, if necessary, to go over and update financial figures. Is your business heading in the right direction . . . or has it wandered off course?


aha!

Still need another reason to write a business plan? Consider this: If you decide to sell your business in the future, or if you become disabled or die and someone else takes over, a written business plan will help make the transition a smooth one.


Making it a practice to review your business plan annually is a great way to start the year fresh and reinvigorated. It lets you catch any problems before they become too large to solve. It also ensures that if the possibility of getting financing, participating in a joint venture, or other such occasion arises, you’ll have an updated plan ready to go so you don’t miss out on a good opportunity.

Whether you’re writing it for the first time or updating it for the 15th, creating a good business plan doesn’t mean penning a 200-page novel or adding lots of fancy clip art and footnotes. It means proving to yourself and others that you understand your business, and that you know what’s required to make it grow and prosper.