building a better business plan

7/28/2019 Building a Better Business Plan

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Building a Better Business Planby T.M.Hoy

Before you begin (To write or not to write):

Creating a business plan is a major investment of time and energy, requiring a lot of thought, research,planning, calculations, and effort. It's an essential first step on the road to owning your own business.But not everyone needs to write one. First, you need to decide whether your idea is worth pursuing.

Before you begin, take a deep breath, step back from your normal, everyday mindset, and look at yourbusiness (or business idea) from the perspective of a stranger. Considering that starting your owncompany requires an enormous amount of physical and mental energy, combined with (usually) everybit of money you can scrape together, this kind of commitment deserves some careful thought beforeyou take the plunge. Ask yourself - Is this idea worth the price you'll pay to bring it to life? Be harshlyrealistic about the likely outcome, given your best effort. And crucially, what are the alternatives?

Imagine where you want to be a year from now, in three years, in five years or whatever your time

horizon may be. Create an ideal vision in your mind of what success looks like, then write down thethings that would need to happen to make your vision a reality.

After this exercise, examine how your business fits (or doesn't) into the picture. Search your feelings,and take your time doing it. A few days is probably a wise minimum period for reflection. If it feels likethe right choice of action; if your ideal vision of what you want your life to be merges smoothly with it,and you're energized (rather than drained) by these exercises, then you probably have the motivationyou'll need to bring a successful business to life.

So, you've decided the pros outweigh the cons, your idea beats working for someone else, it's betterthan competing ideas and plans, and you're ready to fully commit yourself with all your resources and a

lot of hard work. Where do you begin?

You start by being clear about why you're writing a business plan. Identify your audience because thiswill determine the focus of the plan and have a big influence on its contents. If your plan is written toclarify your own ideas, build your confidence, improve your focus on what's needed for success, and toget some concrete strategies and plans on paper your plan doesn't need to be formal or lengthy. It caninclude or exclude whatever you like, with the proviso that the greater the detail, the greater likelihoodyou'll catch errors and problems early (and spare yourself grief later).

If, on the other hand, your audience is made up of potential investors and lenders, your plan must bethorough, professional, and fairly detailed. If the plan is to impress potential customers or

stakeholders (a term roughly including everyone your business will impact or interact with), it can besomewhere between these two positions, i.e. formal versus informal.

Of course, once you've written any sort of plan, you can change it later so that it fits a differentaudience, but it'll save a lot of trouble if you know up front who is most likely to read and need it.

Business Plan - 2.) Contents

There are many approaches to what a business plan should include, but at its most basic, your planneeds to consider four main factors that will determine whether or not your business will succeed.


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These include: 1.) The opportunity an analysis of the market need you're filling, and how attractivethat market is. 2.)Critical resources all the assets needed to make the plan succeed cash andmonetary assets; human assets such as suppliers, experts on tap, etc. and hard assets like equipment andmachinery (in short, how you can bootstrapthe start up - that is, minimize starting costs with existingassets). 3.) The entrepreneurial team the special skills, talents, and experience owners and managersbring to the business. 4.) The financing structure how the business will be funded (debt versus

equity), and how the financial risks and rewards will be shared by founders and investors, focusing on awin-win deal for all involved.

A thorough business plan includes a lot more than this bare outline, normally containing 10 sections orso. A typical plan contains: a cover page with contact info, and relevant details followed by:

An executive overview or summary.

An offering or funding request.

A description of the company.

The product/service (including promotional efforts and development).

Market and industry analysis (including competitive strategies).

Operations.

Management/ownership team (including legal advisors, accounting pros, etc.).

A schedule of implementation.

Risk assessment and solutions.

Financial statements and analysis.

The plan must be designed to reveal that the business person who wrote it understands every aspect oftheir business, and convinces the reader this business will succeed. This perspective will ensure yourplan meets its goal namely, gathering the support of readers.

This means, above all, it shouldn't be boring!

