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Chapter 6: The Business Plan

A business plan sets the goals and strategies for success in business. The document contains all the information that will be needed to obtain financing for your small business. When applying for a bank loan for a new business, a business plan is an essential piece of the application. Business plans can benefit the business even when you are not applying for a loan. Writing the plan will focus your thoughts and help reveal all of the ways to make your business more profitable. The plan also serves to lay out responsibilities among partners if you are operating under a partnership. The actual writing can be a valuable experience. Although it is possible to hire someone to write the plan, doing it yourself forces you to think through the issues and really think about all aspects of your business. Your specific plan must reflect your needs, marketing conditions, funding, and the advice you receive from your attorney and accountant.

The business plan is a critical item for determining if you will really succeed. A business plan forces you to think through financing, time required to make a profit, accounting, and more. Do not worry if there is not enough information available to fill out every suggested part of the plan. Discuss your background and what you have determined to be the market for herbs and the other products offered. Explain why this business will add to the economic community and how it will fill a need you have perceived, and be sure to include your expertise in herbs. Estimate how much money you will need for each phase of the business and when you may turn a profit. Make sure you are being realistic when you are drafting your business plan. Do not sugar coat the negatives of the business — to do so is only to fool yourself. Start writing the business plan immediately. Calculating whether you think your business will be profitable should be done even before you have a name, equipment, or have chosen an organization type. If your herb business does not have a chance to be profitable, then going through the rest of the process of planning for and starting your business is not necessary because it is not a viable business. Once you have determined to make a go of it, channel that optimism through your pen (or keyboard) and write a plan that takes into consideration just how your dream will be made into a reality. The companion CD-ROM and Appendix will have a sample plan for a fictional herb business known as Herbs, Herbs, Herbs.

Writing the Business Plan

Apply the basics of good writing to prepare the plan. Write in simple sentences, and before using the plan to support a loan application or anything else, be sure the grammar and spelling are correct. When sending the business plan to the bank, add a cover sheet and a table of contents so the bankers can reference each part of the plan easily.

The executive summary

This is the last part to you will write but the part that will appear first after the cover letter and table of contents. The reason it is the last section to write is because it comprises the best of each section of the plan. After you have written each section, go back and pull out or compose a one- or two-sentence summary of each section. Think of the executive summary as exactly what its name implies: a summary for a busy executive to read or hear in a short period of time. Imagine what you would say to the president of the local bank about your business if you had a ten-minute interview to explain your potential business, including how you will operate it, and what you need in the way of money to start the business and keep it going until it makes a profit. The executive summary should be no longer than four pages, but shorter is better. As the name of this segment implies, this part of the plan requires you to sum up every aspect of the plan so a bank officer or someone else will learn from the first page the parameters of your business. Also, with your short one- to two-sentence section summaries, include a few sentences about the mission of the business and the business’s long- and short-term goals. This is the place to say if employees will be hired or not and describe the business structure. This introduction should also include basic information such as the location of the business; its contact information via phone, fax, and Web; and a brief summary of future plans.

The Small Business Administration (SBA) website advises to also include the names and roles of the founders of the businesses, their qualifications (a summary of those), the location of the business, and the banking relationships already established.

Statement of purpose

The statement of purpose should be included in the executive summary. This should be one or two sentences on why you want to start an herb business. Be sure to consider not only your own benefit but also the positive effect your enterprise will have on the greater community in which the business exists.

Description of products and services

The business plan needs to include a detailed listing of the products and services offered. This is where any market niche your herb business will fill should be described and is the place in the plan to show your potential investors what will make this business unique. Answer this question: What does this business bring to the market in terms of goods and services not offered, at least not in the same way, to the potential customer base? For example, Shelton Herb Farm sells herb plants, cut herbs to restaurants, and other vegetable plants. It offers other goods and services as well. All of this information needs to be included in this section of the plan.

Spend time researching the services you intend to offer. You can hire someone to conduct this research for you, but if your startup budget is tight, you may have to conduct your research on your own. Luckily, there are a myriad of resources you can use to find this information.

Talk to:

You may also want to talk to your potential customers to see which products they buy, which products they would be interested in buying, and the price points they are willing to pay for each of the products. Potential customers may include:

You need to be aware of your competition, their prices, and the market. Do you plan to operate a nursery to sell plants and related products to the general public? This is where the survey mentioned in Chapter 1 will be of some help. It gives you an idea of who the competition is, what they offer, and how you will meet and beat the competition — not necessarily always on price, but on having more variety, healthier plants, and by offering added value (education in the form of directions and/or craft ideas, and/or recipes) to each plant sold. Some of the primary sources for gathering information on your competitors and others working in the herb business include networking, the Internet, phone books, and your local library.

