What is a Business Plan? Craft One You’ll Actually Use
One of the most interesting components of small businesses today is how the traditional business plan, taught for nearly a century in colleges and universities around the world, isn’t used. There are a lot of reasons for this – some small businesses, like Amazon resellers, are already following a model and in other cases, the entrepreneur is “to busy” to make the time to craft a clear statement of what – and how- the business will run.
No matter what the excuse, writing and analyzing you business plan is a very smart way to see pitfalls in your business before they slow you down. Sure, the original business plan was designed to “sell” an idea in order to generate funding, but even if you don’t have to go and borrow money or find investors, writing out a business plan and then asking for real feedback from seasoned professionals – not friends and family – is a great way to see challenges before they imperil your new company.
What’s in a business plan?
Traditionally, a business plan will contain the following seven components and could easily run over 20 pages.
- Executive summary
- Company description
- Market analysis
- Product or service description
- Sales and marketing strategy
- Organizational and management structure
- Financial projections
This is the style that business plans have been created in for decades and work well for many companies. Each of the parts are very straightforward, but, again, this format and length is about securing financing and partners, not just about creating a company. We’ll talk about securing financing in a little bit, but first, let’s talk about the business founder and the things they need to really have crystal clear in their minds and their business plan – the business idea.
Making the Dream Reality
When you get right down to it, a business is really nothing more than a dream. Even Michael E. Gerber, author of The E-Myth Revisited and one of the most respected minds in small business development encourages his readers and clients to only open a new company after they understand what their Dream, Vision, Purpose, and Mission will be – those four components make up the first half of the business plan as taught by Gerber Today, it may be fashionable to be “following your dreams” when you open a business, but that dream has to be seated in reality – and thus, the need for a business plan.
What, exactly, is your business idea and why will it be successful when, statistically, 80% of small businesses fail in the first five years?
THIS is critical – you may not be curing cancer or solving world hunger, but what is it about your way of doing business that will make it successful?
Remember, Uber does the exact same thing that public transportation and cabs do – but it uses technology to speed up the process, make is safer, and less expensive. 1-800-Got-Junk simply helped make it easier for people to throw things away.
Amazon was a way for Jeff Bezos to sell books out of his garage.
Where Will You Go?
When you craft a business plan, it doesn’t pay to think 3, 5, or 10 years down the road – it needs to stick to the critical periods from open to break even and then, perhaps, one more year. An important part to remember, especially if you are writing your business plan more as an exercise in understanding how your business will function than as a treatise to attract investors or secure financing, is that the smallest businesses inevitably morph. Perhaps you opened the doors to sell websites, but 12 months in, your finances indicate that you do far more social media marketing than website building.
Should you keep building websites? Sure, but the primary business focus may have shifted to social media – and at that point, you can revise your business plan with this new data. Here’s something to remember – your business plan is just that – a plan. You may sign a contract to secure financing, you may dilute equity by bringing on investors, but, as a principal, as you identify trends in your company and industry, you must investigate how those can impact your future business and your current business model. Your business plan is not set in stone, but when you take the time to create it, take the time to understand potential alternate streams of income for the business as well, not just a core product.
Attracting Financing with a Business Plan
If one of the primary reasons to create a business plan is to attract financing, then your business plan needs to meet the traditional criteria we talked about at the top of the page. More importantly, your plan needs to thoroughly discuss and analyze the financial aspects of the business. At the early development stages, financial forecasting and a winning team are two of the primary focuses of investors – they look for principals with established and successful track records and they look for realistic data with respect to how their money will be used and how they will recoup their investment.
It goes without saying that, in these circumstances, formatting, spelling, and grammar are critical – this may be the only exposure you have with an investor and your ideas need to have solid financial forecasts that can easily be understood.
At the same time, you need to understand the particular “quirks” of certain investors – for example, HBD Venture Capital has a mandate for investing in high-growth, technology orientated businesses; Old Mutual’s Masisizane fund focuses on businesses that contribute to black economic empowerment and Business Partners has a broader mandate focusing on a wide range of industries and venture types.
If you identify specific information like this, it pays to custom-tailor your business plan before you submit it to them so it focuses on why your company is a seeking their investment. At the same time, using your own network for personal referrals can also open doors, whether it be at a larger investment firm or simply a local bank in a small town.
Who’s on the team?
Much of what we’ve covered this far has allowed us to focus on any small business, from one solopreneur opening his own company to a fully-loaded team planning an IPO next year. It’s imperative, if your company is based on a core group of founders, to know who is one that team and to understand what, exactly, their role is in the company. They may have an extensive list of contacts, they may have successfully opened multiple concepts, or they may be operational geniuses. In any case, the business plan needs to note their previous accolades and the specific roles they will play in the new venture. Just as importantly, each member needs to understand the role they play, in both the short and long term.
Managing the Financials
With respect to the financial side of your business plan, whether you are submitting the plan for an investor or merely drafting a road map to follow, think growth before you think about profits. Many, if not all, investors are looking for solid growth projections because they understand that growth will equal profits, not the other way around. At the same time, seasoned investors also realize that financial projections are just that, projections. Profits are great, but real growth comes from spending profits. Focus on understanding how to generate growth.
The financial section of your business plan should thoroughly document your projected revenues and expenses, and expected cash flow. Not planning for the timing of inflows and outflows of cash will leave your business vulnerable to failure, no matter how strong your idea. You also need to clearly understand how and when cash flows into and out of your business. Sales are great, profits are great, but cashflow is king.
Writing a business plan is the perfect first step to opening your business, no matter what it is. Taking the time to thoroughly vet the “how” and the “why” can provide you with investment capital and help you to see critical shortcomings in your idea – before it costs you. If you aren’t sure where to begin, of course, we’d love to spend some time with you discussing your own plan and strategy and how the financial aspect of your business plan may impact your new company.
By: Chris Groote
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