Let your passion and excitement show through. Take your time writing it. Use pictures and imageswhenever possible to illustrate your ideas, and use your creativity. Make sure the plan shows the scopeand size of your business, and your vision of where it's headed and what it will become.

Study your competitor's ideas, methods, and marketing, and cherry pickthe best stuff. Combined withyour own ideas, you'll be more likely to create a winning plan and strategies.

Ideally, each section builds on the one before it like painting a picture or building a house. Make surethe picture you paint is the one you want to create, and one you can achieve. This is harder than itsounds. Keep working at it until you get it right, rather than be forced to follow a plan you don't want!

The sections on financial statements and analysis are sufficiently important to require their own article.

Please see The Language of Money, after completing this one, for the full details on how to writesuperb financial statements and financial analysis. A brief description of both are given here, butreaders are advised to consult the more in-depth article.

Cover Page

This gives the company name, tagline, or motto, its logo, and contact info (e-mail address, phone andfax numbers, mailing address, social media contact information, and other details).


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It should also include the date the business plan was produced, a disclaimer that the plan is confidentialand can't be reproduced without permission if you so desire, and the number of copies made so as tokeep track of them.

When producing your cover page, remember that this is the first thing your reader will see. Make sureit's visually appealing, and if you can manage it, exciting.

1. Executive Overview/Summary

Write this section last (as it encompasses all the changes and new ideas your plan takes on overtime asyou work on it) and make sure it focuses on the highlights without the greater details. It should be ashort page about 250 words or less.

The overview is a slightly longer version of the so-called elevator pitch. This term refers to the 1 2minute summary of your business idea/plan that you can give to a busy prospect in the length of anelevator ride. It's just enough detail to entice, enough to get them hooked but keeping the trade secretsto yourself (until they're committed or, in this case, committed enough to read your plan).

2.Offering/Funding Request

This should be presented in no more than a two-page format giving an investor the basic sales pitchof how much money the company needs, when it's needed, and what's being offered in return.

Like the elevator pitch of the executive summary, your focus here is convincing an investor yourcompany deserves funding. Investors are market-oriented, NOT product-oriented, and are a skepticalbunch. Products or services meet a need show the size of the need, and how the company will meet itprofitably.

Make your financial projections believable more conservative (and less attractive) is far better than

grossly overoptimistic, but obviously based on wish fulfillment and fantasy land numbers. Avoidoverly detailed projections (the well grounded business person recognizes that uncertainty is the onlysure thing), and make your goal to raise enough money for 12 to 18 months of operations.

Here are two good formats to follow:

Table 1. (a good financial summary format)3 Quarter Fin. Summary

All $'s in M's U.S. 1 Q 2Q 3QUnits Sold 0.5 1.7 3.2

Revenues (per unit) $0.42 $1.10 $1.40Gross Margin 41.00% 56.00% 63.00%EBIT* $.05 $.27 $.32Cash Flow $.81 $1.77 $2.15*= Earnings Before Interest & Taxes

Deciding how much equity to offer and how to value it is your hardest decision. Use your competitor'snumbers (both their revenue statistics and their valuations) as a rule of thumb. Close with this offer, andbe certain to include the projected ROI percentage (Return On Investment) to show your offering as anattractive alternative to other investments.


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The second attractive format is to show at a glance how the money will be obtained and used.

Table 2.Offering Sources & Uses

Sources:Bank Debt $100KEquity:

New Investors $300KFounders $100K

Total Sources $500K

Uses:Product Development $125KPersonnel Costs $75KWorking Capital:

Cash $20K

Accounts Receivable $100KInventory $80K

Machinery $100KTotal Uses $500K

3.A Description of the Company

Briefly describe the type of organization (whether LLC, Corporation, partnership, sole proprietorship,etc.) Mentioning why this type was chosen, followed by the names of the owners and managers, thelocation of the business, how long it's been in operation, and other relevant details. If possible include

pictures it brings your business to life for readers.