Organization and management

This is the part of the plan where it is time to describe the type of corporate structure and provide a brief résumé, in paragraph form, for each person involved in the management. This includes the entire team, such as you, a partner, board members, and any professionals hired to fulfill important functions for the business such as legal advice, insurances, accounting, and marketing. If you are having a greenhouse built, it is wise to include the qualifications of the firm doing the work. It does not include the person working with the business from the Small Business Administration, but it is a good place to talk about the fact you are seeking or have sought advice from this corps of professionals and from other professional organizations, such as the Herb Society of America. Do not forget to include business experience, courses, and herb-related training for each person involved with the business, either directly by working in it or indirectly through financing.

Market analysis and sales plan

This segment tells about the target market and the potential customer base and lays out the plan to reach them. It is one of the parts of the business plan that seems daunting at first because it involves looking at statistics such as how many items are sold by the competitors and the preferences of people in your market area.

This section of the plan should take a look at competitors and show where they are and how this business will meet and surpass them by fulfilling an area of customer need not currently being met. Again, the information survey in Chapter 1 will come in handy. Will this business be more convenient for customers, a one-stop shop for herbs and herb uses? Do the plants and plant-related services you supply offer a better product and more information to the customer so he or she can better use the product? How will pricing be determined? Will pricing be a key part of the competitive strategy? Outline the planned strategy, the methods used to reach customers, and the estimated cost of each method. Is a direct mail campaign planned? Will you write press releases to be put in local papers and magazines? Will you set up a website? Be sure to include that cost, and if hiring a Web consultant to develop your website is what you want to do, then this cost needs to be included as well. Lay out the sales terms and credit policies you plan to follow as well.

A list of sites to do market research and resources to help produce a marketing plan are included at the end of the book. You will learn more about marketing tools in Chapter 8. Some of these might become a part of the business plan, especially if you are planning to handle marketing and sales yourself.

Financial analysis and operations

There are two sections in this part of the plan: funding requests and financials. This is the part of the plan where you provide the information that tells potential investors or banks who might want to loan you money just how you plan on making money with your new venture.

It is essentially your profit and loss projections based on the cost of your materials and overhead (the cost of the who, what, when, and where), along with how you plan to finance the business until you start making money. You will likely not turn a profit right away. According to the Small Business Administration, millions of small businesses start each year, but many do not turn a profit until the third year of operation. Be sure to account for the hidden overhead costs: light, heat, air conditioning, cost of sales, marketing, your cost (as a worker), salaries, and other employee-related costs if applicable. Budget for the cost of professionals you will need to hire, such as a lawyer or accountant. Allow for the cost of insurance on the business and possible downturns in the economy. Include as much financial data in the plan as possible. This includes any loan applications made for the business, a list of all of the capital assets including equipment, and a list of supplies.

The Small Business Administration also advises including a balance sheet and a breakeven analysis. This sounds daunting, but a balance sheet is simply a statement of what will come in and go out of the business in terms of dollars, and a breakeven analysis tells when the amount coming in will equal the amount laid out. This is when you estimate the costs of setting up the business and daily operations (including salaries and overhead) will be surpassed by the flow of funds into the business.

Income projections for three years, monthly for the first year and quarterly for the second and third years, are usually included in a business plan. Be sure to explain all of the assumptions that form the basis for the financial projections and how the cash flow will be handled. The example below explains this part of the plan in easy-to-understand terms.

Here is where you make your financial projections for your first three years. These are estimates based on solid information and market conditions but, as with all business activities, nothing is guaranteed. Nevertheless, this is a financial blueprint.

First, make a column of all of the services you plan to offer and forecast sales
for them.

2010

2011

2012

Wreath-making Classes

$7,500

$10,000

$12,500

Sweet Basil

$5,000

$6,500

$7,000

Rosemary

—

—

—

List all of your services and products and what you reasonably expect them to bill. Next, list your costs. These would include cost of goods but not equipment because it is a capital expense, rent, phone, marketing, insurance, fuel, equipment maintenance, and other costs of doing business.

Storage rental

$8,000

$8,000

$8,000

Phone

$600

$625

$700

Insurance

$2,000

$2,100

$2,200

Ad/marketing

$5,000

$6,000

$8,000

Fuel

$1,800

$2,000

$2,000

It is important to make a good faith effort at predicting your costs. Your actual expenses may be higher or lower than your initial projections, so track your expenses monthly to allow for adjustments. For instance, you may increase or decrease your marketing expenses according to projected costs versus actual expenses.

Labor

Here is where you list your labor expenses. How much are you going to pay yourself and your part-time employees? If you have employees, you must pay unemployment insurance, workers’ compensation insurance, and possibly other fees, depending on your state’s laws.

