Business Plans

What is a "business plan"?

Every business needs a well-defined description. Whether you are seeking financing or not, you should document your company's business plan in order to have a clear statement of purpose, goals and strategy. Business plans also detail the company's financial situation.

Business plans are useful to owners and employees because they help everyone participating in the business to understand the company's mission. Putting a business plan together is an opportunity to analyze the marketplace, including customers, suppliers and competitors, devise a marketing strategy, and project future costs, sales and profits.

Business plans are essential to obtaining financing, either from lenders or investors.

What are the different types of business plans?

The type of business plan you choose depends on the type of company you have. They can vary considerably in presentation in order to emphasize what is important about your business.

Entrepreneurs may create a very short business plan of 10 pages or less, briefly covering all the important topics, as a kind of first draft before attempting a more comprehensive plan. Expanding it into a working plan is a more involved and lengthy next step, but it will still lack depth and polish. If you simply need a business plan for internal purposes, this may be sufficient.

But if you are going to show your business plan to anyone outside the company, you will want to take it to the next level and turn it into a presentation-worthy business plan. Use plain, jargon-free language understandable to everyone. All facts must be accurate and consistent. The plan should be printed and bound using high-quality materials.

You may also want to create an electronic version of your business plan for ease of transmission or use on an overhead projector. Some investors may prefer an electronic version over a printed one.

Do I have to create a business plan to get financing?

Yes. You will definitely need a comprehensive formal business plan to present to lenders in your loan proposal.

What should my business plan include?

First, a business plan should have a cover, title page and table of contents.

If you intend to use your business plan to borrow money or attract investors, your business plan should include a description of the business, including its purpose, how it operates and your marketing strategy; an analysis of the marketplace and your competitors; a discussion of your professional experience and accomplishments; and a detailed financial summary with projections.

The business plan can be broken into three major areas that cover the business idea, the marketplace and financial information. Within that overall structure, you should include the following sections:

Executive summary

First, clearly state what you want. If you are seeking a certain amount in business loans or equity funding, say so right up front. The reader is most likely someone who can provide you with the capital, and they do not want to have to search the document for that information. Let them know from the start what their participation in this venture might be-that is, how much money they would need to give you to meet your needs.

Second, describe the basic concept of your business-what product or service you provide, what market you serve and what competitive advantage you have.

Third, briefly summarize important financial information, including sales, profits and cash flow.

Fourth, explain how much total capital you need-from the reader and other sources-to meet your goals and how the money would be used.

Finally, discuss the background of the company, including its legal structure, the owners and management, and what milestones have been achieved so far.

The executive summary should be short-usually less than one page. So be concise in your wording.

Business description

Begin the business description with a brief discussion of the industry, including current trends, the future growth outlook and how potential developments could affect your business. Make sure any data you cite is accurate, and reference the sources you use.

Describe the type of company you have-for example, whether it is a retail business or a manufacturing operation-and what type of legal structure it is, such as a partnership or corporation. Explain why you chose that structure and what the partners or owners bring to the business in the way of experience, contacts and equity.

Inform the reader about your products and services, how they are distributed and what sort of promotional and customer support they have. Make sure you emphasize any competitive advantages.

Finally, give all the reasons why your company will be profitable-and why additional funding will boost that profitability.

Market strategies

Before you complete this section, you need to do a thorough market analysis, which is an important exercise for you as the business owner. This type of evaluation can help you better understand the industry you operate in, narrow your target market more accurately and position the company accordingly.

Through market analysis, the company can decide on the best pricing and promotional strategies to profitably compete and what type of distribution works best in this market. The company can then develop an estimate of its own growth potential in the market.

In this section, outline the findings of your market analysis-including the size of the market, total sales, competitive environment and growth outlook. Detail what segment of the market you plan to target as well as your potential market share in light of your positioning, pricing, promotions and distribution channels.

Competitive analysis

While market analysis takes a look at the big industry picture, a competitive analysis focuses on the specific players in that industry. Through this type of analysis, you identify your competitors, evaluate their strategies, pinpoint their strengths and weaknesses and compare them to yours.

In this section, readers will want to learn what competitive challenges you face, what advantages you have and how those advantages are exploited in your company's strategies.

Design and development plan

In this section, you should describe the design of your products in depth in terms of both production and marketing. You should also outline your product development goals, strategies for achieving them, development funding needs and product revenue potential.

Readers will want to see what procedures you have put in place for product development as well as for the market and organizational development needed to support those products. Determine a schedule for each stage of product development and a budget that takes into account all expenses that go into the process, including materials, labor, overhead, equipment, personnel, and marketing and sales.

You should include some discussion of personnel expertise in product development. Detail your goals in recruiting and training personnel and how much skill is required of them. Each position should have a specific job description and occupy a specific place on an organizational chart.