This section might also include a concise (very concise, preferably like a line or two) missionstatement or statements on the purpose of the company. What the company seeks to accomplish, I willwill get there, and progress to date on these goals if it can be kept to a short paragraph or two. Becareful not to get too preachy or self-righteous.

4.Product/Service

Depending on your audience, this is the heart of your plan. Make your pitch for your businessesproduct and/or service and inject your enthusiasm into it. Think about what sold you on it.

Fit in with your mission statement or company goals and aspirations.

Here are some questions you need to answer: what makes your offerings different? How will youcompete? How you meet (or preferably exceed) customer expectations? What's your pricing strategy,and why? How will you identify major customers? What are your methods of distribution (do we haveyour own retail outlet, or do you use wholesalers and distributors, dealers, etc.)? Do you offer awarranty (and why or why not)?

Following these answers, promotion should receive detailed attention. Your ideas of what media to use


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our vital . Will you use all or some of the traditional methods, namely newspapers, radio, TV,billboards, Yellow Pages, direct mail, specialty ads, trade shows, magazines, catalogs, displays,contests, coupons, direct sales, door-to-door? Describe the type and nature of your business advertisingstrategy, and compare it to the competition.

It's also vital to have an online presence and promotional strategy. Whether using targeted Google ads,getting your business listed in online directories for markets, setting up a fully interactive e-commercewebsite, and making use of social media such as Google +, linked in, Facebook, twitter, Pinterest, andothers you need to use the power of the Internet to boost your business.

You need to engage with your customers; be responsive to their needs and desires, and the Net andsocial media are an easy and essential way to do that. If you can sell your product or service onlinewith companies (check out affiliate ads with companies like Amazon and click bank) do it, andunderstand this is an extremely efficient way of reaching new markets as well as interacting with yourregular target market. Research the cost and the effectiveness of your media/promotional strategy, anddiscuss how you've made your choices.

Point out the various reasons your business is superior. Focusing on integrity and ethics is an excellent

perhaps the best of all possible selling points, when combined with a commitment to quality. This ispart of your brandingstrategy (please see Brand/Anti-brand) though be careful to only commit towhat you can authentically create. There's nothing worse than getting a rep as a faker or a poser. A low-cost way to do this is to join civic and quality control organizations such as your local Chamber ofCommerce, the Better Business Bureau, sign up for ISO (international standards organization)certification, and with similar entities. Display these icons of your membership prominently on yourwebsite with links to the organizations, in the windows of your business, on business cards, etc. Thiswill reassure customers are your trustworthiness and establish a positive image.

Finally, one way to really set your business apart is to reach out your businesses stakeholders and thecommunity, with a plea for making it a better place. Choosing a local charity to support, or setting up

your own campaign to improve the neighborhood (however that applies to your business) can be apowerful strategy. Making your business green, sustainable, and concerned with social andenvironmental justice are all hot buttonissues with consumers and incorporating aspects of theseideas into your business can give you invaluable local Goodwill, high visibility and free mediaattention and radically increased sales.

5.Market &Industry Analysis

This section lays the groundwork for how you conduct your operations giving the details on whyyou're operating the business in the manner you've chosen. The basic questions of these analyses arecommon sense: who's your target market? What's the size the market and is it enough to sustain your

business? Where'd you get your info (revealing the depth and quality of your research)? Aie that in withmarket trends, the characteristics of your markets, the geographic area and its demographics, and so on.How is your business affected by the economy (local and national, and/or international)? What aresocial and public attitudes toward your business? What is the regulatory (government) environmentslike? Describe your use of technology (new and existing) and similar issues.

This ties in neatly with industry and competitive analysis what's the current profitability of theindustry as a whole? Who are your direct and indirect competitors (and in particular, the majorcompetitors your business faces)? What are the barriers to entry into your market? Try and include data


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on the sales, growth, profits, market share, and strengths and weaknesses of your competitors, and howyou'll deal with them. This info reveals your businesses likely prospects in a concrete and convincingway.

Cherry pick the best ideas of the competition and also make use of industry best practices andguidelines learn from their mistakes to boost your own chances of success.

