BUSINESS PLANS

12 min read

An Introduction to Business
Plans
Why is a business plan so vital to the health of your business? Read the first section of our tutorial
on How to Build a Business Plan to find out.

Image credit: Ken Teegardin | Flickr

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A business plan is a written description of your business's future.

That'sall there is to it--a document that desribes what you plan to do
and how you plan to do it. If you jot down a paragraph on the back of
an envelope describing your business strategy, you've written a plan,
or at least the germ of a plan.

Business plans can help perform a number of tasks for those who write
and read them. They're used by investment-seeking entrepreneurs to
convey their vision to potential investors. They may also be used by
firms that are trying to attract key employees, prospect for new
business, deal with suppliers or simply to understand how to manage
their companies better.

So what's included in a business plan, and how do you put one

together? Simply stated, a business plan conveys your business goals,
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
finally, 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 to a business plan:

• The first is the business concept, where you discuss the

industry, your business structure, your particular product or
service, and how you plan to make your business a success.
• 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'll position yourself to beat it.
• Finally, the financial section contains your income and cash
flow statement, 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 even further, a business

plan consists of seven key components:

• Executive summary
• Business description
• Market strategies
 • Competitive analysis
• Design and development plan
• Operations and management plan
• Financial factors
In addition to these sections, a business plan should also have a cover,
title page and table of contents.

How Long Should Your Business Plan Be?

Depending on what you're using it for, a useful business plan can be
any length, from a scrawl on the back of an envelope to, in the case of
an especially detailed plan describing a complex enterprise, more than
100 pages. A typical business plan runs 15 to 20 pages, but there's
room for wide variation from that norm.

Much will depend on the nature of your business. If you have a simple
concept, you may be able to express it in very few words. On the other
hand, if you're proposing a new kind of business or even a new
industry, it may require quite a bit of explanation to get the message
across.

The purpose of your plan also determines its length. If you want to use
your plan to seek millions of dollars in seed capital to start a risky
venture, you may have to do a lot of explaining and convincing. If
you're just going to use your plan for internal purposes to manage an
ongoing business, a much more abbreviated version should be fine.

Who Needs a Business Plan?

About the only person who doesn't need a business plan is one who's
not going into business. You don't need a plan to start a hobby or to
moonlight from your regular job. But anybody beginning or extending a
venture that will consume significant resources of money, energy or
time, and that is expected to return a profit, should take the time to
draft some kind of plan.

Startups. The classic business plan writer is an entrepreneur seeking

funds to help start a new venture. Many, many great companies had
their starts on paper, in the form of a plan that was used to convince
investors to put up the capital necessary to get them under way.

Most books on business planning seem to be aimed at these startup

business owners. There's one good reason for that: As the least
experienced of the potential plan writers, they're probably most
appreciative of the guidance. However, it's a mistake to think that only
cash-starved startups need business plans. Business owners find plans
useful at all stages of their companies' existence, whether they're
seeking financing or trying to figure out how to invest a surplus.

Established firms seeking help. Not all business plans are written
by starry-eyed entrepreneurs. Many are written by and for companies
that are long past the startup stage. WalkerGroup/Designs, for
instance, was already well-established as a designer of stores for major
retailers when founder Ken Walker got the idea of trademarking and
licensing to apparel makers and others the symbols 01-01-00 as a sort
of numeric shorthand for the approaching millennium. Before beginning
the arduous and costly task of trademarking it worldwide, Walker used
a business plan complete with sales forecasts to convince big retailers
it would be a good idea to promise to carry the 01-01-00 goods. It
helped make the new venture a winner long before the big day arrived.
"As a result of the retail support up front," Walker says, "we had over
45 licensees running the gamut of product lines almost from the
beginning."

These middle-stage enterprises may draft plans to help them find

funding for growth just as the startups do, although the amounts they
seek may be larger and the investors more willing. They may feel the
need for a written plan to help manage an already rapidly growing
business. Or a plan may be seen as a valuable tool to be used to
convey the mission and prospects of the business to customers,
suppliers or others.

Plan an Updating Checklist

Here are seven reasons to think about updating your business plan. If
even just one applies to you, it's time for an update.