Finally, lenders and investors will want you to identify and address all risks in the product development process.

Operations and management plan

This section lays out the ongoing operations and management functions of the company, including the organizational structure of the company and the expense and capital requirements associated with its operation.

The organizational structure usually consists of marketing and sales, production, research and development, and administration. Identify which tasks each division performs as well as what responsibilities the managers of each division have.

You also need to detail the capital and expense requirements of operating the business. Decide on the number of personnel needed and total labor expense for each department. Calculate overhead expenses, or all nonlabor expenses, including loan payments, rent, equipment leases, utilities, maintenance, supplies and insurance, noting which are fixed and which are variable.

Here, you will build the foundation for the financial statements later on by tabulating operating expenses, capital requirements and cost of goods.

Financial information

Financial data always comes last in the business plan, but this information is of crucial importance to lenders and investors. They will consider this section very carefully because it quantifies a company's current value and future prospects. However persuasive you are in describing your business idea and strategy for executing it, the financials will provide hard evidence of that fact.

You should include an income statement, a cash flow statement and a balance sheet. These three documents are interrelated and equally important.

Sidebar: During the first year of business, companies should generate an income statement and cash flow statement monthly. During the second year, they should generate these reports quarterly. After that, they can be generated annually. The balance sheet only needs to be generated once per year.

Essentially, the income statement shows the company's profitability. The income statement includes:

• income
• cost of goods
• gross profit margin
• operating expenses
• total expenses
• net profit
• depreciation
• net profit before interest
• interest
• net profit before taxes
• taxes
• profit after taxes

The cash flow statement indicates how much cash the company needs to spend and where it comes from. The cash flow statement includes:

• cash sales
• receivables
• other income
• total income
• material and merchandise
• production labor
• overhead
• marketing and sales
• research and development
• administrative labor expenses
• taxes
• capital
• loan payments
• total expenses
• cash flow
• cumulative cash flow

The balance sheet summarizes all the preceding financial information. It organizes that information into three categories:

• assets
• liabilities
• equity

Assets include current assets and long-term or fixed assets. Current assets will be converted to cash or used by the company in 1 year or less. Long-term assets last more than 1 year.

Current assets include:

• cash
• accounts receivable
• inventory
• total current assets

Long-term assets include:

• capital
• investment
• miscellaneous assets
• total long-term assets
• total assets

Liabilities are also classified as current or long-term, depending on if they are due in less than 1 year or more than 1 year.

Current liabilities include:

• accounts payable
• accrued liabilities
• taxes
• total current liabilities

Long-term liabilities include:

• bonds payable
• mortgage payable
• notes payable
• total long-term liabilities
• total liabilities

On the balance sheet, the difference between the total assets and the total liabilities equals the owner's equity. The amount of equity in the business is an important factor to lenders and investors in determining how much capital to lend or invest.

Some business owners provide brief analysis and explanation following each report.

What financial projections should I include in my business plan?

Forecasting your company's finances is a matter of making informed estimates about how much the business will make and how much it will spend in the future. Financial projections give lenders and investors an idea of how profitable your company will be.

Your financial projections should include:

• a startup cost estimate: the total expenses needed to launch the business;
• a break-even analysis: income and expense estimates indicate whether your company can generate enough money to meet costs;
• a profit-and-loss forecast: take the income and expense estimates from the break-even analysis and create month-to-month profit projection for the first year of operation; and
• a cash flow projection: money coming in minus expenses going out equals net cash flow; estimate how much cash flow your company will generate each month.

How long should my business plan be?

Business plans are typically 15 to 20 pages in length, but they can run more than 100 pages in some cases. The length largely depends on the type of company and the complexity of the business idea and financials.

When should I update my business plan?

Companies update their business plans monthly, quarterly or annually. You will want to do an update before you seek any financing because lenders want to see the latest numbers. Management changes, new products or services or shifts in market trends also necessitate an update.

How do I put together a loan proposal?

In addition to standard loan documents, you should put together a written loan proposal once you have finished writing your business plan. The business plan is the centerpiece of the loan proposal, but the proposal should also separately communicate how much you need and how you plan to pay it back.

The loan proposal should include:

• the business plan;
• a cover letter stating the amount that you are requesting and how you will use the loan;
• a proposal of terms for repayment; understand that you will negotiate this point with the lender;
• personal financial statements; these statements should list your assets and your liabilities; provide copies of your personal tax returns and a list of credit references;
• supporting documents, such as letters of reference, contracts, leases and certificates of incorporation or partnership agreements; and
• collateral; list business and personal assets that could be used to secure the loan.

After you present your loan proposal, lenders will take some time after the initial meeting to review your business plan. If your loan is approved, make sure you review all documents and understand everything before signing.