6.Operations

Describe the nuts and bolts of how your business works.

Start with your building/plant/office/shop is it adequate? Do you rent, lease, or are you purchasing?Lay out the costs (maintenance, taxes, utilities, etc.), and how the site is a benefit -or, if it's a drawbackhow you'll overcome it. Do vendors deliver there, and are there zoning issues? What are yourexpansion plans, and how will this affect your current location?

Detail your equipment (models, types, prices of each, etc.) And how it helps the business and/or addsvalue. How do you assure quality control?

Discuss your vendors their payment policies (credits or cash only), why you've chosen them, andrelated issues. Similarly, discuss your employees, their numbers, positions, salaries, and so forth, andgive an overview of your employment policies and practices, training and retention strategies, and howyou'll ensure good customer service.

Some modern tools to help your business include business management software (which supplies thetemplate for for operating your business, streamlines it and solves many operational issues), and doinga thorough online search for alternative sources of products/services, finding other companies that canaid yours, and up-to-the-minute, cutting-edge advice, resources, and technologies.

7.Management/Ownership

List your board of advisors lawyers and other professionals helping your team along with everyone inmanagement and that has an ownership interest in the business. This is your brain trust your businessteam. For your business to succeed you need dependable, competent management. Describe the teamwith mini-biographies (a paragraph each, figure about 150 words or less and don't forget those pics !),what you're paying them, and what talents and skills they bring to your business.

Who's on your Board of Directors (if you have one)? Do you have outside advisors? Mentioning theprofessionals your company uses can raise your credibility so name your lawyers, bankers,accountants, insurance agents, ad agencies, etc. which all assist in building the profile of your

company.

8.Implementation Schedule & Plan of Action

It's best to be as realistic (and as generous with time) as possible when creating your timetable. Settinggoals high can inspire employees and motivate you to excel, but it can also create deep disappointmentand turn off investors if you fail to meet them.

Give a brief description of your goals, how you decided to set the timetable you've created, and how


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you intend to achieve the main goals. A fill-in the blanks list is easy to understand and effective formatwith several headings.

Task time periods to achieve them (wks., months, or quarters)

and so on.

Alternatively, you can list your goals with bullets a la PowerPoint presentation style, and give yourestimate of when each will be achieved.

Whether in chart or list format, put put the goals in order of importance, and give dates for theircompletion. Seeing how closely you've adhered to the schedule later will give you an excellentscorecard on how well you (and your team) have done, and how realistic you been.

9.Risks/Problems (& Solutions)

This section, when all pretense is stripped away, addresses how the business will pay back investors ifit fails. However, it is also an opportunity to show readers that you've prepared to deal with most (if notevery) contingency, and overcome every obstacle to success.

The list of risks and problems to be addressed varies quite a bit from industry to industry, as well ashow exhausted the list should be. A good rule to follow comes from the courts and the standard forpersonal liability in lawsuits. If a risk or problem should have been foreseen by a reasonable andprudentperson as being a potential source of danger (and dealt with accordingly), then that person orcompany is liable when something goes wrong. This is a decent standard to use for what to include in

this section, enter prepare solutions and backup plans for worst-case scenarios.

Some obvious areas to cover or consider for inclusion are the risks of lawsuits or changes in laws andregulations concerning your product or service; competitive risks relating to the marketplace, that is how you'll deal with sudden shifts in consumer behavior, the industry and other competitors especially regarding prices; the safety of your product/service and any health issues; issues on theavailability of capital and credit; dealing with the sudden downturn in the economy or industry; crisesthat might occur with various stakeholders; any other problems specific to your business.

Try to be thorough about the potential risks your business faces without being tedious. This is adifficult task but not impossible (think about how disaster movies can entertain, with yourself as the

hero/heroine).