• A new financial period is about to begin. You may update your

plan annually, quarterly or even monthly if your industry is a
fast-changing one.
• You need financing, or additional financing. Lenders and other
financiers need an updated plan to help them make financing
decisions.
• There's been a significant market change. Shifting client tastes,
consolidation trends among customers and altered regulatory
climates can trigger a need for plan updates.
• Your firm develops or is about to develop a new product,
technology, service or skill. If your business has changed a lot
 since you wrote your plan the first time around, it's time for an
update.
• You have had a change in management. New managers should
get fresh information about your business and your goals.
• Your company has crossed a threshold, such as moving out of
your home office, crossing the $1 million sales mark or
employing your 100th employee.
• Your old plan doesn't seem to reflect reality any more. Maybe
you did a poor job last time; maybe things have just changed
faster than you expected. But if your plan seems irrelevant, redo
it.

Finding the Right Plan for You

Business plans tend to have a lot of elements in common, like cash

flow projections and marketing plans. And many of them share certain
objectives as well, such as raising money or persuading a partner to
join the firm. But business plans are not all the same any more than all
businesses are.

Depending on your business and what you intend to use your plan for,
you may need a very different type of business plan from another
entrepreneur. Plans differ widely in their length, their appearance, the
detail of their contents, and the varying emphases they place on
different aspects of the business.

The reason that plan selection is so important is that it has a powerful

effect on the overall impact of your plan. You want your plan to present
you and your business in the best, most accurate light. That's true no
matter what you intend to use your plan for, whether it's destined for
presentation at a venture capital conference, or will never leave your
own office or be seen outside internal strategy sessions.

When you select clothing for an important occasion, odds are you try to
pick items that will play up your best features. Think about your plan
the same way. You want to reveal any positives that your business may
have and make sure they receive due consideration.

Types of Plans
Business plans can be divided roughly into four separate types. There
are very short plans, or miniplans. There are working plans,
presentation plans and even electronic plans. They require very
different amounts of labor and not always with proportionately different
results. That is to say, a more elaborate plan is not guaranteed to be
superior to an abbreviated one, depending on what you want to use it
for.

• The Miniplan. A miniplan may consist of one to 10 pages and

should include at least cursory attention to such key matters as
business concept, financing needs, marketing plan and financial
statements, especially cash flow, income projection and balance
sheet. It's a great way to quickly test a business concept or
measure the interest of a potential partner or minor investor. It
can also serve as a valuable prelude to a full-length plan later
on.
Be careful about misusing a miniplan. It's not intended to substitute for
a full-length plan. If you send a miniplan to an investor who's looking
for a comprehensive one, you're only going to look foolish.

• The Working Plan. A working plan is a tool to be used to

operate your business. It has to be long on detail but may be
short on presentation. As with a miniplan, you can probably
afford a somewhat higher degree of candor and informality
when preparing a working plan.
A plan intended strictly for internal use may also omit some elements
that would be important in one aimed at someone outside the firm. You
probably don't need to include an appendix with resumes of key
executives, for example. Nor would a working plan especially benefit
from, say, product photos.

Fit and finish are liable to be quite different in a working plan. It's not
essential that a working plan be printed on high-quality paper and
enclosed in a fancy binder. An old three-ring binder with "Plan"
scrawled across it with a felt-tip marker will serve quite well.

Internal consistency of facts and figures is just as crucial with a working

plan as with one aimed at outsiders. You don't have to be as careful,
however, about such things as typos in the text, perfectly conforming
to business style, being consistent with date formats and so on. This
document is like an old pair of khakis you wear into the office on
Saturdays or that one ancient delivery truck that never seems to break
down. It's there to be used, not admired.

• The Presentation Plan. If you take a working plan, with its low
stress on cosmetics and impression, and twist the knob to boost
the amount of attention paid to its looks, you'll wind up with a
 presentation plan. This plan is suitable for showing to bankers,
investors and others outside the company.
Almost all the information in a presentation plan is going to be the
same as your working plan, although it may be styled somewhat
differently. For instance, you should use standard business vocabulary,
omitting the informal jargon, slang and shorthand that's so useful in
the workplace and is appropriate in a working plan. Remember, these
readers won't be familiar with your operation. Unlike the working plan,
this plan isn't being used as a reminder but as an introduction.

You'll also have to include some added elements. Among investors'

requirements for due diligence is information on all competitive threats
and risks. Even if you consider some of only peripheral significance,
you need to address these concerns by providing the information.

The big difference between the presentation and working plans is in

the details of appearance and polish. A working plan may be run off on
the office printer and stapled together at one corner. A presentation
plan should be printed by a high-quality printer, probably using color. It
must be bound expertly into a booklet that is durable and easy to read.
It should include graphics such as charts, graphs, tables and
illustrations.