Startup costs

List here what you anticipate the cost of opening your business will be. Some startup costs could be leasing a truck, purchasing office equipment, remodeling costs, purchasing initial stock and supplies for the business, perhaps the cost of building a greenhouse, and your startup marketing. This section includes the things you need to purchase before opening day.

Funding requests

If you are going to borrow the money needed to start the business, provide a detailed financial statement in addition to the information you already have in your business plan. This is the same information you would provide for any loan from a bank or other financial institution. You must provide assurance that you can and will pay back the loan and offer a form of security. This might be your home or other assets such as savings, stocks, or real estate. Your business and its assets will be part of the security package.

Appendices

This is where all of the supporting documents go. It makes it easier for the reader to work his or her way through the documents if a cover sheet that summarizes each document in one or two sentences precedes it in the package. Be sure to include tax returns for yourself and all others involved in the management of the business. Include at least three years worth of records. The next group of documents should be the personal bank statements of each principal. If you are going to lease or purchase any property, be sure to include all of that material. All of the licenses and other legal documents that pertain to the business should be included as well as résumés of each person in the management tier. Also, include letters from potential suppliers that attest to the fact they are going to supply the business with the necessary inventory. If you have included your résumé in the management section, it is not necessary to duplicate it here or vice versa.

Cover letter, table of contents, and statement of purpose

After the plan is finished, it is time to package it for the readers. For your own purpose, a table of contents always comes in handy so you can quickly reference the information you are looking for without having to flip through the entire plan. For the potential financial investors and banks, a cover letter that includes a statement of purpose for the business is also necessary. It is the introduction to the business plan and the introduction of the business proposal to those who read the plan.

The cover letter is a short one- to two-paragraph introduction to the specific person whom you are directing any copy of the business plan to. The letter should simply state the nature of the business, the purpose of the letter, as specifically and succinctly as possible, and that a plan is enclosed in the mailing.

Sample Cover Letter

Herbs, Herbs, Herbs
100 Any Street • Anytown, NC 12345

100-555-5555

August 9, 2010

Dear Mike Smith:

My name is Jean Wilson, and I am in the process of starting an herb business in Anytown, North Carolina. This is an application for a loan in the amount of $15,000 to cover my business’s startup expenses. These expenses include inventory buildup, construction of a greenhouse to preserve plants in the colder weather, and advertising for the business opening.

The entire business plan and your bank’s loan application forms are enclosed for your review and consideration. I can be reached at 100-555-5555 if you have any questions.

I look forward to hearing from you.

Sincerely,
Jean Wilson,
CEO Herbs, Herbs, Herbs

Enclosures (2): Loan Application, Business Plan for Herbs, Herbs, Herbs

The table of contents is simply a way for the person reading the plan to find various sections easily. Be sure to state the title of each section with the page number as a way to find that section. Without a table of contents, those who need to use the plan to consider giving funding to the business, or anything else, will have a hard time using it. Even you, the author of the plan, will have a hard time referring to it for updates and revision of goals without a table of contents.

Where to Go for Help

There are many options out there for writing business plans, and there are forms to help start your business in this book’s companion CD-ROM. If you need help figuring out how to use these forms, you may be able to obtain low or no-cost assistance from a few key sources.

SCORE, a part of SBA, or other Small Business Administration offices
(www.sba.gov): The SBA website has the most comprehensive outline and description of each part of a businesses plan and a free training course in how to write one. Their resources are free to use. If you need personalized help, their offices are ready to help you on the telephone or in person. The SBA small-business programs are wonderful and free to all. To reach SBA by mail:

U.S. Small Business Administration
409 3rd Street, SW
Washington, DC 20416

To reach SBA by phone or e-mail:

SBA Answer Desk
1-800-827-5722
answerdesk@sba.gov
Answer Desk TTY: (704) 344-6640 (TTY are phones for those with hearing disabilities)

Check directly with your state SBA district office or business office for help in writing the plan. The SBA has also developed an online audio-video course that can be accessed on its site with the following URL: http://app1.sba.gov/training/sbabp/index.htm.

Other computer training: If you are looking for more detail on the business plan, Business Plan Pro by Palo Alto Software is a program that provides a step-by-step guide to writing a plan. The SBA also offers a free tutorial course online for writing the business plan.

Internet resources and books: A management consultant who specializes in writing business plans can be found in the local yellow pages. Find other help at websites such as www.sba.gov that explain each facet of writing a business plan in terms that are easy to understand. There are many books available that offer examples of plans. The library will have a listing under “Business plans” as will bookstores and online book outlets. There are so many books on this topic that only one or two are listed in the bibliography at the end of this book.

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