10.Financial Statements & Analysis

If you intend to raise money with your business plan, your financial statements analysis of the mostimportant part of the plan. Accounting is the language of money, and your financial statements sendclear messages to lenders and investors. You therefore need to know how to speak that language atleast the basics of it. This vital knowledge deserves an in-depth discussion. Please read the article


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following this one (The Language of Money - Financial Statements & Analysis).

What's given here is only the briefest of overviews, and needs to be supplemented by further reading.

A business plan's financial statements should include (at a minimum) a funding request, and ownersinvestment and personal financial statement, a borrowers collateral sheet, an income statement, abalance sheet, a cash flow statement, a sales and earnings forecast (and the assumptions made incalculating these numbers), followed by a section on financial analysis, including standard investmentratios and an appendix with any supporting documents, such as market research reports, tax returns,current capital structure, and related documents. There are crucial items/entries within each of thesestatements that investors and lenders focus on. It is vital you know which one, and what message is sentby each. It speaks to the lenders of your understanding of money management and reveals yourunderstanding of investor concerns.

Financial statements are, unfortunately, made difficult to understand because the jargon andterminology they use. Obscuring easy understanding of the subject using arcane language is, of course,standard tactic of the elites and professions through the ages, meant to keep outsiders from gainingaccess to the treasury. Boiled down to its essence, financial statements are simple pictures of the value

of a business at the moment a picture is taken (when the statements were prepared).

The big three are the balance sheet, the income statement, and the cash flow statement. Their purposeis also simple to examine the profitability of a company, identify the source of that profitability, andshow how the profits are being managed.

A balance sheet is a summary of business assets and debt. The basic formula is:Total Assets = Debt + Ownership Equity. It shows the company's assets, sources of financing, and itsdebts.

The income statement (formerly called the profit/loss statement) summarizes whether or not the

business earns a profit. The basic formula is:Sales (Revenues) - Expenses = Profits (Income). It breaks down a business's expenses and showswhether it earns more than it spends.

The cash flow statement tracks inflows and outflows of cash. The formula is:Beginning Cash + Total Cash Receipts - Total Cash Disbursements = Ending Cash Balance.It shows when cash enters and exits the business, and how operations affect your cash flows.

These three, plus a sales and earnings forecast, given investor and/or lender enough information todecide whether or not your business is a potentially good investment/credit risk. Sample financialstatements are included here, though there are different kinds of items and entries that very from

industry to industry. For example, banks balance sheets and income statements are often complex andhighly detailed, whereas most retailers and service industry businesses tend to have very simplestatements.

A brief description of what each financial statement in your business plan should include follows here.

Owner's investment and personal financial statement. This is the capital brought to the business by theowner, and his personal financial statements (these may not always be included if the lender requiresyour personal guarantee, then yes, otherwise no).


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Borrowers collateral sheet. These are the assets free of obligation that can be used to secure funds andpay off investors if necessary. This includes fixed assets like equipment, land, buildings, cash on hand,accounts receivable, stocks and bonds, etc.

Income statement. The income statement gives the total income of the business, minus all expenses,yielding the profit/loss after everything has been deducted (the income statement was referred to as theprofit/loss statement for this reason). It shows how the firm spends its income, and whether it isoperating successfully.

It gives the income from sales and revenues (inflow of cash), followed by costs of goods sold, generaland administrative expenses, other expenses like wages, benefits, office supplies, insurance,repairs/maintenance, utilities, interest expense, taxes, etc., then gives the gross profit, the operatingprofit (gross margin minus administrative and selling expenses), net profit before tax, after-tax, andfinally the net profits (or loss).

Balance sheet. This provides a picture of a company's resources, obligations, and solvency at a givenpoint in time. It has three parts assets, balancedagainst liabilities and owners equity.

It is generally broken down into the categories of current assets (cash on hand, accounts receivable,inventory, and things that can be turned into cash on short notice); long-term/fixed assets (property,plant, equipment, depreciation allowances, and other long-term assets), and 'other' assets such asprepaid expenses, insurance, goodwill, and fungible things not included in the other two categories.