It's essential that a presentation plan be accurate and internally

consistent. A mistake here could be construed as a misrepresentation
by an unsympathetic outsider. At best, it will make you look less than
careful. If the plan's summary describes a need for $40,000 in
financing, but the cash flow projection shows $50,000 in financing
coming in during the first year, you might think, "Oops! Forgot to
update that summary to show the new numbers." The investor you're
asking to pony up the cash, however, is unlikely to be so charitable.

• The Electronic Plan. The majority of business plans are

composed on a computer of some kind, then printed out and
presented in hard copy. But more and more business information
that once was transferred between parties only on paper is now
sent electronically. So you may find it appropriate to have an
electronic version of your plan available. An electronic plan can
be handy for presentations to a group using a computer-driven
overhead projector, for example, or for satisfying the demands
of a discriminating investor who wants to be able to delve
deeply into the underpinnings of complex spreadsheets.
Source: The Small Business Encyclopedia, Business Plans Made Easy,
Start Your Own Business and Entrepreneur magazine.
Continue on to the next section of our Business Plan How-To >>
Plan Your Plan

You've decided to write a business plan, and you're ready to get

started. Congratulations. You've just greatly increased the chances that
your business venture will succeed. But before you start drafting your
plan, you need to--you guessed it--plan your draft.

One of the most important reasons to plan your plan is that you may
be held accountable for the projections and proposals it contains.
That's especially true if you use your plan to raise money to finance
your company. Let's say you forecast opening four new locations in the
second year of your retail operation. An investor may have a beef if,
due to circumstances you could have foreseen, you only open two. A
business plan can take on a life of its own, so thinking a little about
what you want to include in your plan is no more than common
prudence.

Second, as you'll soon learn if you haven't already, business plans can
be complicated documents. As you draft your plan, you'll be making
lots of decisions on serious matters, such as what strategy you'll
pursue, as well as less important ones, like what color paper to print it
on. Thinking about these decisions in advance is an important way to
minimize the time you spend planning your business and maximize the
time you spend generating income.

To sum up, planning your plan will help control your degree of
accountability and reduce time-wasting indecision. To plan your plan,
you'll first need to decide what your goals and objectives in business
are. As part of that, you'll assess the business you've chosen to start,
or are already running, to see what the chances are that it will actually
achieve those ends. Finally, you'll take a look at common elements of
most plans to get an idea of which ones you want to include and how
each will be treated.

Determine Your Objectives

Close your eyes. Imagine that the date is five years from now. Where
do you want to be? Will you be running a business that hasn't
increased significantly in size? Will you command a rapidly growing
empire? Will you have already cashed out and be relaxing on a beach
somewhere, enjoying your hard-won gains?
Answering these questions is an important part of building a successful
business plan. In fact, without knowing where you're going, it's not
really possible to plan at all.

Now is a good time to free-associate a little bit--to let your mind roam,
exploring every avenue that you'd like your business to go down. Try
writing a personal essay on your business goals. It could take the form
of a letter to yourself, written from five years in the future, describing
all you have accomplished and how it came about.

As you read such a document, you may make a surprising discovery,

such as that you don't really want to own a large, fast-growing
enterprise but would be content with a stable small business. Even if
you don't learn anything new, though, getting a firm handle on your
goals and objectives is a big help in deciding how you'll plan your
business.

Goals and Objectives Checklist

If you're having trouble deciding what your goals and objectives are,
here are some questions to ask yourself:

• How determined am I to see this succeed?

• Am I willing to invest my own money and work long hours for no
pay, sacrificing personal time and lifestyle, maybe for years?
• What's going to happen to me if this venture doesn't work out?
• If it does succeed, how many employees will this company
eventually have?
• What will be its annual revenues in a year? Five years?
• What will be its market share in that time frame?
• Will it be a niche marketer, or will it sell a broad spectrum of
good and services?
• What are my plans for geographic expansion? Local? National?
Global?
• Am I going to be a hands-on manager, or will I delegate a large
proportion of tasks to others?
• If I delegate, what sorts of tasks will I share? Sales? Technical?
Others?
• How comfortable am I taking direction from others? Could I work
with partners or investors who demand input into the company's
management?
 • Is it going to remain independent and privately owned, or will it
eventually be acquired or go public?

Your Financing Goals

It doesn't necessarily take a lot of money to make a lot of money, but it
does take some. That's especially true if, as part of examining your
goals and objectives, you envision very rapid growth.