This is followed by liabilities, divided into current liabilities (accounts payable, notes payable, payroll,and items that require immediate payment); long-term debt such as loans, bonds, and debt stretched outover time or requiring payment in the future. The last section owners equity includes capital stock,retained earnings, and the net worth of the company to the owner after all debts are paid.

The two sections assets versus liabilities, should match, hence the term balance sheet.

Cash flow statement. This tracks the flow of cash into and out of your business, and reveals whethercash comes in and goes out in a way that sustains your business. It includes beginning cash balance,followed by cash receipts, cash sales, and collection of accounts receivable, for total cash receipts followed by cash disbursements (the cost of goods sold, expenses, payment of salaries, general andadministrative expenses, taxes, equipment, rents, insurance, etc.), capital expenditures, dividends andwithdrawals, and ends by yielding a figure for total cash disbursements, followed by the cash surplus(or deficit), minimum cash requirement, loan requirement, loan (s) repaid, and then the ending cashbalance.

Sales and earnings forecast. This may be based on your competitors numbers, or industry 'bestpractices' numbers, or on current sales and your estimates of growth. It shows where the cash comesfrom the schedule of when it arrives. In this respect, it is very similar to a cash flow statement, thedifference being that it projects cash flow into the future. It includes goods sold, interest income, andthose entries found in the cash flow statement.

Assumptions. This is where you describe how you arrived at the numbers. What figures were used andwhy? How did you estimate labor, cost of goods, and other expenses? Give explanations as to sourcesand the nature of payments on borrowed money, if allowances were made for unforeseen events and


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problems. Make a list of categories and assumptions that show how the numbers were arrived at, andwhy they are reliable and accurate.

Financial Analysis

This section can be as simple or as complex as you want to make it. But at a bare minimum, you shouldevaluate the company's performance in four areas: its ability to pay debt as it comes due; the company'sprofitability from its assets (that is, a good rate of return on assets [ROA]); the amount of debt thecompany is using, and the rate of return on owner's equity (the investor's return).

The measures used by investors are ratios; these are given below. Make sure you discuss how youarrived at these figures, with references to your financial statements and assumptions.

Liquidity (the ability to pay debt using cash on hand): called the current ratio = current assets dividedby current liabilities. This number should be at least a two (where assets are equal to two times theamount of current liabilities).

Profitability (using company assets): there are three standard measures, return on assets [ROA] =

operating profits divided by total assets; operating profit margin = operating profit divided by sales;total asset turnover = sales divided by total assets.

Amount of Debt (the company uses): debt ratio = total debt divided by total assets. The debt ratioshould be limited; ideally, less than 50% of financing should be from debt (the rest should come fromequity that is, investment by owners). Total debt should be less than 50% of assets.

Rate of Return (earned by the owners on their equity): return on equity [ROE] = net profits dividedby owners equity. Return on assets [ROA] = operating profits divided by total assets = operatingprofits divided by sales multiplied by sales divided by total assets.

A few notes on all this are in order. Compare your numbers with those of your industry's standards.Average financial statements for most industries can be obtained through Dunn and Bradstreet(www.dnb.com), Robert Morris Associates (www.rmahq.org), trade and industry associations, andother organizations that compile such data.

To attract financing, you need to focus on short-term profit, and sacrifice things like maximizing salesand longer-term profits to show you'll be able to pay back debt quickly. Whatever your situation, makesure to obtain sufficient financing. Over 50% of all business failures within the first three years ofoperation occur due to insufficient capitalization.

Further, each industry has its own standards for asset requirements. These are very useful for seeing

how your company matches up against your competition. The more assets your company needs toreach profitability, the greater your need for financing. Some examples: grocery stores average 20%assets to sales; oil and gas companies average 65%. This is called the 'percentage of salestechnique'. Thus, with a grocery store if sales are $1 million = .2 x $1,000,000. = $200,000. Is neededin assets.

Finally, do as much research as possible! The more you know about your competitor's finances,investor and lender expectations, industry standards and best practices, etc. the more prepared andprofessional you will be.


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Good luck !

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