Energetic, optimistic entrepreneurs often tend to believe that sales

growth will take care of everything, that they'll be able to fund their
own growth by generating profits. However, this is rarely the case, for
one simple reason: You usually have to pay your own suppliers before
your customers pay you. This cash flow conundrum is the reason so
many fast-growing companies have to seek bank financing or equity
sales to finance their growth. They are literally growing faster than they
can afford.

Start by asking yourself what kinds of financing you're likely to need--

and what you'd be willing to accept. It's easy when you're short of
cash, or expect to be short of cash, to take the attitude that almost any
source of funding is just fine. But each kind of financing has different
characteristics that you should take into consideration when planning
your plan. These characteristics take three primary forms:

• First, there's the amount of control you'll have to surrender. An

equal partner may, quite naturally, demand approximately equal
control. Venture capitalists often demand significant input into
management decisions by, for instance, placing one or more
people on your board of directors. Angel investors may be very
involved or not involved at all, depending on their personal
style. Bankers, at the other end of the scale, are likely to offer
no advice whatsoever as long as you make payments of
principal and interest on time and are not in violation of any
other terms of your loan.
• You should also consider the amount of money you're likely to
need. Any amount less than several million dollars is too small
to be considered for a standard initial public offering of stock, for
example. Venture capital investors are most likely to invest
amounts of $250,000 to $3 million. On the other hand, only the
richest angel investor will be able to provide more than a few
hundred thousand dollars, if that.
Almost any source of funds, from a bank to a factor, has some
guidelines about the size of financing it prefers. Anticipating the size of
your needs now will guide you in preparing your plan.
 • The third consideration is cost. This can be measured in terms of
interest rates and shares of ownership as well as in time,
paperwork and plain old hassle.

How Will You Use Your Plan

Believe it or not, part of planning your plan is planning what you'll do

with it. No, we haven't gone crazy--at least not yet. A business plan can
be used for several things, from monitoring your company's progress
toward goals to enticing key employees to join your firm. Deciding how
you intend to use yours is an important part of preparing to write it.

Do you intend to use your plan to help you raise money? In that case,
you'll have to focus very carefully on the executive summary, the
management, and marketing and financial aspects. You'll need to have
a clearly focused vision of how your company is going to make money.
If you're looking for a bank loan, you'll need to stress your ability to
generate sufficient cash flow to service loans. Equity investors,
especially venture capitalists, must be shown how they can cash out of
your company and generate a rate of return they'll find acceptable.

Do you intend to use your plan to attract talented employees? Then

you'll want to emphasize such things as stock options and other
aspects of compensation as well as location, work environment,
corporate culture and opportunities for growth and advancement.

Do you anticipate showing your plan to suppliers to demonstrate that

you're a worthy customer? A solid business plan may convince a
supplier of some precious commodity to favor you over your rivals. It
may also help you arrange supplier credit. You may want to stress your
blue-ribbon customer list and spotless record of repaying trade debts in
this plan.

Assessing Your Company's Potential

For most of us, unfortunately, our desires about where we would like to
go aren't as important as our businesses' ability to take us there. Put
another way, if you choose the wrong business, you're going nowhere.

Luckily, one of the most valuable uses of a business plan is to help you
decide whether the venture you have your heart set on is really likely
to fulfill your dreams. Many, many business ideas never make it past
the planning stage because their would-be founders, as part of a
logical and coherent planning process, test their assumptions and find
them wanting.
Test your idea against at least two variables. First, financial, to make
sure this business makes economic sense. Second, lifestyle, because
who wants a successful business that they hate?

Answer the following questions to help you outline your company's

potential. There are no wrong answers. The objective is simply to help
you decide how well your proposed venture is likely to match up with
your goals and objectives.

Financial:

• What initial investment will the business require?

• How much control are you willing to relinquish to investors?
• When will the business turn a profit?
• When can investors, including you, expect a return on their
money?
• What are the projected profits of the business over time?
• Will you be able to devote yourself full time to the business,
financially?
• What kind of salary or profit distribution can you expect to take
home?
• What are the chances the business will fail?
• What will happen if it does?

Lifestyle:

• Where are you going to live?

• What kind of work are you going to be doing?
• How many hours will you be working?
• Will you be able to take vacations?
• What happens if you get sick?
• Will you earn enough to maintain your lifestyle?
• Does your family understand and agree with the sacrifices you
envision?
Sources: The Small Business Encyclopedia, Business Plans Made Easy,

Start Your Own Business and Entrepreneur magazine